[00:00:02] Speaker A: Hey folks, welcome back to Masters in Small Business M and A. I am your host, Peter Lehrman. It's great to have John Hill on the podcast today. He is the managing partner of Hyde Park Capital Investment bank with some offices on the east coast, on the west coast, Florida, California, maybe a couple other locations as well. This is going to be a great conversation on 30 years of investment banking and what's changed and what stayed the same.
And with a particular focus on small and medium sized businesses in the middle market and the lower middle market. John, it's great to have finally pinned you down. I'm happy we have this time together. Thanks for coming on the podcast.
[00:00:40] Speaker B: Thank you, Peter. I'm pleased to be here and appreciate the invitation
[00:00:44] Speaker A: because a lot of what we're going to talk about is just what has changed and what has not changed over a few decades of investment banking and M and A for private companies.
So let's start with you just taking us back to 1989. You were a senior at the University of Chapel Hill, North Carolina.
And if I'm not mistaken, you found your way to Morgan Stanley as stop number one. So why don't you just take it from there and tell us about how you got into the business and we'll go from there.
[00:01:11] Speaker B: I have an undergraduate engineering degree from Virginia Tech. When I graduated from Virginia Tech, I went to work for IBM. I didn't even know really investment banking existed as a field, much less I ended up spending most of my life working in that business. I was a president of my fraternity at Virginia Tech and I met a good friend who was president of his fraternity at Duke. He had a job at Morgan Stanley and we were serving on the national board of directors of our fraternity together. And I found out what he was doing. I thought it was really interesting, decided, you know, maybe I'm going to try to do that. But in order to get there, I needed to go get my MBA in finance. So I went to the University of North Carolina, got my mba, ended up doing well there at Morgan Stanley in New York. Had offers from kind of all the bulge bracket firms, decided to go work at Morgan Stanley. Was recruited mostly as a technology banker because of my background with engineering and having worked at IBM. But I did work on various deals as needed, which was a fairly rigorous experience as you could expect.
Worked there for a few years and then was recruited by Raymond James with a real focus in particular on technology.
So Raymond James was starting their, their industry focus and they needed someone to come down and help build out a Technology effort, but they also didn't want to spend a lot of money doing that.
And so they recruited me as a more junior associate banker at Morgan Stanley. I came down and worked with another banker to get that line of business off the ground at Raymond James. And Raymond James today, you know, has around 800 bankers. And at the time I think I was the sixth or seventh banker to join the group.
[00:02:50] Speaker A: Did you leave New York for that job?
[00:02:52] Speaker B: Yeah, I left New York. I moved to Tampa, Florida actually to St. Petersburg, Florida and joined Raymond James and got started.
[00:03:02] Speaker A: And then you were at Raymond James all the way through the dot com ramp up and it looks like you wrapped up there in 2000. Right.
[00:03:09] Speaker B: My confidence in starting Hyde Park Capital was a combination of being young and not knowing any better about how hard it is to start an investment bank and also a very successful run at Raymond James. So when we started there, there were no technology deals and there wasn't really much of an investment banking effort. We had done a handful of deals as of like 1991, 92.
But when I left like nine years later, I had the largest team in the investment bank. It was technology and telecom. We split the two into two separate industry groups. But for a long time we were doing technology deals. We got to see a lot of technology change in the 90s with avid email and the Internet and the growth of the smartphone and the like. Things changed dramatically during that period. But we did it. Billions of dollars of public and private financing as an M and A were, had a very successful run. A lot of public capital work, which was a much different market back then for public capital from a deal size point of view and the like. And private equity was really just taking off in the early to mid-90s.
Decided to leave to start Hyde Park Capital but ultimately ended up with a view to be like provide high end investment banking services to lower middle market companies. Initially mostly in Florida. We had a view, but Florida was at the time the fourth largest state, now it's the third. I was on planes all the time, as you might expect. Did a lot of business in Europe actually at Raymond James and have four little kids and was trying to figure out a way to stay around a little more often.
And so we had the idea that, you know, if we could do deals in Florida, which was great environment and basically have a short flight or a drive around the state, that could be a good model. And that was the model for probably the first 10 to 15 years. It's been 26 years since we'd started it so that was kind of originally the model and that's changed quite a lot now. But that was how we started.
[00:05:11] Speaker A: Did you start before the dot com meltdown or after the dot com meltdown? I'm curious. The fact that you started in 2000 makes me want to know a little more about the specifics. What point in time in the year 2000 and 20? Yeah, it just must have been either really, really hard or really, really easy. And then really, really hard. But certainly at some point by the end of 2000, it was a very different landscape.
[00:05:34] Speaker B: We didn't time it well.
Originally we were going to be like a more of a merchant banking model because a lot of deals were getting done at that time that were unusual deals in the sense that you would have very small companies trading for very high prices.
There are deals that people know about, like mark Cuban steel broadcast.com, which he was highly successful in selling a 10 or $20 million basic streaming business. Nobody had done that model for like $2 billion. There were software companies back then, like inked me and others that were being very aggressive in acquisitions. And even here in Tampa we had a software company and at the late 99 closed in early 2000s, that might have been 10 million ish of revenues that traded for $4 billion. People actually were able to monetize that. There was a lot of those kind of deals that were just phenomenal deals for the entrepreneurs and shareholders. And we thought we would do like more of a merchant banking model. Initially we would be investing in these deals while we also did M and A and advisory work. But the whole market blew up shortly after we got started. That tech bubble burst. At that time there just really weren't strong fundamentals behind those companies.
You fast forward, today's companies are really very earnings driven and very substantive and real revenues and cash flow in general. But back then there was a lot more vapor.
[00:06:59] Speaker A: How did you guys survive that period? Once the market fell apart for vapor and hype and the promise of the future and that kind of fell apart, there was a huge IPO winter. There was probably a really significant M and A winter. What deals were you able to get done?
[00:07:17] Speaker B: We had nine, 11 too. In 2001 we had a recession. So we had like a lot of externalities that were not great for the business we were trying to build. We always had a broker dealer, we're always licensed and everything like that. So we ended up doing a lot of smaller capital raises for venture like companies.
We don't really do that now, but we did that for a while while we tried to weather the storm and over time build our M and A business. And originally, you know, our M and A business is very focused on technology and healthcare. Over the years we would run into say a really nice business, service company or industrials company or manufacturing company or could be any kind of company, but companies that made like real ebitda, you know, as opposed to some of these tech deals that were maybe we're lucky if they're 5 or 10 million of revenues and these companies would be 5 or 10 million of EBITDA. Our business did shift where instead of just being all technology and healthcare, we started to branch out into these other sectors. But we were still small. It was challenging to scale up like we have now in those early days. But we did also have the benefit of starting to do some different types of deals that weren't just in our initial swim lanes. And that helped. Also from a financial point of view
[00:08:33] Speaker A: today, do you still yourself tend to have a bit of a view and a bit of activity yourself? I know you're running the whole firm now, but would you still consider yourself to be pretty connected to the tech sector and tech M and A?
[00:08:47] Speaker B: I'm connected, but for 35 years, plus or minus, I executed transactions mostly as the lead banker on a deal.
A few years ago that changed where as I hire more and more senior bankers, my role became more about trying to run the firm and manage the senior bankers.
Deals are so time consuming, I couldn't really execute transactions like I used to. And candidly, I did it for so long, I really wasn't inspired to keep doing that. And I find it interesting as I'm growing a real firm and a real company, all the different things you have to manage, you have to manage FINRA and compliance and the financials and of course all the employees and HR matters investment bankers because they're known for being so easy to get along with and easy to manage.
[00:09:36] Speaker A: Yes,
[00:09:38] Speaker B: I said like Herdy cabs, but I might say look at my picture and say it's like herding wolves.
We tried to create a different culture here. I always get around. We're the only investment bank as they recruit people that has dogs on their website, which some people will look down at us for that. But during COVID it was brutal time. We're trying to get people to come to the office. I have a lot of young people and they didn't have anywhere to take their animals. Bob em have dogs and so they talked me into letting them come to office. Like anything you know, you crack the door and then people are going to look to open it some more. So next thing you know, we're getting photos for the website taken, and they've got pictures of the dogs going. And my office manager's like, john, the team really wants to put the dogs on the website. Or okay, I don't know about that one. That sounds unprofessional, but I do like dogs. So I go and I talk to my wife Cheryl, who's been very supportive of me all these years, ups and downs, trying to do this business. And she's like, well, you know, John, if people don't like dogs, they're probably not going to be very good clients.
That's a good point. Probably you do reach a point where you want to have clients that you want to work with. So we decided to do it. We got great feedback from people. And to help the employees from morale point of view, we talk about as you do grow, an investment bank is trying to create the culture where people don't feel like just a number and they feel appreciated and recognized and valued and all that. We try to spend a lot of time on that kind of thing.
[00:11:06] Speaker A: Even if your company is an investment bank, it's still an operating company and it's made up of people and processes and good cultures and bad cultures.
I'm curious if you have come to believe that there are elements of running an investment bank that are distinctly different from running a different kind of operating company.
What is your view on the unique elements of running an investment bank versus any old product or service company that has its own challenges as well?
[00:11:37] Speaker B: It's not unique in that it's a professional services business. So it's like a law firm, an accounting firm, a consulting firm or the like. All those professional service companies. We sell a fair amount of professional service companies all share a lot of commonalities on the investment banking side. First and foremost, from a financial point of view is we have no recurring revenue. It's a hard business to forecast because it's hard to sign up new deals and it's hard to get them done and closed. Our model is predicated upon success fees at closings. It's a traditional investment banking model. Most of our deals sell sites. Some buy set M&A or capital raises debt or equity for all kinds of different purposes or applications. But that's at the end of the day, what we're doing. So we got to get deals closed. That's not that easy. And then what happens when we close them? Peter, is everybody High fives for five minutes. We pop the champagne and then we look around and say, oh shoot, we just lost a client and so we got to go get another one. And if we want to grow, we got to get two. It's not like the apple tree out there for deals. So you got to spend a lot of time on your pipeline. You need to have a very large pipeline because it's highly competitive and hard to win deals. And then you need to be selective on the deals you do so that you're working on deals that generally can get done and they all don't get done for different reasons. And then you got to be really good at the execution, the blocking and tackling of that with what you do with your CRM, what you do with technology, having the right team involved.
I always think of it as, it's like one of the most complicated things you can do is sell a company because you have to kind of know everything about the company at the end of the day. Deals will greatly revolve around the financial picture, but you have to know all the operating metrics of the business and how they go to market and how they generate business. And you got to be knowledgeable about their industry sector, who are competitors and who are the buyers who are interested in this type of company.
Let's say it's a sell side transaction. The owners are counting on us to help them maximize the value of the deal they get. I think of it not just in price, but the price, the terms, the structure, the fit.
We sell a lot of founder owned companies where they don't have a lot of experience at this too. There's a lot of handholding involved. Sometimes we kid around that we're like they're half therapists as senior bankers anyway with our clients you have to have good people skills and EQ too to kind of get to wherever that deal ends up, that you've got a client that feels, at least for sure, that you did everything you could to help them get the best deal they could get done, that you're on their side, aligned with them. There's a lot to that whole process and not everybody can do that. You can get people that are great at building models, but they can't move to that next step of being able to build confidence with clients and think on their feet and provide good advice as you run into these. Some situations are very technical, but some are more qualitative.
[00:14:33] Speaker A: I think it would be really interesting to chart a little bit of the history of M and A with you and talk about some of the things that you have seen change and some of the things that you have seen stay the same since you got into the business in 89, 1990.
One of the things that you mentioned was, was that private equity was just getting going in the 1990s and today it's more than getting going. It's a huge new market and is the primary exit endpoint for most lower middle market companies at least. Certainly not IPOs. Right. It's either a private equity exit or it's a corporate exit, or maybe it's a generational transition. But it's a major capital market now for lower middle market companies relative to what it was in the late 80s and in the 90s.
So that's one of the biggest things that's changed for lower middle market companies is just what are the exit pools and the exit ramps for the business.
Do you have thoughts on like why private equity has become so big? Why wasn't it already big in 1990? What has changed over the last 30 years, 35 years that has made it bigger and bigger and bigger?
[00:15:47] Speaker B: If you chronologically start in the late 80s, early 90s where there were only a few, pretty large, not large relative today's time, but at that time large buyout funds and enforcement little and KKR in those days were the big names. They were out pursuing large cap, large company LBOs. And if you were a smaller company that was growing and needed capital, there was not this plethora of private equity out there. Private equity capital. There was venture capital. There are a lot of funds today that started out as more venture capital, like Take a Summit Partners, which probably manages now, I don't know, 20 or 30 or $40 billion. At the time they were like a 2 or $300 million venture fund in like 1990, probably 91. But then they migrated over the years from kind of venture where they still do a lot of growth and some venture, some stuff, but they're really more of a private equity investor and buyer. They'll just do minority deals as much as they'll do majority deals. At the time, the funds were a lot smaller. What was available in the early to mid, even in towards the late 90s was the ability to go tap the public markets. When I was at Raymond James, we would do pretty frequently underwritten public offerings for companies that might be as small as 30 or $40 million IPOs.
At the time, though research could work with investment banking hand in hand, there was a fairly attractive margin for trading these securities. Equity traders did pretty well and things Would trade like at an eighth or even at a quarter, which nowadays with decimalization, we got fractions of decimals. What happened when you move forward was in the 2000, early 2000s, they separated research and banking. And they also, as they moved more to electronic trading, they took a lot of the margin out of trading equities.
And then what also happened at the same time is the private equity market really grew significantly and funds got bigger and more funds came into the market. As the ability to do these smaller IPOs and public offerings went away, the private equity firms came in and filled that void. The reason that so many funds then got off the ground was because there was a big void to fill, because the companies no longer had that IPO window to go out as a smaller IPO formula or approach. They had to look at other alternatives. And the private equity players, as they grew, fill that void to finance these companies such that instead of being, you know, going and doing 30 to $50 million IPOs, you were heading towards 3 to $500 million IPOs. Companies just had to get bigger, but they could get bigger with the backing of private equity. That was the transition from the mid to late 90s to the first decade of the 2000s. And then what happened is that so many funds were successful. The market became more and more mature. The capital markets have grown so significantly that these funds that had posted attractive returns were able to attract a lot more capital.
They make a lot more money if they have more capital under management. And so people be, you know, raise bigger and bigger funds. And the whole marketplace changed. Even today. I mean, I don't know, at some point there's a diminishing return here. But I always kid around. There's so many more private equity funds than there are investment banks because it's an easier model to get off the ground. There's just so much capital available nowadays, as you point out. You fast forward to today, and I would say in the lower middle market, the 25 million to at least 100 to 150 million, 200 million deals are a majority of those deals, for sure, are private equity kind of related.
And then as you go up from say 200 to 500 million, then 500 million to a billion up, you start to see more strategic interest.
But I mean, when we sell companies, we kind of do deals from 25 million to 500 million plus, with the majority being in the 25 to 250, 300 million range. But we do a lot of deals with strategics. But I mean, they're so often Backed by private equity. Because private equity owns so many companies now. The market just changed. I do think there's a void out there for people to be able to go or companies to be able to stay independent and go public as a smaller cap company. But you see that happen with SPACs. That's part of the reason for the success.
And I say success hesitantly because spac market is pretty complicated. And there's a lot of not successful stories out there too. But there are some successful ones. There are companies that would like to be independent that look for trying to figure out how you can do that. And now from an exchange point of view, you really can't do it in the us you could do maybe chronic stock exchange or maybe go overseas.
[00:20:44] Speaker A: Why would a small company want to go public? What is the benefit of that versus just selling the business?
[00:20:50] Speaker B: I think it's similar to why people do ESOPs. It's a pretty effective way to transfer or to help get stock in the hands of employees in a public case. And you can mark the market. Although I certainly would agree that for smaller cap companies it's going to be a less efficient marketplace because they're not going to have the same kind of sponsorship and coverage that you would as a larger cap company. But you do have a public security. It becomes a little easier to make acquisitions and the like too. You can certainly do it with private company stock. Companies do it all the time.
There is a lot of movement to try to get the cost of being public, particularly for smaller cap companies to be lower. I mean, because it is fairly onerous. We're going to see some movement and changes in this regard. But the market's gotten to be. I mean there's so much capital to market. Again, most of the tension is for where you can put more capital work and for bigger opportunities.
[00:21:46] Speaker A: One of the other things that we talked about when we were just connecting on this podcast, what might be interesting was just you mentioned that you guys used to get deals done in 30 to 60 days all the time.
Some of that got done, you know, in the pre Internet days. It certainly got done before you had Claude and a bunch of AI working on your behalf. Certainly got done before the high bandwidth build out was complete and all the fiber was laid down for high speed Internet.
On the one hand you had in the 2000s decimalization, more automation, more trading volume in public markets.
Seems like everything was getting faster, cheaper and better and more automated.
As long as 25 years ago that trend was already underway.
Meanwhile, the timelines to close M and A transactions for private companies is certainly not shorter today than it was back then. If anything, it's much longer. I'd love to just hear your point of view on this. I know it's kind of your observation. I'd love to hear you lay it out and talk about why you think this might be happening and whether you have any plans to change that trend for the rest of us.
[00:23:01] Speaker B: So I think one of the biggest challenges you go back to like managing an investment bank is also how long it takes to get deals done. So it used to be we could do deals in five or six months. And I mean deals meaning, you know, traditional sell side engagements. And now we're kind of lucky if we can get it done in eight or nine months. And it could certainly take longer. I think all the time managing an investment bank about how do we shorten the deal cycle. I have some optimism that as AI is deployed both on the buy side and the sell side, that could help accelerate things. I think most people look at the M and A markets and particularly like the lower middle markets, and they think that 2021 was the kind of the peak of the market and then it's been slower and more tepid. And every year we thought 2025 was going to be this great year with Trump coming into office. And then we had all the tariffs and a lot of noise and it wasn't as good a year for M and A as we had hoped. And then 2026, we end up with the Iran war and more externalities that just cause rising interest rates and other things that are negative for the M and A environment. It's a cyclical business. So we are headed towards, we should have at some point an acceleration in the M and A sector. And right now what happens is that generally buyers are more risk averse. They're spending a lot of time on risk mitigants and want to make sure they don't lose money as opposed to in a more accelerated market where people are more ebullient. People are thinking about, hey, I want to get this deal done because I got to make so much money on it.
As deals accelerate, then people will move faster. Why did deals get slower? Because virtual data rooms really have only taken off in the last 20 years.
Before that, we were sitting with boxes in conference rooms and going through a lot of information and we would all sit down and go through it together. And it did cause us to be, while we're all doing that, we would maybe sit down and go through a purchase agreement and other legal Documents and we could look to get stuff agreed to and get it done sooner. And there was certainly a lack of what I'll call perfect information.
But as we got more and more online and we move more and more digital, we have the virtual data rooms, we have so much information.
Then you have, everybody wants to look at everything they can possibly think of as, you know, you're able to pretty much analyze most everything now. Investors, buyers, they're interested to look at everything that they can think of, trying to understand trend lines and metrics and margins and growth rates and externalities and all the rest. And so it just creates a longer process. And then we have now we used to kind of rely on an audit or sometimes we didn't. For smaller companies, we might not even have an audit. We might have a review, hopefully not just a compilation. But now we have quality of earnings upfront. Even if we're audited, we might have quality of earnings. We'll do that in the sell side. But that could take an extra four to eight weeks to get the deal out the door to get that done, depending upon the complexity of the financial picture at the company and how well managed they are. And then on the backside we still have a buyer is going to do their qab. When we finally get to a point where we selected a buyer and we move forward, all that stretches out things considerably. And then we finally think we're getting ready to close and we're going to do our rep and warranty insurance. And that might take another couple weeks to kind of get it put together because you really can't nail it down until your contract's pretty much done.
There's a real benefit to it because our buyer can keep more money and have less risk subsequent to the closing. And the insurance companies certainly like the product. But again, these are all things that extend the deal cycle. So that's one of the things that we are looking at trying to figure out how can we get better and more efficient.
[00:26:43] Speaker A: Why does the sell side do its own Q OF Even if the buyer is going to do their own qv, what's the primary impetus for the sell side to commission that?
[00:26:52] Speaker B: That's what our clients ask us. Why do I need to pay for this?
Because it's pretty common that we don't have for founder owned companies in particular. This is less common for PE backed companies that we might sell. But the great majority of our deals are for founder family owned companies. And they might not have invested in the most qualified CFO or might not even have a CFO may have a controller, they may not have audited financials. And so when we go to market, one of the things we try to do is try to deal with anything we can to deal with uncertainty. If we do get a Q of E, we have a lot more confidence around what are our numbers. They're very solid and we know what they are as opposed to we don't get one. Maybe we made some mistakes on how we accounted for things.
Then that comes back to us later because we might sell a company with only 5 or 10 million of EBITDA. And if we think the EBITDA 7 and we finally get to where we're going to sign a LOI and then we sign it at seven, let's say it's a nine times deal. So we got a like a 60 plus million dollar deal. And then they come back and say, you know, look, we think it's really five because we did our QV and maybe their QV if we didn't do one has some pretty good points to it. And so all of a sudden we're looking at instead of a $60 million deal, $45 million deal. If we keep the same multiple. And then we have just like a quagmire, you know, we have a problem. And so we would argue like it's worth the investment upfront. And then I think the other thing is when we do the Q views, when we get them arranged for our clients, we typically are working with like the 6th or 7th largest accounting firm to the like maybe 25th now they're all consolidating. CBIZ now owns Crow. And so they just went together or Markham, I'm sorry, Crow just did a big deal with a private equity backing Foris is now the compilation of quite a number of firms. But you want to work with firms that are nationally recognized. So the buyer says, oh, okay, I know who that firm is, so I can at least put some credence in their number and what they've come up with. They typically work on the buy side a lot in addition to the sell side. In fact, they work more on the buy side. The benefit to us on the sell side is we get the benefit of their knowledge on. We're trying to create the best pro forma that we can. What ideas, what you've seen recently that seems to be successful that you think we could sell as we look at our pro forma. And if we have a pro forma that's backed by an accounting firm as opposed to just the investment bank, there's More credence given to it. And then when we get to that point where they do their qvc, our accounting firm will argue with their accounting firm. I call it the Kabuki theater dance, you know, of QVs. And hopefully whatever we're arguing over is it's a half million dollars in a 10 or 20 million dollar EBITDA business as opposed to something more substantive. But sometimes it's more substantive and it can make a difference in whether we can get a deal done or not.
[00:29:41] Speaker A: So you think that maybe it's just sort of the professionalization of all these different pieces of the M and A process that are the primary things that are lengthening it. There's a financial product around reps and warranties, there's a professional service offering around Q of E that takes the place of audited financials. And those are the things that are primarily extending the timeline. Maybe I guess also just infinite analysis from the buy side.
[00:30:07] Speaker B: Sometimes, I mean, we do run into situations where we have what buyers want to see we can't produce because the company just didn't track the data and the information, the metrics in that way. And so there we have to get people to kind of agree that we're not going to get that or they will stand down. I do think like I look at our business and you think about investment banks, what do you do? I mean we put a buyer list together, we build a sip, we call it Confidential Information Presentation. Now used to be a sim, used to be like a 30 to 60 pages of written words and nobody reads anymore. So now we have like 50 to 100 slides and people will look at pictures. We put together valuation models, we put together management presentations, but all these are like discrete tasks. So like right now we're building out AI engines for all these discrete tasks that we do to make us become more efficient in how we do our business. And I know on the buy side the buyers are doing similar things to what they do because buyers now will take all the information that is in our vdr, in our SIP and everything, anything we can give them, and they'll download it in AI and they'll have a large language model that will analyze it the way they want to analyze it and give them some synthesized report.
I am optimistic that with AI that we may be able to get things done faster. Even like, so if you're an accounting firm, you're doing QBs, maybe you can have an AI engine that will help you then get that QB done faster. And so if we can get it done in two weeks instead of two months. That's going to help a lot. So there's some sense of optimism out there. We can see some recovery and this elongated process. And then we also see people that are. This is just a normal human nature of deals where buyers will try to be preemptive because the private equity is so competitive now that any angle anyone can get to avoid a protracted long auction process.
Some funds will try their best to do that.
[00:32:05] Speaker A: How do you see them do that?
[00:32:07] Speaker B: Well, typically they tell us, hey, we really want to potentially be preemptive. And it really will come down to kind of pricing and then certainty of close. Because sometimes people do that and then they want to not say they want to retrade. You could be a strategy, but not always. But then we just had a false start. And so you kind of weigh like, okay, this is a group we know, we trust, we think they're serious. And the benefit of the longer process is you try to put everything out there in full disclosure. Because if people run into stuff that they don't like, then it's better for us that they just drop than if we kind of, you know, get them to a deal and then they drop after we sign loi or they retrade us because of some point that they knew or they should have known about earlier in the process.
[00:32:51] Speaker A: What do you think about AI processes sort of arriving? I understand the hypothesis that it might compress the time horizons.
Isn't it possible that it just continues to increase the amount that gets analyzed?
[00:33:05] Speaker B: I think 100%. Yeah, but it does it so fast because AI can analyze so much more, but they can do it so much quicker.
[00:33:14] Speaker A: And what are you seeing from buyers when a buyer is on the receiving end of a artifact that's been produced by a large language model?
What is your sense for the credence that they're giving to the output from the AI? On the one hand, they know that they can't just blindly trust the perspective of the AI. On the other hand, why bother running the material through some form of AI assisted process if you're not going to somehow benefit from that?
[00:33:47] Speaker B: There's different stages. So a lot of funds now upfront are screening deals based on using AI. And I think there they rely a lot to a larger degree on whether they are interested to entertain or not entertain the deal. And they'll try to train the AI model for what they look for and do that initial screening. But if it doesn't pass the initial screening, they're probably not as likely to Revisit it. Unless there's some relationship or somebody brings something up to them that they hadn't thought about, that's a little outside of their traditional screening model. Buyers rely a lot on that. I think that not everybody does that, but that's becoming more and more common. When you get further into the deal now you're trying to figure out, are you going to do this deal? You're using AI to help evaluate a lot of different aspects of the deal.
I think there, you know, people are going to make sure that whatever they're getting told by AI to the best of their ability to figure it out is correct. So there's a higher level of scrutiny on the back end versus the front end.
[00:34:46] Speaker A: You mentioned earlier that you've got the kabuki dance between the Q of E providers on the buy side and on the sell side. At some point, there's clearly going to be a fairly substantive kabuki dialogue between the buy side agents and the sell side agents. The AI advocates advocating for both sides.
What is changing about investment banking? What are your top producers at Hyde Park? What are they spending more time on these days? What are they spending less time on these days? Where are they getting leverage from AI, if anywhere? If AI is moving as quickly as it seems to be. Any thoughts on what a great investment banker looks like and acts like and what they still do and what they've stopped doing three to five years from now? Five plus years from now.
[00:35:31] Speaker B: I don't feel like the investment banking model is threatened to say the legal model.
I just had one of my junior bankers decide to go to law school. My counsel was, hey, that may be a tough road to go as a junior lawyer into the foreseeable future, because AI is, I think, able to handle an increasing amount of more routine legal situations that typically maybe junior lawyers would handle. I think for investment bankers, we can make ourselves more efficient with AI. And so what we're trying to figure out is, can we get more volume through a smaller team of junior bankers at High Park Capital? We are trying not to be a sweatshop and crush our junior bankers, but the nature of the business is, you know, you got to do what you need to do to get stuff done. And so we have a lot of amendment in our business. And it's like a blessing and a curse because it does put a lot of pressure on for your bankers. And we're hoping that with this investment in AI that it'll make them more efficient so that they don't have to stay till midnight. Every night or work every weekend because that's certainly not what our goal is. We're not trying to be like those firms that pride themselves on that. I think it's not a long term sustainable model. People just burn out and they quit and they move on. I think it's going to hopefully make people more efficient. I think for the senior bankers, I think they have to be technically savvy, but I think it's more about all these regular skill set of. I mean you have to understand finance and investment banking and transactions and be able to give good advice. There's all the qualitative side. You got to engender confidence in clients, you got to be likable, you got to be a good communicator, you got to be responsive. For senior bankers there's always have this challenge between executing on current transactions and finding new deals. And we do a lot at Hydro Capital to help them from a deal origination point of view. But they still have a responsibility to try to originate things and that might be through like relationships they have with the lawyers or accountants or private wealth managers. We get referrals where they go to industry trade shows and identify companies that we might be able to work with. But all that kind of stuff. I don't really see the AI changing that dynamic. And then there's just the whole part of like how organized are you now? AI can help you maybe be better organized.
How hard do you work? All the basic stuff that you would expect.
We do some of our own independent outreach. So I have a team of people that do direct outreach, more focused on the entrepreneurial, founder or family owned environment. And it depends. It's across all kinds of sectors tied to bankers and their industry expertise. But there we also are using AI for outreach. So that is another benefit. But I think at the senior level it still goes back to the total person, total banker skill set.
[00:38:27] Speaker A: Do you think you could see more like ex operators turn into investment bankers as a result of AI? You could see corporate refugees that were GMs or CEOs or COOs of businesses and the sort of like finance and modeling and accounting side of things kind of gets slowly but surely swallowed a little bit more by better and better AI. And like the X operator becomes this really interesting archetype for a high quality senior investment banker. They kind of have more empathy for running companies and they kind of have a little bit more of the like sat in the shoes storyline to tell. And any thoughts around operators becoming investment bankers as AI eats into the modeling and materials creation
[00:39:18] Speaker B: I think there's kind of a long history of successful operators. Either ones that were entrepreneurial, that kind of liked the deal side, or ones that were at larger companies that will get involved in investment banking. I think it's more common to see it in private equity where you have operating partners, you know, working with private equity funds. Depending upon how successful you were when you did sell your company or maybe did multiple deals, successful deals, a lot of those guys will kind of then become investors because they've got capital to invest and stay involved. So not as much bankers as investors, but there are firms out there that lean into that operating model, investment banks that say, hey, we want to find more operators. We've been always been more like a more traditional finance oriented investment bankers because
[00:40:07] Speaker A: it's worked.
[00:40:08] Speaker B: Yeah, it's a lot of work and it is super heavy on finance and accounting and the like. And we tend to recruit externally from firms like Jeffries and Harris Williams and these other firms where you have guys who've been bankers growing up through the system and so they know how to do transactions and they're highly skilled at it. And then you just marry that with some kind of industry focus.
[00:40:31] Speaker A: Maybe say a little more about industry focus. We talked a little bit about how industry focus has gotten more and more segmented and fragmented and more and more specialized.
What are you seeing there? What do you want to see there? What is the direction you're taking Hyde park in from an industry specific banking perspective?
[00:40:50] Speaker B: Let's say we have 25 ish bankers. The senior bankers are half of that say, and they work across different industry sectors. We're very prolific in writing M and A reports on different sectors and we use it as a marketing tool. We'll try to look at deals within a sector and multiples, values, trends, buyers, all that type of stuff. The people, if you're operating a company in that arena, you would be interested in understanding. So we used to write reports like on healthcare. Say healthcare is our largest industry group. We would write a report on healthcare, which now seems crazy to me. That's pretty broad. I don't know if that's super helpful, but that's what we used to do. And now today things have become more and more specialized. And within healthcare we have many different verticals. So we have take physician practice management, which are, you know, clinical practice groups, provider groups. But even there we might have then gone from healthcare to write a report on the PPM space. And now instead of doing that, we would write a report on say orthopedics within ppm because we're very active in orthopedics, one of the top banks in the country in that regard. So we'll do a drill down into just orthopedics or maybe into dermatology or cardiology or pain or ophthalmology, whatever it might be. And healthcare more broadly will become like it's behavioral or home healthcare or medical devices which is still pretty broad. So we probably need to go to narrower on that, maybe that if we're talking about medical devices we might go like into respiratory devices as a more narrow subset. And then if you take a different industry group, say industrial slash business services and we're talking about all the trades, instead of writing a report on blue collar trades, we would write a report on roofing or landscaping or H vac or plumbing or electrical or concrete. So we become much more specialized. And I think from talking to owners of companies, that's how they think about things. And they want bankers who know about what they do. And this more specific knowledge will help us both win engagements and be more successful executing them.
[00:42:58] Speaker A: Do you think that something is getting lost as the bankers get more and more specialized or is it all upside for the banker and the owners that the bankers represent to get deeper and deeper into the niches?
I sometimes hear from generalist bankers that have hung onto broader categories. And at Axial we refer owners that are thinking about exiting their business, we refer them to top performing bankers on the axial platform. It's one of our business lines and we're always weighing the merits and the pros and cons of okay, let's refer this owner to a hyper specialized banker who's done Nothing but sell MSPs in the IT services category for the last 10 years versus a banker who has been active across a broad range of categories. Maybe MSPS being one of three or four areas. We're always just sort of weighing whether the specialization is pure upside or whether it has some narrowness and downsides associated with it.
[00:44:01] Speaker B: I think that it does help to have a broader perspective. The market has kind of moved more towards really this narrow specialization.
I think what we're able to do as a smaller firm but this is harder to do a bigger firm. So you take again like ramy James is 800 bankers. Lincoln has over a thousand who hands like 2000 at that firm. You don't have a lot of room to do much other than whatever your box is. You're going to be elbow and somebody else and they're going to be not happy about it because now you're in their space. One of the sign points when we recruit people is that like we got a lot of white space and, and I have like some bankers who are very knowledgeable about certain sectors, but they work in different sectors too. I've got a banker who's very deep in medical transportation, done numerous deals, knows that space really well. But at the same time he also has done. You brought up IT service deals. He's done a lot of IT service deals, MSPs and cloud services and infrastructure. But he knows a lot about that too because IT services is part of business services, say, or could be part of technology, wherever you put it. But then it's a lot of professional services and sometimes actually services staffing too, tech staffing.
Now we're working in the legal space. You might have heard like that law firms are starting to trade. We have a real concerted effort right now to build a business model there. And we're selling our first law firm and we have a strong pipeline of law firms. It's a really new field. The banker doing that is also a banker who has done other professional services. But this is a new one. Everyone has its own nuances to it. But I do think you kind of benefit from being able to think across different categories. The competitive dynamic will be, hey, we want people that are just so specialized. And sometimes there's an advantage if you are a little broader that you might think of other buyers perhaps that are not linear, that might be good buyers that are not traditional. Some funds are very specialized and some funds are more general. And so if you're very specialized, you might be going mainly to. Especially if it's all you do, you could go to the same funds all the time, but maybe you're missing a bunch of funds that are interested in the category, but they also do other stuff that has nothing to do with what you do and you don't think about them.
[00:46:17] Speaker A: That's one of the places where the specialization breaks down the most is your universe of buyers. That, you know, is a very good universe of buyers, but it's a very precise and very narrow universe of buyers. And you can miss the forest from the trees there maybe. Last topic, just say a little bit about buyers and how you guys evaluate buyers. Private equity has got all shapes and sizes now, every color of the rainbow. There are committed capital funds, there's big funds, there's small funds, there's specialist funds. There's some really competent sponsors out there doing deals on a deal by deal basis. Even if they could raise a fund, they kind of prefer the deal by deal model.
How do you triage and evaluate the private equity world in terms of trustworthiness and appropriateness for a given business and a given owner in a given deal? How are you guys making heads and tails of this huge ecosystem of buyers that's out there now?
[00:47:16] Speaker B: The good news as a seller is there are so many buyers, more and more buyers. And what we have found, where you're talking about the different types of buyers more broadly, we would think of things as strategic buyers and financial buyers. Then Financial buyers used to be like traditional private equity funds, funded sponsors, and then it became the what we called the fundless sponsors, which became called independent sponsors. And a number of those are very credible and highly successful. And like you say, they don't want to have a fund because you know there's some benefits to not having a fund too.
It may be just a model they prefer. Go back five or ten years ago, we were more skeptical on the independent sponsor front. And now I would say we pretty much embrace that side of the business model. But we do have to spend more time to qualify those people if we don't already know them. Overall, we are super relationship oriented. So we have relationships with many hundreds and hundreds of funds. There's a lot of benefit to that and that we know who we're working with and there are certain funds we don't want to work with. Maybe we feel like they didn't behave well. We don't want to go through that experience again. So we won't work with them. But there's not many of those. But we do that too. I think overall we think that if it's a traditional financial buyer that's a traditional private equity fund, they can move much quicker generally than other buyers. Strategic buyers that are owned by private equity funds can also kind of generally move pretty quickly. Public company buyers or bigger company buyers, they generally don't move as fast. It takes a while just to get their attention, much less to kind of figure out whether they think and are trying to do a deal with them is just going to take longer. Most of the time with independent sponsors, they're going to take a little longer too because they generally have to go out and finance the deal by deal. So we started a new line of business recently.
I hired a really great banker, ex Lehman banker, you know, former Kravath lawyer, who spent a lot of his career raising equity and debt, but a lot of equity on the LP side. So he would work with funds to help bring capital to the fund. We're working now with independent sponsors to help them finance acquisitions where we can go out and help raise that capital.
The other thing is continuation vehicles that you certainly heard about. Where I've seen estimates like 20% of PE exits now are CVs and that includes independent sponsors too. And typically like 30% of the LPs will roll and 70% won't into the new entity into that continuation vehicle. So then we can help now structure those deals and go out and find the LPs to replace the ones who are exiting big, like Evercore and Houlihan and William Blair. Jeffrey's been really big players in that space. But we're trying to come in and basically be able to do smaller deals in that regard. Could be a hundred, two hundred, three hundred million dollars deal versus a one to three billion dollars deal. I think that overall with buyers, when we go to market, we try to figure out what our client's goal is. If their goal is, hey, we just want to sell the company and they want to try to get the best deal we can, which is fine, then we're going to generally go to both financial buyers and strategic buyers. Sometimes they're like, look, I want to do a recap. I want to kind of keep control.
Maybe not financial control, but operating control.
So they might sell a majority interest to a financial buyer, but they want to keep running it and just take some chips off the table.
That one could take us in a different direction. We do spend a lot of time evaluating the buyers and making sure that if we are going to get as far as where we enter into an agreement with them that they really want to do the deal and that they can get it closed.
[00:50:52] Speaker A: John, it's been a 70 minute wide ranging discussion on 30 plus years in the M and A world. Congrats on everything you've achieved with Hyde park, all the new business lines you're now standing up.
Thanks for the partnership with Axial over the years with some of your bankers. It's great to sit down and we'll have to do it again. Maybe in the next one you can tell us about the story of the handsome wolf behind you in your office there.
It's been great to be with you today. I've learned a ton you've shared very freely. Appreciate the time.
[00:51:20] Speaker B: Well, thank you so much, Peter. We value our relationship with Axial. You guys do a great job and we're super grateful to be involved and connected and thank you for inviting me to participate in this with you. It was fun.
[00:51:32] Speaker A: Look forward to the next one.
[00:51:34] Speaker C: If you enjoyed this episode, check out axial.com there you'll find every episode of this podcast as well as our recorded Axial member roundtables, some downloadable tools for dealmakers, Axial's quarterly league Table, rankings of top small business acquirers and investment banks, and lots of other useful content that we've created over the course of time. If you're interested in joining Axial as either an acquirer, an owner considering an exit, or as a sell side m and a advisor, you can get started for
[email protected] as well. Lastly, if you have ideas for podcast show guests, feel free to reach out to me
[email protected] I promise I will respond. Thanks for listening.
[00:52:22] Speaker D: Peter Lerman is the CEO of Axial. All opinions expressed by Peter and podcast guests do not reflect the views or opinions of Axial. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Podcast guests may have ongoing client relationships with Axial.
