00:00Let's get more with Rich Lawson, HGGC co-founder and CEO. Rich, thanks so much for joining.
00:05Thanks, Amy.
00:06And by the way, you had an excellent conversation with Jason Kelly when you closed this fund.
00:11But a lot has happened since then. I would love to hear from you because I know a really big
00:16and
00:16for a very long time part of your LP base, your investor base, has been Middle Eastern sovereign
00:21wealth funds. They're facing a lot of volatility there. What are you hearing for them in their
00:25plans, deploying capital? Does it change when they all of a sudden enter wartime footing?
00:30I think for what we do in sort of the U.S. mid-cap middle market private equity,
00:35nothing has changed, I think, for us. I was probably in the Middle East seven times for
00:40the last year or two. That's changed in terms of the opportunity to travel back and forth. But I
00:44think the interest level in the asset class, the alternatives in middle market, is still very high
00:50out there. But hasn't it slowed? I imagine this last month of war has slowed dealmaking there.
00:57Are deals still getting done? Deals are still getting done. I think that as people begin to
01:03think about the implications, I think you mentioned earlier, Matt, $7 gas. I came from California here,
01:08and we all, I think, feel these profound implications of this geopolitical strife. But again,
01:14there are certain pockets of the alternatives, and particularly medium-sized companies globally,
01:19there are being transacted. We've actually bought a business in Canada. We've taken a business
01:25private in the U.K., and we've also done a fund admin in Luxembourg in recent times. So deals are
01:31still happening. One of the things I find so interesting about HGGC is you've, and we've
01:35talked about this before, you've made the strategic decision to stay middle market, to stay at the size
01:40you are, where a lot of your peers who grew up at the same time as you have exploded, have
01:45decided to
01:46become these huge platforms. Why make that decision? Why not go and become one of these cash-grabbing,
01:53publicly-listed funds?
01:55Well, for five funds now, nearly two decades, we have raised 30% to 40% more than our prior
02:02funds.
02:03And so for us, the opportunity to take and create good businesses and transform them into great
02:09companies continues to grow. The denominator of global businesses in Western Europe and North America
02:14is only growing in the medium-sized format. And that's where you can generate real alpha. Someone
02:20once told me that it's far easier to buy a business for $500 million or $1 billion and sell it
02:25for three
02:25than buy it for three and sell it for 12. And we continue to see that cycle in and cycle
02:30out through
02:30this environment.
02:31Are middle market businesses also more resilient in times of stress? I mean, I think about the tariffs,
02:39right? And the big companies aren't agile and the small companies were in trouble. Do the middle-sized
02:47companies do better? And do they do better in times of stress like we're looking at now in Iran?
02:51Well, there's a lot of opportunity to help a medium-sized company, thousands of employees,
02:5750 to 100 million of EBITDA, improve. And I think that's where we've spent a lot of time helping
03:02their go-to-market motion, helping them grow globally. There's just a real opportunity to
03:07build a much better business. So it's a very different set. And I also find just fascinating
03:13listening to the private credit dialogue that's going on right now. The market's wide open,
03:18syndicated market, private credit market for a billion-dollar transactions and below. We did our
03:23first one 17 years ago. And that market, maybe you can't do deals that sold for 450, but you can
03:30get
03:30them done. Well, the other thing about existing in the mid-market, we saw this explosion of funds
03:35that existed in it because maybe the barrier to entry is not as difficult for those $3 billion to
03:40$12 billion deals. What does your peer group look like now? Because for a long time, people have been
03:46talking about a shakeup happening. Has the shakeup come? Are we in the middle of it? How much longer
03:50does it last? There was a period of time where coming out of COVID, folks thought, okay, I can't sell
03:57now. But this huge dry powder wall was continuing to grow and liquidity was necessary. I think
04:02many times in our industry, people confuse performance and liquidity. It actually requires
04:07both. And so to be honest with you, I think that if you're not being able to demonstrate the ability
04:12to exit businesses, that is going to be a problem. I think our success in being able to raise a
04:18fund that
04:18increased the hard cap in this very difficult environment was because we sold and basically
04:25half, nearly half over unrealized and half. And because of that, I think that is going to be
04:30where the have and have nots will begin to happen, is folks that were investing that hadn't been able
04:35to actually return capital. You talk about you can still get deals done, maybe not at $450 so far.
04:41What do deals look like now? Or what does the financing look like now that private credit has come under
04:46stress? And it has been the engine, really private credit behind deals. Well, we invest across four
04:54different sectors, asset light businesses and technology, business services, non-balance
04:59sheet financial services and consumer. Our partnership orientation of investing in U.S.
05:04mid cap and Western Europe typically involves some level of seller reinvestment. It could be a founder,
05:10a management team or private equity firm. And in many cases, they're reinvesting in the same
05:14transaction that they sold control to us. So it sort of moderates the purchase price. It also
05:20implies lower leverage multiples. So we don't come under stress as much, Matt, in environments like
05:26this. And to be honest with you, a fund cycle or two ago, I just remember in 2017, that 17
05:32vintage,
05:33blue sky, interest rates were zero. We did 500 add-ons. Today, geopolitical strife, very difficult
05:40environment, having to be a little bit more disciplined, you can still do deals. What do you make
05:45of a big push into retail, which by the way might get even bigger because the administration is
05:50talking about loosening rules for 401k? Again, you've stayed very core to what you do. Do you
05:54think some other funds have kind of been distracted is the wrong word, but kind of led astray by their
06:00big moves into retail investing and retail investors in private capital? It certainly has become part of
06:08the alternatives universe for private equity managers. You see it less so in the medium-sized
06:15market, but it has changed the dynamic in terms of how important delivering liquidity is. So again,
06:22when we talk a little bit about BDCs and the caps on redemptions, imagine again, if you're not returning
06:30unrealized nav, that's a real big issue. So I think the industry average is probably 10 or 15 percent
06:35over the last few years. And we've been triple that. And so I think if you have retail investors,
06:40they're going to be much more focused on that.
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