Episode 35: Devin Mathews of ParkerGale Capital on
How to Create Value by Being Unconventionally Right
On this episode
Shiv interviews Devin Mathews, Partner at ParkerGale Capital.
Shiv and Devin discuss how ParkerGale invests in smaller companies that many firms would consider ‘too hard’.
Learn how Devin and his team view potential challenges as value creation opportunities, and how they prioritize their resources in portfolio companies post-close. Plus, hear how to avoid buying the right company at the wrong valuation, how to minimize investment risk, and the value of setting realistic expectations for your return.
The information contained in this podcast is not intended to constitute, and should not be construed as, investment advice.
Key Takeaways
- How Devin built ParkerGale, and how his background with William Blair has impacted his current approach to private equity (2:39)
- How the areas where private companies are often underdeveloped can be opportunities for growth (10:21)
- Why ParkerGale invests in companies that many other firms would consider ‘too hard’ (16:29)
- How to avoid falling into the trap of ‘good company, bad valuation’ (20:50)
- Factoring in risk to maximize the chances of getting your money back (28:53)
- Why realistic expectations win out over swinging for the fences - in your fund return and your value creation approach (33:14)
- Which areas to prioritize post-close when you have a small team (40:38)
Resources
Click to view transcript
Episode Transcript
Shiv: All right, Devin, welcome to the show. How's it going?
Devin: It's going great. Thanks for asking Shiv.
Shiv: Super excited to have you on. So why don't we start by sharing a background about yourself and ParkerGale and we'll take it from there.
Devin: Yeah, you want the long version or the really short version?
Shiv: The long version sounds great.
Devin: No, I grew up in upstate New York. One of four boys, so I'm packed in the middle and kind of an intellectually competitive crew of people I grew up with, brothers and parents and things. So never intended to get into finance. I was an art history major in college.
I moved out to Chicago to get a PhD in sociology at the University of Chicago, chickened out and applied for a job. This is the early nineties when you actually like answered ads on the paper for a research job at a place called the William Blair. I didn't know what William Blair was. Apparently it was an investment bank. I didn't know what investment banking was, but the guy who interviewed me liked me. Assumed I was a good writer given what I had done in college. And he was transitioning his research list and needed somebody to help kind of write the report.
Back then, William Blair used to write the definitive research report on a stock and they were totally focused on emerging growth. So luckily I got assigned to the video game industry. So it could have been a lot worse. I could have been following like the, the packaged air and kitty litter industry, which were two companies that Blair followed at the time. So yeah, so I got to play video games, write research reports about it and learn finance from, you know, a few really brilliant and super kind people and, did that for two years. Then my boss said, Hey, you should go work in the private equity department. William Blair just raised its fourth private equity fund. And I was the analyst in that fund for a few years. I went to business school. and then I spent five years in Boston at Great Hill Partners with Bryce Youngren, one of your prior guests and a good friend. And then I rejoined my old team at William Blair, who had spun out to start Chicago Growth. I was one of the four partners there and ran the tech practice. And then about 10 years ago, me and my operating guy decided to spin out and start ParkerGale. So each time I've moved, I've moved to kind of something smaller and more specific. So eventually it'll just be like me and one portfolio company.
Shiv: Yeah, or you starting a company from scratch. Yeah, that's a great story. So why don't you dive deeper into that experience? And usually we don't do this on episodes, but given that you've worked at so many reputable firms and been a part of that journey, like William Blair is one of the biggest investment banking firms that advises all kinds of software transactions. And we'd love to learn about the lessons from there and then how that translated into Great Hill and what you're doing now.
Devin: Sure. Yeah, I, I had no idea what William Blair was and I still have the face book that they put out in 1995. Cause my office manager here at Parker Gale and I started working together in 1995. so we have the face book from that, which was literally a printed book of, you know, everybody by department. I think there might be, have been 300 people in there, maybe 200, 250. I think Blair probably has 1500 people just in investment banking right now.
So that's interesting. I was there at an interesting time. It was still felt famil- owned and family-run. you know, Bowen Blair and, and the Blairs, the sons of the founder were still, you know, walking around the office. So it was just a really special place to be.
So the first part of my career, I learned how to value a public company, and analyze it. And then I moved into private equity and I was taught how to value a private company. I think it's a very similar process, except for public companies, there's only, there's a limited universe. There's X number of public video game, you know, software companies. So Activision, Broderbund, Electronic Arts, you know, all those, all those names. Some of which is still around, some of which aren't. And the private markets is kind of everything, right? Public markets, pre-Reg FD, you got to know everything about the business quite a bit.
Now, not so much. You can't know things that other people don't know because of Reg FD, which is a good thing in general, but it's certainly made covering public companies harder, or at least having deep, keen insight into it. And then on the private side, it's like, okay, I want to, I like this segment. I like this industry. Okay. What do I like about that industry? What are the companies in industry? Okay. What are the, what are the, what is the best part of the company? So an investment I worked on at Great Hill Partners called Vigo Remittance Corp was a Western Union competitor, but only the part of Western Union that was US to Mexico, largely. They did other things, but the biggest revenue source was recent immigrants from Mexico sending money home to their families.
So I had covered First Data, so I knew the First Data business well. I thought the best part of the First Data business was Western Union. I thought the best part of the Western Union business was remittances and the remittances, they were charging 30 % to send 200 bucks. You know, might cost you 40 to $60 to send 200 because they had no competition and they had great service and it was secure and all that. But there were these other solutions out there. They were just as good, just as secure. They just weren't as well known and branded. So that was a thesis we built at Great Hill. We executed it well, sold the business to Western Union because we were doing more transactions to Mexico than they were, even though we were such a small business compared to them. But again, that's the process I think of finding a good investment. Go macro to micro, micro to macro. And the difference is in private companies, if you knew as much about a public stock before you bought it, or the company before you bought their stock, as you do about a private company before you buy the company, you would never buy a stock. You would never buy it.
Shiv: Why do you say that?
Devin: Cause we get to see all the warts in these businesses before we buy them. And we still buy them, whether it's, you know, financially a perfect business from the outside or, you know, or a turnaround, every business at this scale in the private equity scale. And just like Bryce, I live at the lower end of the middle market, like the micro end of that market.
If you know Brett Beshore from Permanent Equity, who is a brilliant guy and everybody should follow and really more around Main Street businesses than the software side. I think his quote is every private company is a loose, well, every company is a loose collection of complete chaos. And the fact that they actually can, you know, move forward and, and thrive is always a shock when you get under the covers. Yeah. So then at Great Hill, I learned how to source. It was a typical East coast, you know, Boston, you know, sourcing machine, you know, the junior employees were sourcing aggressively. And I didn't have to do that much at William Blair, cause I had such a good reputation. The phone just rang and we worked on what we worked on. So that was a good, another tool in the toolkit. And then when I was reunited with Jim Milbery, my operating guy at, at William Blair capital, and then my operating guy at Chicago growth partners, it was, you know, kind of a ‘reunited and it feels so good’ situation and after five years of doing a nice job at CGP we decided to take our take the you know the show on the road and raise our own fund.
Shiv: That's an amazing story. I want to touch on a bunch of things that you brought up. So let's start with this private versus public. And if you knew what you knew about private companies, you wouldn't buy stock. Dive a little bit deeper into that. Like we've seen when we work with our clients and private equity firms and you look under the hood, there is chaos. There is a lot of data is not in order. It's hard to understand how well things are working and not everybody inside has a complete picture of where money's being invested or what the ROI is, and all kinds of things. But just curious from your perspective, what have you seen inside these companies that lead you to that perspective?
Devin: Well, you know, I've been doing this coming on 30 years. Yeah. And you just see the same thing over and over again. You see really passionate founders. Now we only buy from family owned businesses and founder owned businesses, only software businesses. So my whole career has been software, first institutional capital, buying from families and founders. We can talk about why that is and why. That's our sweet spot. When you're buying a, you know, a 40 year old software business that's had one owner, no outside capital, no board yeah, they're probably not doing things the private equity way, which in a lot of cases is good, right? They have deep connection to their customers. They have deep discipline on margin and profits because they're not funding it with somebody else's money.
But a lot of the things that we would view and kind of the value creation plan, just basic execution, you know, have either been put to the side or delayed. You know, founders are either building businesses, out of pure passion - some of those do well, some of those don't do well - they're doing it for a profit. Right? So let me maximize profits at the expense of growth. And if you owned a business in your seventies or eighties, why wouldn't you do that? if, you know, if the cash was more every month in the bank account, you know, why are you, why would you be so worried about growth? They have no idea what the rule of 40 is or LTV to CAC and they don't care because they own the business and they're doing fine or they're running it for ego.
Or other things like, Hey, I'm not going to be that profitable because I want an office in Zurich and Melbourne and you know, and, and other places. Cause I like going to visit those places. So maybe, you know, you’re not running as efficiently as they could. So our investment thesis is we're looking for gaps between, you know, opportunity and value. So we want to find businesses that aren't being run to maximize enterprise value.
Shiv: Do you find that, and I like how you phrased that, which is they're not as familiar with the PE playbook, but that's often a good thing. And some of the things that you listed, like deep connection to customers as a founder, like I deeply identify with that because there's a connection to customers and our clients that I have that somebody coming from the outside may not necessarily have. And that's an advantage because you're so close to the customer, you understand how their needs have evolved over time. Like, what, for example, what private equity needed two years ago versus what they need now is very different in the current market environment. And we understand that because we're so close to customers. So stuff like that, how do you preserve that when institutional capital comes in and now value creation is more important, driving rule of 40 might become a priority. And, and maybe the previous founder is transitioning out and there's a professional management team coming into place. Like how do you preserve that essence that made that business great in the first place?
Devin: Yeah, I'd say we're often capturing a business when the owners are starting to play not to lose rather than play to win. So they all started these businesses 10, 20, 40 years ago and we've bought companies, you know, that old. So they've, they're making choices around what's important to them.
And so why would you hire a new CFO or hire five more salespeople to grow faster if you thought you might sell the business in a year or two, right? Those just aren't, you know, you're not maximizing your utility. So we're trying to capture a business that is, you know, doesn't have the foot on the accelerator. Now I'd love to buy a business that's grown, you know, the pure rule of 40 business, never raised capital, wildly profitable, great growth profile, doing all the right things, but that person's going to hire a banker, run a process and get a very rich price. Even in this market today, I mean, we're still seeing pricing. So we're still seeing 2021 pricing for A assets in this market. So that's not a mark - that's not a segment of the market we compete in. Our view is, right, there's buying companies and there's making them better and there’s selling them. And then there's running a fund. So we're trying to generate a, a return that's in excess of what our investors could get doing other things. And everybody knows the two by two. You could either be conventional and right or conventional and wrong and unconventional, right, unconventional, wrong. And the only way to outperform your peers is to be unconventional and right. Right. Some people may say contrarian, but I like unconventional more than contrarian because buying software companies today isn't very contrarian. Maybe we, the way we do it may be unconventional. People can decide. But if I just buy great software companies in processes, I'm basically buying the index. Cause everybody's doing that. So I'm either going to be a little bit better or a little bit worse than everybody else. If I'm doing stuff that other people aren't doing and I'm good at it, then I can outperform the market in some given time. So yeah.
Shiv: And so what is that for you? What is that unconventional approach?
Devin: Unconventional is like we do - we buy companies that other funds think is in the ‘too hard’ pile. So, in the current market, there aren't a lot of small funds. So that's one. So if you go back to what Bryce's conversation was, there's 70% of the money chasing 4% of the companies or something crazy like that. Right. There will be more small companies that are big companies in the last five years.
There's more money in big funds than small funds. There's never been a bigger move to scale and quality, perceived quality then, and certainly in the last two years. There's 2X the amount of money in $5 billion plus tech funds than there was five years ago. And there's half as much money in sub $500 million tech focused buyout funds than there was five years ago. So that's unconventional. Most people have exited the small end of the market and they're moving up.
That's one we focus on the small end of the market, 10 to 30 million of revenue companies found our own family owned, never raised outside capital. So they have to be profitable. I don't need a lot of growth, right? We'll, we'll improve the growth if we do our job right. It doesn't need to be wildly profitable. I'm probably going to spend some of the business's profits in the first couple of years, to bring in a more professional team, pay down tech debt through our hands-on operating model, build out a sales team. So there's often under investment in sales, no marketing to speak of, tech debt and growth that isn't repeatable, right? It's either episodic or it's just nascent. But if you've built by a system of record in a decent end market where we look for high market share, like high NPS, high market share, low market awareness. So I'm the number five player in a, you know, we owned a accounting business, software business for law firms. They were the number four market share and the number 14 market awareness. Why is that? Because it was owned by two guys in their seventies who didn't market. They just had a couple salespeople who sold directly to customers. They weren't on LinkedIn. They weren't doing content marketing. They weren't doing lead gen, they weren't optimizing the funnel, no SEO, SEM. It was just, they owned the business, they did what they want with it. They did very well on the exit to us outside of a process, kept some of the equity for themselves, and we brought in a new executive team. At their request. I mean, we are often the exit for the founder, almost always. I would say almost always in all but one instance we are the exit for the founder. And that is why they're coming to us. Like, ‘Hey, I'm selling my business. I'm stepping away. We hear you're the team that does that.’ A lot of other funds would view that as a big negative sign. The founders walking away. Why would the founder walk away? Well, if I was a 35 year old founder who was going to put $30 million in my pocket and you needed to make 300, sell for 300 to make your return. Well, okay. Maybe you want me to stick around. Maybe you want me to have ton of skin in the game. Maybe you don't want to go through that complexity. Well, we don't do stuff like that, right? I don't need the founder to stick around to execute the business because I'm going to execute it in a different way at a different pace than he or she did. So we're looking for businesses with those types of dynamics. And that's often a business that no banker in their right mind, especially William Blair and company, never take on for a sale because it's going to be hard. Right?
Shiv: It's going to be hard to sell, yeah, because not enough buyers are out there. So just funny side story. And I have a question as a follow up to what you just said. But one of the ways I discovered the thesis for this market is Bryce was having an event for all of his portfolio companies. So he asked me to come and speak. And somebody from William Blair gave a presentation about how multiples in this market were increasing and how much money was being deployed during diligence and post close. And that's when I learned about the volume of capital moving through this space and that's when I decided to go kind of all in on this business.
But coming to that point is that a firm like William Blair or the bigger PE firms out there wouldn't necessarily buy a lot of these companies and with good reason, maybe they don't have great retention or profit margins aren't at the rate that they want it to be or revenue is not where they want it to be to write the right kind of check size or they're not growing fast enough. So looking at those kinds of companies in your shoes, you could be walking into a situation where there are some fundamental things that need to be fixed. Like for example, net revenue retention, if it's not in a great place, you can kind of get stuck with an asset that doesn't have great expansion opportunities or able to retain its customers, especially in these kind of old models that are run by families or founder only type of businesses. And maybe they haven't invested enough into improving the product over time and it's in a super competitive space. So, how do you navigate that? Because you can easily deploy capital in a situation where now you have to throw good money after bad to recover that investment.
Devin: Yeah, well, I mean, I guess that presumes that we made - we didn't do a lot of diligence. So the throwing good money after bad, I would say, at what price? So two years ago, three years ago, even today, a lot of funds are very comfortable paying double digit revenue multiples, right? Double digit forward ARR multiples still today. So that's great if the growth continues and if the market still rewards businesses with those profiles at those values. So in the SaaSacre of June, 2022, everything got rerated. Pretty much everything got rerated in the public markets for sure. Right? So if you bought a business growing 40 % break even, and you paid 12 times forward revenue for it, you probably got, back then two, three turns of revenue debt on it, would be my guess. So 80% of the cap structure is now equity. We all know growth has slowed down and we all know in June ‘22 things got rerated. So that 12 times revenue business might be worth six or seven, or maybe it's worth eight or nine. And if you're growing 40%, it's hard to grow 40% four or five years in a row. So maybe you're growing 20, 25% now.
So just run the simple math. And I posted it on LinkedIn. I did a series called good company, bad valuation. You can take the Google sheet that I built. If you look at my profile and my posts on LinkedIn, you can run the math yourself. Okay, I paid this much for it. The growth rate looks like this. The multiples have compressed. It's impossible to route run multiple compression of this magnitude. So, so that's one way to make money is the market's gonna stay, it's a trend following game. And you can make a ton of money following the trend if you stop following the trend at the right time. So for people who sold out in 21, 22, early part of 22, great, they banked the wins. For people who hung on because they wanted to get one more turn or they wanted to return half the fund or the whole fund or whatever and things got re -rated and retention went down and growth is now down and now profits have to come up. I mean, that's a tough transition to make. And you're seeing a lot of management teams get swapped out, right? You had a grower, now you need a grinder. So you're seeing that all over the place. If you talk to the head owners, our view is, enter at a compelling valuation, try not to fall into the value trap, right? Which is I bought it cause it's cheap. And we've fallen into that before, and we spend a lot of time and diligence making sure, do we like this for more than just the valuation? But this - you're talking to a guy who two and a half years ago bought on fax software business in Boston from a 91 year old who started the business in 1985 after taking early retirement from Wang laboratories. So most of your listeners don't know what the Wang laboratories is, but it was one of the first PC companies that got beat by IBM. So he left that 1985 and started a fax board business that turned into a fax software business. So why would we do that? Because they had, they cared a ton about product. They were all engineers. They had 60 employees. It was wildly profitable. They were not selling in any kind of professional way. They had amazing retention, but very little organic growth. And it was a really sticky product in a highly regulated industry. So we replaced 40 of the 60 employees in the first 12 months of our ownership, including the entire executive team. But that was the deal. That was no surprise to the, to the sellers and it was no surprise to the employees. But if you signed up to work for a 91 year old in Boston to work at a fax business, you did not sign up to work for a private equity firm that needs to make multiples of a capital in a short period of time. So we're very upfront and open about that with those sellers and the employees of the team which is hey, we're gonna ask you to do things you haven't done before. A lot of it may not make sense to you. We will teach you all of it. If you want to run with us, this will be - will be hard and fun and if you don't we will give you a very generous path to somewhere else and will help place you at a place that's more your speed and then you have to attract a team to go do that. So that's kind of the how do we get that magic of like keeping the past good and but also, you know, accelerating the business.
There's two tools in private equity, I think - urgency and empathy, right? Not a lot of, I don't know. Maybe people talk more about cashflow and growth, but I'll talk about urgency and empathy. All urgency, no empathy - like that's the worst boss you ever had. That's the meanest coach you ever had. Right. It's all urgency now, now, now, now, zero empathy for how hard that is to do, especially in a 40 year old business where you're trying to, you know, rebuild the boat while it's sailing. We can get into the philosophy of Theseus's ship and all that stuff, but we'll skip that for another conversation. Is it the same boat if you've changed every board on it as you're sailing across the Mediterranean? Probably not. And then all empathy, no urgency. I mean, that's Nana. I mean, Nana's awesome. Nana just loves you and wants to give you a hug and tell you how amazing you are and send you a check for $5 on your birthday. I had two great Nanas. But that's all empathy, no urgency. So that's not pushing you to be great. That's just loving you for what you are and who you are. And that's awesome. But trying to balance empathy and urgency as an investor with a management team, trying to do hard things, right?
All of our deals are hard. All of them are hard. The people who sign up to work with them are hard. We're taking a business that’s been around for a long time, and we're trying to completely change the trajectory of it in a very short period of time. And it can be emotionally rewarding, financially rewarding, and you can look back and say, I did that. First is, hey, I bought a perfect company and I paid the most for it in an auction, and it continued to be perfect. I owned it.
Shiv: And then you optimized it.
Devin: I'd probably can't say that I had a whole lot of impact on it because it was a great team, great market, great execution. And then somebody paid me a lot more for it. That's awesome. I'm all for that. And there's a lot of people in my segment of the market who do that, but you're either going to be a little better than them or a little worse than them. I'm trying to be significantly better than my peer set and yeah, eventually we'll get it right. And, and you know, we'll, we'll will do that, but that's how we think about investing.
Shiv: I think that's coming to the unconventional right versus conventional right concept that we're talking about earlier. I guess my question even in the fax example that you gave, like, how do you factor in for the risk that - I'm assuming your goal here with an investment like that is to eventually flip it as a way to return it, or are you counting on profits and cash distributions to make that up. And then how do you factor in for the fact that if you are going to sell this business, when you try to sell it, the market of potential buyers, similarly, because it's an unconventional thought to buy it when you bought it, there won't be enough buyers at that point in time? And how do you kind of hedge for that?
Devin: Yeah, good question. So the good news for us and Bryce and smaller funds is that there's been so much money raised above us, like hundreds of billions of dollars in private equity funds, bigger than us over the last 10 years, that there's an unending list of larger funds that need assets that have been professionalized and cleaned up. So that when I started my career, it was, well, Microsoft buy this, will Oracle buy this, right? We're building businesses to get in the way of their strategic. We're basically outsourced R and D for strategic software buyers for the first 15 years of my investing career. We still think that way. So I'll back it up. Can we price and structure the deal to get our money back? We bought it well outside of an auction, probably below market, but we could argue about, you know, we play market clearing prices, obviously, because we buy companies, but did we think we got it for, you know, a good deal? Can we structure it in a way where our capital is senior in some sort of, you know, participating preferred where we're double dipping on the preferred and the common and getting a dividend?
Could we structure price and recap our way to like get our money back, even if the market isn't great, right? And I tell my investors, we take end market risk. Sure, I'm taking team risk and some tech risk. The tech works, but maybe it's not that fancy, but none of our companies are getting bought for the tech stack. They're getting bought because they have thousands of customers transacting at a good gross margin and a good profit margin with good gross prospects and blah, blah, blah. But can we price structure and recap our way to our money back? Can I run the business better, execute better to make a double? Could I do some M&A and some tuck-ins to get to a triple? And beyond three times your money in four or five or six years, I think a lot has to, so much has to go right for that to happen that, yeah, maybe you got a little lucky. So we're not trying to swing for the fences on every deal and have a ton of volatility.
So if I can pack that in, I can deliver, I think, an outsized fund return, but hey, talk to all the value investors for the last 15 years. It's been rough out there, right? Momentum has been the flavor of the decade. so yeah, we're, I'm not sure. Is there a value investing in private equity? I'm not so sure. Like what's the intrinsic value of a private software company? Not sure you could, you could convince me that there is.
But like, you know, we're value-oriented. We care about entry price. We think you make a lot of your return on the buy. And then you can execute add on and market time your way to an outsized return. But if you just do the basics, could you make two to three times your money? You know, that feels like a safe place to be. And the market can be hot, the market can be soft, right?
We're not riding a wave of, ‘Oh, valuations are up. Now's the time to sell cause I can make a return, but if valuations are down, I'm in trouble.’ You know, we're significantly - coming in at significantly below the 30 year average of a software business. And we look at the world in 20 to 30 year chunks, not in two or three year chunks.
Shiv: Right. It's interesting what you said is you make your money on the buy and earlier you were talking about getting a good company at a good valuation is a big difference. And I was talking to an investor a little while ago and he said to me that, you know, if you can get two to three X on a fund, that is a phenomenal return. And a lot of people would take that. There are folks that try to swing for the fences and try to get five or six X, but in general, that's quite rare, way more rare than people would think, especially when you start factoring in all the external factors that come into play, transaction costs, paying out cap gains and everything else that goes along with working in this market. And so even from what I'm hearing from you is just about having the realistic expectation is key to having like a healthy investment approach.
Devin: I hear the same thing. I'd love - I've got all the data. I subscribe to Preqin. I see all the public data from all the big public pension funds. Pretty easy to find a lot of data on fund returns for the last 30, maybe 40 years, just sorted by how many people have returned - private equity, not venture - return a five X fund. GTCR put up an 11 X fund on an $80 million fund in I think 1982. So like if there are people out there saying they're trying to put up a 5X private equity fund, I mean, that'd be like flipping a coin a million times and having it come up heads every single time. It's possible, but it's certainly not something you can manage towards. And if anybody who said that did that at a skill, I'd be, I'd - Talk to them about the difference between skill and luck. You can have one thing just blow it away. That's amazing. Now the sad thing is an LP will say, well, you can't replicate that. So I'm not going to give you credit for it. It's like, well, I just did it. So like, come on, give me a break. And if you don't do it, it's like, well, this other guy did it. So again, two times net. You do two times net over your career. Like that's hall of fame, private equity returns.
Now that, that has all been - It's gotten a little noisy the last few years, because I think a lot of TVPI out there looks really juicy, especially in tech, but you can't eat TV PI. You can eat and you can't eat IRR. You can eat DPI. So like, let's see how the DPI comes in. Cause there are a lot of amazing funds in 99 and early 2000, you know, and I think we're in a similar category except the quantum of capital that's in tech private equity is 10, 20 X what it was back then. So that's all got to go somewhere and it's going to figure itself out. But again, if you're starting a firm and you're like, Hey, I'm going to do four X net read funds. Great. Go for it. I would say raise 40 or $50 million funds. That's how you could get there for $500 million. There was once a stat. I think the Aberdeen guys did it or Meketa or somebody was, you know, not too long ago, there was no $2 billion fund that had ever returned more than two times net, like fully liquidated. Maybe at one point it was above that, but like it's very hard to generate 3X net on billions of dollars of funds. Then maybe people are doing it. I just, you know, I'm not seeing it.
Shiv: Yeah, we work with them, you know, when you net out of… When you net out everything, I've heard from some of the larger funds that we work with that are 10 billion plus, that 1.5 X is a home run. If you can get there, that's like a great return. And I get it at smaller fund sizes, you may want a higher return. But I think just that perspective is so important because the world gets smaller. You don't need to kind of do everything. And I liked even how you explained your value creation approach. It wasn't 30 things.
It was just getting two or three things right. And if you do those things extremely well, you'll get to that return on a particular investment.
Devin: Hey, I think simple execution is highly underrated. Just execute the base business. So we're looking for businesses that are hard to hurt, right? This fax business had 2000 customers. No customer was more than % of revenue. I had 40 years of financial data for the business through multiple cycles.
I saw how it did in 08, 09. I saw how it did in 2000. We bought it in 2021. I saw how it did in during COVID. It's able to see all that data. and the team was like, here's everything we haven't done. Right. We just haven't gotten to these things because the owner is maximizing profits. And here's the things we would do if we could open up the purse strings a little bit.
And those are the things we did. It wasn't rocket science. It never is rocket science. And, yeah, private equity firms who take credit for the value creation that - I don't even like the term value creation inside a business, you know, it's like, well, it's the management team that did it really like, you know, how much did the private equity firm really do at the end of the day? Maybe we set the right incentives and right expectations, gave them some frameworks. We're good sounding boards and things. You know, we've got an in -house operating team. They're on the, on a plane all the time. They're inside these companies all the time. Of course they're making changes and adding value, but we would never take credit for it. That's always the management team who gets the credit for doing that stuff. And again, that's balancing that urgency and empathy, urgency and empathy. And now we're on, you know, whatever generation three, four or five of private equity. You're also on generation three, four or five of management teams working with private equity.
And if you talk to management teams who've been successful, they have highly, very strong opinions about how they want to work with a private equity firm and they get to choose - the best ones get to choose with who they work with, who they want to work with and how they want to work. Our goal is that our approach is empathetic, but urgent, experienced and approachable. Like we win a lot of deals in the room with the founder who's like, I don't know who ParkerGale is and I don't know who any of these other firms calling me are. They have no idea what the AUM of these brand name firms are. They have no idea who they're talking to inside these firms. Do they own the place or are they just an employee? Are they on the investment committee? So it's very confusing to them and they don't care because they're not reading Dan Primack every morning and they're not reading the Bain private equity report the day it comes out about value creation and all the things. They own their business.
They care who owns it next, but they're walking away. So they care up to a point, right? So we don't keep the founder on to tell our new CEO what to do and how to do things and second guess them. We need total clarity and we're going to do these things. We're going to make these changes. Are you comfortable with that? And most founders, certainly ones we deal with, they're like, yeah, I'm very comfortable with that. I want you to do that. And I'll be excited to watch it happen. And I hope I can make a bunch of money on my rollover, but like, I'm going to the beach. And that's the situation we live in.
Shiv: Post-close, where do you usually focus? You mentioned three things, the professionalizing the team, getting the sales team ramped up, and then resolving tech debt. Would those be the top three areas that you're seeing most value left on the table that you can then capture post-close?
Devin: Yeah. I mean, we have a relatively small team. We run small funds. I've got three in-house on my payroll, full-time, in the carry, operating people. So we don't have operating partners who are consultants. We don't have operating people who charge the portfolio. We don't, all of our operating team is in-house and sitting in the same meetings and deal sourcing and structuring and acquiring and diligence and everything. So we're kind of one team working on it. Got an ex-CTO who takes care of the tech stack, tech debt, integration, tech diligence and all that. That's Jim Milbury. Got a go to market guy, that's Paul Stansik. He was a sales guy, he was at Bain for a while and he's been working with us for almost six years now. So he's go to market. So that's just like, who are your customers, right? Get the customer cube in diligence. Like how many customers do you have? What do they own? And if you have multiple products, how many customers own all the products you own? Oftentimes in a founder owned business you know, they have a thousand customers and 200 - and they have four products and the average customer has 1-2 products. It's like, okay, just sell more to the existing customer base. Basic stuff like that. Then how do you do prospecting? How do you use AI in interesting ways internally? How do you use all the tech stack in sales and marketing to get more insight, more data, more predictability, and then systems. You know, the fax business we bought, which we've already sold, didn't have a CFO for 40 years. They were running on an unsupported old version of Great Plains. And I said they had 2000 customers, right? Doing thousands of transactions a week across multiple products. In diligence, Cass on my team, who was a CPA, worked in transaction services for an accounting firm, was our first associate, went off to business school.
So she's built all the waterfalls, she's built all the systems, she's built all the reporting for us and our companies. And now she runs that for us across the portfolio. So very quickly we're getting data we can make decisions on. So if we can pay down the tech debt fast, right - And I say tech, every company has tech debt, every company, right. We may step into some more monolithic systems than others, but we're more technical than most other private equity firms. So we're comfortable doing that.
And Jim Milbury's 40 years in being a head of engineering and CTO, and we can do some really cool things that other funds would look at and say too hard, where other funds would hire a third party tech diligence group to say, don't touch this with a 10 foot pole. And we would say, why? I'd say, well, because it's built in PowerBuilder or something, right? We don't like the tools it's on. It's an unsupported version of an old technology. We would look at it and say like, we're quite good at moving things from power builder to something else. We're good at transitioning a tech stack. And if you're really good at AI, that stuff can happen faster and faster and faster, burning down tech debt, if you're really good at it. And I think Jim is really good at it. So we'll step into those things. We're also stepping into nascent sales and marketing. The phone is just ringing, but it's ringing less than it used to because they're not, you know, refreshing the messaging. They're not listening to customers as much as they may be used to, and systems are all over the place.
If I get those three things in diligence - now most of our deals are in a process either like the fax business, we signed up to a hundred days of due diligence, right? And it was because like, that's what we needed. We had to get the financial information. We needed to analyze it. We needed to do a Q of E on it. Then we needed to diligence it. It didn't exist. You know, where maybe other people would look at that and say, that's too hard. so everybody we buy from has options you know, they're getting called by every private equity fund on the planet or not even getting called. They're getting emailed by every private equity fund on the planet. We all have Sourcescrub. We can all email everybody in mass volume all day, every day, which I think is off putting to most founders. And I like that most friends do that because we think we do it differently. And so how do you differentiate yourself in that? And then how do you get them to choose you? And then all the other stuff is just basic private equity stuff, which everybody should know.
Shiv: Everybody kind of deploys, you know. That's great. I mean, thanks for sharing all that. I actually have so many more questions, but we're kind of coming up on time here. So if there are founders listening that want to potentially learn more about you, what's the best way that they can get in touch and learn more about ParkerGale?
Devin: Sure. Well, I'm at Devin at ParkerGale.com, D -E -V -I -N. So you could go to send it to D -E -V -O -N and it probably will still come to me. But Devin, D -E -V -I -N at ParkerGale .com. We spend almost all day every day talking to founders and owners of businesses who are in various states of ‘should we sell’. Again, this fax business I keep bringing up, I had been talking to the son of the founder for three years on and off. His dad wasn't ready to sell. And when he was, he says, hey, we could sell it to the big public competitor for this price, I think, or we could sell it to you for something in that range. Will you take a look? So when he was ready, we were ready. We went out to Boston and spent a few months getting to know the business better, but we had known the family for a long time and he liked our approach because it was very product driven and there was 21 founders he could call on their cell phone and ask what it was like to work with ParkerGale.
Another way is a podcast. So we beat you to the punch. We started a podcast almost 11 years ago and there's 350 episodes on iTunes and Google Play and our website ParkerGale.com. So if you want to hear about how we do private equity, we like to say we do private equity with you, not to you. That's probably our unofficial tagline at ParkerGale. So you can hear exactly how we do things with the people we do it with, the people we've backed, the people we work with, the people that work for us. So really it's kind of a very folksy simple down-home, like, let's just talk about the stuff. Right. So we talk about what's an ICP, what's debt, in a couple of weeks I've got the head of tech lending from PNC coming on and he's going to walk through basically like, here's where the lending market is right now for software businesses. And then we talk about, Hey, how do we use AI in the portfolio? What's value creation? So, you know, we walk through an LOI for founders with me and a guy from KNE. We walked through one of our actual LOIs term by term and explained it to founders so they could understand, okay, why do I need this? Why do I need this? What's the negotiation going to be around exclusivity? What's the negotiation going to be around, you know, due diligence and fees and expenses and terms and all this. And me and the head of the Chicago office from Kirkland and Ellis go through that line by line and decipher it for founders and sellers. Because the asymmetry of information for a long time is how private equity has gotten a leg up on sellers.
Shiv: So we'll definitely, yeah, wel - I think, by the way, I have listened to that podcast. It is a good podcast. We'll definitely include that in the show notes as well and in your email. And they want to learn more. I guess they can also check out your website, right? ParkerGale .com.
Devin: Sure, yeah, lots of ways.
Shiv: Yeah, we'll include that as well. And with that said, thanks a lot for doing this, Devin. I think especially your insight on keeping this super tight and, and having the right types of expectations for companies and, and having a more deliberate approach to value creation. I, I really appreciated that. And I think a ton of people listening founders and investors alike can take a lot away from it. So I appreciate you doing this.
Devin: Hey, thanks for having me on. And, you know, we didn't get to anything we talked about in the pre-interview, which means, Shiv, it was a good conversation because you didn't have to look at our notes once. So I appreciate that.
Shiv: Hahaha. Exactly. We'll maybe do a part two sometime. So thanks for coming on. All right.
Devin: Happy to do it.
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