E421: Jack Purcell — Building an $11B Private Equity Firm

What if the biggest edge in private equity isn’t finding better deals, but designing better incentives? In this episode, I sit down with Jack Purcell, Managing Partner at Ridgemont Equity Partners, to unpack how alignment helped turn a Bank of America spinout with fewer than 15 people into a private equity firm managing more than $11 billion. Jack explains why Ridgemont invests significant GP capital alongside its LPs, why more than two-thirds of the team participates economically in its funds, and how a nine-person unanimous investment committee uses a proprietary 40-point scorecard to evaluate deals.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  Most people think that the best private equity firms are built on great investments. But you think that they're built on great incentives. Why is that?

• 0:08Speaker 01

  I'd almost say, David, incentives and alignment, those two words sort of blur together. And I don't know about in your business, but I've yet to meet an institutional limited partner that comes to our office, meets our team and sort of says, I really want to make a five-year investment in one fund because I have this super, I'm convicted in this idea about your business or the end markets you focus on. If you think about institutional LPs, they're generally thinking about a two, three, four, or five fund commitment, right? Our business has been around since 1993, managing institutional capital on behalf of third-party LPs since 2010. And if I think about our investors, many of them have been with us for 15, 16 years.

• 0:53Speaker 01

  And so that decision really isn't a three- to five-year trade. It's really sort of a long-term, do I want my capital parked with this firm? Not just with this one fund. And if you think about that sort of mental mindset from institutional LPs, it means that alignment with those LP partners is really important, right? And so for our firm, we've tried to bring almost like a, call it like a principal-first mindset to running the business. And if you look at each of the funds we've raised over time, as a GP, we've typically been, if not the largest, a top-three investor in each of those funds.

• 1:34Speaker 01

  And so it sort of forces you to bring this LP-first, principal-first mentality. And I think that's important just to keep in mind in a business where the market averages, you put 2% of the fund in as a GP and you get 20% of the upside, right? That creates some, or can create some weird incentives, right? And so if you change that to where the GP is actually bringing a principal-first mentality, it creates such better alignment with all the institutional partners that you're managing capital for.

• 2:02David Weisburd?

  Maybe you could double-click on the two-in-20 model. Why could that create misalignment?

• 2:06Speaker 01

  The 2% I was referring to in that math equation, David, was more around sort of the standard GP commitment amount of 2%, right? Where, gosh, if you have a tough fund and you only return your basis or you make 80 cents on the dollar, which that's probably top-bottom decile performance in terms of private equity over time, you really don't have that much skin in the game that you lose. But gosh, if you have a three-times gross MOIC fund, 20% carry on two turns a gain, that's a lot of incremental upside. And so when the sort of levered effect of your GP commitment is that extreme, it can create some just odd incentives, right? In terms of, should we go and hit the long ball and try and make three or four X on something?

• 2:48Speaker 01

  When the right risk-adjusted decision might be, hey, how do we make two or two-and-a-half times very consistently? But the more capital you have, the more of your net worth you have tied up in the business as a principal investor, it forces you to really think about that risk-return trade. That's sort of the nuanced difference.

• 3:05David Weisburd?

  This low skin in the game almost turns you into an options trader. You have these options and what do options trader want? They want all the

• 3:12Speaker 01

  They want variance. That's right. They want the long ball. And so I think at least in our business, what we've built over the last decade and a half, we've really tried to think principal-first and that's been a good formula for us.

• 3:25David Weisburd?

  How did you go from the spin-out in 2010 from Bank of America to today having more than $11 billion that you own?

• 3:31Speaker 01

  So when we started in 2010, we had a very small group. There were less than 15 of us. And for almost two decades, we had worked for one institutional investor. It was Bank of America. We invested straight off of the bank's balance sheet. And so this notion of, hey, we've got to go find third-party institutional capital was completely foreign to us. The notion of fundraising and how to build the fundraising muscle completely foreign to us. And so we started on this journey with a small team, a really good track record, and that's it. The first fund we raised, it took us well over a year to raise it. It was less than a billion-dollar pool of capital, which was smaller than the last fund that we were raising at Bank of America.

• 4:13Speaker 01

  And in hindsight, it was a great time to start and build a business, right? We were coming out of the GFC, who knew it at the time, but we were on the precipice of a 10-year run with 1.5% to 2% inflation, low rates, plus-two, plus-three GDP growth consistently, positive jobs growth month after month for a decade. In hindsight, it was very fortuitous timing to start a business. And, you know, my partner, John, has this great quote about success, but getting success, right? Fund one went really well and the three core sectors we focused on exclusively did great. Fund two did well and fund three. And it sort of just, in many ways, kind of happened and evolved. I'd say five or six years after spinning out from the bank,

• 4:55Speaker 01

  it became clear to us that we had the shot to build a real business, not just spin-out partnership that are good investors that raise a little bit of money and kind of go on down the way. And so I'd say 2015, plus or minus, we really decided as a partnership to build a business, which is different than building an investment partnership. A business has real thought around, well, what's your sales strategy? What's your IR team investment? What's your commercial excellence plan? It has real thought around what's your operating infrastructure, right? What does Finance Fund Administration back office looks like to support a business that could have 10, 20 billion of AUM someday? And so I'd say the last 10 years, in addition to being in the investing business,

• 5:37Speaker 01

  we've also been in the business-building business, not unlike our portfolio companies. And that part in particular has been really rewarding. Our team's grown from 15 people to almost 70 today. It's about half of our headcount is in the investment team, the other half in the functional areas supporting the business. That's just been a really, a really fun journey, particularly the last seven, 10 years.

• 6:00David Weisburd?

  Spoken to hundreds of GPs, you guys have one of the most aligned businesses from the bottoms up. When did you make that decision?

• 6:09Speaker 01

  In many ways, sort of doubled down on this alignment piece, David, in the last five to 10 years and added a lot of other elements beyond sort of the simple GP commitment, right? And just to give sort of a flavor of some of them, so we've been really intentional about how we've set up our management company. It's funny, like a management company circa 15 years ago, like not sure if I were on your podcast, I'd even tell you what the management company is or was or what it even could become, right? And for us, it's become a real source, we think, of building a durable business. Our management company today is 100% owned by the active leadership of the firm.

• 6:52Speaker 01

  We've not gone down the path of a GP stakes transaction. We haven't thought about taking

• 6:57David Weisburd?

  It's becoming more and more unusual.

• 6:58Speaker 01

  Yeah, it is a little bit unusual, right? And there's nothing against the great firms that have gone down that path. For us, though, it just feels like having the active leadership team own the business is the best thing for making long-term decisions. And so we've spent a tremendous amount of time getting all the plumbing right to effectuate that, to have retiring or retired partners sort of gradually transition out of the business in a way that's seamless, to have new partners come into ownership of our management company at no cost to themselves, sort of a gradual on-ramp, gradual off-ramp. And that really sort of further ties and binds the partnership together in a cohesive way.

• 7:40Speaker 01

  So yes, we're significant investors in our fund. Yes, we have great alignment with our limited partners in our funds. But we also have great alignment thinking about what's the right investment decision today in our business to propel it 10 years from now? And that ownership structure, that's been a big piece of that overall firm alignment.

• 7:57David Weisburd?

  You mentioned retiring partners.

• 8:01David Weisburd?

  Term for this is generational transfer. Probably one of the most poorly executed strategies, whether private equity, venture capital, or really any private markets business, what have been the learnings from that?

• 8:13Speaker 01

  And I would say not only private market businesses, right? Just mid-market businesses that we invest in, we see this all the time. And we invest in a ton of founder-family-owned businesses. And getting that transition right and architecting it in a way that is seamless. And on the backend, everyone's excited about the outcome. That's really, it's really tricky, right? And so our firm's been around since 1993. And depending on how you count it, David, we've been through, call it six or seven renditions of succession planning, where partners, senior partners, transition out over time, move towards retirement. And so we built the muscle six or seven times around how to do it in a thoughtful way.

• 8:55Speaker 01

  The output of that is some of the plumbing I described in terms of economics slowly fizzling over a couple of fun period, new folks coming in. And we're super pleased that we've never had a spin-out, we've never had fracturing in the partnership. And as each kind of five-year chunk goes by, I'm coming to appreciate that's more and more rare, right? You don't see that very often. A lot of it is sort of the mechanisms we've put in place. I think a lot of it is also our, just our firm culture. Our business is based in Charlotte, a little bit of a different place compared to some other mid-market competitors. The type of talent that we attract, we typically attract folks at the midpoint in their career.

• 9:34Speaker 01

  Our business is not built based on finding really senior people and bringing them on board and trying to intertwine them in our culture. It's generally built on bringing junior, mid-level talent in and then promoting folks from within over time. And so that allows us to have really strong guardrails and control on the culture that we have built. And there's a lot of things we do to sort of maintain and keep that culture and it becomes self-reinforcing. And so culture paired with a good and thoughtful succession planning architecture, that's allowed us to succeed with six or seven renditions of generational transfer.

• 10:12David Weisburd?

  You mentioned you built this muscle of generational transfer. What were some of those early institutional mistakes that the firm learned from?

• 10:20Speaker 01

  First 20 years of the partnership's existence, we were almost a corporate utility of Bank of America. We were a business unit inside of a bank. And so this notion of like, how does the partnership succeed over the next 10 or 20 years? It was, I'd say it was less palpable. It's really the last 15 years as an independent partnership when we've had to focus on it more. And I think a lot of the credit goes to many of the partners, senior partners that founded the business in the early 90s, when it came time for them to think about the next phase of life and moving on from the business, they were really focused on setting the firm up for success and rooting for the next generation

• 11:04Speaker 01

  in a way to be more successful in every definition of that word than they were in their career.

• 11:08David Weisburd?

  Why do you think that is?

• 11:10Speaker 01

  I think a lot of it was just pride in what had been built and a strong desire to see that continue, right? Charlotte's a pretty unique town. We've got the largest

• 11:22Speaker 01

  Private equity fund in town, there's a lot of pride in what we've built in Charlotte. And if you look at our team of almost 70 today, our tentacles are sort of spread throughout the community in a lot of different areas. And making sure that survives and grows and succeeds, that was a very important thing to the founders of our business. It's a really important thing to me now as I think about the next 10 or 15 years and where Ridgemont could go. And so I think a lot of it was just sort of the nature and the quality of the leadership team around this business.

• 11:56David Weisburd?

  It's funny because I'm around a lot of these private equity billionaires and DECA billionaires. And oftentimes you see them almost play this value maximizing game, hurt a lot of relationships along the way, then have this absorbent amount of capital and then they die with this capital and they give it to a library. And then the question is, why wouldn't you create a legacy where a firm that outlives you with people that you've worked with, people that you care about versus giving it to this landmark that nobody will remember, nobody really cares about?

• 12:28Speaker 01

  And it's interesting, we've taken a very, I'll call it an egalitarian approach to the success of the firm. So if you look at our team today, David, over two thirds of the team are hard dollars investors in our fund, participate in our carry waterfall. We have one carry waterfall. There's no, hey, David, you're in the industrial team, so you get a big spiff based on the great industrial deals that you've done. When the fund does well, the firm does well. And so a really simple one waterfall architecture, broad distribution, the economics, even our management company, we have 15 shareholders of our management company today, every partner

• 13:07Speaker 01

  at the firm, functional area partner, CFO of the business, COO, sector lead partners, and of course, the senior leadership team, we are all shareholders of our management company. And I think that egalitarian approach to economics, egalitarian approach to sharing the success of the firm, that cuts off a lot of the one person, one agenda that I've observed from other firms. Even our investment decisioning, our partnership has an investment committee of nine voting members of the IC. Everyone has a veto. We use a proprietary 40-point IC scoring system to vote on which investments actually end up in the fund.

• 13:49Speaker 01

  It's a very, in many ways, sort of democratic approach to finding the best ideas to put inside of the business. There's a lot of thought and intention that's gone into sort of constructing this business in a way that's set up to survive any one person or leadership team or time period.

• 14:05David Weisburd?

  Everyone I talk to on the show is chasing the same thing, an edge. And more and more, the edge comes down to your information, not just having it, but being able to trust it when the stakes are highest. AI is doing more of the information gathering for you every day and most tools are very good at sounding right. The summary reads clean, but can you trace it back to the filing, the transcript, the specific passage that drove the answer? Or are you just trusting the confidence of the output? For investors, that's not a minor concern. A missed filing, a misweighted source, a context that got lost somewhere in the retrieval chain, those aren't edge cases, they're how decisions go wrong. AlphaSense is the AI market intelligence platform built specifically for this. They own the content, over 500 million curated documents from broker research and expert

• 14:49David Weisburd?

  transcripts to filings and earning calls, and they own the retrieval layer on top of it. So every answer links back to an exact verifiable source because the answer is only as good as what's underneath it. And with AlphaSense, you know exactly what that is. The edge goes to whoever could trust their information and prove it. See it for yourself. Start your free trial at alpha-sense.com/HowIInvest. That's alpha-sense.com/HowIInvest. What's downstream of having non-investment partners? You mentioned the CFO and I imagine other operating partners have economics in the fund.

• 15:29Speaker 01

  A maniacal focus on, in our monoline business, a maniacal focus on how do we generate excellent returns in our core funds? And so I think about our portfolio operations team or our business development team, the origination team, our IR team, like we are all focused on, we just finished raising Ridgemont Equity Partners Fund V last year, about a $4 billion fund. We are laser focused on how do we make this a terrific fund? How do we generate greater than three times gross remote returns for our investor partners? And you've got the whole firm sort of channeled behind that. Everyone in the organization touches the business in some way on a direct basis. And when you've got that alignment, it's a really powerful tool.

• 16:11David Weisburd?

  Do you think that becomes an end in of itself where winning the game for the team itself is the reward?

• 16:18Speaker 01

  I do, I do. I think that's a great, at this point in my career, it's beyond sort of the economic rewards of what this amazing industry and our firm provides. Like seeing our team win together, seeing younger folks succeed in their career, starting families, having success, like that just brings tremendous joy and pride in a way that's well beyond whether this current fund is 3.1x gross remote or 2.8. Like it's just, that for sure, that's a big.

• 16:49David Weisburd?

  Aligning incentives with the companies that you buy, how do you go about doing that?

• 16:54Speaker 01

  If you look at the data, we spend an unusual amount of time with a prospective company, family, entrepreneur before we actually invest. The most recent fund we fully invested, David, we spent on average over three years with each company before we put our money in the ground. And so this notion of a really long and intentional incubation period, it's a little bit of a test drive, right? Counterparty gets to know us and vice versa. That's really important. And when you've spent that much time together and you've aligned on the shared vision for where the business should go, or if you've aligned on what the right succession plan for a founder or CEO should be, almost a byproduct is, well, of course, we're all going to invest a lot in this together.

• 17:38Speaker 01

  And so when you look at the businesses we buy, our ownership is typically 55, 60, 70% of a company. It's very rarely 90 or 95% of a business. And that's because we've got shared vision with a selling counterparty and they decide, well, gosh, we really like this Ridgemont team. We think they can help accelerate our business. Let's invest together. And so that tends to be the kind of transaction archetype we find. It looks and feels more like a bespoke recap than it does an actual full buyout. That's not only true with founders, it's also true with smaller sponsors who have rolled beside us, independent sponsors who have chosen to roll beside us, even some peer sponsors where we've recapped one of their businesses and we partner up together.

• 18:21Speaker 01

  And so that's a clear deal archetype that matters to us. Now that we've done this for 15, 16 years as an independent partnership, each time we go to raise a successive pool of capital, we have that whole group of former portfolio company investor partners, many of which are now investors in our fund. And so we've got 75 or 80 current and former portfolio company CEOs or families that own businesses that we bought or we bought together or sold to that are limited partners in our funds. And so it sort of keeps this flywheel going of just more tightly tethering us all together.

• 19:03David Weisburd?

  Maybe you could double click on that three years as a hind mark. Maybe you could double click on what exactly those three years look like.

• 19:12Speaker 01

  It is a long time. And one of the reasons we have a team of almost 70 people is because we are running a, what's effectively a labor intensive model. We've got a dedicated in-house origination team that we first invested in 2002. So I don't know if we were the first in the mid-market, but we were really early to invest in a in-house dedicated origination team. That is a team of five today. And they're really tip of the spear, David, in terms of incubating this forward pipeline of companies that we'd like to invest in. Mentioned the three sectors that we're in. This is not like an environment where you can be an industry tourist. You've got to be really deep in these subsectors to know what you're doing.

• 19:53Speaker 01

  And if you're really deep in a subsector and if you have a great network and an excellent origination engine, it's pretty unusual for you to come across a company that you've never heard of before. You haven't spent two or three years getting to know and all of a sudden say, yeah, I'd really like to make an investment. So our whole model is built around forward pipeline tracking. So with reasonable certainty, I can tell you now what the early start to Fund V investments will look like. Cause these are companies that we've known for a long period of time. We've had the CEO partner to one of our events or to meet our investment committee in Charlotte. Our whole model and even the way we run our weekly pipeline meeting, the way we run our quarterly dashboard, we're talking about by sector forward pipeline development and planting these little seeds.

• 20:38Speaker 01

  And you know, they can ripen at odd times. We had one investment where it took 10 and a half years of talking to a founder before we led a recap. These things can take a long time, but when you get to periods of turbulence in the market, I think back to COVID, where M&A volume was light, a lot of firms were paralyzed for 12 or 24 months. We had terrific deployment years in 2020 and 2021. And we kept right on four-year deployment pace for our 2019 vintage fund. And I think a lot of that was this forward pipeline we had been incubating over years. And some of it just happened to ripen at a point in time that others frankly weren't very busy.

• 21:21David Weisburd?

  There's a fund manager, Brent Bishore, he has a 30-year fund and he's sitting around for basically blood on the streets and partners. And he deploys a lot of capital in these most difficult times because. It's hard to raise capital. There's a disconnect between the best opportunities and the most difficult times to raise capital.

• 21:38Speaker 01

  We're definitely not trying to call the bottom. We view this more as a treadmill and our goal is to keep the speed of the treadmill at roughly the same level as often as we can. If I look over the last few years, we've been able to generate a little over $2 a DPI for every dollar that the industry has generated. And I think we've been able to do that because we've been so disciplined in the rate at which we deploy every year, the way we think about monetizing the portfolio in a really intentional way. And this goes a little bit back to just thinking about our own balance sheets and how we think about investing in the fund and getting liquidity coming back and keeping that treadmill alive.

• 22:15David Weisburd?

  On this three-year relationship cycle, what does that look like?

• 22:18Speaker 01

  About half the firm is set up in our investment teams, on our investment team spread across three sectors, half in different functional areas. A lot of that incubation period tends to be thinking through business building and what does the next chapter look like? Of course, there's sort of a relationship element to that. And we do a lot of unique things as a firm to build better connectivity.

• 22:40David Weisburd?

  What are some of those unique?

• 22:41Speaker 01

  Hosting prospective CEO partners at a variety of things that we do. We've got a unique event we do every year on the Masters, which is a really terrific kind of intimate setting to get to know someone if you've spent any time there at Augusta. There's a big aspect of relationship building for sure, but there's also a lot of just business building that occurs or business planning that occurs during that period. It involves our portfolio operations team, our origination team, our sector teams. And so by the time we make an investment, shame on us if we don't sort of have the blueprint fully polished and ready to go. That oftentimes builds confidence in the counterparty to say, gosh, there are really folks that I want to partner with and I'm going to roll over and invest a significant amount beside them. So there's a lot of business planning that goes on during that.

• 23:24David Weisburd?

  It's two sides. The company is de-risking their involvement with Ridgemont and you're de-risking your involvement with the company.

• 23:31Speaker 01

  Yep. And we're also kind of compressing the shot clock a little bit when the gun finally goes off on the investment because there isn't that six or 12-month period where you're sort of really getting to know everyone and really getting the two, three key initiatives off the ground and running. Shame on us if by the first week, that gun comes out and we're just running. And so that's what helps a lot with this model that we're running.

• 23:55David Weisburd?

  Maybe you could compare proprietary sourcing to this auction process.

• 24:00Speaker 01

  Particularly as we've gotten bigger, participating in auctions or limited processes for high-quality assets, we have to do that in order to deploy capital successfully. The difference for us is that we're not set up to sort of win a process for a company that we really don't know that well. We really don't know the counterparties. We need to go up and down in a period of three or six months and get all of our work done and clear the market on price. Our firm is just not constituted in a way to play that game successfully. I know there's other great mid-market firms that are excellent at that. We just aren't. And so our model is much more built around this forward pipeline development.

• 24:44Speaker 01

  The great thing about a process, a marketed process, is you have a selling counterparty. And you think about some of these more proprietary things that we work on, oftentimes you're pushing on a string and you actually don't know when push comes to shove if the family or the entrepreneur is actually going to transact. A high-quality asset we've known for a long period of time, we know the selling counterparty, we know the management team. The fact that it's going through a process, that doesn't bother us at all and we're happy to dig in. It's just those prerequisites leading up to it. Do we really, are we really deep in the subsector? Is our network excellent? Do we know the company? Do we know the end market well? With all those prerequisites checked, we're happy to play that game. We've bought some great businesses out of what outside looking in are very competitive processes.

• 25:29David Weisburd?

  You almost have relationship alpha and information asymmetry going into this process.

• 25:34Speaker 01

  That's a great way to, great way to characterize it.

• 25:35David Weisburd?

  If you run a business, you probably start your morning with way too many tabs open. You're checking revenue, ad performance, email, inventory, spreadsheets. And before you've made a single decision, you've already spent your morning just figuring out what happened yesterday. That's what I like about Perplexity Computer. Instead of jumping between every dashboard yourself, Perplexity Computer could connect to the tools you already use and build a command center for your business. It could pull together things like revenue, ad spend, margins, inventory, and email performance, then show you what changed, where you might be losing money, and what you should look at next. But what makes Perplexity Computer really interesting is that it can actually work on projects. It could help rewrite an email flow, build an ad campaign, or draft outbound outreach. And unlike most AI tools, you're not locked in into one model.

• 26:20David Weisburd?

  Perplexity Computer orchestrates leading AI models behind the scenes and automatically chooses the right one for each step. For a limited time only, you could try Perplexity Computer for free. Head to pplx.ai/invest. That's pplx.ai/invest to try Perplexity Computer today. Most AI tools are still answering questions while Perplexity Computer is completing full projects. If you run a business, you probably start your morning with way too many tabs open. You're checking revenue, ad performance, email, inventory, spreadsheets. And before you've made a single decision, you've already spent your morning just figuring out what happened yesterday. That's what I like about Perplexity Computer. Instead of jumping between every dashboard yourself, Perplexity Computer could connect

• 27:02David Weisburd?

  to the tools you already use and build a command center for your business. It could pull together things like revenue, ad spend, margins, inventory, and email performance, then show you what changed, where you might be losing money, and what you should look at next. But what makes Perplexity Computer really interesting is that it can actually work on projects. It could help rewrite an email flow, build an ad campaign, or draft outbound outreach. And unlike most AI tools, you're not locked in into one model. Perplexity Computer orchestrates leading AI models behind the scenes and automatically chooses the right one for each step. For a limited time only, you could try Perplexity Computer for free. Head to pplx.ai/invest. That's pplx.ai/invest to try Perplexity Computer today.

• 27:46David Weisburd?

  Most AI tools are still answering questions while Perplexity Computer is completing full projects. Support for today's episode comes from Square, the all-in-one way for business owners to take payments, book appointments, manage staff, and keep everything running in one place. Whether you're selling lattes, cutting hair, running a boutique, or managing a service business, Square helps you run your business without running yourself into the ground. I was actually thinking about this the other day when I stopped by a local cafe here. They use Square and everything just works. Checkout is fast, receipts are instant, and sometimes I even get loyalty rewards automatically. There's something about businesses that use Square. They just feel more put together. The experience is smoother for them and it's smoother for me as a customer. Square makes it easy to sell wherever your customers are, in-store, online, on your

• 28:30David Weisburd?

  phone, or even at pop-ups, and everything stays synced in real time. You could track sales, manage inventory, book appointments, and see reports instantly whether you're in your shop or on the go. And when you make a sale, you don't have to wait days to get paid. Square gives you fast access to your earnings through Square Checking. They also have built-in tools like loyalty and marketing so your best customers keep coming back. And right now, you could get up to $200 off Square hardware when you sign up at square.com/go/HowIInvest. That's S-Q-U-A-R-E.com/go/HowIInvest. With Square, you get all the tools to run your business with none of the contracts or complexity. Run your business smarter with Square. Get started today. It's the best bitch for why a company shouldn't go through an auction after meeting you.

• 29:14Speaker 01

  At the size companies we're investing in, David, these are typically $20 to $75 million EBITDA businesses.

• 29:24Speaker 01

  The market's liquid and efficient. And so this notion of, gosh, every other business that looks like this traded for 15 times cash flow and we're somehow going to buy it for eight? Like, that doesn't exist, right? These are very smart, sophisticated counterparties that we're dealing with. And so price discovery, price transparency, it's almost there. And so our model is not a, we really want to have a ton of proprietary deal flow and get value-based investments. It's really how do we find super-high-quality companies with great counterparties, great management teams that are growing nicely, where we can put elbow grease in and accelerate all that? That's what we're trying to do.

• 30:06Speaker 01

  And so I think for folks that are thinking about, gosh, should I do a one-off recap or sell it? I almost think as a given, they're going to get to a market clearing price, whether it's a big, wide-open process or even if it's directly negotiated. Maybe there's a little bit of alpha picked up that way, but not a lot. 10 or 15 years ago, I'd answer it very differently.

• 30:27David Weisburd?

  I've had a lot of private equity firms say that it's almost impossible to get these really bespoke and very specific types of partnerships put together within an auction process. Is that true?

• 30:38Speaker 01

  Depends on the process and it depends on how much of a head start you have. And what I mean by that is if there's rigidity around information, if there's rigidity around the amount of relationship development time you can have, if there's rigidity around how much information is shared between the asset owner and the management team that you might have a relationship with, that can be trickier. Absent sort of a good head start with good knowledge of the company and the end market, it can be really tricky to crack that code. And there's a lot of businesses that go through processes like that and we just don't participate in them. And so we've learned enough to sort of know what process archetype looks like one that we can win. And our efficiency in those is really good.

• 31:19Speaker 01

  If you look at broken transaction costs as a very simple metric of how efficient are our sector teams with actual conversion, we've got de minimis amounts that hit our P and L every year. So we tend to know which processes we can succeed in and we stay away from the ones that we don't.

• 31:36David Weisburd?

  You just recently raised your Fund V, roughly $4 billion. Before we started recording, you were telling me a little bit about your LP base, pension funds, insurance companies, sovereign wealth funds, family offices as well. Have you gone about building those partnerships with your LP base?

• 31:53Speaker 01

  First thing I'd say is we've enjoyed exceptional long-term partnerships with our LPs. With each successive fund we've raised, we've had well over 100% net dollar retention, net dollar re-up. So we've enjoyed these partnerships, some going back to all the way when we spun out from Bank of America in 2010. And that's sort of our philosophy and ethos as we enter one of these partnerships. It's not, we talked about this earlier a little bit, David, it's not sort of a one-fund trade for anybody, right? And so we're thinking about, hey, how do we partner with these folks over time? We have a commercial excellence program inside of our firm as it relates to prospecting with limited partners. We have a head of investor services who's delivering what we think is a white glove

• 32:38Speaker 01

  experience to our 90 institutional LPs from around the globe. And so it's a little bit different than 10 or 15 years ago when we were just getting going. This is a Sales customer service function within our business and we treat it as such. We have a formal commercial excellence program that we're working intra-fund to make sure when we get to the next fundraise, we're in an excellent spot, not only with our existing partners, with a select group of prospects that we've nurtured over time. So that intentionality around our IR effort and our IR apparatus, that's served us really well.

• 33:12David Weisburd?

  Outside of returns, obviously that's really important. What else underpins your relationships with your LPs?

• 33:18Speaker 01

  At the top of the funnel is kind of a basic, top of the decision tree, there's sort of basic math of here, is this manager generating returns that are acceptable? Right? And sort of the second order of how are the returns being generated? What's the quality of the team? What's the alignment look like? All the things we just talked through. There's also just a sort of treating our investor partners like partners. We don't use the term LP ever in our offices. We use the term investor partners. We say investor partners. We think of our, these 90 institutions as investor partners. They're supporting our business in a way that we couldn't grow the firm without them.

• 33:59Speaker 01

  And so being really intentional around the cadence of investor communication, being really intentional around the quality of our materials, the quality of our AGM, being really intentional around the experience when we spend time with our LPs. Being really intentional about what we choose to communicate at our LPAC meeting twice a year and really giving sort of an under the hood look at here's how our team is doing and here's how the investments are performing. If you do this long enough, you're going to have tricky situations and tough investments. And we have four values at the firm. I talked about the first, support the Ridgemont family. The second is communicate transparently.

• 34:42Speaker 01

  And with our investor partners communicating transparently, in particular, the tricky news, the bad news, that just builds a level of goodwill and currency and mutual trust that has served us really, I think it's served us really well over time. Being, wrapping all that into a commercial excellence program is important. I personally figure out a way to see each one of our LPs in person every year, irrespective of the fundraising cycle. And it's a little bit of a travel commitment, particularly for folks in the Middle East or APAC or Latin America or Western Europe or all over North America. But that's important to me. That's important to our firm.

• 35:25Speaker 01

  It's important to kind of give regular updates in a way that's hopefully valued. So when you do have another fund you're about to raise, you're not sort of the, well, gosh, I really haven't seen these guys in five years and all I heard was the good news and here's the math now. It's a much more kind of fluid relationship. That's all part of our commercial excellence program.

• 35:46David Weisburd?

  I got to meet Jonathan Graze, President of Blackstone. I asked him, how does he deal with a downturns and with his investors? And he said, almost the exact same thing. He said, you can't over communicate. I get on a plane and I fly to every single person, every single partner, and I tell them exactly what's going on. I tell them the knowns and I do as much communicating as possible. And actually that's extremely, especially he was talking in the context of global financial crisis, these really three standard deviation events. And that's extremely differentiated because most GPs want to hide under the covers and kind of go radio silent. And that's where these 10, 20 year relationships get broken overnight.

• 36:27Speaker 01

  Totally agree. And you think about our partnership, been around for 30 years, right? You had the tech bubble, GFC, COVID, like these things, they happen, right? And oftentimes they're exogenous to our core business, but they happen and they impact our business. And so just hitting it head on and sort of describing it for what it is and communicating transparently, in many ways, that's sort of all you can do. And we've tried to do our best at that over time.

• 36:54David Weisburd?

  You mentioned going to APAC, going to LatAm. How do you think about the geographical breakdown of your partners?

• 37:04Speaker 01

  Money keeps moving west. Like the US continues to be just a magnet for smart institutional LPs. And so we benefited from that. Second is we've seen more eyes focus on the mid-market and kind of migrate from the large cap world to the mid-market. We've been beneficiaries of that. And then the last point is a little bit about what we focus on. When we were out raising Fund IV back in 2022, it was a very different period. And if you weren't talking about SaaS and tech and ARR multiples, it was really hard to catch the attention of a new institutional investor partner. That was so in vogue at the time.

• 37:46Speaker 01

  And our businesses are very basic and in some ways boring at their core. These are kind of like heartbeat of the American economy businesses. We always say, if you can't describe our business in one half of one sentence and the listener doesn't understand what it is, it's not the right business for Ridgemont. And that was out of favor in 21, 22, when we were raising Fund IV. When we raised last year for Fund V, it was very much in favor. That pendulum had completely swung back towards these more basic businesses, sort of heartbeat of the American economy businesses. And so money moving west, money moving to the mid-market, money moving to basic businesses, that in addition to team quality and strength of returns, that explained a lot of our success in this most recent fundraise.

• 38:30David Weisburd?

  In 2021, 2022, did you have doubts that you guys were in the right business?

• 38:35Speaker 01

  We never had doubts. We always got to our hard cap. We had success attracting new capital. I'd say we had frustrations that there wasn't better attention paid to some of these more basic service companies, distributors, three core sectors, industrials, business services, healthcare. But these businesses have done well since the early 90s. And we think the outlook for some of them, particularly in the subsectors that we operate in, is really bright. So we, you know, we always got there, but it's just interesting to see how that kind of momentum comes and goes.

• 39:08David Weisburd?

  As a fund manager, there's always this question for any business, whether they double down on their strategy, whether they pivot, whether they evolve their strategy. What's your framework for figuring out, for example, if you would do a fourth industry?

• 39:22Speaker 01

  Our business is in some state of constant evolution. And if you look over time, we have certainly edged out into very logical adjacencies within our three core sectors. I'll pick one as an example. Within our business services effort, there are certain pockets of financial services that we have found attractive over time and we're spending a little bit more time on now. If you think about our history, 20 years inside of a bank holding company, we've known our way around some financial services assets. So yes, on the margin, there's sort of evolutionary changes in terms of where we invest. But again, this is not a market to be an industry tourist.

• 40:04Speaker 01

  And to think of a new, hey, we're going to go stand up a consumer business tomorrow. We're going to go stand up a retail business tomorrow. We're going to go stand up a manufacturing business tomorrow. There's a lot of very sophisticated managers that are experts in those areas. We know where we are experts and we want to stay in those lanes. You won't see radical drift in terms of the sectors that we're focused on.

• 40:25David Weisburd?

  Chasing of novelty is a big failure mode for private equity managers. Famous management consultant, Peter Drucker, used to say that as CEOs got bored, they started doing M and As and destroyed company values. Same thing happens with private equity managers. They get bored of buying the same widget company and five years later, their returns go down, they're kind of questioning why that happened.

• 40:46Speaker 01

  The nice thing about our business, I will say, is I'm glad we're in these three sectors because there are periods of time where, I mean, you think about particularly coming out of COVID, the supply chain unwind, it made parts of the industrial economy really tricky to underwrite. Think about transport and logistics as an example. And we had made many successful investments over years prior to that. If we were just a transportation and logistics firm, it would have been really tough sledding the last three to five years. But the fact that that's just one subsector underneath industrials and we have a vibrant and growing healthcare services practice and a vibrant and growing business services practice, there's plenty for our 70 person team to chew on in those different areas if one is a little bit more in or out of favor at the time.

• 41:30David Weisburd?

  So that's something that you've pre-negotiated with your investment partners that you may drift from different verticals based on the relative value of those industries?

• 41:41Speaker 01

  We try and have roughly equal NAV weight across the three within a portfolio. It's really down at the subsector level where you may sort of lean into something or lean away from something. And again, this gets back to sort of the kind of more team-based mindset about how we run the firm. Nine members of the IC, democratic process, 40-point IC scorecard, big GP commitment. Like we're all rooting for the same thing. And so if there's a pocket of the industrials business that's soft and one of our partners who has particular expertise there is not having a particularly productive two or three year run, that's okay. Like that'll come back over time. We're thinking about this business over decades, not just little one fund increments. So the model's set up in a way to tolerate some subsectors being more active than others at different points in time.

• 42:26David Weisburd?

  Are there trade-offs of having this democratic allocation of profits across different teams?

• 42:32Speaker 01

  Is there trade-offs to any of these decisions when you think about running a business? The clear benefits are you've got, you get the benefits of kind of group knowledge and it's more than one voice or mind making investment decisioning. And we've got a lot of really experienced people that have grown up in our system. It's also an excellent development tool. We have a 40-point proprietary IC scorecard. We have the data going way back in time where each IC member has voted on a deal. And then good news is three, five years down the line, you're going to know if it was a smart vote or not, right? And so that data repository has been a great training tool, particularly for some of the

• 43:14Speaker 01

  newer partners that come onto our IC as they're growing in their seniority within the firm. So there's a lot of benefits to it. Times it can make us less nimble, for sure. It's not unusual to spend an hour or two amongst the nine of us kicking around something, even if it's an early stage investment opportunity. But we think on balance, it's worth the cost of some of that.

• 43:35David Weisburd?

  I was going to ask you about that, your nine-member IC unanimous vote. That's quite a strict process.

• 43:44David Weisburd?

  Do you not worry that leads to picking the least bad asset versus the best asset?

• 43:50Speaker 01

  So this, we were talking about this before we got going, David. It's sort of like, hey, if you're a baseball player, would you rather be two for two with three walks or four for five? And this four for five, the question I always ask is like, well, are they four singles? Or did you get some extra base hits or an RBI in there or a home run?

• 44:08David Weisburd?

  Were you compensated for that?

• 44:10Speaker 01

  Yeah, exactly. And if you strike out in your fifth at bat, but you had four triples, like, that's a pretty good day, pretty good day at the plate. So it's something we spend a lot of time thinking about. We actually think about it less at the deal specific level and more at the portfolio level. And what I mean by that is we're trying to put 15 to 20 companies in each fund. And within the fund, we want to have some variance. Like, we will consciously say, okay, this asset that we all really like, this should be lower than average risk. And maybe we're only going to underwrite to two and a quarter or two and a half times gross Moic returns. And we know what this company's role is in the portfolio.

• 44:56Speaker 01

  And we talk about this as an IC. That same group of nine, we'll have another conversation where we say, hey, you know what? This is, maybe it's higher than average risk, but we think there's a really good shot. We can make five times gross returns on this. And this asset tagged that way fits at this point in the fund cycle, fits this point in the portfolio, doesn't have correlation with other subsectors where we're invested. And so we have really robust discussion about that. And so by talking about that out loud, by being intentional around portfolio construction, it allows the nine IC members to say, okay, I'm not going to default to just where everybody feels great, that we're not going to lose our money and we're at least going to make it double.

• 45:36Speaker 01

  And so educating the IC on that ethos is really important to avoid the trap of, well, let's only do the things that everybody feels like we're not going to lose our money and make it double on.

• 45:47David Weisburd?

  It's one of the most common biases, this over diversification. And Roger Vincent, who is at the Cornell Endowment, and he was talking about how many LPs over diversify. They sometimes even triple over diversified. They want to make sure that every single company is super conservative, none of them lose money. And then every single portfolio, and then their entire portfolio, where really they should be thinking about their entire portfolio of managers. How is that looking? What's the variance on that? What's the expected return? What's the three standard deviation drawdown? But they get upset, obsessed on every single asset. And that's almost categorically a wrong way to approach investment.

• 46:21Speaker 01

  Well, that's really just a path to buying market risk.

• 46:24David Weisburd?

  Beta.

• 46:24Speaker 01

  Right? So you're a beta hog at that point.

• 46:27David Weisburd?

  I'm my first kid on the way in October, boy. Maybe you could give me some advice. How do you navigate? You have to travel a lot with having your two girls. How do you navigate that? And how do you make those trade offs?

• 46:39Speaker 01

  Awesome news on boy number one for you. Really exciting. I have no boy dad advice because I've got two daughters that are 14 and 12, rising high schoolers, crazy as that is to say. Talked a little bit about our firm culture around family first. And that sort of permeates the way a lot of us think about this whole kind of work, life balance topic. And it really is a priority for me and the rest of my partners, this whole family first approach. So if you kind of poll the group around Charlotte in our offices, you're going to find a ton of soccer coaches. You're going to find a ton of church league hoops coaches in the winter and little league coaches in the spring.

• 47:24Speaker 01

  And if it's a Tuesday night at five o'clock and you need to check out for a couple of hours to go coach little league baseball, it's really, that is your priority. And we make that crystal clear as a firm and certainly as one of the leaders of the firm. I make that a priority for myself. Even with travel, I've worked pretty hard to make sure I'm doing a lot of day trips, kind of out and back to get home

• 47:52Speaker 01

  for dinner. We run the business in a way where we try and keep in perspective what's really important.

• 47:56David Weisburd?

  And distinction there may be flexibility around when you do your work, but expectation that you will work really hard.

• 48:03Speaker 01

  For sure. And we've got a really competitive in a good way culture. And so it's a kind of full throttle up, everyone grinding really hard, 70 people hard at it. We probably have, I bet 20% of the firm, David, are former college athletes. And so we've got a lot of competitive intensity around the firm. Back to this culture point, we, throughout the year, depending on the calendar, we have a lot of different events or engagements that we run to sort of drive culture at the firm. The month of June every year is our fitness challenge. We take the whole firm, we divide the firm into four distinct teams and it's cross-functional. So it's the folks that you don't work with every day. And for the month of June, there is a very competitive

• 48:47Speaker 01

  fitness scheme that's run with some algorithm I don't fully understand to calculate points to figure out who wins. It involves walks in the morning with your little kids in a stroller. It's awesome. But it's just one example of how building this family first culture really matters. And it kind of blurs the lines a little bit between, are you working? Or the work-life lines are a little bit more blurry. That allows everybody to be fully present at home, but also not sacrifice the pace with the throttle at which they're working. It's a constant work in progress, but we're trying to do our best at that.

• 49:24David Weisburd?

  You guys spun out in 2010. You're now at hopefully 75 employees, I believe. At which point did the culture become self-perpetuating?

• 49:31Speaker 01

  I think culture is one of those things that requires constant effort and can never be put on autopilot.

• 49:39David Weisburd?

  Does it get easier?

• 49:41Speaker 01

  That's a great question. It requires the same level of intensity and intentionality to maintain culture. I think the difference as the culture becomes more embedded is the culture carriers expand. And the depth of folks in the organization that are really focused on perpetuating the culture grows. It's not just one or two folks that, hey, this is really important. We're going to invest in this in a way with real intentionality. It's across organization at all depths of seniority where folks will kind of come up with an idea or pick up something that's important to them that perpetuates the culture.

• 50:24Speaker 01

  That part is really neat and rewarding to see. But the amount of effort and of intentionality, it's required to keep it going.

• 50:30David Weisburd?

  If you go back to 2010, when you had just spun out of Bank of America and you could give yourself one time a space of advice, what would that be?

• 50:38Speaker 01

  We talked a little bit about this earlier. Many times in this business, you want to be right. And you want to make smart and shrewd investment decisions. And there's a lot of weight on your shoulders from your investor partners, your business partners, your family. And that can create a level of defensiveness in some ways that there are certain points in time where an aggressive offensive strategy is just fine. And I think about when we were coming out from the bank, we had no institutional LPs. We needed to go one for one every time we pulled the trigger.

• 51:24Speaker 01

  The future of the firm depended on that next investment. It had to be perfect. And I reflect back on the 2010, 11, 12, 13 vintages. And I wish we did 80% of the things that we were wringing our hands over. Gosh, it's a really good investment. We think this will be a good one, but it's not perfect. And now it's easy to say that now, right? In hindsight, at the time, a little bit more aggressiveness, a little bit more, hey, let's, let's not go two for two. Let's go seven for eight.

• 52:02Speaker 01

  That, I think, would have catapulted our business forward in a way that was even, would have us in a better spot than we are today. We're in a great, I mean, looking back, we're in a great spot. And the fact that we've grown to this size and this much AUM, there's just tons of pride and nostalgia reflecting on all that. But I think at those critical times, being prepared to put a little more fuel on the fire. That was something I wish I had better perspective on coming out of the GFC. I think we learned from it. I think in COVID, we were

• 52:34Speaker 01

  definitely more aggressive in our posture and some of the returns show that that was a smart decision and paid off. But particularly now that the size of our firm, the AUM, the capabilities that we have, we really are set up to take advantage of some situations if we see it. And so I think just being a little bit more courage of your own convictions, a little bit more confident, a little bit more ready to take the risk when it comes in front of you. That's a perspective that I value now that I did not have in 2010.

• 53:00David Weisburd?

  And that 2010 vintage, was it a blind pool capital or were you doing deal by deal?

• 53:04Speaker 01

  No, it was, it was interesting. When we spun out from the bank, the bank, and we had a wonderful relationship with the bank for a long period of time. We still have many of the senior executives of Bank of America that are investors in our fund as an LP today, interestingly. But the bank, in addition to helping us spin out some assets, provided us with what was effectively a warehouse line of credit that allowed us to keep investing. And then when we raised our first institutional fund, we trued all that up and we were off and running. But the bank has no formal tentacles into our business today of any sort.

• 53:39David Weisburd?

  So you really had to get those right.

• 53:41Speaker 01

  We had to get them right. And this notion of one for one, we were living and dying by each one of those. And thankfully, they were great companies, great investments. One of those is in Indiana, not far from where you grew up, David.

• 53:56Speaker 01

  But also just a great vintage for the asset class. All those things sort of came together in a way that sent us on this journey.

• 54:02David Weisburd?

  A lot of listeners don't know the amount of back and forth that comes into these podcasts. I've gone to get to know you. You're truly a nice guy. And I say that as a double edged sword. You're a nice guy as in nice person. But also has that held you back in private equity, which is known for being a really brutal industry?

• 54:21Speaker 01

  I don't spend a lot of time thinking about that. Honestly, I think

• 54:26Speaker 01

  we've all, particularly all the guests you've had on this show, we've all had such

• 54:32Speaker 01

  success in life in the grand scheme of things. It's a little bit of life's too short to be anything but thoughtful and kind to the people you come in contact with. And if you're sort of playing the long game and the currency you're looking to accumulate is the quality of relationships, the quality of friendships, the quality of partnerships. That's really what I think my partners and I are trying to optimize for. And so we don't, a firm culture is the sharpest thing from super aggressive, sharp elbow.

• 55:01David Weisburd?

  Maybe said another way, do you find that your style starts a little bit slower and compounds more than other styles?

• 55:08Speaker 01

  Definitely starts slower. I think that's probably true of most of our firm and most folks from Charlotte. It's just a little bit more

• 55:19Speaker 01

  methodical, intentional. Even just the relationship development aspect of our business, whether it's with investor partners or prospective CEO partners, we, it takes time to develop a relationship and to do it in a thoughtful way. And that's the way we've chosen to conduct ourselves and that's served us well over time.

• 55:38David Weisburd?

  Jack, this has been an absolute masterclass. Thanks so much for jumping on.

• 55:40Speaker 01

  Yeah, great to be here, David. Thanks for having me.