[00:00:00] Speaker A: For the first time in history. It might not be a scenario where I'm going to major in this. And at 22, I can be a lawyer for 50 years. It's hard to see that far in the future right now.
[00:00:09] Speaker B: Is it becoming a fundamental element of the assessment of the analysts what their own level of AI maturity is when they walk in the front door?
[00:00:16] Speaker A: No question about it. I'm hiring a new executive assistant at the CEO and we're hiring another one for our Denver office. And even in that process, which is even a banker, part of our case study is how do they utilize AI, every role at our company? Absolutely.
[00:00:34] Speaker B: Hey folks, welcome back to Masters in Small Business M and A. I am your host Peter Lehrman.
Really excited to have Matt Pluster back on the pod. We sat down two years ago and we will get back into it again today.
Matt, thank you so much for carving out some time. It's great to have you back.
[00:00:50] Speaker A: Great to see you my friend.
[00:00:52] Speaker B: For those of you who didn't hear the original podcast episode, we covered sort of a 101102 primer on private credit non dilutive debt oriented capital in the lower middle market.
And feel free to take a look at that episode if you want a 101 today we're going to take it in a bit of a different direction and get a little more precise and specific.
Before we do that. I do want to jump in right away, but before we do that, why don't you just give a quick 60 seconds on and in particular Bridgepoint just so that new audience has that context.
[00:01:29] Speaker A: Thanks for the time. Great to be back. Appreciate the relationship. Matt Pluster, Founder and CEO of Bridgepoint Investment Banking Bridgepoint Investment Banking is a firm I founded 16 years ago after 10 years at Bulge bracket banks committed exclusively to serving family and founder and non private equity owned clients in the lower and middle market. In North America we do two things. We sell companies, which all boutiques do. But we have a unique private credit and private capital practice where we place bespoke capital for main street American companies all day every day. And so the way we serve companies is across the spectrum from 100% debt to 100% sale and everything in between to meet the objectives of those ownership groups and those families.
[00:02:19] Speaker B: The reason that we originally connected was because of that private capital group which sits side by side with your M and A franchise and your M and A practice.
Two years ago you had a view that private credit was thought of as like this mega cap, mega private equity product.
But that There was not only a very robust opportunity to bring it, but there was a lot of existing activity already.
The lower middle market related to private credit. It just isn't well covered and it's not particularly well understood.
So we're going to get into just what has changed and what hasn't changed since two years ago.
And the reason that I nagged you for another episode was because in the last couple of months there's just been a ton of headlines on private credit related to the big alternative investment managers.
And so it just felt like an interesting newsworthy headline and a good opportunity to revisit things in the lower middle market. So why don't you just take it from here in terms of just what you feel are the big things that have changed and that also the things that you think are basically exactly as we left them two years ago.
[00:03:29] Speaker A: I think that what has not changed is that while private credit has taken meaningful share from banks and kind of the how companies are funded on Main Street America in the ecosystem, it still shocks us 24 months later since our last podcast as to how many people still don't know about private credit or even more so how to use it and what applicability it does or does not have for their business. So I would just say that while it has become much more Main street, it still has a long ways to go. And I think that trend and momentum in taking share from kind of the traditional ecosystem of banks on one side and equity on the other, and not much in between, that's only going to continue.
It has taken some share, but there's more for it to take. And quite frankly there is still more need than has been placed for what I would call just efficiently capitalizing Main Street American companies. So the education cycle continues. We spent a bunch of time on the road trying to bring this capital down market, which is really exciting, and I think it will continue to be more and more impactful over the next decade in how our economy grows and how companies are capitalized.
That's probably the what has not changed?
[00:04:44] Speaker B: Let me ask you one quick question there before you switch to what has changed?
When a business does not have familiarity with it, when a business has a set of advisors with a limited amount of capability or familiarity with it, what do they do? In other words, when the education is not there, when the visibility and understanding is not there, what tends to happen in, you know, and from a transaction perspective in those cases?
[00:05:08] Speaker A: Yeah, two things. One, either they do the, they do what everybody's done for the last hundred years which was take the deal that their commercial bank has. Which, and don't get me wrong, commercial banks are an incredibly important and valuable piece of our ecosystem and will continue to be. In fact, every private credit we do actually still includes a, a commercial bank. That's an important note where I think a lot of, you know, advisors view it as one or the other. They're actually symbiotic and just allow for more efficiency.
But one, they generally still capitalize the company like they used to, which is to take the amount of capital and for the things that fit in the commercial banking box, that's option one. Usually though, what we find is most owners like myself and I don't know about you Peter, of companies, right, have a kind of a dreams, wants, needs list that lives out there that maybe just doesn't get executed on.
That's, that's one or two, they're paralyzed. And I think that the place we see that a lot and actually have seen that a lot more recently is in family owned companies or multi shareholder owned companies where it's like we've got a $100 million company.
The one brother isn't active and has a health issue, owns a third of it. His stakes worth 30 or 40 million dollars. And the bank says we'll loan you 10. Well what does everybody do? They kind of just keep doing what they're doing. He doesn't get cashed out. And the guys and gals that are making the company move send a third of it out the door every year. So we see a lot of paralysis where capital is the issue in solving the problem. It's kind of funny, we have one of our bankers that's recently been saying kind of an acute way money can solve family issues. And that's one of the, you know, there is more capital out there if people were more aware of it to solve these issues, which is a really cool mission. That's what we get up every day to do. And I think back to the previous comment, usually when we're bringing these cap, you know, non dilutive or private credit solutions to bear, it's kind of like oh my gosh, there might be a solution versus oh yeah, we knew about it and we just have not decided to act on it yet. So I, I'd say still a lot of people financing companies with traditional, you know, either 5% money or 30% money, not in between or we're stuck in this, we're just going to have a dream board over here or wants problems board and we'll keep doing what we're doing, but we wish we could fix it because we don't know about it.
[00:07:27] Speaker B: And when you are talking about private capital and the private capital group at Bridgepoint, do you tend to be talking about standalone private credit transactions that are distinct from an M and A change of control? Is that typically what you're referring to? I know there's private credit used in the context of M and A as well, but when you guys are talking about it, you're typically talking about it on a standalone basis.
[00:07:49] Speaker A: Yes, mostly. So mostly we're talking about non control or non, you know, non sale transactions and we're talking about transactions that generally do one of a couple things. One, it's growth capital, which is beyond and more the bank than the bank will typically go in their risk box.
Two, it's, it's liquidity capital, which generally banks don't like to lend money to watch it go out the door if they can't recapture it. Three, a lot of times it's used to remove personal guarantees which most banks want personal guarantees from owners like you and I.
And four, shareholder type dynamics and or acquisition finance dynamics which are just more aggressive and take more capital than kind of the bank bucket at, you know, 5 to 8% type risk. That's mostly what we're talking about, which is that that set of scenarios.
Now you also mentioned M and A deals and one of the things that has changed is I think two years ago we talked about staple financing or using debt to push valuations on M and A deals. That still exists, but I would say it's more Main street now or more common to see a staple financing package. Whereas two years ago we were kind of winning M and A deals because we were the only ones that were bringing that to bear private credit. No bones about it, is still used by a lot of buyers, particularly private equity buyers, to finance their transactions and their purchase of your company more optimally and hopefully pay you a little bit more too because the debt will go further. So it takes less equity to get a higher valuation.
[00:09:17] Speaker B: Okay, well I kind of cut you off a little bit. Sounds like a lot of continued education. A lot of people in the intermediary community or corporate advisory community, lawyers, accountants, still not as literate as they could be on just the utility of private credit. So that work continues for you guys and for the overall market and the product, product category, and that's kind of unchanged.
You mentioned just now staple financing becoming more and more frequent and more common. Do you want to just go through other interesting changes that you think have taken place over the last couple of years?
[00:09:52] Speaker A: Yeah, I think the, the blinking light for everybody probably, or a lot of people listening is the amount of headlines that private credit has gotten in the last. I don't know, what would you say? Three months probably, Peter. Particularly around the mega cap stuff. Yeah. Year to date, probably 26 around the mega cap kind of dynamics where a lot of the exposure is in private credit.
And so it's kind of an interesting. I just call it a weird market, quite frankly.
The headlines are dislocation in the market spreads, widening potential defaults, and pretty pessimistic ink, if you will, like in the Journal and on squawk box.
So it's really a bifurcated market though, because the reality is beneath those headlines which everybody's like, ooh, private credit bad. And caveman speak at our end of the market in the lower and middle market for what I would call Main Street American owners, ladies and gentlemen, or groups of them who are owning and running and borrowing money to fund their operations.
It's actually the most borrower friendly setup we've seen in years for the right kinds of companies that are good credits.
And the window is remarkably open right now. Peter, we didn't talk about this, but you know, we run around the company kind of doing these seminars and teach ins because we love the education cycle on private credit and the solutions like that it yields for companies. That's our mission.
And in that process we've also had a bunch of those funds who we syndicate deals out to in the lower and middle market on stage. And the credit quality down market is, is remarkably high. I can think of the last one we did, we had three funds up there, over a hundred portfolio companies and not, not a single default or distress in their portfolios. And so I do think it's a very bifurcated market where the option set down market for Main Street American companies. And what that feels like is probably very, very different than the headlines that are scary about, you know, big allocations to big fund stuff, doing big sponsor work. The market is really open down market. And what actually matters if you're a private company owner is that it's actually a supply issue. So there's actually a ton of demand down market and not many quality companies for them to underwrite. And so it's actually a great time to be thinking about what this means for your company and what options you have. And I think that's like, if you saw that piece in the Journal, you'd be like, wait, that sounds the Opposite of what I'm hearing, you know, every day in the headlines.
[00:12:19] Speaker B: There's no bullishness in the headlines right now. I think that that's tied.
Seems to me like that might just be tied a lot to like the big sort of inflection point in AI and AI models and AI model capability, which kind of took a turn for the better right around the end of the year, beginning of the year.
And it does seem very software centric. I know software is only, you know, it's, it's, it's a piece of what Bridgepoint does. But is there any validity to the bearishness from your perspective?
[00:12:50] Speaker A: I think so. I think the, the software underwriting paradigm has just shifted and changed probably to what it should have been all along, but it definitely got overheated.
And what you saw over the past 24 months, probably like the year after we did our first podcast mostly was a bunch of aggressive and large cap growth oriented underwriting or ARR lending. So the private credit folks of market lending aggressively on ARR multiples and loan to values that were really aggressive relative to those like, that's gone.
It's a return to underwriting for software companies like real, real ebitda, real recurrence of revenue, defensible customer relationships, like real moats. And then obviously, like in software, everybody is very actively asking right now, what are the impacts of AI on your business as a software company? And like, do you actually have a defensible AI ecosystem company or will AI commoditize your business? And so like that's a, that's gone from a tailwind for software companies to actually, you need to address why you still matter and you're still going to be here in five years with the current or better, you know, actual credit metrics around cash flow and debt service coverage. That's a very different conversation than okay, Thoma Bravo is going to buy my company for 12 times ARR and I'm going to go to 7 times on debt. Right. That's a very different, That's a paradigm shift though, I'd say is unique to the software ecosystem around private credit.
[00:14:24] Speaker B: Have you heard of or have you guys been able to get private credit deals done in the software category since the shift?
[00:14:32] Speaker A: Yes, one.
And we've only taken out a couple just because it's a little bit unknown as to the ecosystem right now and we've candidly just focused less on it. I mean we're still looking at them, but it's a lot easier to underwrite a core industry or a services business right now across the spectrum than it is a software deal. And you know, we're 35 bankers, so we're going to do 20 to 25 deals this year.
And we still love the conversation with software companies. The reality is the bar is just higher and how those deals are underwritten has fundamentally shifted. And really, really, Peter, they're just being underwritten like all the rest of the sectors now, like they maybe should have been all along.
[00:15:11] Speaker B: Yeah, I get that. But is anybody at this point who runs a software business able to persuade a private credit or even equity investor that they have a sufficiently clear crystal ball for what their business is going to look like in a mature AI ecosystem? Or is it just so fundamentally dynamic that this is just a point in time when software businesses aren't going to trade on the credit or the equity side?
[00:15:34] Speaker A: I mean, in the a hundred private credit meetings I've had In the last 90 days, none of them have said we're not doing software, but everybody has said the bar is higher. And AI sustainability in that ecosystem is like, is the fundamental question. And we're moving slow and cautiously like that's the headline.
[00:15:52] Speaker B: 100 meetings in one closed deal. Yeah, yeah, yeah. I mean that kind of, that makes a lot of sense.
[00:15:58] Speaker A: Maybe that answers your question.
[00:15:59] Speaker B: Yeah, maybe. Yeah, exactly. Makes a lot of sense.
[00:16:02] Speaker A: What I don't want is a software owner listening to this and be like, okay, that's off the table. The reality is it's not off the table. It's still part of the solution set. It's just a pretty acute time and what it feels like to try to get one of those deals done.
[00:16:15] Speaker B: And do you think that the software owner has to have credible free cash flow generation in order to have that conversation right now? Or is there any sort of break even ARR conversation to be had?
[00:16:24] Speaker A: Yeah, at least a path to it. Like the one deal that we did, we did an ARR thing, but it switched to an underwriting, but it switched to an ebitda company covenant 18 months out. So there has to be a path and an underwritable like rock solid path to cash flow if it's not, if it doesn't already exist.
[00:16:42] Speaker B: So 18 months after the money is wired, there's a covenant which is EBITDA oriented in nature.
[00:16:48] Speaker A: Correct?
[00:16:49] Speaker B: Yeah, got it. That's really good detail. That's really interesting detail.
[00:16:52] Speaker A: The cool thing about what you just said though is that conversation is the conversation we love to have have around private credit and non dilutive capital, which I think is a Better word is like designing more aggressive and bespoke capital structures to actually fund growth and to think around companies and how they are going to scale versus just like there's the box here that's always lived here on private equity or on commercial banking debt to actually meet the demands of company owners that that conversation still very much exists. And wrapping it all the way back from your AI questions and your software questions like the market is wide open and people want to put capital to work. It's tougher to be a fund, but it's a really good time to be a company talking to funds about their solutions.
[00:17:36] Speaker B: Yeah, well, why don't we maybe flip to the other side of the AI coin for now. If you look at software multiples in the public markets, they're trading in a way that reflects a lot of this bearishness. But then if you pull up the bridgepoint industrials report that you guys put out at the beginning of this month, you'll see that basically a whole bunch of your publicly traded comps are trading somewhere between 90 and 100% of their 52 week high and some of them are trading like 4, 5, 10 times above their sort of like typical average, you know, enterprise value to EBITDA multiples. So there's a bull market in the AI category as well and you guys have been doing a tremendous amount of work in industrials. Why don't we just talk through the flip side of the coin of AI before ending on such a sour note in the software category, which I'm sure will work itself out at some point.
[00:18:31] Speaker A: It only gets better from here, right Peter?
[00:18:32] Speaker B: That's right. Yeah, exactly.
[00:18:34] Speaker A: We've been saying for a while now it's kind of a flight to boring, but boring is good. I don't know if I shared. I grew up an industrial spanker in the auto sector and did a bunch of foundry and could not be more basic than pouring metal into shapes. Like that's how I grew up in finance 25 years ago.
But the reality is industrials and services and kind of core industry stuff has been really attractive now for and this isn't just a year to date phenomenon probably since we did our podcast.
And some of the outcomes for companies on a multiple basis and or a private credit or non dilutive capital underwriting structuring basis are quite frankly pretty remarkable.
And I think that speaks to the ecosystem of the amount of private capital across the ecosystem from private credit to structure to private equity that wants to put capital to work for defensible stories down market and so that really spans the spectrum of the industrials and the services ecosystem. I would say though, that the brightest subsectors are anything around the grid and infrastructure and data center build out the built environment.
I was chuckling over the summer. I don't know if you saw, Peter, there was a journal article about, you know, 25 years ago everybody wanted to grow up to be an investment banker or a lawyer. And now it's like, you know, all of the investment banker lawyer kids want to be H vac people. Right. Or plumbers. And so I saw, yeah, that was
[00:20:05] Speaker B: a big, that was a big piece the journal ran. I saw that.
[00:20:07] Speaker A: That was cool. Right. And so, so we've, we've seen, we continue to see a ton of activity in core industries and a ton of people wanting to put capital to work across the spectrum in those industries.
Because it kind of speaks back to the comment on AI, which is like real EBITDA is the new ARR.
That's the sexy stuff like defensible moats and, or tailwinds around cash flow generation. At the end of the day, private credit and private equity are no different. They take more capital coming out at the end or free cash flow than they did going in to make their returns work. And that's what's working right now.
[00:20:43] Speaker B: Yeah, I mean, I would love to hear some more detail maybe around this area that's working in particular. I'm curious whether or not the conversations that you're experiencing that you're part of or you're leading or you're in the room for them.
Is there any sense of hesitation around just the durability of the AI boom and the way it reverberates through the industrial supply chain, or is that for now, not, is that not coming up right now? I'm just curious whether or not there's, there are people that are digging in on the duration of the demand growth from AI within all of these industrial categories, or whether they think it's just so big and so significant for a sufficient number of years that they're not really worrying about that.
[00:21:31] Speaker A: Yeah, And I don't mean to oversell it. I am not our head of industrials or our built environment or our power and grid banker. But I do hear about all the deals and I'm in the room when we're running around New York with all the funders. And what I hear a lot of is we want to invest anything with, in anything with data center and grid exposure, especially on the services side or the environment side. I hear a lot And a lot of that, whether it's engineering, whether it's any piece of that. Right. Like that entire thing. What I don't hear any of is, boy, I'm not sure this is going to be here at five years. I don't hear that.
[00:22:07] Speaker B: Okay.
[00:22:08] Speaker A: And not to overclaim the space, but there is a real froth. And what I hear a lot is like, whether you like it or not, it's not going away. And I don't see any way this thing doesn't continue to accelerate. So the tailwinds there I don't see being actively questioned, at least not often by the funders.
[00:22:26] Speaker B: I can see how that makes sense in particular for shorter duration non dilutive credit forms of capital.
What's your perspective on the equity going into these deals? Given, given where pricing has gotten to like, is there a way to make money putting in equity capital into these parts of the market right now? Or it just seems like the, the trade has now happened and everything has repriced to such a significant peak level. I wonder how much money can get made in the equity markets in this part of the market.
[00:22:56] Speaker A: I think that's a smart comment.
I mean everything we're doing for a core industry deal like that has grid exposure or is a 50 out 12 to 18 times deal, which you're taking the bet that it's going to be a 12 to 18 times deal on the back end and that all the tailwinds like in between are executed upon. I think there's probably less margin there, but at the same time I think the tailwinds there are probably stronger than anything else we can point to at a pretty dynamic macro environment. A pretty dynamic. I don't know about you, just even as a business owner we're seeing people like what is the impact of AI going to be on my business? I mean my business is no different, right? White collar work.
We're seeing people saying I don't know if I can see the future.
And there's a lot of thought pieces out here out there, leadership thought pieces out there about what is the future. And you know, can you go into work at 22 and say I want to be something for 50 years? I don't know.
So playing the margin in a long term tailwind industry is probably not a bad place to play. But are there going to be, is there going to be a lot of alpha and returns?
[00:23:59] Speaker B: I.
[00:23:59] Speaker A: It's hard to see when people are paying 15 to 18 times for the, for that exact reason.
[00:24:04] Speaker B: Have you guys seen any private equity pullback relative to strategic buyers as a result of that or is it just sort of full speed ahead?
[00:24:10] Speaker A: I don't know that it's been full speed ahead since 21 really. It's been a pretty choppy environment.
I think the headline on the equity side would be I think us and our peers have seen a lot of Lois go and you know a lot of companies go under LOI in the last 60 days or 90 days and our company is no different.
I would say diligence time frames continue to be a little bit expected.
I think the reverberating like tenor of the market is it's hard to build momentum towards closing. I think it's going to be a great year for M and A. It's kind of like slow and choppy and the in between. I mean 21, 2021 it was like sign an LOI 45 day closing period. Don't ask all the questions and there's 10 other people who will do it if you don't. That's not the environment but I do think the general sentiment is funds want to and need to put money to work and strategics also have said look chaos is kind of the new normal and want to get deals done. It's just a little bit slower to the finish line I'd say still and a lot of things seem to be in the news every day that cause people to ask questions but I'd say it's a pretty positive market. It's a good time to go to market. I think it's a great time to go to market for private credit and non dilutive capital and still a good time to go to market for equity. And I would say on the equity side we've actually probably been seeing strategics win the bid more than sponsors recently. I would say the hierarchy of winning would be strategics sponsor backed strategics and private equity is just a brand new platform, new play as a distant third.
That's really where there isn't as much momentum but the people that have platforms in spaces that are roll up plays and or strategic consolidation plays that's what's on fire and our but our outlier bids have been for strategic value like strategic value is the question we're asking most frequently at deal committee at Bridgepoint which is you know who are the strategics whether they're sponsor backed or not that need to own this. That's what's driving deals to get done with pace at ibounds.
[00:26:10] Speaker B: Makes sense. Anything else you want to cover on private credit? I mean I thought One other thing that might be kind of interesting to talk about, I haven't really talked about it with anybody yet, is how you're thinking about AI as the founder of an investment bank, which obviously takes us in a really different direction. So before we maybe head there and spitball on that topic, anything else on private credit that you think is worth covering?
[00:26:34] Speaker A: I don't know about you, Peter. You guys interact with a lot of private funds. It always seems to be herd mentality. And maybe it's the same for us investment bankers too. Right. It was like market on, market off. And I think it's a really interesting time to be a thought leader and maybe buck the trend of the headlines and evaluate capital options. I really believe that. I think the people, like the countercyclical thought of the people that go to market right now for their options are going to be winners in the long term because I do think with the amount of capital there will be a herd mentality when it swings back to and it's going to be really hard to get attention right now. You'll get a lot of eyeballs and a lot of people who will think creatively around your capital structure and being your capital partner. And so I think that's good advice. At Bridgepoint, we always call it the dad or the mom advice. Like if your mom or dad owned a company, what would you tell them? And I think I believe in that advice. It's a supply issue right now and it's a fun time to be talking to funds down market. Outside of the headlines around what capital options are, it's pretty attractive. That's the last thing I'd say.
[00:27:37] Speaker B: Yeah, my only comment is just because the software category is so hated right now and there's so much fear there, I do think that there probably will be some very, very contrarian money that gets made in that category over the next five to 10 years. I think you're either going to need to be lucky or really, really, really skilled business model transformation sort of operator.
But it's hard to, hard to believe how some of these businesses are trading right now just based upon a lot of earnings results that just came out in the last, you know, few weeks. A lot of these businesses are generating revenue and earnings that's still very compelling and in line with a lot of historical norms. But there's just so much fear and overhang on the future that, you know, they're trading at, you know, 2, 3, 4 times ARR. Where they used to be trading at, you know, six to six to 11 times ARR. So in the private market, you know, software businesses I think are getting crushed as well.
And it may not be a great place for private credit, but I do think that a contrarian private equity move to buy some of these businesses and to be able to navigate the transition, that might be a place to make a fantastic amount of money. Just because everybody else is leaving them on the side of the road for the time being.
[00:28:59] Speaker A: Yeah, I think that's a smart comment. And for those AI defensible businesses, I think you're exactly right. I mean, this has happened in private capital forever, right? The pendulum tends to swing a lot in both directions.
And if you can kind of stick to your guns right down the middle, you could probably make money on both sides of that if you play it correctly from a timing standpoint. So I completely agree with that. And it's an interesting time to be a business owner from an AI standpoint. It's also an interesting time to do deals, which is opportunity for some and probably there's some others that chefs care about it if they're not going to
[00:29:35] Speaker B: move in accordance in the industrial category where things are so strong right now. As you just discussed, I think part of what the narrative was even before the AI narrative continued to gather more and more steam and pick up more and more capex visibility, there was also a narrative that just broadly speaking, that sort of Trump administration was going to be very, very focused on reshoring manufacturing capability. Back in America, a tariff policy that aimed to create tailwinds there for American manufacturers that's not really getting too much coverage right now. It seems like AI and Iran are getting all the coverage right now. Do you and your bankers feel like there is a standalone tailwind around reshoring and American manufacturing that is sort of separate and distinct from like the AI boom, or was that really more like a political platform that doesn't really seem to be making its way into the real economy? I'm curious whether there's like two legs to the manufacturing and industrial boom or whether it's really more just AI centric down on the shop room floor, so to speak.
[00:30:43] Speaker A: Yeah, I don't want to give you a non answer because I think my general answer as a banker would be that, you know, like we sold 100% tariff exposed roofing, you know, distribution platform last year for a really good value at like the worst time in the tariff headlines. And he's like, we've been dealing with tariffs for a hundred years, I don't care. Like they come and they go. And everybody in the industry knows about it. It's pretty efficient. And what I would tell you is despite being a very strong industrial franchise here at Bridgeport or having one at Bridgepoint, we haven't had a single deal that's been markedly disrupted by tariff and onshoring or supply chain. It's an issue always. But the lower middle market is pretty resilient and generally is more event driven than super high level macro stuff.
And so I would say that it's really about AI right now and sustainability of just where the market is moving now. I also have friends who own manufacturing companies and very distinct niches who have been really impacted. So. But those people also aren't doing deals. So I don't mean to oversell the macro piece, but as an investment banker I can speak to the lower middle market on the deal side and say that it's, you know, it's kind of like the private credit headlines. The impact down market hasn't been as substantial and really hasn't really hasn't fundamentally shifted our deals getting done and at what values.
[00:32:09] Speaker B: It's so hard to have a conversation these days without having AI just basically consume the whole conversation and maybe I'll just lay down my weapon and give up on that attempt. What are your thoughts on being a 22 year old wanted to get a job in investment banking? I mean, how are you thinking about hiring for the Bridgepoint organization right now? And before we got on the call today, you sent me over a summary from Claude. You're obviously at a minimum tinkering around with these things, maybe more.
What's going on at Bridgepoint related to AI, like what's, you know, what are you guys doing? Where do you guys feel like you are in the adoption curve there? I'd love to hear what it's like from, from the founder seat.
[00:32:47] Speaker A: Geez, Peter, asking us all of our secrets here, huh?
[00:32:49] Speaker B: Yeah, no, I, I won't ask for secrets, but I am curious how much you guys are spending time here.
[00:32:54] Speaker A: We're spending a ton of time. I view it as my, my job as a leader to lean into it. I think, I think this is the period, I don't know, next 18 to 24 months of Alpha where there's going to be a little bit of a competitive reorganization. I think two or three years from now, probably one of those phases where there will have been winners and losers and I think there will be by the way, for sure, but that we're all going to be maybe doing a lot of the same stuff again.
[00:33:20] Speaker B: Right.
[00:33:20] Speaker A: And It'll be kind of mass adoption.
But we are, I'm viewing it as my job and my obligation to our people here to be a winner and to lean into it. I mean so we've got an in house AI person, we've got a bunch of it's easy to buy a big box tool. We're doing bespoke agents, bespoke process stuff.
I am utilizing it in every aspect of my job as a CEO with our board, with analytics on the financial side, on the strategic side.
And I think fundamentally as a leader you potentially have a choice of are we going to, you know, tear up our business model and have a bunch of agents work for us or as part of my job as a leader to make sure that our business is defensible so that we can keep all of our people and pay them well. And we're fundamentally in a white collar service business and I think nobody's going to experience it more than we are. Right Law firms, the billable hour, US success fees, but that extrapolates back to hours worked right at comp.
And so I think it's super exciting and scary at the same time. I think we're blessed. I'm a 45 year old CEO and my wife is a 40 year old CEO. Like we're pretty young.
We try to be a pretty progressive investment bank.
I think there will be winners and losers in investment banking. We haven't seen models that have really totally disrupted it yet. Although there are some AI, you know, native AI investment banks. I see that more as marketing today. But no owns about it. It is going to change the inputs and the outputs and what work is worth on the white collar side and I think will impact how we hire analyst classes and associate classes going forward. I think no different for you know, corporate attorneys. I think they're going to be able to do the same amount of work with I don't know, 30 or 40% less associates. Like I'm seeing this in my role. Literally in the last three to four weeks I've gone from a dream list of strategic projects, insights that I wish we could do to now my struggle is I have a lot of those. I have like four memos on my desk right now of 20 page things that I need to now find the time to read and figure out how to implement. It feels like we've skipped over a lot of the process stuff in between to actually give us the time to be more strategic. But I think in the, in the long term like our analysts should be able to do more Value add work, but they're still going to be analysts. Our CEO, me, should be able to do more value add work.
But I don't see, I don't see an environment where A, you know, $100 million Gen 2 manufacturing company in Wichita, Kansas is going to say, okay, robot, do my deal. I don't see that in the next five years.
[00:35:55] Speaker B: Are you guys currently hiring small to medium sized analyst classes on an annual basis?
[00:36:00] Speaker A: Actually, we're. We have a super day two days from now and we'll be hiring more analysts at one time than we ever have before. So you are? Yeah. I just think what those analysts are going to be doing is going to be a little bit different. Add, more value add. And that's where my head is at as a leader. I will tell you, as a dad, I know you're a dad too.
It's a little bit of a scary environment, I think, to say, you know, what's my major? What work am I going to go in? I forget the podcast I was listening to last week, it's like. Or maybe it was Elon. It was like for the first time in history, it might not be a scenario where I'm going to major in this. And at 22, I can be a lawyer for 50 years. It's hard to see that far in the future right now.
[00:36:41] Speaker B: Yeah, but your analyst class is as big or bigger this year, or at least it looks like it will be, than, than ever.
[00:36:48] Speaker A: Yes.
[00:36:49] Speaker B: Is it becoming a fundamental element of the assessment of the analysts what their own level of AI maturity is when they walk in the front door?
[00:36:57] Speaker A: No question about it. Peter. I'll, I'll take one step further. I'm. We're currently hiring, I'm hiring a new executive assistant at the CEO and we're hiring another one for our Denver office. And even in that process, which is even a banker, part of our case study is how do they utilize AI to optimize their role? So I think every, every role at our company. Absolutely.
[00:37:18] Speaker B: Yeah. My sense right now is that people that are really strong on AI and how to use AI that are coming out of college or in their 20s right now can bring a huge amount of adoption acceleration to an organization like Bridgepoint that has the appetite for it, has the demand for it, but needs to populate a team with people that are further up the curve than maybe some of the legacy talent, which is like great talent, but just isn't as far up the curve or is busy with a day job getting deals done and they just don't have time in their schedule to spend three or four hours each week and really understanding sort of how do I use Claude and how do I use it? Well, so my sense is there's almost this opportunity right now. If you're young and you really are curious and eager and fluent in AI, you actually might even have like a leg up right now. Even though there's a lot of doomerism around young people not being able to get, get jobs, I feel like there's a, there's a little wrinkle in that statement.
[00:38:14] Speaker A: I think that's really smart. I was joking with another business owner friend of mine, he actually owns a software company, but a dear friend of mine and it's like if I had the time I would, I would start an AI consultancy company right now with a bunch of them. Because I can tell you that, you know, in my YPO group, for example, as a proxy, right, 40 to 50 year old business owners, like nobody's asking what the price is. Everybody's just saying I need it, how do I get more of it faster? And I don't know where to go for it, right? It's like name your price. I mean that's, that's the dynamic. And I think there's a real opportunity. I think you nailed it. There's a real opportunity there for. We've even discussed fundamentally shifting maybe the profile for one or two of our analysts in this class around like let's, we should be talking at Nebraska it's called the rake school, but it's like the top 30 programmers, like maybe that's our analyst, maybe it's not a finance student. Right. To your point. So I think there's a real opportunity there that's actually pretty exciting in an otherwise interesting market for talent. How are you guys thinking about it? Peter at Axial, are you thinking about it?
[00:39:15] Speaker B: Well, we're continuing to hire in the organization across a number of different categories. We've been continuing to hire engineers.
You know, we need to deliver reliable production grade code to production. And so while you, while it is true that you can have non engineers create code, that's definitely true. Ultimately you know, that code needs to make its way to production and, and, and it needs to connect well with the existing installed base of code that's in production. And there's certain changes that we can make where the risks are very, very limited. And then there's other changes that we're going to make when we code to production where the consequences of elevating that code can be profound and significant and so you really want to have good knowledgeable engineers reviewing AI code. I'm not exactly sure sort of how it'll all shift around, but my sense is that great engineers will potentially move more towards editors of code than writers of code. But like, I just, I just don't see a huge amount of important commercial software getting elevated to production without skilled human engineers as kind of part of that QA and evaluation and review process. That's a shift that we see in our engineering and technical organizations. We have product managers now with development environments that never had them before so they can develop and create products and make recommended changes to products in an environment. And we didn't have that even a year ago. So there is a real change happening inside like a software engineering sort of development life cycle companies like ours. And, and, and, and that's, that's not news at this point.
One thing that definitely seems to maybe sometimes get missed is if you get these like new levels of abundance around. You know, it may be that some organizations, if they don't have enough good ideas or if they don't have, you know, maybe they move into a cost cutting mode. But I think a lot of organizations will just find more work to do. The productivity won't lead to necessarily a reduction in workforce. I think it might just lead to more work. We certainly have a more ambitious product roadmap this year than we ever have in the past.
And so as opposed to keeping our headcount flat or reducing headcount or anything like that, we're either keeping it the way it is or we're slightly increasing it. But the backlog of work that we think we can get through is much more significant.
And we're taking on projects that a year or two ago we were like, man, that would be a really bold undertaking. And now we're like, well, why don't we take a shot at it and see if we can, you know, see if we can get it done.
So I don't know, I think it's called Jebin's paradox. But it's kind of like, you know, when it's like if you, if you took every highway in America, right? Let's say all the highways in America were like six lane highways and you turned them all into 12 lane highways. Right. Would you get rid of traffic in America or would people just drive way more until, you know, until the traffic was stack. You know, time will tell, but I think a lot more work will get done.
[00:42:32] Speaker A: Agreed. Yeah. And I think higher, higher impact, higher ROI or strategic work is possible. That's how I'm viewing it. So it is a bless though.
[00:42:41] Speaker B: One of the things that is just a huge plague to the sellability of American Main street and small businesses is the financial confederate, the financial condition, the just the, the hygiene of the financials.
And one of the things that I'm curious about is just whether or not there can become some level of agentic level recasting of financials that is very, very low labor intensity today. Recasting financials, taking a bunch of receipts out of shoeboxes and getting things into a condition where a private equity or a strategic buyer can really understand it and look at it. That's a very, very labor intensive process. And I do wonder whether or not a lot of businesses that ultimately can't really be sold because the, the financial statements are in such poor condition. I do wonder if not necessarily in the next 12 months, but maybe in the next 36 to 60 months, whether really low cost agents can automate the cleanly preparation of financial statements. And if that's the case, I think you could see maybe a whole new slug of business for sale inventory be in a position to hit the market that today either breaks down in the LOI stage or never even gets there just because they just don't have their books and records in an acceptable condition. That's an interesting open question.
[00:44:04] Speaker A: I think the push pull there is interesting because something we've seen for sure is like Q of E. And if you want to talk about AI impact on deals right now, QOV and financial diligence are faster.
Data room review, cohort analysis, contract review.
You know, usually that would have taken six weeks, that might be like two weeks or three weeks right now.
But at the same time the bar is rising. So it's kind of like we talk internally around process. Well now we basically know when we send out our SIP or what people used to call sims, right? The book on a company, whether it's private credit or minority or majority recap or sale.
We know that almost every private equity associate we send it to, the first thing they're going to do is send it through Claude or their AI.
And so now we do that first, right? So it becomes this game where we're both just serving the robot a little bit.
And that's kind of the same on the data side. Like there's a little bit of alpha now if you're. First of all, you're in more trouble than you used to be if your data isn't clean. But it's a really good time to go to market right now if your data's really clean and you get there quicker.
But the expectations are also creeping up too. So we're all just going to be serving robots in three years, basically, yeah.
[00:45:21] Speaker B: The number of people that have AI creating their emails right now. Right. And I think it's only a matter of time until people have like the AI robots creating their email and the AI robots responding to their email. And like you said, it's just only a matter of time until the robots are handling all of our affairs and corresponding bonding back and forth with one another.
In some ways it seems like a general purpose technology like this just kind of like it just resets the tide for all of us. And we all have to, we all have to find a way to just be valuable and interesting and relevant on top of this new baseline of technology that just has diffused its way into society. I know you have teenagers, I know you don't have college grads, but because you're in the middle of super day, I mean, what, what is impressive to you coming out of college today? Like, what kinds of people are you excited to hire? I think it'd be an interesting way to maybe end this conversation just to talk about like, what is your advice for young people and what is impressive to you that you get to meet as part of an, you know, putting together an analyst class at a place like Bridgepoint.
[00:46:27] Speaker A: It's interesting you asked that question. We just did our case study competition here a few weeks ago. We just put it out on social like literally a couple days ago and we had four universities in presenting case study competition. I would just tell you I was blown, continue to be more and more blown away by the, by not just the quality of talent. And I think it's easy to be the old guy. Like people don't work as hard, you know. And the whole, you know, back in my day, the reality is, is I think I turned our group, or it was on our next Monday call. I was like, I'm glad I have my job because I don't think I'd get hired anymore.
One thing that's just shocking to me is how early people select, especially for finance. I mean, we had a bunch of like, we're offering freshmen going into sophomore summer internships now. Whereas like I literally had my first interview two months before I graduated from University of Chicago 25 years ago.
How early, how thoughtful and aware they are of the market and the opportunities. And then the biggest thing is I think how purpose driven young people are is really, really impressive. To me. I mean, when I was, you know, not only 22, but 24, 25, I was thinking about way different stuff, which is like how do I get my next beer, you know, kind of thing.
Young people are really, really impressive.
[00:47:40] Speaker B: Do you think they're, they're, they're over programmed around all of this sort of careerism and stuff like that or.
[00:47:46] Speaker A: Yeah, but I don't, I don't find it just as programming. I find them to be really thoughtful and driven and mindful. Not just of like, what am I going to make, but am I going to feel passionate about what I do? Is it impactful work? Those weren't conversations we were even having 25 years ago and now that seems to be pretty much table stakes among the best of the best that we're interviewing. So it's an impressive generation is my view.
Been very actively recruiting for 25 years now. It just keeps getting better and better and it seems like the cycles are just speeding up.
[00:48:18] Speaker B: I think that's a great, optimistic place to stop. Thank you so much for the time today, Matt. We covered a bunch of stuff and even a couple of topics that you and I hadn't planned for. Always enjoy seeing you and chewing the fat in all of these interesting areas. So thank you for giving me some time today.
[00:48:34] Speaker A: Hey Peter, always great to see you my friend. Thanks for the opportunity.
[00:48:37] Speaker B: See you again soon.
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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.
