Hey WSO! Long time poster and lurker, but created a new profile with my identity public. Came from tough background and WSO, for all of its quarks, shined a light on a career path that has traditionally had little transparency. So want to figure out some ways to give back; let me know any ideas.
For quick background, grew up in between Detroit and South Florida and went to Emory University. Graduated in 2010 and started my career in investment banking at a now defunct bank in their restructuring group in Atlanta. Spent just under 2 years in banking, and joined a firm in West Palm Beach called Comvest Partners. From Comvest, moved to NYC and was a Vice President at Cerberus Capital in their Private Equity Group. One of the Partners with whom I worked closely at Comvest, John Caple, called me in 2016 thinking about founding a firm. I joined in Feb 2017 with no portfolio companies, no fund, no infrastructure, etc.
And since, it has been a ton of fun. We are fortunate to have top decile returns in Fund I (~$265M) and look out to Fund II and beyond, but the rewarding part to me has been building the team (~20 employees now), growing the firm and our PortCo's, and take the best of what we have learned from our prior firms, but leave the unnecessary and bad behind.
My experience is rather generic and nothing extraordinary compared to the litany of the AMA posts, etc. and not sure how often I will check/post but hopefully will find a way to share some unique insight or provide value in some other way.
Andrew Joy
Hidden Harbor Capital Partners
Partner
4855 Technology Way | Suite 500
Boca Raton, FL 33431
Awesome to see somebody do this under their real identity. We never connected on one but I used to send you guys deals when I was on the banking side :). Can you shed a little light on how the firm has built out the BD team, and how you think about sourcing strategies / intermediary relationships?
Good question. Separately but related, generally there is lack of transparency in this type of stuff because the truth is for 80%+ of what private equity does is the same. Maybe you can differentiate yourself on the other 20%, but if 80% is a commodity its a way to justify the 2/20.
Sourcing / BD should be developed from your investment strategy. If I had to summarize ours, it's buy a company for 5-9x EBITDA that has good value prop, good market leadership, but will trade in that range because of operational complexity or issues (no management team [carveout], founder transition, poor systems/data/financials, etc.], but if we fix those issue we can get multiple arbitrage.
So to buy decent to good businesses at a value-ish price, you have to see, and bid on, a lot. So we on average see 1,500 deals a year; will be closer to 2k given post Covid deal activity. So we have invested heavily in BD [and operations] with a bit of two prong model - hire couple senior-ish great BD folks to cover the Lincoln's, HL, etc. of the world, but have more associates and interns call the longggggg tail of boutique bankers and business brokers. So think we have seen deals from 300+ unique intermediaries in 2021 YTD, looking for the diamond in the rough. One of the businesses we acquired had a 11 page "CIP" and no idea what it really did until I flew out there to see it.
Not the most glamorous part of private equity, but where it's where I wanted to align myself for the long term, as I think the strategy has one of the more compelling opportunities for risk adjusted returns, after spending time doing various larger, MM, and LMM deals....
Hope this was helpful
Appreciate you doing this. Sound like you were happy about making the leap to founding a new firm, which presumably sounds exciting at a mid/senior level as you are going to be a crucial piece of the puzzle. When you were building the team, how did you sell junior recruits on making the leap, and what would you recommend current IB analysts looking at new PE fund opportunities as an associate? Is it just as interesting as an opportunity to join a new fund as an associate, or is it only really worthwhile as a VP+ as you have real skin in the game and a longer career history behind you to help keep you afloat if the new fund didn't take off?
Another good question.
WSO Response: Go to the largest, best name firm early in your career; easier to move down market than it is up market.
Personal Recommendation: Go where you think you will (i) learn the most; (ii) reflects your values and vibe best with culture; and (iii) will give you upward responsibility and mobility.
From starting up HHCP, I'd say we approach recruiting a little bit different; partly by need to compete against the bigger firms with a ton of fee money to throw around, but also because we think it results in better outcomes. We recruit for (i) raw intelligence; (ii) genuine passion for business, business models, and that intellectual curiosity, (iii) cultural fit; and (iv) connection or genuine desire to be in S. Fla (it's a... unique place, and turnover is indirectly extremely expensive). And so if filter through that lens; there are a ton of super smart consultants, fleeing hedge fund industry guys, corp development, etc. are interested in PE investment position, so can recruit top tier talent.
Also everyone at the firm has carry, we try to sell our culture, etc. Our first associate we promoted to Sr Assoc at year 1, VP at year 2, and Principal at end of this year (congrats if you are reading this! haha) and is just such a critical member of our team, on our Investment Committee, leads deals, etc. because he is a rockstar, so pointing to case studies like that also help.
Thanks for doing this! No questions in particular but I'm in S. Florida as well and see that we have several mutual connections.
LinkedIn up dawg
Hi sir! Thanks for making yourself available for Q&A. How much of the underlying returns you're seeing at Hidden Harbor do you think is attributable to the blood/sweat/tears and brains + differentiation of your team vs. positive underlying macro factors (low interest rates, very rapid market multiple expansion from 2017/2018 when your fund started doing deals to 2020/2021, continued low interest rates, extremely hot M&A market, etc.). What's the % split (if you had to allocate)? Assuming that your fund I return stats are based solely on the sale of Stella, which (based on CapIQ) appears to be your only exit to date.
Have always been curious about this question (i.e. what is the value-add of any given investment professional?), and look forward to hearing from an actual seasoned partner.
So for *a* business [need to respect confidentiality] that we exited, we bought it as a corporate carveout of a distressed parent. CEO was retiring, no CFO, pushing paper to support ops (20 year old ERP, etc.), local market leader but only in one MSA, stagnant growth, some concentration. When we sold it, tripled the size of the business, half from organic new wins and half from tuck ins at accretive multiple, 5 new geographies, hired CFO, CEO, COO, VP Ops, FP&A, CTO, etc., improved technology and data, carved the business out of corporate with standalone functions...
But also benefited from the macro environment, I am sure, as well. Why I like this strategy is because, in my view, our underwriting of returns is more things we can affect the outcomes of, rather than pricing to where we convince ourselves market growth will be over 5 years etc. Have tremendous respect for many other firms and their strategies, it just tends to be the one that resonates with us.
To your next question, I can't exactly answer bc of confidentiality with buyers, LPs, etc. But we have had large other realizations from dividend recaps and SLBs, have businesses in the market right now, and unrealized gains from significant growth and / or debt paydown. We typically never mark up our portfolio via multiple arbitrage for conservatism, leave that constant and just roll latest LTM EBITDA and net debt into it.
Finally, I think the value of any given investment professional in PE is fairly minimal, including myself despite have a great track record. I think what makes a good professional is the environment that transcends above any one individual and is more of a function of the collection of the team - do you empower your team to speak up when something doesn't look right in the data, are there no misaligned incentives, do we have a true investment identity and a replicable, process driven playbook, low churn on the team, objectivity and removal of cognitive bias, approach deals as one team (not his deal, her deal), etc.
Honestly, my biggest takeaway from being a partner is how much value the rest of your team really provides. Individually, I've seen partners differentiate in a few different ways - get the call on inside look/track on sweet deal, industry expertise - but think the success of a firm is much broader than just the sum of the individual skill sets.
Thank you. Very insightful.
Question: If I got another partner, maybe a VP and an associate on investment team, someone from ops team, and someone from BD to host a live webcast/Q&A discussion, would that sort of thing be of interest to the WSO community?
Yes
yes
Bet - will want to make sure there will be some min attendance to get the yield but will start to plan for it - maybe sometime in 1Q22
Yes
Can someone start a similar venture in 10-20 years?
Feel almost the exact same way about building value in the LMM and MM from what I’ve seen and don’t think it’ll go away, you get multiple arbitrage from ‘cleaning up the books’ and getting attractive add-ons sure but generally the people who ran the business before aren’t able to ‘plug in and out’ so many variables so quickly as someone who looks at thousands of businesses and knows where to do +A -B etc and is also equipped to find A (like operating execs) and with fresh eyes and no ties make quick changes.
Hearing your story makes me envious because I feel late to the game // think it will only get harder to work for the same $$$. Companies like yours in the LMM already look at thousands of businesses a year, have a Rolodex of operating execs, BD, etc.
I think the value add will always be there and justified so dont see it going away for 30 years even, but what will it look like for new firms starting out in 5,10,15 years? Will they have to screen 5,000 a year for the same amount of investments (# of companies invested e.g. dollars put to work) or will the influx of new businesses per year be enough to outweigh that?
I am not smart enough to know the answers to a lot of your questions; as it's a function of so many variables with uncertain outcomes - macro trends, micro trends, global geopolitical events; interest rate environments; fee structures in asset management; matriculation and gravitation of talent; long term domestic fiscal decisions, etc. etc. etc.. But I think the market will continue to generally get more competitive until IRRs in any given strategy normalize to their risk adjusted baseline in general. But that doesn't mean I believe in Fama purely efficient market dynamics at all times either - there will be always pockets of strategies that will be positioned to outperform in a given environment.
As I wind the clock 10, 20 years for now and what it means for our strategy and our "old economy" businesses - I see further disruption by the proliferation of data availability and technology, and the direct and indirect impact accelerating quickly It's one of the reasons why think its important for us to invest in the near future in functional human capital specialties at HHCP on our Operations Team that focuses on digital, data modernization and advanced analytics, and data driven marketing. Those value-add capabilities in our trash and steel end market driven businesses will eventually be subject to the same forces of creative destruction whereby it will be a competitive advantage for early adopters, the ante to be competitive for a while, and then an archaic disadvantage unless further adoption along the curve is made...
And from a personal perspective, one of the benefits of being on the younger side of being a Partner / leading deals in my view is I grew up in an accelerated technology adoption era that leads to an edge on how it impacts our prospects and companies vs. the average PE Partner. But at the same time, know my technological base will be inferior to the next generation who grew up on more sophisticated technology base than I did, and why I want to keep those fresh. More concretely, I think my ability to quickly manipulate data and information, know how the technology stacks of our companies are built, and how blockchain technology works, for example, is an advantage over the other senior folks in the industry, who trained up ordering physical K/Qs from Edgar, modeled on one tab with 256k data limit on Lotus123, and doesn't know the difference between Amazon Web Services and a Cumulus Nimbus Cloud... But unless I continue to invest time or let ego get in the way (i.e., I am a Partner, why am I doing XYZ), I will end up being the dude doing the equivalent of keyboard pecking, unable to PDF files or run redlines, and has let how the real world works - not the PE bubble world where you become reliant on people doing basic things for you - pass by and the next hungry dude coming up eats my lunch.
Helluva meandering post here...
And of course someone "can start a similar venture in 10, 20 years"; just has to be similar relative to the investing and broader ecosystem that happens to persist at that time, and that's for you young guns to figure out what the equivalent strategy would be, as the world passes the older generation by at rapid rates...
But, in general, my advice wouldn't be to focus on some of your existential questions. It would be asking yourself, "In my current role, am I enjoying what I do, continuing to learn every day, and feel like I am trending towards progressing my professional skill set and value relative to roughly where I think I want to end up..." If so great, keep at it. If not, find something else that you think will advance you in this regard.
But, my crystal ball is probably not as clear as others who spend more of their time on macro trends and global capital flows... So just one perspective to TIFWIW....
Hahaha yeah I agree with your sentiment too, but part of being filter-first gives me a bit of a pessimistic view in terms of seeing negative trends almost more than what the payoff could be.I like the sentiment though cause it just reflects living a good life, bout the journey not the destination and if you don't enjoy what you do then you 'suck' at life haha (at least that's what I feel about myself)Appreciate your thoughts though, wasn't looking for a crystal ball or anything but the types of levers you identify or think are significant enough to think about are important for people like me to try adding to how we think/ evaluate things on some level (and focus on trying to be better at).Thanks PS Florida / BR is awesome know a few people from there hope more finance moves down there, and not necessarily miami
Oh, and sorry for the delay in response - market be cray cray with folks trying to jam in deals to close by year end '21. given the potential tax changes on the horizon...
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