A private equity firm bought a paint company. Turned out their sales reps were handing out 50% discounts to any contractor who asked nicely.
That's the kind of blind spot 3 PE leaders talk through in this episode. What actually happens once a private equity deal gets underway.
Carl Evander (OC&C), Sean McDevitt (Arthur D. Little), and Dave Clement (Simon-Kucher) break down how a deal actually gets picked, checked out, and sold for a profit.
You'll learn:
- Why the numbers on older deals are forcing PE firms to sell now, ready or not
- What "real diligence" looks like once you've actually bought the company
- The 1 skill partners say will matter more than AI in 3 years
Meet the Panelists
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Transcript:
Meet the Panelists: OC&C, Arthur D. Little, and Simon-Kucher
Mark Di Giorgio: Hi everyone. My name is Mark. I first and foremost am a coach at Management Consulted. I've been in this role for just over a year, approaching two years now, and I love being a coach. The reason why I am one is because I used to work at McKinsey – I was a management consultant there for almost three years. It was my job right out of undergrad, and through that experience I got to do a lot of financial services work, data strategy, and broader strategy and transformation. It was an excellent experience. Since leaving McKinsey, I've been working at a large asset management firm in Toronto for the last couple of years. It's a pleasure to be moderating this panel for everyone today. So enough about me – let's get to the main event of the hour.
Our impressive and talented guests, Carl, Dave, and Sean. So to start off, before I jump into the Q&A where I'll be teeing up questions for the three of you and we'll be engaging in some back-and-forth dialogue, I want to start with a broader introductory question for all three of you. As we all know, private equity consulting looks very different today than it did 5 years ago. So before we explore that, for everyone on the call who might not know your firms, can you all share a little bit about yourselves and where your firms sit in today's PE market? And maybe also what sponsors are bringing to you most often. We'll start with Carl, then go to Sean and Dave.
Carl Evander: Great, thanks Mark. And hi everyone, appreciate the opportunity to be here today. My name is Carl Evander, I'm a partner at OC&C Strategy Consultants, where I lead our global private equity practice.
I'm gonna start by just not saying the full number – I've been in the strategy consulting into private equity world for over 20 years now. I started my career at Bain in Europe, worked with Bain across four different continents before ending up in the US about 15 years ago. I briefly spent a period of time in private equity myself as an operating partner before coming back to consulting about 6, 7 years ago with OC&C.
Just on my firm – OC&C is a global strategy consulting firm, and we're one of the last pure-play strategy firms. We look a lot like Bain did when I started my career at Bain, meaning we focus on fast-twitch, high-level strategy problems. About 50% of the work that we do is for private equity, and that work spans the deal and investment lifecycle – from pre-deal corporate due diligence and strategic and commercial due diligence, through value creation planning and value creation initiatives during the ownership period, into exit planning and sell-side diligence and sell-side prep work. And we do that with a lot of sector depth across a few different areas, including consumer products, retail and leisure, business services, industrial products, and tech, media, and telecom as well.
Sean McDevitt: I guess I'm up second. Sean McDevitt, partner at Arthur D. Little, based here in Boston. If you don't know Arthur D. Little, we're considered the original management consulting firm – we're celebrating our 140th anniversary this year. We have about 53 offices globally and about 2,000 staff, and we remain a private partnership, which is a little unique compared to some of the other bigger-name firms you know. Our position in private equity is fairly specific.
We tend to be differentiated in technology-intensive, infrastructure-heavy sectors – think telecom, data centers, digital infrastructure, energy, healthcare, industrial tech – where market understanding is typically not enough. The clients we see are typically investors and lenders financing these assets, but also the operators that are building and running them, and often suppliers who are providing technology to these types of businesses.
We have a fairly unusual perspective across the ecosystem. In terms of what we're seeing, I think sponsors tend to bring us three types of questions: one, is the underlying market thesis real? Second, can the technology, the network, or the physical asset actually deliver against the business plan? And third, what do we have to do after closing this deal to create value and realize what we're underwriting or investing in?
What we're seeing now is increasingly those questions start to arrive together in a way that they didn't years ago. A data center investment, for example, isn't just about a demand forecast – it's about power, land, connectivity, construction, customer concentration, technology evolution, financeability. So we view our role serving this customer base as very much around integrating commercial, technical, and operational diligence into one investment view. That integration across those things is becoming increasingly important as these assets become more and more complex, and the margin for error in underwriting these becomes smaller.
Dave Clement: Awesome. Great to be here, thanks for the opportunity, Mark and team. My name is Dave Clement, I'm a partner with Simon-Kucher. We're about a 40-year-old consultancy that specializes in growth strategy. We've got about 45 offices across the globe in 30 countries or so, and within private equity, while some of the other folks on the call have deep specialization in certain industries, we're really the functional expert of the group.
5 years ago, sponsors typically hired us to do very specific pricing or commercial strategy projects. What we're seeing as the world evolves is there's a much larger question about how you really build capabilities, both within a portco and within the PE firm. We've always been known for pricing and commercial excellence, but increasingly we're building out the org structure, the operating model for some of these commercial functions. We've got an ongoing PE commercial maturity benchmarking tool, and that essentially tests value creation planning, portfolio execution, and firm-level operating model. The planning really isn't where the opportunities lie these days – that's obviously critical, but it's more about how execution is driven consistently across the portfolio. So looking forward to talking about that with the panelists today.
Why the Era of Financial Engineering Is Ending in Private Equity
Mark Di Giorgio: Awesome. Yeah, thank you. I think one broader theme I heard across all of your answers is just how much sponsor expectations have evolved over time towards a focus on rigorous execution. So that leads nicely into our next question, because it touches on how the broader private equity playbook has changed over time. As Japheth mentioned, when we did this year's research for the top 10 private equity consulting firms, of course each of your three firms came up. But another broader theme that kept coming up was the era of financial engineering fading out – specifically meaning that creating value now requires operational transformation. So from where you sit, what do you think is driving that shift? Maybe we'll go reverse order for this one. Dave, we'll start with you.
Dave Clement: Yeah, so I think in general sponsors have fewer external levers that they can rely on, right? There's higher financing costs, longer hold periods, generally a tougher exit market. So what that means is companies actually need to grow and drive EBITDA expansion, and that's really critical. So across all functions, that's really driven operational value creation. We're seeing even more of a specific shift towards commercial value creation – oftentimes it drops right to the bottom line: pricing, salesforce effectiveness, go-to-market.
I think what surprised us in some of the recent work we've done is not that operational value creation or commercial value creation is more important these days – it's actually also a key area where both PE and portcos are struggling to connect this opportunity to the execution lens that we're talking about. Maybe just an example: that study I referenced, less than a third of companies are even pulling a commercial lever within the first 6 months of a hold. And of course there are other things that have to be done first to get house in order. But given we talk so much about the opportunity here of pulling a price increase, right-sizing your salesforce, et cetera – the fact that less than a third are actually doing that shows there's some disconnect between what folks talk about and what they do.
Mark Di Giorgio: Right, thanks. Sean.
Sean McDevitt: Yeah, so first I agree with everything that they've just said. I especially think I agree with the premise of the question, but I'd make one distinction – I don't think financial engineering's disappeared. I think it can no longer substitute for strong operating performance. There's a few reasons behind that. Dave hit them extremely well: cost of capital's higher, valuations are demanding, hold times are longer, exit multiples – people are more discriminating.
So I think you have less room to rely on leverage or assume the next guy's gonna pay a higher multiple. Also, investment theses are becoming operationally more complicated, right? Growth could require you to build the network, build a new salesforce, build a new technology platform, secure additional power. These are not simple spreadsheet assumptions – they require management capability, they require execution discipline, often technical judgment.
I really want to pick up on what Dave said – value creation should start in diligence, and it should be actioned very early in your ownership period. Before there's a closing, an investor should understand the size of the upside, specific actions required, what capital's gonna be needed, what's the sequence, who's owning it, and how do I manage to make sure that plan's working. To be honest, I think the best sponsors have always done this. I suspect the three of us have worked with people for whom this is old hat – they've always done this and done it very well. But this is no longer optional for people. You can't wait 6 months and certainly not 2 years to discover that your thesis isn't materializing and you need a transformation program. Today the clock starts before the deal closes.
Carl Evander: I think Dave and Sean have already broadly answered the question. I would challenge to some degree the idea that the era of financial engineering is over – we've been saying that for the last 25 years, right? Because it has been over for the last 25 years. The idea of just pure barbarians-at-the-gate leveraged buyouts hasn't existed since the '90s. Private equity has always been around driving value – it's the nature and the depth to which private equity does that that continues to evolve.
As Sean alluded to, a lot of these firms have been really focused on it for the last 5, 10, 15 years. They've added groups, experimented with different models – specialist models, generalist models, big teams, small teams, lots of external consultants, lots of internal teams. But that hunt for additional alpha, as it were, is what everyone is driving toward – it continues to be the differentiating factor, because it's also what's driving multiples up.
The better the firms become at that engineering, the more they're able to pay, the higher they're able to value the businesses, the higher the multiples become. And therefore, the more you have to be able to do it to succeed at the multiples you're paying. The only thing I'd add is I think LPs are driving a lot of this right now as well, because the low multiples and long hold periods are really damaging the market and the industry right now in terms of DPI. We've got – DPI of deals done 5 years ago, that's dividends to paid-in, i.e. how much money has been given back to investors – in a world that typically holds an asset for 5 years, it's about 10%. So these 2021, 2020 deals that were done at peak multiples – everyone is itching to get out of them because their investors are screaming at them to give the money back. The only way to get out of them at this point, at multiples where they are today, is to make them more valuable. You can't just sit there and hope they get better overnight.
AI Infrastructure and Data Center Investment in Private Equity
Mark Di Giorgio: Yeah, for sure, great points. Operational value creation is definitely becoming the new battleground, or at the very least increasingly important. Even in my experience, I think one area that a lot of companies or industries are pulling on to drive that is digital infrastructure, or the transformation of digital infrastructure. Given the trend toward AI and the push toward AI and good data, there's a huge amount of money right now being poured into data centers, fiber, and the power to run them essentially. The Hyperion data center financing is just one recent example of that. So what do you think is pulling sponsors into this space? And what do you think separates the opportunities that will create more long-term sustainable value from those that are just riding the fad of today's investment cycle? Maybe Sean, we'll start with you on this one, and then Carl, love to hear from you as well.
Sean McDevitt: Sure. I think what's pulling capital into this space is pretty straightforward and understandable, right? AI is turning compute capacity – and therefore power, land, data center capacity, connectivity – into the world of strategic infrastructure. With demand growing quickly, the capital requirements becoming enormous, hyperscalers becoming more flexible in how they deploy that infrastructure, including off-balance-sheet models, it's creating a lot of opportunities for infrastructure funds, private equity, private credit, and other long-duration capital to start to look at this.
I think we should be careful not to think about AI infrastructure as a single asset class though – that label can obscure some very different risk profiles. The folks that are going to create lasting value will probably focus around 4 or 5 things. First, there's credible demand with a strong tenant, strong contract structure – not just top-down AI growth forecasts, which might have passed muster years ago. Second, you've got to have secured and deliverable power – theoretical interconnection is very different from power that's going to arrive at the scale and timetable that you need. Third, you need a site and a design that can be technically and economically relevant, because compute density, cooling, and hardware are going to change and evolve. And then, realistic capital and construction contingencies, recognizing supply chain constraints and risks to infrastructure build.
Those things are all appearing in ways that didn't before. You referenced Hyperion – that illustrates scale, right? Initially a 2.6-gigawatt, single-site data center, $30 billion of capital. Subsequently it's been expanded – it will be built out by Meta to 5 gigawatts. The broader lesson isn't "bigger is better," but at that scale you're talking massive industrial infrastructure, and you need to make sure that commercial demand, engineering, and power are all together.
There are attractive assets in this whole wave that we're seeing, but some projects are gonna depend on every single assumption being optimistically correct. I think, collectively, it's the three of our jobs – plus everyone in the profession – to distinguish between the two: are they attractive assets, or does everything have to go right for this to be attractive?
Carl Evander: Yeah, maybe to build on that and take it in a slightly different direction – especially Sean, appreciating your deep expertise in data centers themselves. I think the other thing we're seeing with this data center build-out, and I agree with all the drivers building that – it's compute, it's AI, it's just the sheer billions of dollars that have been committed to add megawatts into the ground here and help foster the AI growth.
We're also seeing a huge amount of activity – one of the few areas where we're seeing consistent private equity deal activity – in all of the ancillary services that benefit from that build-out. It's not just the data centers themselves, it's the power companies doing the engineering to deliver the power, to upgrade the grid, to build the substations and transformers. It's the design firms designing the data centers, it's the people making the heat exchanges, the cooling systems, all of the componentry that sits within those data centers as they need to be built out and then maintained over time.
A lot of people are looking for ancillary ways to play all of this, and that includes the power build upstream, serving the IOUs and the utilities. It includes behind-the-meter power generation, as increasingly – not just is it a question of you need the infrastructure and you need the power – a lot of these firms are taking it upon themselves to build the power plants. Like Meta is in Richland, where they're building 3 CCGT power plants just to meet the power demands of a single data center.
Where we're seeing questions come up in diligence more and more, and where there's a bet to take – and it's not necessarily a bad bet – is between assets that are levered to the build-out of data center capacity, and assets that are levered to the volume of data centers in the ground. What I mean by that is construction-related work is going to benefit hugely over the next 5 years from the growth of data center build-out. But there's an uncertainty around that build. There's a question mark about – are we in an AI bubble? I'd argue we're definitely in an AI bubble – it just depends on what kind of bubble we're in. So the question is, what kind of bubble are we in, and is that going to restrict capex, and is that going to change some of these forecasts? Are you taking a bet on the growth of the build-out and the pace of the build-out?
But there's a lot of interesting opportunities in companies that are less levered to the growth and more levered to just the installed base. If I'm doing services to data centers that's an ongoing, recurring service, I'm more likely to see stable growth – not as exciting growth, but stable growth, and less risk of downside if some of that bubble bursts.
How Private Equity Due Diligence Has Evolved
Mark Di Giorgio: I'm really glad you referenced the diligence process there, because I want to spend a little bit of time talking about that now. As you know, when it comes to private equity, it's all about making the right decision. If we just think a little bit about that diligence process – it used to focus heavily on market attractiveness, but today sponsors are expecting much more. So how would you say the diligence they're asking you for has changed? Carl, I'll jump back to you to continue the diligence topic, and then Sean.
Carl Evander: Yeah, sure. Sean talked about this a little bit in his intro, but if you wind the clock back – certainly 20-plus years ago – diligence was a very market-focused, very limited, skinny product. Some of that is productivity improvements we've seen ourselves in the consulting world and the amount we can do in a diligence period. But also, as that value creation lever has become more and more important, I'd say every year our diligence shifts from being data provision and information giving to our clients, into being full thesis validation and even creation.
What I mean by that is this isn't just "is this a good market" or "is this a good business" – you need to understand how you're going to make money with this business, how you're going to generate a return. That takes you from "what am I buying" to "what am I buying into," but also into "what am I going to sell in 5 years' time." Increasingly, you want to have a view before you put any money in the ground of exactly what you're going to do in the first 100 days, the first 300 days. You want to almost start writing the sell-side on day one, or day minus 5, where you're saying, "Look, I'm going to buy a business that looks like this, but I'm going to sell a business that looks different. I'm going to know going in what the steps are that I'm going to take, and I'm going to have some conviction that those steps are realistic."
I'm going to have looked at the M&A landscape and who I can buy and how I can change this business. I'm going to have evaluated the opportunity to change the business – to inflect the pricing of the business, grow the business geographically, grow the business into new end markets. And I'm going to have a really strong thesis on what I'm going to sell in 5 years' time, or 7 years' time – because that's how you start that value creation journey as early as possible. That's being rolled into the commercial diligence that we do, and our scopes are now sometimes 50% value creation planning already in the diligence phase, before a single dollar has been spent.
Sean McDevitt: Yeah, I'll pick up on what Carl said – I'll echo him. All these traditional market questions that those of us who cut our teeth in the industry a long time ago as BAs know – market growth, market size, competition, customer behavior, share potential – they're all important, but I'd echo what Carl's saying: they're almost at the beginning of the diligence, not at the end.
I think people are increasingly looking for 3 or 4 things that Carl highlighted: technical asset validation – can this network, platform, or facility deliver what the plan assumes? If I have to spend capital, where am I going to spend it? What do I have to spend over time – is it M&A, is it investments? What happens if things are late or over budget, and how does that relate to my debt, my covenants? Operational achievability – does management have the team, the systems, the design, the processes, the commercial capabilities to do this plan, and if not, what do we need to bring in very quickly at the beginning of our ownership period? And writing the exit memo is a great metaphor – what's the ownership and exit planning? You should have a pretty good sense of that. Not that your goal is to exit, but you should have a pretty clear idea of what initiatives you should consider and do that are going to create the value.
We're seeing much more focus on those areas, which is very consistent with what Carl said. The other thing we're starting to see is a greater scrutiny from a broader set of stakeholders. It used to be years ago that private equity or infrastructure funds hired us. Now we're having lenders do it, or lenders insisting that reports get done on their behalf, paid for by the sponsors. We had a project recently where the rating agency – we weren't involved in the commercial diligence, we weren't involved in the technical diligence, other firms did that work, nothing wrong with the work – but the rating agency came in and said, "We have a question that hasn't been addressed by these two things." That ended up creating a project opportunity for us. The rating agency didn't pay our bill, but the project was created because they now have a role. I don't think that would have happened 5, 10, 15 years ago, at least in my experience.
So to hammer it – I think the best diligence is market, technical, operating, capital, financial: where is this base case going to be plausible, what assumptions, what risk, and what do I need to do immediately after closing. That's actually part of the diligence now, not a subsequent phase.
Conventional Wisdom in Private Equity Consulting That No Longer Holds
Mark Di Giorgio: Interesting. Yeah, well, from both of those answers, it definitely sounds like the diligence process has become much more sophisticated than it used to be, and much more detailed at the very least. That makes me wonder what other traits or assumptions about the space have also changed. So here's a question for all three of you – Dave, maybe we'll start with you on this one. What would you say is one piece of conventional wisdom in private equity consulting that you simply don't agree with anymore?
Dave Clement: Yeah, so I'll tie it back to the diligence question that Sean and Carl just answered, and also maybe change the question a bit – not conventional wisdom, but something that's coming up quite a lot, maybe even in the past year or so. I wholeheartedly agree with everything Sean and Carl said about the importance of very specific thesis-related diligence. We've been doing diligence just on pricing opportunity for 15 years, right – super specific. But how do you pull that lever?
As a result, the talk around "integrated diligence" is potentially something I don't fully subscribe to. There's a time and place, and the end goal has to be integration from the sponsor, but typically that comes, at least from my perspective, from a best-of-breed approach. Sean just talked about getting pulled into something at the last minute for a very specific question that his firm had the right answer for and rationale to be in.
I just think we're moving into a more specialized world – or we've been in a more specialized world for a number of years. Commercial, AI, tech, ops, supply chain, and then deep expertise from an industry or subsector standpoint. The firms that stand out can go really deep in a few of those, and of course it can go across the deal lifecycle. But being able to do everything for everybody, I think, is a misconception, or something people are talking about more. I'm not sure I'm a believer that that's a real North Star.
Sean McDevitt: So, conventional wisdom I think is BS – I think sometimes people think speed and depth are in conflict, and I don't think that's true. PE timeframes are short, but a lot of times people think, "I need this standardized diligence, a broad market model, a few management interviews." I'll pick up and echo what Dave was saying – speed should come from really knowing the sector or the topic that matters. Identifying the handful of assumptions that are really going to drive value, and putting the right senior people on the key questions. This is not about examining everything superficially.
Maybe depending on the topic, one firm can meet your needs, but maybe you need to sew together 2 or 3 firms once you really understand what's critical. The days of a diligence having 10 or 15 things that are interesting to look at – the truth, I think most of us probably see, is that there's really 3 or 4 that are going to destroy the thesis or make the thesis happen. Our job as consultants is to figure out what those 3 things are, test them rigorously, and explain the consequences clearly. Diligence isn't about a 500-page document – it's about what's the most decision-relevant analysis. I don't think speed and depth are in conflict, but I think sometimes people believe they are. You have to find the right firm – what's the right tool for the right job.
Carl Evander: Always a great one to go last on when some good answers are taken. I might say something that comes across as in conflict with Dave's answer, but I don't think it is – which is, I think one conventional wisdom, and certainly one structure I've seen in some firms over time that I think is starting to go away but is still retained more than it should be, is this concept of "deal guys" and "value creation guys" – that you sort of have the guys who are very good at doing diligence, and then the guys who are very good at doing the value creation work. I think particularly in private equity, they are one and the same thing.
The mindset that private equity goes into when it's doing value creation is grounded in diligence and understanding of an investment thesis, because ultimately that's what they're trying to build. Trying to go in with a different set of partners who are used to, for example, long-term public-market consulting for a 20-year growth strategy – that's not what private equity is trying to do. Private equity is trying to pull a very short number of levers to get to a specific business in 5 years' time – and maybe those aren't the levers you'd pull if you had a 20-year horizon.
Maybe that's because some of the levers you'd pull over 20 years won't give you enough return in a 5-year cycle, and you won't get enough benefit out of them in that time to generate the value you're looking to generate in a world where exit is part of the thesis. So I think the idea that you'd have different consulting partners help you on one side of the coin versus the other is one that's already going away a little bit, but I'd challenge it to the extent it still exists.
Where Pricing and Commercial Upside Still Exist in PE
Mark Di Giorgio: Yeah, that's a great point. I want to slightly pivot now to talk about something closely related to value creation – pricing. A few years ago, a sponsor could buy a company that hadn't touched pricing in a decade, maybe more. But now everyone's touched it. I'd love to hear from you on where you think the pricing and commercial upside is that's still on the table. Dave, maybe we'll start with you on this one again – Carl, I hate to put you last again and make you find a new answer, but we'll start with you, Dave.
Dave Clement: Yeah, well first of all, I sure hope there's still pricing and commercial upside, or I'd be out of a job pretty fast. I think there's somewhat of a misconception built into the question. I do agree that most sponsors have touched pricing over the last couple of years, but I think you'd be hard-pressed to find most sponsors happy with the success of their ability to touch price and really realize it. I don't think that's a strategy challenge – I really think it's an execution challenge.
An example: we diligenced, maybe 2 years ago, a paint manufacturer – think like Sherwin Williams, but not Sherwin Williams. I don't know if folks know, Carl's in Denver right now – we had our analysts do some store checks across different paint stores. We called a Denver store, had one of our analysts pose as a contractor, and at the end of the call, Debbie from Denver, the counter clerk, said, "Hey honey, when you come, make sure you ask for Debbie so you get a 50% discount." This woman at the counter was just offering a 50% discount for absolutely no reason, just because our analyst was nice and charmed her.
So that told us the full story – this was not a strategy problem. The sponsor acquired this company and hired us post-diligence to do some work to drive price realization. Of course we start with a price increase – this company had not realized more than half a percent of their price increases over the past 6, 7 years. We put forward a price increase, they realized 75% of it, which is pretty good. But that didn't come from just picking the number – it came from strengthening governance, having clear ownership, aligning sales incentives, thinking about sales execution. In about 12 months' time, we drove $48 million in EBITDA expansion just through this price increase. But 20% of it was doing the math, 80% of it was changing hearts and minds. That's really where the opportunity is with pricing.
Of course, you've got to get pricing right, so you have to do the strategy and math first, but if you don't have that hearts-and-minds execution capability building, it's not gonna stick. And it becomes a project, that's not...
Mark Di Giorgio: Well, I need a new color for my walls, so put me in touch with Debbie, please. Carl, on to you.
Carl Evander: Yeah, I mean, it's hard to overestimate how little has been done, often in these situations. I'd challenge the premise of the question too – I suspect there's a lot of low-hanging fruit and very easy levers that just haven't been pulled, which is why there's still a lot of value creation to be done through private equity ownership in general.
Maybe to build on Dave's point – and Dave knows this space better than I do – but I think on top of the simple pricing levers, where those have been pulled (because there are some companies that have been owned by good investors), the ones that sometimes get missed are just the architecture and the systems that continue to raise it. It's not just about "where can we raise prices today, where can we push this through" – it's often about what's the indexation we can put in, what's the escalators, how do we ensure that on a year-by-year basis we don't lose track of this price and let it drop over time.
And then the other secret bit that often gets lost in pricing is it's not always like-for-like – it's often mix as well. It's about how do I push myself towards the customers, segments, product segments where I can extract a higher price because I'm driving more value, rather than just "can I charge everyone 10 bucks more." How do I stop taking the call from the charming analyst at Dave's firm who's automatically going to want to offer a 50% discount, and move towards the guy who's gruff on the phone and not going to give the discount.
Mark Di Giorgio: Of course, some change management is involved there, for sure. Well, maybe just to double down a little bit on this topic – all these points on pricing and commercial upside only matter if they can translate into value at exit. And exits – at the risk of this question being reframed again – exits are harder now than they've been in a few years. Multiples are down, hold periods keep stretching, et cetera. So what would you say separates the assets that command premium valuations from those that struggle in today's exit markets? Carl, would love to start with you here.
Carl Evander: Yeah, absolutely. You'll be glad to hear I'm not going to challenge the premise of the question, because I think exits have been a real struggle. I will, however, take advantage of being first by saying the most obvious thing, which is: they're better.
What Separates Premium Exits From Struggling Ones
The companies that can exit and have an easy way to exit are stronger, they're better – they are higher-quality companies that, regardless of the exit environment, regardless of macro factors, people get excited about and want to pay up for, because they can see the growth potential in those businesses. Now, what does that mean for individual companies? It varies by sector, it varies by company. Sometimes it is sector – we're seeing it's a lot easier to get out of an infrastructure engineering business, a power engineering business, a power services business, anything that touches data centers, some areas of consumer health. It's a lot harder to get out of vertical software where there's a high risk of AI disintermediation, where people are a lot more worried.
So sector is number one, but then within sectors, it's about what are the high-quality assets versus the low-quality assets. Often that's going to be around segment leadership – do you have a position that creates a barrier to entry and prevents competitors from challenging you, and means you're going to be able to outgrow the market even if there's a downturn, even if there's a softer period. It can often be where that value creation plan is clear, where there are a lot of clear adjacencies and value creation levers to pull with limited risk attached and high conviction. Those are the kinds of things people can also pay up for. Ultimately it's going to be the businesses that have been well managed, well positioned, have a lot of juice left in the tank to drive growth, and are preferably positioned in markets that are more stable and expect higher growth going forward.
Mark Di Giorgio: Okay, to summarize – like you said, they're better. I'm sold. Dave, would love to get your thoughts on this one too.
Dave Clement: Yeah, I wholeheartedly agree with everything that was just said. Maybe from a commercial lens – where I spend my time – it's not just about EBITDA improvement, it's that durability, that repeatability. I worked for a PE-backed player in the steel space, and in 2023 their prices increased like 300%, and margin looked fantastic. But they had no systems in place, so 2024 skyrocketed back down, and I think we're in year 8 or 9 of the hold there. We're helping build kind of commercial org and competency.
Interestingly, some of the benchmarking we've done – commercial ownership isn't really embedded across the portfolio. Less than 10% of PE firms we've surveyed say the majority of their portcos have pricing owners. That's not the only thing, to be clear, but I think that's a good proxy for some of the lack of ownership of these really critical topics. If no one owns pricing, things become inconsistent – discounting becomes inconsistent, governance is inconsistent – that's a lot of execution risk, or opportunity, on the other side. But from a premium-multiple standpoint, that's pretty clear. On the other hand, if you've got more institutionalization of capabilities, KPIs, processes, tools – those are the levers that folks think give a foundation that can be built upon.
Mark Di Giorgio: Would you say that concept of having a pricing owner is something that'll become increasingly important, and companies should continue focusing on developing that capability within their firms?
Dave Clement: Yeah, I mean, if you're asking at the portco standpoint – once you get to some size, like $100 million in revenue plus, there's enough business complexity, enough money on the table. What we're seeing – and I don't know if this is the question – is more firms actually having centers of excellence around certain commercial levers, or individual owners of pricing. I've seen more job posts for "pricing operating partner" in the past 6 months than probably in my entire career. That speaks to some of the opportunity that's there. But you have to get pricing specifically right, because you can really screw up a business if you don't get it right. So I think the ownership of it signals that it matters, regardless of whether you're talking about at a portco or within a PE firm.
AI's Real Impact on Private Equity and the Consulting Industry
Mark Di Giorgio: Right, thanks. Okay, so moving away from pricing now and slightly back into AI, because it's such a hot topic right now, and it's truly influencing all the topics we've explored – whether it's pricing, operations, exits, etc. And especially when it comes to AI, separating real value from hype isn't always easy. Almost every firm right now is currently talking about it. Maybe to help make that distinction between the real value and the hype, I'd love if you could share your thoughts on where you're seeing measurable impact today from AI, and where conversely you think the market is getting a little bit ahead of itself. Dave, I'll jump back to you quickly, then Sean, would love to pull you in to hear your thoughts.
Dave Clement: Yeah, I mean I think the good news is we're in year 2 or 3 of this broad discussion about AI, and I think no one's debating that AI matters anymore – that conversation is more or less over. We're seeing companies see measurable value in specific use cases. We actually hosted a commercial excellence roundtable on Tuesday, and folks were talking about proposal generation, sales coaching, forecasting, pricing analytics, contract reviews – very specific use cases. I think that's great, but there was also a comment that really summed up the challenge: you can't leverage AI without good data, but you can't wait for perfect data.
I spend most of my time in industrial businesses, and as we all know, there's not good data in industrials, generally speaking. So I don't think AI itself is really the differentiator, or even the use case – it's how does leadership have a culture of experimenting, failing fast, finding some of these use cases that move the needle. I think we're still probably in a world where it's more about productivity savings, cost savings today, but I do think the firms that can cross that chasm and really drive margin expansion through utilizing some of these use cases will create the real advantage sooner rather than later.
Sean McDevitt: I'm gonna agree 100% with everything Dave said, especially on the client side of the equation. Let me take a slightly different tack and maybe turn that inward on the consulting industry a little bit, because I know in the audience that's probably a topic, and I've listened to some people in other consulting firms talk about how consulting will go away, and that firms will never hire BAs and analysts ever again because it all can be done by AI.
I think there is a measurable impact on the consulting industry – there are lots of activities where AI can compress a lot of structured or semi-structured work, whether that's market and company screening, feedback analysis, coding, knowledge retrieval on prior projects, first iterations of analytical outputs – all of those things matter. Specifically with respect to diligence, it should make our teams faster – maybe we can even use a broader and more expansive evidence base in the same period of time. But I think the market's getting ahead of itself in thinking that faster information is going to be the same thing as better judgment. AI is not going to eliminate the need to know whether the source data is good, whether it's credible, whether it's the right data you're looking at, whether these data sets are compatible, or whether management's explanations and the data coming out of the organization and the technical plans they have can actually be executed. AI can produce a beautifully polished answer to the wrong question.
I think it's important – inside the walls of a consulting firm, it will materially change some of the economics and the workflow of consulting. I think that's going to happen, and I think almost every firm has taken steps to incorporate that. But to me, I think it's going to increase, not decrease, the value of sector expertise, judgment, and accountability. I don't think the winning model is ever AI replacing consultants per se – it's even more experienced and topic-knowledgeable consultants using AI to look at more data, more evidence, more quickly, and still remaining ultimately responsible for the conclusion.
Mark Di Giorgio: I think we might have lost Dave there – he got too scared by your answer about AI. Had to drop. There he is, he's back. Look, as soon as we stopped talking about AI, there he is. Dave, can you hear us?
Sean McDevitt: I agreed with him, I agreed with him. That was the AI bot at your firm kind of saying, "We don't need you guys anymore."
Dave Clement: Yes.
Mark Di Giorgio: Yeah, it's funny. Well, I think it is reassuring to hear that perspective – that it isn't gonna completely replace, it will evolve and change, but won't completely replace, and I personally agree with that as well. But it's definitely just one of the forces reshaping the private equity industry in particular, if not all industries.
The Capabilities That Will Matter in Private Equity Consulting by 2029
Mark Di Giorgio: On that topic of change, and maybe looking ahead into the future – if we think into the next 3 years, what capability do you think will matter a lot more in private equity consulting than it does today? And you're not allowed to say AI. Sean, we'll start with you, then Dave, we'll end with you.
Sean McDevitt: All right, I'll work on that. I actually think this is a tremendous opportunity, and I'm gonna try to integrate a bunch of things that Carl and Dave said into this. I'm gonna borrow a term – maybe somebody can keep me honest, I think it's a DevOps term originally – this idea of "continuous thesis evaluation." I think, as my colleagues talked about earlier, value creation and exit preparation and diligence were often treated as separate things. I think they're going to increasingly be one connected process.
It's not going to be "the diligence, and then maybe we use one of your three great firms for value creation, or maybe we use one of the others" – I think there's going to be much more of a connected process. Assumptions you make during diligence can be converted into measurable operating indicators. The data from the portfolio company can help us see if those assumptions are proving true or if they need to change. The consultants working with the management team can identify earlier where maybe the thesis is overperforming and we need to double down, or maybe it's drifting and intervention is needed. I think these tools – I won't use the buzzword – I think they're going to help, but it's really about the right measurement systems, what indicators are going to actually predict value.
If we think going forward, the idea of a diligence report, or reports in different phases, I think we're going to start thinking much less of a document and more of an initial operating blueprint that we share ownership for over time. I think that actually creates a tremendous opportunity for all three of our firms – not that we're trying to sell a big project for the sake of selling a big project, but it keeps us aligned with the management team in terms of co-ownership and co-responsibility to work together in a continuous thesis. So to me, that's a very likely change if we hold this panel in 3 years' time.
Mark Di Giorgio: All right, well, we'll have to do that then and see if you're right. Thanks, Sean. Dave, would love to get your thoughts there.
Dave Clement: Yeah, fully agree. Maybe my answer will actually be one of the implications of exactly what Sean said. I think our work's gonna move more upstream. What I mean by that is, oftentimes we do diligence on a target, or we do value creation on a specific company – I believe we'll be consulting the private equity firms themselves more, on how they manage this process, how they create the systems to leverage the KPIs and connect the dots across the entire deal lifecycle.
The best advisors aren't necessarily going to be the ones that have one super-successful engagement to drive EBITDA for one client, or one really impactful diligence – they're actually the ones building repeatable systems within the PE company, connecting the ops team with the deal team, building centers of excellence for specific functions or subsectors. Things that really compound each time an investment happens. I do think that's gonna be an interesting evolution, and it'll create deeper partnerships in the PE consulting space, which personally I'm very excited about.
Carl Evander: There's just one thing – I know I wasn't down to answer this one, but I might read it slightly differently, in the interest of the audience of this panel, who I imagine a lot of whom are applying into consulting – to read it in a different angle, which is: what capability will matter at an individual level? What skills are we looking for, and what skills will be important? I think the one thing I'd add – not to disagree, because I agree with everything Sean and Dave said – is I think personal skills, soft skills, are going to be more and more important in consulting, because the hard skills are, to some degree, enhanceable and helpable through AI. But what the robots can't do yet is the persuasive bit of our job – the working with management teams, convincing management teams of the right answer, and helping to deliver projects, not just the answer, but actually implementation and building the relationships. I think that's going to be an important skill for the analysts of the future, and certainly the consultants and partners of the future.
Mark Di Giorgio: All right, thanks Carl. Let's hope the robots don't learn how to have personal impact, or else we're all screwed.
Carl Evander: Exactly, we're all in trouble.
Career Advice for Breaking Into Private Equity Consulting
Mark Di Giorgio: Yeah, well, I'm glad you did think about it on the candidate or individual level, because that kind of brings me to my last question here. I do want to have the three of you leave our viewers with some inspiration or words of wisdom as they think about their careers. For those on the call who might be considering a career in private equity consulting, what do you think makes this corner of the industry worth building a future in? Carl, maybe you kick it off – we'll start with you again, then Dave, and Sean will wrap it up.
Carl Evander: Sure. I talk to someone who's been in private equity as an operator, and as someone who's done all types of consulting over the years – for me, the private equity side is by far the most interesting, and it's the most interesting because I like the way private equity buyers think. They're smart, right – that is, for me at least, working for very, very sharp clients on very, very complex problems who are going to really question and push your analytical rigor, and push whether the answer is correct, in a way that I find really invigorating.
Then the benefit of private equity – notwithstanding everything we've all said around lifecycle and staying in deals and helping to deliver value over time – is it's also short and sharp. Particularly in the diligence world, it tends to be short, sharp, and varied, and you get to look at a huge amount of different businesses, see a lot of different business models, learn about a lot of different industries and businesses, in a way that in my days of doing year-long, 18-month-long transformations, you didn't do as much – you went very deep in one company. For some people, that's the goal, and that's what they find interesting. For me at least, it's the variety and the ability to learn about so many different things that keeps me doing this 23 years into my career, and will keep me doing it for another 10.
Mark Di Giorgio: Great, I'm inspired. Dave.
Dave Clement: Yeah, I guess for me – I played sports through college, so the results orientation of private equity is something that's really always been a focus for me. You don't just develop recommendations, you make them work – you have to make them work in this world. You're working with investors making billion-dollar decisions at times, and management teams leading real businesses, and things happen fast, to Carl's point. You might make a recommendation, and 6 months later you know if it worked or it didn't. And if it didn't, you're usually helping them fix it, because that's part of the deal – you want to see your client win as well. So it's really the intersection of strategy, execution, and measurable business outcomes, and I think it's a fantastic place to build a career and stay as a career.
Sean McDevitt: It is tougher to go last on these. To me, private equity consulting is a really interesting place to build a career because you're going to combine intellectual rigor and genuine consequences together. What I mean by that is you're going to work on important questions, work under real-time pressure, work for clients who are smart and bright who need to make decisions. You get to learn and separate what's interesting from what determines value, what's signal, what's noise. It can give you extraordinarily broad exposure – different types of industries, technologies, management teams, investors, business and operating models. It helps you as a business person, even if your career doesn't end up ultimately focused in private equity consulting – it helps you understand why companies succeed and what it takes to change a company.
I'd add – and I'll point to both my colleagues and by inference back at myself – I think the people who are really good at this are curious and humble. They acknowledge what's going on, that there are investment theses, and sometimes the evidence doesn't cooperate. Your job's not to defend your answer, the job's to find the right answer, to work with your clients, to communicate. The soft skills that were mentioned earlier really matter. So if you're someone who wants to learn quickly, wants to work with really smart people, wants to see analysis translate into real decisions, this is an exceptionally good place to get a broad breadth of exposure. That's not for everybody, by the way – there are people for whom the pace, the constant consequence, the time frame, the rigor, isn't the right fit. And that's okay too – there's lots of important work to be done.
Mark Di Giorgio: Right, well, I think you did a fantastic job going last. Thank you both. Carl had to drop, but I just want to say that I personally learned a lot about the private equity industry through this one-hour conversation, and I can definitely speak on behalf of all of our viewers here, who I'm sure agreed. Appreciate your time, it was a pleasure speaking with you. Japheth, I'll pass it back to you.
Japheth Mast: Well, that wraps up hour one – we've got 2 more hours to go, so hope you're ready for that. Just kidding! Thank you both, Dave, Sean. And Carl, I know you're not here anymore, hope you catch your flight. Awesome conversation, thank you so much. Everybody, we'll get the recording to you soon. Check out the ranking, check out everything we talked about today, and join us on another event soon. Cheers. Thanks Mark for moderating.