Zorian Rotenberg’s Post

PE - Unique Differentiation for PE Firms (Next 10 Years) When I was at Private Equity International PE Nexus 2024 conference earlier this year, I heard a few LPs at lunch mention that PE Unique Differentiation of the past has changed. While people & culture (or industry expertise) are important ways to try to differentiate, many PE funds typically point to these as their differentiation. So the LPs at PE Nexus said that to truly differentiate and be unique today, you must do more to have truly unique factors that are tangibly different from other PE firms. Here are the areas where I think they agreed that the best PE funds in the next decade will have uniquely differentiated: - Overall Value Creation: there are many unique and differentiated strategies that can be applied here over the next 10 yrs vs. the way many PE firms have done in the past 10-30 yrs - GTM & Revenue Growth Expertise: real-world, battle-tested expertise and unique specialization in driving capital-efficient and faster revenue growth and helping portfolio companies be leaders in their markets - Modern Operational Expertise: deep operational expertise, not traditional cost-cutting but actually strategic operational improvements that generate efficient but faster growth in PE portfolio companies (it's not simple: it's grounded in Strategic Planning, leadership and management strategies, better recruiting processes geared to building A+ teams, creating team alignment, and of course automation and AI, but not traditional cost-cutting or simple and known tactics) - "RQ" (i.e. "Relationship Quotient"): talented teams at the PE firm who have people-first philosophy and unique skill to create genuine & authentic collaborative relationships (non-transactional) with CEOs & management teams that create a trust-based partnership between a PE firm and portfolio companies which in turn leads to far better results --- With the above in mind, just sharing a quick personal view after our recent Tech Fund's portfolio CEO & Executive Summit (aka 'Revenue Growth Summit - 2024') - I think we took a unique & differentiated approach (which we do with all of our Value Creation initiatives). One of the things I like is that in our mission of transforming innovative tech companies into world-class leaders, I feel we operate differently (i.e. in ways we help our portfolio companies achieve faster and also capital-efficient revenue growth). I also think we are redefining the Tech PE industry with the way we approach our Value Creation strategy (in many ways I feel we have a uniquely different approach in the lower middle-market Tech PE). P.S. Ultimately all this is important because we aspire to be the partner of choice for great lower middle-market tech companies. ------------------ #pe #privateequity #business #growth #valuecreation

PE Growth Insights - what CEOs & CROs of PE-backed companies can glean from the Salesforce (NYSE: CRM) Earnings Call In a nutshell: Many software companies now need a lot more in the sales pipeline (than in the recent past) to hit their bookings target. FYI from Marc Benioff, CEO (from the Earnings Call): " ...we are having to start every quarter with much higher pipelines. We look at these pipeline multiples as much higher than we've traditionally had to start with. And where traditionally, we might have to start our pipelines at 2x, now our message to our distribution leaders is...you better start out at 3x. And this is also our message to our peers as well to evaluate the pipeline much more aggressively than ever before, that means a much deeper inspection of the pipeline but holding it at a much higher level. That is evidence of this environment. And if you would ask any leader in this company, how many times they've heard from me or from Brian that they better started at a 3x pipeline, because that is the world that we're in today." --- Source: Earnings call: Salesforce maintains FY25 guidance amid growth focus: https://lnkd.in/ev3mZdSR --------- #revenue #sales #gtm #growth #business #pe #privateequity

PE - Portfolio Company CX as a Sustainable Competitive Advantage PE portfolio companies having a world-class CX (Customer Experience) can build a Competitive Moat and it will be genuinely sustainable because many companies don't focus on it. And you can measure this Moat with metrics that include: - NRR - GRR - NPS - Expansion ARR - post-CS CSAT, etc. #business #saas #software #tech #ceo #pe #privateequity #lowermm #growthequity #investing #finance #strategy

PE Value Creation & Goldman Sachs on Valuations - EV/Sales is 9.5x - EV/EBITDA is 27.6x - NTM P/E is 30.4x But PEG is 1.4 and that's not cheap plus current relative valuation vs. 10-year historical average (Z-Score) is 2.6 for EV/Sales and 2.7 for EV/EBITDA. This is public markets - and if you are in Tech PE and acquiring companies (i.e. and of course there is a discount to the public market valuations given liquidity, etc) - at these higher multiples, you need a real edge to generate superior returns... PE Value Maximization Strategy: - GTM & Growth Value Creation - Operational Improvement Value Creation --- #investing #finance #business

PE - 3 ideas for the next 3 years - just like every traditional company needs to be a SaaS company, every SaaS company needs to ultimately be an AI company - ramp up revenue growth but always protect the profits - today is the time to innovate (i.e. not re-invent) your business model & strategy - importantly, this applies not only to PE portfolio companies but also to PE firms to get the best IRR --- #pe #privateequity #business #strategy #saas

Moats - Competitive Advantage Morningstar lists top competitive moats: 1. Intangible Assets: Brand recognition, patents, and regulatory licenses that give companies a competitive edge. Example: Coca-Cola 2. Switching Costs: Costs incurred by customers when switching from one product or service to another. Example: Oracle 3. Network Effect: The value of a product or service increases as more people use it. Example: CME Group 4. Cost Advantage: Companies that can produce goods or services at a lower cost than their competitors. Example: UPS 5. Efficient Scale: Markets where a company serves demand more efficiently than competitors, deterring new entrants. Example: Kinder Morgan --- These moats are among the most commonly recognized but not exhaustive. Other potential competitive moats or sources of competitive advantage include: - Technological Innovation: Advancements in technology that lead to superior products or processes. Example: NVIDIA (i.e. advancements in GPU technology, particularly in the areas of artificial intelligence and gaming, which have set new standards for performance and capabilities) - Freemium Models: Offering a free version of the software with limited features to attract users, then converting them to paying customers with premium features. Example: Slack, Dropbox - Data Advantage: Leveraging large datasets to improve products and services through machine learning and AI, providing better customer experiences and insights. Example: Google, Palantir - Developer Community and Open Source Contributions: Building a strong community of developers who contribute to the software, improving it and increasing its adoption. Example: Red Hat, GitHub - Scalability & Performance: Offering a highly scalable and reliable platform that can handle increasing user loads and demands without compromising performance. Example: AWS, Google Cloud Platform - Platform Integrations: Building integrations with other popular software platforms to enhance functionality and make the software more indispensable. Example: Zapier, HubSpot - Innovative Features and Continuous Improvement: Regularly updating the software with new and innovative features that keep it ahead of competitors. Example: Tesla’s continuous updates to its software for cars - Ecosystem Lock-in: Creating a suite of interconnected products that work seamlessly together, making it difficult for customers to switch to competitors. Example: Microsoft Office Suite - Customer Support and Service: Providing exceptional customer service and support to create strong customer loyalty and satisfaction. Example: Zendesk - Customer Loyalty: Strong customer relationships that result in repeat business. Example: Amazon Prime - Selling (how you sell is just as important as what you sell). Example: Hubspot, Zoom, Atlassian, Salesforce P.S. What are some of the other moats you've seen especially in tech? #pe #privateequity #business #markets #investing #ceo

A Trade You Don't Make Inspired by the NBA Finals and from a WSJ story... There is an interesting lesson for companies to have a long-term view with some of your key people (while also having a discerning eye for talent). Summary: - There was a lot of pressure a few years ago to trade away Boston Celtics players Jayson Tatum and Jaylen Brown - critics called them overrated due to playoff failures - Turns out, the decision *not* to trade them has proven pivotal - they are central to the Boston Celtics' success in the NBA Finals - The retention of Tatum & Brown underscores the value of stability and growth within a team, countering pressures and criticisms with patience and long-term commitment to process and progress - Their performance in the Finals highlights the advantages of maintaining core players and evolve them, overcoming past past failures and solidifying their roles as integral components of a championship-contending team --- Source: WSJ - https://lnkd.in/eMUk4WQE --- #business #ceo #cro #pe #privateequity #talent #teams

PE - McKinsey on 5 Alphas & "The next era of PE will be different" From "5 core capabilities can determine which PE managers capture strong returns, growth, and profitability in these changing times"... Post-Acquisition Value Creation via Operational Improvements: - "This source of alpha takes on new importance in an era of higher interest rates, inflation, and uncertain public market exits." - "'Plain vanilla' operational improvements (such as G&A trimming and pricing enhancements) are now table stakes." - "Achieving outsize returns from operational alpha will require firms to develop the conviction to underwrite and the muscle to deliver truly transformational change. " (i.e. better Operational Diligence & internal full-time teams with battle-tested experience focusing on Operational Value Creation) - A leveraged PE transaction needs a 2-4x increase in cash flow CAGR to offset a 400-basis-point rise in debt costs without impacting the planned return. Public market uncertainty extending the holding period by a year requires an additional 10% in earnings. Inflation and longer investment horizons from permanent capital vehicles, patient capital co-investors, long-dated funds, and continuation vehicles exacerbate the challenge. --------- Source: - McKinsey - 5 Alphas: Essential capabilities to succeed in the next era of private capital: https://lnkd.in/ev6GbaWS - McKinsey - Bridging private equity’s value creation gap: https://lnkd.in/eppEmw-Z #pe #privateequity #tech #business #ceo