00:00Let's take a deeper dive into private markets and equity specifically.
00:03Mark Sotir, the president of Equity Group Investments, is navigating the shifting landscape.
00:07And he says that market dislocations may be creating some of the most compelling long-term entry points that we've
00:13seen in years.
00:14Mark, thank you so much for joining.
00:16And EGI is always really interesting to me, you know, managing Sam Zell's money, you know, especially now since his
00:22passing.
00:22You have this longer-term investment horizon.
00:25You don't face the pressure to necessarily exit.
00:27And it's a pressure that a lot of funds are facing acutely right now.
00:31So are there specific deals that are coming online that are really, really interesting to you that haven't in past
00:37years?
00:37Yeah, well, first of all, good to see you again.
00:39Yeah, there are.
00:40And they're not industry-specific.
00:42We spend a lot of time looking at founder-owned businesses.
00:46We buy companies from entrepreneurs.
00:48And if you think about an entrepreneur right now, they've built a company for the last 20 years.
00:54They've gone through COVID.
00:55That's kind of scared people.
00:57Tariffs, right?
00:58AI is out there.
00:59And now you've got a war.
01:00You've got all this uncertainty that you've been talking about.
01:03And that's the group of people.
01:05Those are the companies that are looking for more security, more safety, if you want to call it that.
01:11And that's what we provide.
01:12So they're typically people who aren't ready to sell.
01:15They still want to run their company.
01:16They still want to grow it.
01:17But they want to take some money out of the company.
01:19So we're very busy.
01:21And there's a lot of people like that coming to us where they need capital to diversify themselves.
01:26They need capital to grow the business.
01:28And frankly, they're probably at a stage where they want some help scaling their business.
01:34So maybe they've gone from $100 million to $300 million.
01:36And that's probably larger than they've ever thought.
01:39And we look at it and we're like, we could take $300 million to $1 billion.
01:42But they need some help.
01:44Right.
01:44And I know things like supply chains, which I know intimately well because I, of course, covered your acquisition of
01:49Baja Tuna Farms, which is still my favorite store I've ever done.
01:52So you clearly know supply chains really well.
01:54I wonder about when an entrepreneur and founder comes to you about AI stress, what you do there, because it's
02:01kind of new-ish to everybody.
02:03It's not like there's a bunch of experts that have been doing this for decades.
02:06How do you help a founder who's like, I'm worried AI is going to disrupt my business?
02:10Or conversely, I want to use AI to my advantage.
02:13Where do you even start with that?
02:14Yeah.
02:15So for our businesses, it's more the second, right?
02:17We don't have a lot of software companies and things like that.
02:19So we're not really facing that as much.
02:22I'm actually back a half step.
02:24We're still trying to get some of our companies to use CRMs correctly and ERPs and things like that.
02:28But, yeah, there's a lot.
02:30There's sort of two dimensions to when we go into a company with AI.
02:33One cuts across like every business, right?
02:36There's prospecting.
02:37There's a lot of things you can do in finance and accounting.
02:40There's a lot of efficiencies you can create.
02:42That we bring across like all of our businesses.
02:45And then there's industry-specific topics.
02:48So we own a hospital gym.
02:50And, you know, there's all that coding that goes on and you get paid by the insurance companies.
02:54There's an immense amount of manual labor that goes into those bills going back and forth.
03:00AI is taking a lot of that work out.
03:03So it's making it efficient, but it's also making sure we get our money.
03:07We get the bills paid.
03:08So that's, like, specific to hospitals.
03:10We own some dealerships.
03:12Some trucking and we own a John Deere dealership.
03:15You make a lot of money in service fixing the tractors.
03:18Well, that's all tribal knowledge in a technician's head.
03:21And it takes years to get that person up to speed so that they can fix every model of every
03:26tractor.
03:27AI can actually, what we're going to do over time is build an agent that can almost, like, sit next
03:32to the tech, so to speak.
03:33And when they run into a problem, the agent can actually help them.
03:37Oh, that's this model, this part.
03:39You need to do this first.
03:40And that is an immense amount of efficiency for that specific industry.
03:45So, you know, as I said, there's things that cut across a lot of businesses.
03:50How do you pay bills faster, things like that, hiring.
03:53Then there's these topics that are really specific to each company.
03:56By the way, the example you just gave, are we there yet that it can supplant or replace someone with
04:02that, like, intense industry knowledge?
04:04Are we there yet with the AI?
04:05No, first of all, no.
04:06And I don't think it replaces, okay?
04:08I think what it does, so what happens in a lot of these maintenance shops is there's a technician who's
04:15maybe been at it for two years,
04:16and they're working on a job, and they get stuck.
04:19And then they're trying to talk to the foreman or their service manager, but they're busy on the phone with
04:24the customer.
04:24So it's just the work stops, okay?
04:27And then eventually when the service manager's free, they come over, they help them fix it, and things proceed.
04:31So you get efficiency out of it.
04:32You get that technician who doesn't stop.
04:34They actually have someone or a capability to just kind of keep the ball rolling.
04:41So, you know, no, I don't see that type of stuff as replacing people.
04:45And so, you know, as we mentioned at the offset, you are different than your average fund just because you
04:49do have this longer-term horizon.
04:51For the rest of private equity that have seen deal flows slow down, at least in the first quarter, kind
04:56of this, like, ungluing that hasn't happened,
04:59I know you basically see this as an industry that's going through a reset.
05:03What exactly does that reset look like?
05:06So, I mean, a couple things.
05:08One, it's just much more competitive, okay?
05:10We've all talked about this a lot more money.
05:12But the reality is, and I think Bloomberg had this, there's more PE funds out there in the U.S.
05:16than there are at McDonald's.
05:17Yes, I think that was a KKR sign, and it's an excellent one.
05:20Yeah, and so that just gives you a picture of, like, wow, there's a lot.
05:23This is so different from 20 years ago, right, where it was novel.
05:26You'd go into firms.
05:27They'd never heard of PE.
05:29There's just a lot of competition.
05:30So that's sort of one point.
05:32There's schools teach it.
05:33People come out of school, and they just know exactly what to do.
05:36So there's a lot of professionals in the space.
05:39It's an industry that's just very competitive right now.
05:41So that's going to drive down some returns.
05:45But the other part I don't think people talk about enough is the cost of doing business has actually gone
05:50up.
05:50So, you know, our fuel is capital, and interest costs are higher.
05:55So, again, I'm not talking about the last six months, but if you think about the last 10 years,
05:59and as we think about the next 10 years, we think interest costs are going to be higher than they
06:04were.
06:04Well, that affects the math enormously, right?
06:08That, you take the profit that a company earns, and then you take out your interest costs.
06:14That's a very big chunk of your profit.
06:16So if, I don't know, rates went from 5% to 8%, it doesn't sound like a lot, but it's
06:21an enormous amount of your profit.
06:23So it's harder to do business.
06:24I think the other big thing people don't talk about enough, yes, inflation, maybe oil prices go up,
06:30and people talk about it in the short term.
06:32But the next 10 years, if you keep layering on 3%, 4% inflation, it is very, very difficult to
06:40make money.
06:40All right?
06:41You've got to learn how to pass pricing along.
06:44And I know this sounds very basic, but I think pricing is a skill, a competency that most companies atrophied
06:52over the last 10, 15 years.
06:54They just didn't worry about it at the end of the day, right?
06:56And so you think about 2%, 3%, 4% inflation.
06:58Well, since 2021, that's about 20%.
07:02So now, and this is what we do in our companies, have we passed along 20% price increases?
07:09And odds are, most companies know you haven't.
07:11And that then starts to contract margins.
07:14And it turns into a conversation where people are like, wow, it's just harder.
07:18It's just harder to make money.
07:20And it is.
07:21Yeah, the easy money is gone.
07:23That's exactly right.
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