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

How I Invest with David Weisburd

In this episode of 'Show: How I Invest with David Weisburd,' Jack Purcell, Managing Partner at Ridgemont Equity Partners, shares how his firm

Key takeaways

• Alignment between GPs and LPs is more critical than finding exceptional deals in private equity.
• Ridgemont Equity Partners consistently invests significant GP capital alongside LPs, often ranking as the top three investors in each fund.

Main topics

• Private equity incentives and alignment
• GP capital commitment and skin in the game

Notable quotes

"Most people think that the best private equity firms are built on great investments, but you think that they're built on great incentives."

Conclusion

Jack Purcell's journey from a small spinout team to an $11 billion firm underscores that

Transcript preview

Speaker 2 (0:00) 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? Speaker 1 (0:07) 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 market you focus on. If you think about institutional LPs, they're generally thinking about a two, three, four, 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. 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 principle 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, the top three investor in each of those funds. 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 average is 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. Speaker 2 (2:02) Maybe you could double click on the 2 in 20 model. Why could that create misalignment? The Speaker 1 (2:06) 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 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 MOEC fund, 20 % carry on two turns of 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 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 nuance difference. This low skin in Speaker 2 (3:06) the Speaker 1 (3:06) game almost turns you into an options trader. You have these options. And what do options trader want? They want all the television. 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 principle first. And that's been a good formula for us. Speaker 2 (3:25) How did you go from the spin out in 2010 from making America today having more than $11 billion Speaker 1 (3:30) that you have? 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. 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... One and a half to two percent 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, 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 investment business, 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 head count is in the investment team, the other half in the functional area is supporting the business. That's just been a really fun journey, particularly the last seven, 10 years. Spoken to hundreds of GPs. Speaker 2 (6:02) You guys have one of the most aligned businesses from the bottoms up. When did you make that decision? Speaker 1 (6:09) 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 percent owned by the active leadership. of the firm. We've not gone down the path of a GP's Jake's transaction. We haven't thought about taking Speaker 2 (6:56) it. Speaker 1 (6:57) It's becoming Speaker 2 (6:57) more and more unusual. Yeah, Speaker 1 (6:59) 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. 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. Speaker 2 (7:57) You mentioned retiring partners. Speaker 2 (8:01) 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 Speaker 1 (8:12) learnings from that? 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 back end, 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. The output of that is some of the plumbing I described in terms of economics slowly fizzling over a couple fund 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 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. 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 or 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. 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. You mentioned Speaker 2 (10:12) you built this muscle of generational transfer. What were some of those early institutional mistakes that the firm learned from? First 20 Speaker 1 (10:21) years of the partnership's existence, we were... almost a corporate utility of Bankrupt 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 in a way to be more successful in every definition of that word than they were in their career. Why do you think that is? 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 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. It's funny because Speaker 2 (11:57) 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 worked with, people that you care about versus giving it to this landmark that nobody will remember, nobody really cares about. And Speaker 1 (12:28) 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