Flexible Focus: The Key to Private Equity Success

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Most people think private equity is about money. The truth, it's about knowing exactly how to turn a million into 10, when everyone else sees nothing but risk and today, my guest is going to show you how all this and more coming right now.

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[THE GUEST]: Neel Bhargava is the Founding Partner of NB Group

[THE HOST]: Ryan Miller is an Angel investor, former VP of Finance, CFO of an insurance company, and the founder of Fund Raise Capital,  https://www.fundraisecapital.co where his strategies helped emerging fund managers and deal syndicators to report raising over $1B following his strategies.

Transcript

Ryan Miller  

My name is Ryan Miller, and for the past 15 years, I've helped hundreds of people to raise millions of dollars for their funds and for their startups. If you're serious about raising money, launching your business or taking your life to the next level, this show will give you the answers so that you too can enjoy your pursuit of Making Billions. Let's get into it. 

Ryan Miller  

Most people think private equity is about money. The truth, it's about knowing exactly how to turn a million into 10, when everyone else sees nothing but risk and today, my guest is going to show you how all this and more coming right now. Here we go. Neel, welcome to the show, man.

Neel Bhargava  

Thanks so much. Ryan, yeah, pleasure to pleasure to be here. 

Ryan Miller  

Yeah, it's good to have you, brother. So let's jump right into it, you, you've done a lot. You've built NB Group for, I believe, eight years now, how do people who want to get into private equity or just do deals running funds or syndications? There's a lot going on, but there's a lot of common threads, and one of those is winning. So I'm curious, from your perspective, how would you recommend people get some early points on the board and start winning in private equity and just running deals in general?

Neel Bhargava  

Yeah, sure. Happy to talk about that and you know, really like the community built here, emerging managers, asset managers, people who may want to get into private equity. So happy to share, share some lessons and guide as much as I can. But to answer your question, you know, how do we think? One of the things I've learned is saying I developed is be focused and flexible. What does that mean? I think it benefits you to have focus in one way. Could be on this, on a sector, could be on a theme that cuts across sectors, could be on a region of the country or the world that you want to invest in. Working in the types of companies you know, only businesses that are you know, founder, or something even more specific. By doing that, it enables you to get really educated on that EU sector region you're trying to invest in, get to know lots of people who are connected in that ecosystem, and get your name out, so I think focus is the first part. At the same time. You need to be flexible to get your first deal, your second deal, done. Maybe the business a little bit smaller than your ideal. Maybe the economics you're getting from your LPS aren't you know where you want it to be a few years. Maybe the deal structure you want to do majority deals, but this was going to be a minority. You know, there's lots of different ways to do deals. What's important is get your first deal or two done, be flexible on how you get there. And you know, that's something we have to do when we got started as well. So be focused and flexible.

Ryan Miller  

Love it. That's great advice. Man, so being focused and flexible. What else, how, what else have you seen from your experience? You've done a lot man, on just how people can put some early points on the board.

Neel Bhargava  

You know, you want a lot of deals to be a home run, right? That's what we're in the business for, at least that's what I'm in the business for. But every deal is not going to be a home run. And you know, the first one you do, you also don't want it to go very badly. So I think you need that kind of balance of risk and rewarding first one, you want to be highly confident that not going to lose money. You have a really, really strong chance of getting two times your money back, or whatever it is, also still have the ability to get four or five times, but you want it to be like a tight band around the outcome, I would say, to be at high confidence, because your first deal going really badly is just as notable as your first deal going really well.

Ryan Miller  

Brilliant. And how would you know on this show, we talk about reputation, relationships and results are the most valuable assets in your possession. I'd be curious to know your opinion on how the professional relationships. How does that affect you? Putting points on the board, getting started in this industry. Love to know your perspective on that. 

Neel Bhargava  

So I think relationships are critical. Private Equity is a lot of it is a relationship game, and I think the most important relationship is your relationship with the seller, the person you're buying the business from. Our model is to partner with those owners, those founders, typically of the business, have the routine a good chunk of equity and continue to be involved in the business. And so that relationship is critical for five years, six, seven years out, you know, as the law you're gonna own that asset, but it's also important to get the deals right, and that's that's maybe more about what I mean. You know, why relationships are really important. You know, there's lots of different sources of capital out there. There's lots of private equity firms, there's lots of different other sources of capital. You know, owner could get just, you know, take on a loan as they wanted to in some situation. So establishing that relationship with the seller, making it clear why you're going to really be the right upper of this business going forward, the things you care about are the things that they care about other employees care about. You really need to demonstrate why you're the right owners of the business, but they have lots of options.

Ryan Miller  

Yeah, brilliant. You know, one of the things I know in this industry and alternative assets, a lot of people like to hire consultants or people with investment banking experience, and when it's at the higher level, I can tell you the reason why those people get hired is not because they necessarily possess the one and only skill people get hired have demonstrated that they have the right relationships and they can build those and bring those to the front of the line. So. I even recall a guy, he was on the show earlier, a VC name was Tomasz Tunguz, and he launched his VC firm after 17 years in the industry, and he raised over, like $500 million how did he do that? He'll be the first to tell you, relationships. He was in the industry, and he nurtured those things and took good care and so when it was his turn to kind of spread his wings, he did it beautifully. So I absolutely love that relationships are absolutely critical. Now, the other thing that I'm curious about is, sure, great get good points on the board, but how do you not lose in this industry? So there's downside risks, whether you're a beginner or a seasoned deal maker in this industry, I would say not losing is also part of that. What have you found to be helpful when trying to avoid some of the downside risks?

Neel Bhargava  

Yeah, so there are ways you can structure deals so that you are protected against that. One is using specific financial instruments like preferred equity, where your money gets out first, maybe you have a little bit of a paid in kind dividend on top of that, that's something that when we, you know, we're paying, you know, relatively healthy multiples for good businesses. And, you know, as a trade off, sometimes we're saying, okay, we're going to give you this nice upfront value. We want a little bit of protection through a convertible preferred structure. So getting to sort of the financial mechanics, that's one way to protect your downside, having a, you know, balanced, rich reward trade off, like I talked about a few moments ago, is another one. You know, also look for industries that are economically resilient. You know, we're looking right now at education. Parents are always going to highly, highly value education, and it's for many people, non discretionary, and that makes us feel good about the downside relative to some more discretionary consumer. So those are a few ways to think about where you invest and how you invest to protect your downside of the outcome. 

Neel Bhargava  

Another thing I think about is how to make sure you don't lose that deal when you have line of sight to getting it signed up. And I think one thing I've learned last year after doing this for a while, it is before you sign the papers around a letter of intent. You know, here's the deal I'm going to do, really think, really be thoughtful about every chart you're putting in there, how various constituents are going to think about it. You know, lenders, equity sources this, you know it's easier to find equity sources. How the seller is going to react if different things happen, you know how this is going to translate into legal docs. You really have to be thorough and thoughtful when you're negotiating terms up front, because a good way to lose a deal is to retrade on that deal. Put some asset through the deal out there that someone else who needs to agree is not going to agree to. So I think that's that, that's a lesson learned that I would put out the people.

Ryan Miller  

Yeah, brilliant. So really making sure that you think, think it through, from first principles to second order effects, third order effects, make sure that you really understand who is going to be affected, what's going to be affected. How will that translate to our cap stack, our partners, everything on the deal? How do you feel that, let's say someone doing their first deal. Because I know a lot of people, I've heard it, they're like, well, if first deal I'm going to invest in, you know, building robots in outer space, these like huge moonshots. Do people really go for the Hail Mary and try to win or do they take a more balanced approach? What have you found and to cover that downside?

Neel Bhargava  

Well, I think it's rooted to have, a, I think, a balanced outcome set that you feel confident about in your first deal. But I'd also say, you know, you got to get deals done, and you got to get that first deal done to gain credibility. So, you know, I would say, don't be overly picky. If it's a good deal, you think you can make money, it aligns with what you're trying to do you believe in the owner or the team. Don't wait for the perfect thing, take the deal that you think is going to make a buck.

Ryan Miller  

Got it, yeah, and just make sure that you know a good deal is a good deal. Like I always say, you don't want to catch a fallen knife either, where people are just hawking, you talked about the retrade. So there's a lot of things that go into that for sure. Now I'm curious. I'd love to just shift gears a little bit curious what you're seeing out there in the market. You know, from your vantage point at envy group, what are you what's exciting you maybe, what's some things that are concerning you, and everything in between. What are you seeing out there right now?

Neel Bhargava  

So you mentioned up front, we invest in two areas, one is multi location services, which is business model we invest in across categories and industries, the other is healthcare. We're really excited about geolocation services right now. I think there's so much that falls under that umbrella that, you know, has tons of opportunity for growth right now. You know what, when I first started, we used to call this retail on consumer, which is, you know, the old lingo that, my old adiman you know, it's kind of traditional way to talk about this sector. We call it multi location services, because I think it's a better way to describe it. You know, what this means is businesses that offer a service to businesses or consumers, that can expand by opening new locations, or, you know, moving it to new geographies, otherwise extending their footprint. And when you think about that, there's so much that falls into that, but there's also so many similarities in that that once you invest in a gym business like we have, you may think the landscaping business is very different, but actually there's a lot of similarities. And now you have to manage different regions, how you think about unit economics, customers or locations and everything. So there's a lot of, you know, interesting areas of that, that are still under invested in the US as a massive market, which is part of the thesis here, right? Once you have a model and offering a service that works, you can just duplicate that in, in new cities, new states, new regions, and just grow into this massive market that we're fortunate to have here in in the US. So, yeah, we're really excited about numbered areas with.

Ryan Miller  

Brilliant and where do you see? So, so that's what you're seeing now. That's what's exciting you right now. You see those opportunities now, looking forward, obviously, this is what we do, pro forma in the form of spoken word. But looking forward, where do you see the value? Where do you think the smart money is going and let's, let's unpack that a little bit. 

Neel Bhargava  

I think there's an emerging kind of barbell effect happening in the industry. You've got large, you know, the balls bracket, previously private equity zones, but now really asset managers who are becoming bigger and bigger, gathering up assets, developing new strategies. It could be, you know, now they've got a large cap fund and a mid cap fund and small caps on and a micro fund, and they have private credit and private equity, real estate situation, but it's like, every year or every six months, there's a big strategy they're pulling. They're able to do that because they have really fun flexes to capital, they demonstrated a team strong capabilities and that's that's one strategy. I think there is another strategy around moving down market to businesses that command lower multiples, that have more room for growth, and you've got more inability to really get outsized returning 4, 5, 6 times your money or more, which is where we invest. I think that middle group, you know, the middle market fund with 500 million to $2 billion dollars under management, or something like that. Who's typically achieved, you know, two times return is it's getting hard for those funds to raise, you know, just keep doing that and raise funds, or raise bigger funds, because the capital is getting pulled in two different directions. So that's where I seem to see the market moving, we play at that lower end of the market, higher returns. And I also see more capital moving into, you know, kind of deal by deal model, rather than a fund where you've got more distract discretion about what you're investing in. Your money's up, is locked up and, you know, there's more aligned with the sponsor as well.

Ryan Miller  

Brilliant, okay, and as we round third base. What would you say would be maybe some competitive advantages that you can share with people, just some leave behind. You've been, you've been in the game for a long time, held amazing roles. You're running your own firm, what would you say would be some helpful competitive advantages you can leave with our fans? 

Neel Bhargava  

If you're thinking about starting your own private equity from, you know, from the processes I went through, you know, eight, nine years ago, couple things that then I would, I would point to one consider a partnership. You know, it is. I started on my own, spent several months, you know, picking around deals by myself. And, you know, not having many brilliant talk to, not having that sounding board to make sure my thesis was sound, doing, doing everything. Found it challenging, I found it, you know, lonely. I found it, you know, hard to get necessarily, completely certain about everything I was doing. So brought on partner, who's, you know, good friend of mine, from a long time ago, and done some more things. And I think that's one thing that allowed me to really stay motivated and, you know, let has led to our success, just having a partnership. So you are trading off some economics, doing something on your own and keeping all that for yourself like it's more economically rewarding in theory, but you have to persevere through that and get all those deals done and be able to do as many, I think it's well worth the trade off. So that's one thing, the other thing is, and I should a few moments ago, I do see capital moving more towards deal by deal funding, rather than you know, only having, you know, only investing in funds. We follow the deal by deal model. I think it's a really compelling way to invest for you know yourself as a sponsor, and also for LPS, and it can be done without a fund like you can do really good deals, you can you can build a brand, you can build a reputation, and it could be really, really economically rewarding. So consider, you know whether raising a fund is the right thing or you want to explore just doing things up on a deal by deal basis. So those are a couple things worth going through.

Ryan Miller  

Awesome and you know, I like to ask this question, but is there a book that you just can't recommend enough?

Neel Bhargava  

Yeah, good question. I did set the goal this year to read at least 12 books. I'm well on I think I'm basically, I probably need it. So I have been a bit consuming a lot. One book that stayed with me is called Why We Sleep, really interesting book. Connect those into why sleep is so important, how to be better at it, and, you know, just how to maximize the benefits things you can get from it. You know, it's not about private equity at all, but I think it's about, you know, being the best you can be, which I think sleep provides a foundation for, you know, wellness, I think is really an important topic for me and a lot of people. And this book was just really well written and thorough, and has really made, you know, a change in how I live my life. So it's one when I would recommend.

Ryan Miller  

Awesome. I love it. Yeah, sleep is important matters, all warriors need sleep. My son gave me a talking to last night when he realized I was staying up till 12-1 in the morning every night. He just figured that out, he's nine. He's like, Dad, all warriors need their sleep. I was like, Oh, bless your heart, thank you, but I'm good, but you're, it's no less true. So before we wrap things up, is there any ways people can reach out to you if they want to learn more, enter your world, anything at all? 

Neel Bhargava  

Yeah, for sure, you could find us, find on the web at our website, nbgroup.us, and find me on LinkedIn. Neel Bhargava, reach out to me, neel@nbgroup.us, but would love to, love to talk to anyone who wants to talk.

Ryan Miller  

Awesome. So just to wrap things up, consider partnerships, just to help you cover more ground, to air out your mind. It's really good to have a little bit of that back and forth. Second one is, maybe launching a fund isn't the best idea, right, obviously, lawyers and accountants could tell you, you should talk to them and make sure it's right for you. But sometimes launching a fund is not the best deal structure, and it might actually be cumbersome into what you're trying to accomplish. And finally, great advice, sleep is the ultimate biohack, I think rise and grind is dead instead. Why don't we try to rise and prime you do these things and you too will be well on your way in your pursuit of Making Billions.

Ryan Miller  

Wow, what a show. I hope you enjoyed this episode as much as I did. Now if you haven't done so already, be sure to leave a comment and review on new ideas and guests you want me to bring on for future episodes. Plus, why don't you head over to YouTube and see extra takes while you get to know our guests even better, and make sure to come back for our next episode, where we dive even deeper into the people, the process and the perspectives of both investors and founders. Until then, my friends stay hungry, focus on your goals and keep grinding towards your dream of Making Billions.