00:00Well, we've been very active, so we've been speaking with our pocketbooks, so to speak, both on the liquidity side, but also on the investing side.
00:07We had an all-time high in terms of new investments last year, and while there's risk of disruption from AI, there's policy issues, etc.,
00:15we also find it to be a very attractive investing environment, starting with the fact that it's a more fair pricing environment.
00:22In an environment like this, there are sectors that are overvalued in private equity, but by and large, prices have reset to more reasonable values where the LBO math works,
00:33or where if you buy a business at a fair price and you improve the business, you can drive an attractive return.
00:38I think people tend to underappreciate risk when markets are frothy and then overinterpret risks in environments like this where there's such an active news cycle.
00:48We like this environment much better than, for instance, 21, which was absolutely the worst year to invest in private equity, but there was ebulence in that environment.
00:56So we try to go against the tide a little bit, and we hope this is an active year, just like the last couple.
01:03Danny, what was the T-shirt you saw with DPI?
01:06Oh, DPI is the new IRR.
01:07Yeah.
01:09It's a driver, right, of everything you do.
01:11Obviously, it has always been, but how important is it now when you look at exits, for example?
01:16Well, our industry lost track of that, candidly.
01:18I mean, we saw this massive-
01:20And by the way, it's distributions to paid-in capital.
01:22Yeah.
01:22So our responsibility as investors is to take commitments from our institutional LPs, invest those into companies, ultimately sell those companies, and turn them into cash.
01:33That got deprioritized over the years, really beginning right after the financial crisis when we had low rates, low returns on other investments,
01:42and there was a massive inflow, increased allocation to private equity.
01:46So what happened?
01:46Prices kept going up.
01:48You had a leveraged beta phenomenon where if you were just a leveraged owner of private equity assets, you could do well.
01:54And the focus on value creation and getting liquidity went down.
01:58That all reached a crescendo in 21 and turned in 22.
02:02And since then, our industry has been rationalizing.
02:06Our responsibility as investors is to always be returning more cash than we're taking in.
02:11So GTCR consistently has produced more cash from prior investments than we're actually investing.
02:16And why?
02:17Because we're producing gains on those investments.
02:19So the proceeds on our gains can outstrip the amount of growth in our business and the new investments.
02:24It's, in a way, simple but profound at the same time.
02:27You know, I think we're Chicago-based, and we keep focused on the fundamentals, and there's some basics of our industry.
02:34You have pay fair prices, work with great people, know your industries, but also drive value creation,
02:40and then have the discipline to be realistic about when you should achieve exits.
02:44Our industry lost sight of that a little bit, so now there's this kind of logjam of deals, backlog of companies that haven't been sold.
02:51And now we're three-plus years into this, right?
02:54I mean, the cycle turned in early 22, mid-22.
02:59Here we are in early 26, still talking about when is this backlog of deals going to be cleared.
03:04Because too many other owners are waiting for, like, the dream scenario to sell.
03:07You know, if you overpaid and then you didn't drive value creation, are you going to sell?
03:12And in our business, when you sell, you don't redeploy that capital.
03:16You send it back to your LPs.
03:17We're not hedge funds.
03:19We're not those kind of structures.
03:20So the incentive has been in our industry to play for optionality.
03:24Oh, there will be a better market that will come around next year or the next year.
03:27But that's been going on for multiple years.
03:30And LPs, as you point out, are focused on we need to get cash back to commit to your next fund.
03:35If we don't get cash back, we won't commit to your next fund.
03:37There's a lot of firms in our industry that are under that rubric right now.
03:41And then there's a subset of firms like ourselves, and we're not alone, that have been more disciplined and have produced a lot of cash.
03:47Last year, we produced more than $8 billion in cash liquidity and some other deals that have rolled into this year.
03:53So now we have more than $3 billion of near-term liquidity pending.
03:58If you keep doing that, your LPs, and there's the good returns that go along with that, LPs are happy and will recommit.
04:04One of the, I think, more amusing stats from last year was the thing someone from KKR said, Allison Wood, that there are more private equity funds than there are McDonald's.
04:14I mean, the numbers in the thousands.
04:16So as sort of this proverbial pig makes its way through the Python and people are saddled with assets that they paid too much for, are we going to see that number dramatically shrink?
04:25Are there going to be a lot of zombie firms out there who are just unable to raise new capital because they can't return?
04:31Yeah, I mean, those exist today.
04:32Those exist today.
04:33And I would say our experience in the marketplace when we're competing to buy a business, it's a much narrower set of firms that we are competing with.
04:4221 was, again, an all-time high.
04:44There was the tourists or firms you'd never heard of or got sponsored by some LP, fundless sponsors, et cetera, that were paying big prices.
04:54But you don't see that today.
04:55You see a small cadre of long-established, typically firms like ourselves.
04:59We've been around since 1980.
05:01But we tend to see a lot of the same firms that have the disciplines we have, have the focus.
05:06And, again, that's good for our asset class to have that rationalization.
05:10The problem in private equity is it doesn't rationalize quickly because you have committed capital over many years, so these funds tend to last.
05:18They don't really go out of business.
05:19They just kind of fade away.
05:21Colin, before we let you go, when we were getting all these pronouncements from President Trump about different industries he's targeting, I was kind of cross-referencing it with your portfolio.
05:29I'm like, defense companies, no.
05:31Real estate, no.
05:32That's not there either.
05:33Colin, in just a minute here, is that a coincidence or is that design?
05:37You're not exposed to policy-sensitive factors?
05:39And it's purposeful.
05:41And, again, 45 years of history, we've learned a lot of things.
05:43We used to take a lot more health care reimbursement risk, for instance, than we take today.
05:48So we've evolved.
05:49I'd say, first and foremost, we take a lot of execution risk.
05:53So we are changing our companies dramatically.
05:55And if you're taking a lot of those risks, which you have more control over, you want to take less risks that you don't have control over, exogenous risks.
06:02So we've been purposeful in that.
06:05And I'd say there's a new cycle that every day there's some new thing that people get worked up about.
06:12What we're more focused on are what are the exposures across our portfolio?
06:17If you look through how much supply chain risk, tariff risk, tax risk, stroke of the pen legislative risk.
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