In case you don’t know much about private equity firms, they are on the rise, and they are changing the game. Today, more than 5,400 private equity firms own tens of thousands of companies.

Now, it’s really essential for CEOs and senior management to understand exactly how private equity firms operate, and that’s what this episode is all about. Because Adam Coffey, author of The Private Equity Playbook, has almost 20 years of experience building businesses for private equity companies, he’s going to cover a lot in this episode, including the landscape of private equity, ground rules for finding the right firm to partner with, and how to navigate and continually grow in the private equity space.

Here’s the craziest part: Adam has helped people successfully transition into private equity and they’ve become millionaires because of the switch and his guidance. This episode could change your life, especially if you’re considering getting into private equity.

Adam Coffey: When I think of this book and the genesis of what first started it all, for me it really goes back to an earlier point in my career. I’m a mid-30s, rising corporate star guy, working in the Fortune 500 world of General Electric. Not today’s GE that trades for $6, $7 a share but the old GE run by Jack Welsh back in kind of its hey-day when stock was splitting every two or three years. My career was going really well, I seemed to be rising fairly rapidly through the ranks, and the phone rings. That’s how it happens for so many people in life.

You’re living your life and the phone rings.

This was before the era of telemarketing, so I didn’t have to worry about someone trying to sell me something. But it was a recruiter and who was looking for a CEO of a smaller, middle market private equity-backed company. They were curious to know whether or not I was interested in talking about this potential job opportunity.

“At that moment in my life, the seeds of this book were really sowed.”

It was that age old question, I’m standing at a crossroad of life, I have to turn left or I have to turn right. Do I stay in the Fortune 500 world, career’s going well, it’s predictable, it’s comfortable, it’s safe…or do I go off on this adventure to be president for the first time of a much smaller company obviously? It’s a private equity backed adventure and of course, back then, you know, there wasn’t a lot written about private equity.

Even today, if you go on Amazon, you type in private equity, I think there’s something like 77 things that come back. So the world needed this book. But this is where my life intersected and created this genesis for this book. I wanted to help other people who are potentially either entrepreneurs who built a company and are contemplating selling the company and private equity is calling, or that mid-career Fortune 500 executive who is looking at a potential opportunity but really doesn’t know anything about private equity, how do you make that decision?

That was really the genesis for this whole book idea. It just took me 20 years to write it, that’s all.

Getting into Private Equity

Charlie Hoehn: So, you made the transition into the private equity world, what was that transition like?

Adam Coffey: It’s the school of hard knocks, you know? The growth of private equity over the last 20 years has been absolutely phenomenal, and I think imitation is the greatest form of flattery. So the early private equity companies had so much success buying companies, growing them, and selling them that you went from a few hundred companies that were doing this with a few hundred billion dollars in assets under management, to today, you’ve got like 5,400 companies with three trillion dollars under management.

What was almost a rare exception back in that day, it’s happening all the time today. You know, executives are getting the phone call, “Are you interested?”

So for me, the transition was, at that time at 30 something years old, I’m chasing title, I’m chasing money. I’m looking at what’s the salary opportunity, what’s the bonus opportunity. It’s my first opportunity to become a president. There was no book written, it was a new adventure in the Fortune 500 world when you’re a mid-level executive, you think you know how to run a business but then when you actually go out and do it.

“It’s a different animal.”

There’s a lot more that comes into your wheelhouse that you didn’t potentially deal with in the Fortune 500 world. For me, there was a lot of trial and error. I can certainly tell you that the company I first ran back at that time compared to the companies I’ve run subsequent to that, you grow as a person, you grow as an individual.

At 54 years old today, I certainly know a lot more about running a business, building a culture, taking care of people than I did when I was 34. What I’ve tried to do with this book is to capture all those lessons learned and to demystify the experience so that other people who are following kind of in my footsteps don’t have to spend 20 years trying to figure out how all this works.

Not Completely Unfamiliar

Charlie Hoehn: What is private equity?

Adam Coffey: Most of the time, I like to use an analogy, which is mutual funds. Most human beings on the planet who are adults tend to know what a mutual fund is. In a mutual fund, a bunch of people like you and I, we write checks, we send them in, we want to buy a piece of this mutual fund. It’s a Vanguard fund, it’s a Fidelity fund.

So a mutual fund aggregates the money from a bunch of people and then a fund manager makes decisions about what investments to make.

We can look at morning star ratings, one star to five stars, for a number of different categories to decide, is this a mutual fund I like, I want to invest in? They’re publicly traded, so we can jump on our e-trade account, we can buy this mutual fund and if we decide to sell it 10 minutes later, we can. If we want to sell it tomorrow or five years from now, you know, you can certainly make those decisions too.

So I liken a private equity fund to a mutual fund in that, a private equity fund aggregates capital from multiple sources, generally not just individual people like you and I. Normally, you have to be an accredited investor, minimum investment size could be as big as five million dollars. But it’s essentially pension funds, it’s family office money or family money—wealthy individuals or trusts that are looking for returns that outpace the market. The money is going to be tied up for a period of time as long as 10 to 12 years. So there’s no liquidity, but you aggregate the money from a bunch of wealthy people or pension funds, you put all that together.

A private equity fund, just by nature of the title, it’s private. So it’s not publicly traded, you can’t decide five minutes later or the next day, “I want my money back.” You’re going to commit capital for an extended period of time and then the private equity firm is going to take that money and they’re going to invest it.

“The type of fund I’m talking about is a private equity buyout fund.”

They’ll go out and they’ll buy a controlling interest in a bunch of companies with the money that they’ve pulled together. Then they’re going to work with those companies, grow those companies, and then during the life of their charter, they’re going to buy them, build them, make them better, make them bigger and then at some point, sell them and. At the end of this 10 year lifespan of a typical private equity fund, as the money is coming in, they’re buying things, improving them.

When they sell them, the money is then being returned to the limited partners who invested in the private equity fund.

That’s essentially it. It’s like a mutual fund, but it’s on a bigger scale. The minimum investment size required to participate is usually much bigger, but it’s like a mutual fund.

Where to Invest?

Charlie Hoehn: Let’s say I have five million dollars and I’m trying to decide, do I invest in a mutual fund or in private equity? What are the pros and cons of private equity?

Adam Coffey: From a mutual fund perspective, there’s liquidity. So that’s the biggest difference between investing in a mutual fund versus investing in a private equity fund. When you invest in a mutual fund, you can retain the right to pull your money out at any time. You have the ability to get liquidity and to pull your investment back.

For that, if you look at the stock market over an extended period of time, I think the average current that textbooks uses around 7%. Over an extended period of time, you can expect to make around 7% per year on average. Some years are up, some years are down but the average is around 7%.

That’s the return you would see in a long term investment in the stock market and you have liquidity.

In the private equity world, you’re committing that capital for a period of 10 years, and given the structure of some funds, that could be extended to as long as about 12 years. So you can essentially just say to yourself, “I’m going to commit this capital, and chances are, I’m not going to see it for an extended period of time.”

Now, money will be flowing out because you don’t write a check upfront for the whole amount. What you do is you pledge the capital, and then as the private equity firm is buying companies with that fund, they’re sending out notices to you saying, “Hey, you need to send me $120,000, you need to send me $250,000,” whatever your percentage of the fund is against the investment that they’re making.

So in the early years of a private equity fund, you’re going to be sending a lot of money to the private equity firm to fuel the acquisitions that they’re making, the purchase of the platform companies is what they call them and then they’re going to grow those businesses and as they start to mature and they start to sell those companies, then the flow of money starts reversing. So for the first five or six years of the fund, you’re sending a lot of money into the firm and then for the last four or five years, the money is starting to flow back to you.

All of this happens over about a 10 year period, but the returns that private equity is typically getting in today’s markets, down a little bit historically through competition, there’s a lot of private equity firms out there looking for investments to make.

Typically, 14–15% is a fairly typical return. Better than 20 is a really good private equity fund. So the investments outpace the stock market, and as a result, pension funds, wealthy individuals who are seeking to diversify their portfolio are making these, what we would call alternative investments and is with money that they’re not going to need for the short term.

So they’re seeking an outpaced return and they’re tying up their money for a longer period of time in order to get that return. That’s kind of the nickel dime version of it.

Choosing a Firm

Charlie Hoehn: You mentioned there are over 5,000 private equity firms today, is that right? How do you find the right one?

Adam Coffey: You know, if you go back to the mutual fund example, when you think of mutual funds, there’s these morning star rankings. So funds are rated from one star to five star. In the private equity world, there are also rankings on private equity funds. They break down the results, instead of by stars, they break them down into quartiles. So a top quartile fund is a top 25% fund, a second quartile fund is returning in relation to its peers, somewhere between, it’s between 26% and 50% of performance against its peers.

There’s three main rankings that are looked at. The first is IRR or the individual rate of return. So it’s a percent of return—what’s the percent you’re earning? We talked about the stock market returning, on average, 7%. Private equity has to be much higher than that, and so that’s IRR.

There’s also a measurement called MOIC, which is the multiple of invested capital. Imagine as an example, I invested million dollars and I get three million dollars back. Well, that’s three times the money I invested. It’s a three times MOIC. MOIC doesn’t take into account time. IRR does take into account time. IRR has to do with cash flows coming in and out of the fund and how long it takes to return the money. MOIC just is how much money did I get back for how much money did I put in?

IRR is the most important measurement, MOIC is next, and then there’s a final third ranking, which is a little bit more obscure, which is called DPI. DPI is essentially the speed with which the private equity fund is returning money to the investor.

So these are the ways that limited partners or investors in private equity make decisions and try to decide—is this a morning star five fund is an example or is it a one star fund?

But the book really isn’t necessarily about private equity itself, it’s more about from an investment perspective—either you’re that mid-level executive who’s seeking a job opportunity in the private equity world or you’re a business owner or entrepreneur who started a company, grew a company, and you’re contemplating selling your business to private equity.

So the first section of my book really goes through what is private equity, what’s the history of private equity, how do they raise money, and then how are they rated, how do people decide which is a good fund, which is a bad fund?

I think all of these things are important when you’re contemplating either selling a company to private equity or you’re contemplating working with private equity. Try to understand what is it first of all, how are the private equity firms rated, and then how can you use that information to decide whether or not you’re partnering with a good firm that has a history of making good investments over time.

Joining a Team

Charlie Hoehn: The evaluation process for finding the right team to join—how similar is that process to the one you described of looking for the right firm to invest your money? I’d imagine you’re using similar metrics.

Adam Coffey: There’s a lot of things that go into evaluating any job opportunity, so it’s a little bit different for each person. My book targets two people; it targets a guy I named Josh. Josh is a plumber, started out as a plumber, he was driving a truck and he built an empire over a 20, 30 year period. He’s now got 500 trucks crisscrossing a region of the United States.

He’s getting to the age where he’s trying to decide, “Jeez, what do I do? Do I cash out my chips, do I sell my company?”

Most entrepreneurs think about a sale process as kind of being a one-time event. You know, it’s one and done and I’m going to sell my company to the highest bidder, I’m going to ride off into the sunset.

One of the premises of my book is to get entrepreneurs to re-think that strategy.

I’d like to think of it in these terms:

“Why take one bite of an apple when you can take three?”

Why sell your company once when you can sell the same company three times? My personal record is over a 13 year period getting five multimillion-dollar paydays running the same company.

There’s a whole educational process. First about just what is private equity, but then there’s, “Okay, I’m the business owner, I’m thinking of selling my company and I’m trying to wake up an entrepreneur to a different angle.”

Instead of leaving your company, something that you’ve grown and have built and understand and know and then think about “What am I going to do next” or go start something else. I call it partnering with private equity—keeping some of your money invested by rolling it over into the new entity that the private equity company buys, which is your company, but the recapitalization of it, and then taking money off the chips.

It’s like a squirrel storing up some nuts inside a tree for the winter.

“Instead of riding off into the sunset, keep running your company.”

Only now, you’ve diversified your portfolio. If you invest 34 cents and roll that forward, the average underwritten return in private equity right now is around three times the multiple of invested capital. If you roll 34 cents forward, and then, grow the company and sell it and get a three times return, 34 cents becomes $1.02. Now, what you’ve actually done is the second time you sell the same company that you sold the first time, your second check’s actually bigger than the first, and when that private equity group goes, chances are, another private equity group’s going to come back in on the buy side. You roll 35 cents forward and you do it all over again.

So, you know, there’s no reason to just sell, retire, walk away.

You can partner with private equity. These guys are very sophisticated investors. You can ride their coat tails. They don’t run the company because they’re not operators, they’re financial guys, but they rely on your expertise, you rely on their financial expertise, and the partnership is something that I’ve spent 20 years doing myself from a personal level.

Then the second person I wrote the book for, I called her Rose. Rose is me, me 20 years ago. It’s the Fortune 500 middle manager.

Rose has got a great career going in the Fortune 500 world, and their phone’s ringing, “Hey, come take a more senior role in this private equity backed company.” She doesn’t know what private equity is and she needs some kind of a resource.

So the book seeks to educate on what a private equity firm is, how does it operate, and then, how do you start to evaluate, what is a good opportunity from a bad opportunity?

So the great thing about Rose is that when she leaves the Fortune 500 world, I always tell people when you think about the Fortune 500 world, what is the percent of people that actually earn seven figures a year as the percent of the employee base.

It is almost non-existent, right?

Charlie Hoehn: Really low. Yeah it is zero.

Adam Coffey: It’s going to be zero. So if you now say what is the percent of employees in the middle market environment who can earn a seven figure payday? It would be astronomically higher in the middle market private equity backed world than it is in the Fortune 500 world, and that is because Rose can leave the Fortune 500 world, take the skills that she’s developed, come into that private equity back to middle market company, be the president or CEO or the vice-president of sales or marketing or whatever the position might wind up being without having created anything.

She can use her skills to grow the business, work with the sophisticated financial private equity guys, and generate transformational wealth for her family—and she wasn’t even the entrepreneur.

So the premise of my book is to take those two people and educate them in the world of private equity, which is exploding. You know, $3 trillion capital under management now, and we are approaching a point where almost 50% of every company bought and sold is involving private equity on one side of the deal or the other.

So the opportunities are growing, and there’s this whole world that these few people can now participate in generate true transformational wealth for future generations of their family. One created something, one comes in from private equity or from Fortune 500 not having created anything, but the result is the same for each. That’s what this story is about.

So the first section of the book gives you the history. The second section of the book starts to talk about, “Okay so what are the mechanics and how do you think about working with private equity and evaluation firms?”

So the book uses a lot of sports metaphors. I talk a lot about the scoreboard in this section of the book, and obviously the scoreboard for an entrepreneur starts with price. I am going to sell my company and I want the highest price. So that’s the score.

But out of a scoreboard in a baseball game, there is also a lot of other information. So there’s batting averages, who the players are, how many balls and strikes, what is the speed of the pitch…So then I start to talk about the different aspects. When you are actually working with a private equity group, how do you pick one that fits your personality or is a good partner for you, given your skillset and the way that you like to work either as an executive or as an entrepreneur?

I use things like I call it the hands on or hands off meter. If the private equity firm is hands off, you might expect to be called, maybe you are talking to the partners of the private equity firm once a month, a couple of times a month. You are going through some financials on a monthly basis and you have four or five board meetings a year.

You are doing some budgets and it’s pretty hands off, they’re not really in your face. Then on the other side of the meter there’s the hands on meter where the firm is talking to you every week. You are talking to the board every week. “Here is your to-do list for the week,” and I say it is like they want to put my baseball helmet on. They want to tar my bat. They want to tell me which pitches to swing at and so there can be very different personalities within a private equity firm in terms of how they work with the management teams and the companies that they have acquired.

The person has to be a little bit introspective and decide, “Am I the guy who beats my chest and no one is going to tell me how the hell to run my business, so I am not going to work well with others?” You are going to be looking for a hands off equity firm.

Rose, a Fortune 500 executive, she is probably used to being pushed. She might actually thrive and do better in an environment where they are more hands on, especially for her because it is a first time working with private equity.

So there are extremes, and I think too often entrepreneurs and/or Rose just looks at one private equity firm is the same as another. I don’t know what questions to ask because I don’t know the game.

So this book is designed to teach you not answer your questions but teach you what questions to ask.

Who Needs The Private Equity Playbook?

Charlie Hoehn: So to me this book sounds like it could potentially be a recruiting tool for all private equity firms, because it’s a filter in getting the right people.

Adam Coffey: It’s funny, I was most nervous in writing the book when I first let some private equity partner some senior guys in a private equity firm actually read the book. I’m like, “Oh my God, how are they going to react to this?” and I was shocked and very pleasantly surprised that they loved it.

Someone told me, “Hey, we are going to use this as our recruiting tool on college campuses when we’re looking for associates or interns, because it is a great primer on the entire process as it relates to private equity.”

So we talk about the history, how they’re structured, how they invest. Then we talk about how they’re measured and how to choose a good one or choose between two. It is not good from bad, it’s just different. It’s how do you choose the right firm to work with, either as Rose, the transitioning executive, or as Josh, the plumber who is selling the company and working with private equity.

Then the final piece of the book, the third chapter or section of the book if you will, really focuses on what are the strategies that private equity employs?

From my perspective, although the book is written about private equity, the strategies that are used by private equity certainly aren’t proprietary to private equity. So any business owner out there, or even transitioning executive, can benefit from looking at the strategies on how a private equity firm actually accelerates the growth of a company, accelerates the earnings of a company, and positions it so that it can be sold, calling it a three times return on investment or better.

“So the book itself can stand alone.”

It’s got three different lives through three different distinct sections. The history, how to partner and work with one, and then what are the actual things that you are going to do in a private equity environment when private equity controls the company you are at.

So there are opportunities for Josh, the business owner, to make or rollover investment and continue to generate wealth. There are opportunities for Rose, the Fortune 500 person, to come in, play a senior role, use the skills developed in the Fortune 500 world not having started a business or created anything, but also generating transformational wealth for their family.

So it is a cradle to grave, how does private equity work, where did it come from, and what’s it all about?

Unfortunately, there isn’t that primer out there in the market place today, on Amazon or iTunes or anywhere that does what this book does. I tell people it is very broad but not so detailed that you get drowned in minutia.

So a private equity guy showed me the other day, he pulled the book out from behind his desk and he said, “This is what I was giving to associates,” and it was that 1,700 page legal book written by lawyers. That is the word of private equity.

Charlie Hoehn: Yeah, “Here, enjoy this kindling.”

Adam Coffey: Exactly. I remember a movie where people got trapped in the New York City Library during the start of a new ice age, and they were burning tax books. That’s what came to mind when he showed me this thing. It was written by lawyers and it was for lawyers, so there wasn’t this primer.

It is a professional athlete who decides to play a new sport that they have never played before, and they walk out onto the field and they don’t know the rules. So even though they are a world class professional athlete, if you don’t know the rules, you are going to struggle and there is a high chance that you could fail.

The goal here is to teach you the rules of the game to put you in a position to where you understand the field and you’re prepared to play as a much better educated athlete.

Learning the Rules and Winning

Charlie Hoehn: Tell me a story about somebody who you did help learn the rules—what happened to their career because of it?

Adam Coffey: I love working with executive MBA, fully employed MBA, call it MBA candidates who are the next generation of business leaders in the world. I can use one person as an example, and she actually works for me today. She and I worked together back at GE.

I took off in my first private equity adventure and I needed a VP of operations. Her name is Amy—hi, Amy, if you’re out there.

I talked her into leaving General Electric to come work for me, and she had an opportunity for the first time to experience this private equity thing. She got her first seven figure payday, so hey, that’s what this was about and she and I parted ways for a number of years. I had moved on to a different adventure, she stayed at the company where she was at. Eventually that company got purchased by Aramark.

So she was back in a public environment, moved around while she and I got back together at the current company I am running today, and you know, she’s positioned once again for a seven figure payday as I am looking for my next shareholder right now.

So here is a person where not once but twice by working through the material that makes up the genesis of this book—this person has gotten multiple multimillion-dollar paydays in her career.

I tell people, if I am a boat out in the ocean, the wake behind me includes a lot of different millionaires and people who have been able to earn seven figures by playing the game according to the rules as laid out in this book.

The funnest part of what I do is to inspire people, show them how this thing works, this game works and then to actually have the opportunity to see their eyes light up.

I was on a video chat call just a couple of days ago with four guys who were running different levels of operations in the company, and I am talking to them about the potential payday that is looming for them in the next 90 days.

“To see their faces and their eyes light up is worth the price of admission for me.”

So from my perspective, there are trillions of dollars at work in private equity right now buying tens of thousands of different companies from entrepreneurs. It creates positions for Fortune 500 people to come on over and help run these businesses, and there’s a lot of wealth that’s not just being generated for those shareholders who invested in a private equity fund, but it is also being shared with the management teams and the people generate that return for the shareholders.

It’s a very lucrative field, and I love it when people succeed and actually experience that firsthand. When somebody gets their first multimillion-dollar payday, it truly changes their lives. Not just their lives, but their children or their family or the extended family.

Connect with Adam Coffey

Charlie Hoehn: What is the best way for our listeners to connect with you, get in touch with you if you’re open to that, or potentially follow you?

Adam Coffey: Absolutely. LinkedIn, I’m very active on LinkedIn. So if you just search Adam Coffey, you’ll find me, and please reach out. I love it when I connect with people out there, whether it’s phone calls or emails or follow up. I always enjoy talking to people and getting a chance to meet people.

So I lecture at some of the largest business schools, some of the top rated business schools in the country, and I’m always encouraging people to reach out to me on LinkedIn. If there’s anything I can do to be helpful, feel free to reach out. LinkedIn is the place.

Charlie Hoehn: Awesome. Final question is to give our listeners a challenge. What is the one thing they can do from your book this week that will have a positive impact?

Adam Coffey: From my perspective, when I look at this universe of people that this people targeted, the question I ask is, “Do you want to change your life?”

There’s this great movie quote from the Shawshank Redemption, that’s one of my favorite quotes of all time, and it’s, “Get busy living or get busy dying.”

“So many people out there are dreamers and so few are doers.”

Whether you’re an entrepreneur or a Fortune 500 middle manager, there’s another way. There’s another way to find success at levels that you did not contemplate.

My challenge to you is to join the private equity game. Whether it’s as an entrepreneur who sells your company, doesn’t walk away but actually makes a roll over investment, continues to work with private equity to get paid again and again and again. Or you’re that Fortune 500 person who is chasing the dream, climbing the corporate ladder.

Take a look at this, because as a percent of the employee population, it is so much more likely that you’re going to find financial success on this side of the world than you are going to find it in that Fortune 500 side of the world.

Go there, you got your pedigree, you learned how to run a business and now, it’s time to put that knowledge to work.

So the challenge is, change your life. Get busy living or get busy dying. Join the private equity game, pick up my book today, and I promise you’ll be happy you did.