00:00Joining now is a veteran of the space. It's Colin Roche, co-CEO of GTCR, a PE firm with
00:05investments across financial services, tech, healthcare, media, and telecom. And he joins
00:09me now to take a look at the big picture. Colin, so great to see you. Thanks for joining.
00:13Thanks for having me, Dani.
00:13And look, I mean, David Solomon has a point. I know you've made some sizable exits and you've
00:18been active. So let's put GTCR for the side for the moment. But overall, we're still looking at
00:22quite a backlog of companies. PitchBook had it something like over 13,000 companies still
00:28sitting among private equity. What basically unclogs this thing?
00:32Yeah, I don't know. I don't know. You know, our industry had a lot of inflows, capital that
00:38drove prices up. The risk tolerance went way up in commensurate with the return. And that
00:45kind of peaked in 21. And now we've been living with the fallout from that. And we're in long
00:50duration assets, so it doesn't get reconciled very quickly. I think everybody is surprised
00:55how deal volumes haven't picked up. LPs are committing less. And many sponsors are afraid
01:02of committing because they don't know if they can raise their next fund. And how that gets
01:06unclogged? I mean, it has to eventually. But it hasn't happened. And now you've got the AI
01:10overhang, which is another factor in terms of whether if you're a sponsor and you've got a
01:15company, are you going to get a bid? Is the AI overhang on that company going to mean you don't
01:19have a bidder? So we'll see how it plays out. The financing is there. There's a lot of opportunity
01:25on the financing side. And that's pretty healthy, notwithstanding what's happened in private
01:30credit. But it really is a bid there, especially for larger assets. If you're talking the middle
01:34market, that's much more active. But larger deals, it's a little more dicey whether there's
01:40a bid.
01:41But there's been this real trend of creative liquidity solutions, be it continuation vehicles,
01:46more evergreen funds, what have you. So is that pressure really there to start selling? You said
01:51it needs to happen at some point. As long as you have these solutions, what finally creates the
01:55pressure to open up the dams?
01:57I mean, it's the continuation vehicle market where you find some new investors to buy that asset,
02:04that company from an existing fund. That has become a fairly big part of private equity liquidity.
02:09There are estimates anywhere from 15% to 25% of liquidity. But those are your better companies.
02:15So the issue isn't those. Those businesses can get sold. It's the company that's gone sideways,
02:21that maybe you overpaid for, maybe it was over leveraged and it hasn't performed. And then rates
02:26went up. And then you had negative free cash flow where you haven't compounded value. And maybe
02:31for many sponsors, you're carrying it at too high a multiple because of that. And you can't sell it
02:35at a premium to that carrying value. You can sell it only at a discount, which obviously looks bad.
02:40That's really that great number of companies you're referring to that aren't getting transacted
02:46upon.
02:46So have you found your way around this? I was just looking at some of your recent exits.
02:50WorldPay, Assured Partners. How are you not facing that same pressure? Is it just
02:54you didn't buy these at expensive valuations, basically?
02:57Yeah. I mean, it's sticking to your knitting. It's understanding. When things get
03:01frothy like they did in late 20 and 21 and the very first part of 22, that that's a better
03:06time
03:06to be a buyer or a seller than a buyer. It's also being very disciplined on your marks, how you
03:11carry
03:12it. And that's a discipline on the investment teams. They need to see that, gee, maybe you paid
03:1718 times for a business, but that business is worth 14 times today. If you carry it there,
03:21you're more realistic, but you can also then sell it. Now, the key part of that is if you're going
03:26to
03:26have that kind of multiple compression, did you create value that offsets that, right? So that's
03:31another thing. Our industry kind of became leveraged beta and lost track of we need to be
03:36in the value creation business. We're not in the buying and selling business.
03:39Well, a lot of ways that we've seen a lot of your peers talk about creating value now is like,
03:43we're teaming up with XAI, LLM, and they're going to come in and they're going to make differences.
03:48I wonder, does that actually add a source of alpha to try to AI-ify or whatever the word might
03:53be
03:53for your companies? We'll see. Our view at GTCR is that needs to be internal to the private equity
03:59firm and that needs to be internal to the management team of the portfolio company. Our model, working
04:04closely with our management teams, we affect change in every investment. We call transformation and AI
04:10is now a huge part of that. But we think the private equity firm of the future needs to have
04:16that
04:16as the core part of their DNA. We have most of our firms on co-work, on Anthropic. We have
04:21been
04:22early adopters to these AI technologies. They're amazing. We're still trying to figure out how to
04:27deploy them into portfolio companies, especially to find costs and efficiencies. But the power of
04:32these tools is there. And private equity firms need to own that intellectual capital to deploy
04:37their private in their portfolio. The other thing that's been happening in your industry is calls
04:41and not just calls, but action of consolidation. I mean, you're a large platform. You're $50 billion.
04:47But this thought has arised, you can't be tens of billions. You have to be hundreds of billions.
04:50I wonder if you agree with that. And if you yourself would even look at M&A to grow the
04:55size of your firm.
04:56It's not a priority for us. What I'd say is, you talked about the Advent deal earlier,
05:02great firm. There's some other great firms that we compete with. We're, by and large,
05:06monoline firms. We primarily do control private equity. And we try to do it really well and
05:12have alpha in what we do. There's some other forms of private equity that are much more index-based.
05:17And that's fine if you want to get exposure to a private equity index. But the real outperformers
05:21tend to be monoline. And that's OK. So that's where we're positioned. And many of our peers
05:26are oriented.
05:27I just wonder, do you see large and only a little bit of time here left, Colin, but like
05:30large consolidation for those who aren't monoline and maybe aren't one of the big platforms?
05:35Yeah, I think I think you're going to see more of that because, you know, you've got some
05:38weak hands out there that have some capability, but maybe should be part of some other platform
05:42that needs that capability.
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