Scott Estill, Lancor | Talent Dynamics in Private Equity: How Firms are Refining their Approach

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I'm very excited to be here with my friend Scott Estill from Lancore. Scott, thanks so much for joining us.

The first year of Blue Wave, I blamed you for it, but now I'm incredibly thankful to you.

But the reason I say that is my frustration with M&A is that you take two companies, same industry, same size. Four years later, one's a five bagger, one's a zero, and you're like, Wait a minute, the models are giving the same numbers. Why the heck is one company actually so much more successful? And if you do the regression on that, it's almost always about management team and their ability to pivot and transition during an ownership period. To generate truly differentiated alpha. As opposed to just financially engineering your way to return. So most people, most operators, will say, Yeah, that's obvious, right?

But most finance nerds like us in the banking world and P folks were like, wait, doesn't salvation lie in Excel? I mean, that's supposed to be all the answers are. So that's one pillar of the model for us, and the other one is around the bad math. In my mind in search, right?

So I used to get these calls from Hydric and Struggles, and they used to call the CEO. Kevin Kelly would try and get you to change jobs and I'd say no. And at the end of one of these conversations, they're like, Listen, I get it. Scott, you don't want this job that I'm trying to get you to take, but you should come join us as a firm. And I said, No, that's a horrible idea. That's not at all what I do, but what I heard him saying this will quickly come full circle is the problem they have in search is if pick your PE firm is looking for a new executive and you reach out to 100 people. More than half the people that you speak to don't want the job. They're just curious about what's going on in the market.

And I was like, Yeah, that's certainly consistent with my experience. And of the remaining half, half are moving to New York or Nashville, or California, Cleveland or London. Or pick your location around the world, right? So the pool of people that are both good and actionable on a search, it's like, 5. So I said, All right, listen, if that's true, respectfully, you've got a pretty bad business model CEO of a public traded company. Here's what I would suggest you do is, why don't you reach out to these executives and say, Listen? On the one hand, I'm calling you because I'm looking for a new executive. And if you want the job, great, but if you don't, why don't you keep your current job because you're good at it?

That's how I got your name. And two, let me introduce you to these firms, these P firms. Not when you're looking for a gig, but when you're not because you have more leverage. Third, you can co-invest, that's of interest, fourth, you get equity.

That's how you make real money. Fifth, you can join the board, right? all while keeping your current job the same, and sixth, maybe you do want to be a buy-in executive. Well, then great, but you don't have to change your job necessarily to create value. So he said, Listen, I know what that means, but it sounds great. You should come build that.

So I did, I left traditional banking, built what I called an executive-led merchant bank. And Hydra can now do it here at Lancore, where we've got offices all over the world. And do this proactive, reactive model where we're working with executives to generate angles and then helping P firms see around corners. Because you're going to have to pay an irresponsible purchase price multiple, sadly, for an asset. So if you are, you better have a game plan that's operationally sound like day negative 70, not just once you own it.

That's when I was at my best in private equity, when I was going with the flow and then the world changed. And similarly, I was like, I need someone very specific to give me an edge. And so I think the Siren call that drew you to creating this, really. I think novel take on people and talent was really similar. And so I can 1000 appreciate and respect the pull that led you to creating, in some ways, a segment that didn't exist before. And similarly, probably going through what was otherwise accused as a massive midlife crisis.

Right?

So it's a it's a neat position to be in.

So I would love Scott. What? One of the questions I'd like to ask is, What's one of the things? We'd know you better if we knew this about you?

I think you can shine that on. But I really do like talking to someone who's a mile deep in healthcare, a mile deep in consumer, a mile. I mean, it doesn't matter. There you have to be in the two things you always look for in our own colleagues. And when we're trying to back a business is like, intellectual curiosity and humility. Those things don't go together often, but when they do, it is just awesome.

It's fun. It's a leading indicator of top decile investing. So I think it is just. I really do enjoy getting to know people's stories because, and then helping them figure out what it is that they want to do next.

Or one guy is like, Hey, I'm a chicken farmer, you know, everyone in Nashville seems to have like chickens. If you're an Uber driver, so they're like, Hey, do you want to buy some eggs? and they're in their trunk? I'm like, No, so I probably should be like, sometimes hit that button more.

And he goes, well, actually, I'm a clothier and I go, Oh, no, because because I knew exactly what was going to happen within within an hour. Or the person that had figured out my email and was trying to style me, I was like, Clearly, Sir, you have met the wrong person. I am not going to spend money in styling.

And, you know, maybe in the in the 80s or 90s, early 2000, the line was, you know, the hardest thing about business was the people. Now it's the most important thing about business is the people. And everyone realizes this. And our data shows it. I mean, usage of human capital every quarter. It's like a new all time high. And so I'd be curious, you know, if you were to, if you were to, kind of like, if you could turn the this kind of open, candid conversation towards some of your clients. What are some of the most important things that you think? Hirers of talent, whether it's a private equity firm or a CEO, or otherwise, can and should do to make their search. Getting to the right person and navigating the complexity of humanity as successful as possible.

But maybe the better question is often, what's the investment thesis? what are assets that you've passed on? why did you pick this asset? what are the you can't have ten number one priorities? But what are the two or three things that, from CEO to secretary, that you're going to try to accomplish during your ownership period?

Right, and it's like a puzzle piece. And so how do you think about what the team's good at, if you're honest? And where could they be better? And then putting that into, like being ruthlessly systematic, teasing out those specific desires. So then when we're talking to someone I want, I can get empirical evidence that suggests. Is it selling into these big box retailers if they still have those anymore?

Is it going after these clients? Is it maybe forgetting about integration that hasn't been a strong suited opportunity? Is it better? KPIS? All the things is all we do. Is PE, right?

So what specifically are you looking for? And it seems like an obvious thing to ask. But too oftentimes, people go off sort of half baked and sort of say, Listen, let's go get going. Here's a bunch of CFOs in Nashville that understand health care, that's part of it.

But an important part. But all those other nuanced questions style what if you're looking for a CFO? What is the CEO like? what is she or he thinking about? what are they looking for?

Do they want them to be? You know, everyone says, I want a strategic CFO, do you? I mean, here's what that means, how much of it has to be blocking and tackling. Is there a strong controller?

So we spend hopefully not an inordinate amount of time, but a lot of time before even starting a search, just asking those questions. So then it feels like when we're talking to an executive, here's why we've co-invested, here's the opportunity, why it matters. Here's the different things this PE firm has looked at. Here's what they've passed on.

And here's why this asset is unique. unique is a tough word, differentiated. And here's why I'm calling you candidate A, because you have these qualities, that.

What matters? Spending time to see what's important, turning that into KPIS, those type of things. And and that was one of my big epiphanies. You know, when I started having to hire people was taking that time to really focus on, like, what should be on that scorecard? And then there was research from people, this this duo called Hunter and Hunter, that led to this kind of structured interviewing. And then and then you had groups that did these kind of assessment groups within private equity, that kind of are part and parcel to some of the whole process as well.

And and what I learned is, like, this whole idea that, you know, like, name the cliche. It's it's measure what matters, it's measure twice, cut once, it's. You know, if you fail to prepare, you prepare to fail. Kind of a thing. And and all of those things are so really important in terms of setting it up for success. And then what that helps you do is is kind of actually go get what they want and need. And and so I think that's really, really good advice.

So you know, what are, you know? I guess one of the questions that I'd be curious about is. You've gone through these processes where you're aligning people, the right people to the right role, et cetera. And and you're spending this time up front, what is, you know? How are you seeing private equity firms using human capital, you know, which is kind of a, to be candid? It's like, private equity has to put capital in everything you know, so otherwise called human resources. In a way to to create alpha.

It's not necessarily about picking the right weighted average cost of capital, or whatever it is, for the inputs of the model. How much debt to put on a business you need to? It's the people, and so, you know, you need to do that earlier and earlier, right? So it's not just in my mind. There's three buckets of the of a lifecycle, of a business bucket.

One is, What should we buy? Lovely? And we we talked about how we help PE firms figure that out. Bucket two is okay. I've identified the asset. Do I really want to own it?

Well, sure, you can use talent to help you figure out that sort of equation. And the third bucket is now I own it. I better do what I said I was going to do an investment committee. And most search firms play in that middle half of that third bucket, right? Which is, oh my God, you know, it's always month 13 that it's not going as advertised.

I got one arrow in my quiver. We're going to get rid of the CFO. And the next thing, you know, because you can't fix, you can't measure. As you said earlier, next, the next one is I get rid of the CEO. Well, now you've wasted 15 to 20 months in your IRR clock.

So you got to get that talent in Bucket one and Bucket two to help you determine what's the right asset. And then, of course, you're going to augment the team as necessary, right? But you need to be thinking about that talent equation throughout the lifecycle of a deal, not just once you own it. You lift up the hood and you're like, Oh God, like, you go to your first board meeting and you're like, Hmm, this person. So even in that scenario, what we're doing with P firms is saying, all right, you've gotten your first board meeting. You're sort of not super convinced that this is the right person.

How about we just give you five people in Location X that understand this industry and are in this C-suite, and you can pressure test them right now. That's counterintuitive, because, you know, why would I do work, you know, without the traditional signed engagement letter, which we always want because we're retained? It's called business development, it's called knowing good people, and so, you know, it's what I used to do as a banker.

I would show you or anyone else at a PE firm and do good things for you. And you would give me a sales side or a financing, or an IPO mandate or whatever. Right? So I think the talent is getting better and better within PE. To start to the talent side is to use talent and partner with talent earlier and earlier.

To make sure that you're thoughtful about where you want to go.

And then in between, there's certainly there's value creation that involves those as well. But. But the speed and the certainty is something that plays really big before you make the valuation and as you're exiting, for sure. And one of the one of the trends that we're certainly seeing a lot more of is private equity firms. Calling us to get connected to a really excellent executive recruiter like Landcorp and you before the deal even closes, and that's, that's kind of a new trend, but you're taking it a step further.

You should know your person before you're even really getting into the system, because really, that plays on this valuation. But the speed and certainty of the outcome is so important. And you know, finding an A player in this market still takes six months, at times, right? maybe three.

You're doing really well.

And it's not just a waste of time, you know? Just like a group group like, all right, John, whenever you have a deal, let me know and I'd love to work with you. Like, how many times has an executive heard that, right?

But if you can translate that into real opportunities and board roles, the most underutilized arrow in the quiver of PE is independent board director. Now, most search firms don't like it doesn't pay that much. I mean, people are coin operated animals, right?

Yeah, it's actually awesome BD to talk to the best executives out there, right? So I think that's something that people can do a better job. And you got to put yourself on the board because as a person, as you own the company, it's your fiduciary obligation.

But sometimes you can get away with not making a change on the search side. By putting in independent board director is going to help the management team get to your goals faster. So it's how do you be? The old term that everyone talks about a trusted advisor? I mean, either you are or you're not.

And so you're trying to find various ways to give give, give first. And you know, results, economic results come after you've built real relationships, both the firms and executives.

It's just harder because that's what happens in an industry. And so one of the things that we've certainly seen is in the journey of of a recruiting process and the journey of bringing your a player. It's no longer about, you know, having the candidates beg you for the job. It's much more than that, and there's almost like there's both an assessment and a sell process on both sides of the table now. So I'd love to get your perspective about how top private equity firms are kind of managing through the kind of the assessment phase. But then thinking about, I want this person to want us as well.

Now it's, you know, when you and I were starting off. You'd sell a business, you'd go to 20, 30, you know, whatever institutions, now you're going to 300. So basic supply and demand would suggest there's too many PE firms chasing the same amount of assets, so therefore the returns are harder and harder. So that means the war for talent is more difficult.

And so I think what executives like to hear is, I mean, it's how am I? I'm a body of work today and I want to be better going forward. So what am I going to get out of working with you? PE firm? Outside of millions of dollars, everyone's going to make millions of dollars, all these successful deals.

So hey, let me talk to one of the things that resonates a ton with some firms do this. Listen, we want you to join us. We'd love you to talk to a handful of executives either both current. we'll let you pick.

Here's a list of, you know, if it's a CFO CEO, whatever see something it is. Here's a bunch you can pick from. Why don't you call them? We want you as our next executive. Why don't you just call?

I won't be on the phone and I'll ditch, I'm not going to. I'm not going to pick which ones, you just pick which ones you want to just call and we'll let them know you're calling. And you talked about, because we're not perfect, right?

We try to be additive and then you get that sharing of like, that. Self-awareness is sort of a best practice that often wins the day for PE firms, as opposed to. You know, I'm again, I'm going to let you work for me, I'm going to keep grilling you, I'm going to put you through more case studies.

I want to again. You need to do your diligence, full stop on executives, but you do need to show the human side. I mean, that's sort of why operating partners exist, and we do a ton of operating partner work. Because you need the EQ IQ combination that person possesses and can be the translator between the C-suite. And, you know, sort of vesting committee. But I think, you know, if you ping with a wide brush. If PE firms can be more and more human about what it is to work with them and why they value that talent, it makes the talent, of course, feel good and it differentiates them from the competitors.

You know, that's something that that that is relatively new in private equity, but incredibly important because one, it helps you kind of stand by your results. And you let people, we're going to, we're going to let it call anyone you want. But also it provides discipline, like we're going to be in a partnership, knowing that you could be a future reference someday on both sides of the equation. Which I think makes this whole symphony of motion and value creation and PE just work better as it becomes more integrated.

That's not why I left, that's not why I'm making this move. In fact, what I want is buy-in to my career progression. And so engineers are a big one there, where it's like such a war on talent there. And so how do you get someone where they they have a skill that's needed?

It's not just paying them more, it's spending the time to really invest and helping them progress. So I think that's throughout the, you know, as I said earlier, CEO to secretary, everything in between, it's got to be felt the same way, that it's, it's collaborative.

Yeah.

I just take little pieces of what other people have figured out and hope they work for me, you know? So it's like, live my life through an expected value equation.

And so I'd be curious, Scott, you know what are you know one? Or some of your favorite you know business or personal books that you've read, and maybe some of your takeaways?

Like, there's this book, Chip Wars, you know, if you've seen this by Chris Miller. But it's, you know, we all know that well. You know a lot about the history of microchips and how it started in Moore's law and whatever.

So that was a great book. I mean, you talk about, like, a what's a nanometer? and then what the hell, right? It's a billionth of a meter.

So that, you know, one human blood cell in this, you know, I remember, in the in the in the. One human blood cell is 7,000 nanometers in diameter. So you think about how? 7,000 nanometers for one blood cell. And these are down to three, five nanometers. These chips. So it's another way to think about it is that if the microchips, like the size of your thumb, nail just your thumbnail, it's got billions of transistors on it. So that was a great book.

Is it just? It was easy reading, it wasn't super dense. Talking about the history of sort of, I don't know technology. And then, I guess, riffing on that. There was a cool book called AI 2021, so it was written in 2021. Surprise, surprise.

It was written by two guys that worked together at Google, and one ended up being a venture capitalist, and one ended up being a science fiction writer. Super interesting, but they, they, they co-auth this thing. And so there's 10 short stories of how technology over the next 10 years and 20 years is going to change our everyday life. So, you know, five or 10 or 15 page, whatever short stories. But it's, man, it's interesting.

And it's coming from the perspective of, you know, a bit authenticity, of knowing where, technology, you know. Not perfect because no one's crystal ball is perfectly aligned, but knowing what's reasonable and what's not. And I don't know things like that, those are cool books. Where you're, it's just has conversation starters amongst folks like, Is this real?

Is that real, and how does that affect my business or my life or whatever? So, you know, two quick reads that are just fun, and, you know, maybe people will find it interesting.

But um, this is, um, they track you, right? And so they're, they're what you're doing, because technology is good at that. And are you doing things that? Are, you know, going to increase or decrease your insurance premiums as a family or whatever, right? So, like, going to a dangerous part of town temporarily increases your insurance premiums. You're like, you know, or, you know, a love interest of someone who is more or less compatible are going to be good for you in the future. Increases or decreases your life insurance premium.

So like, you know, and then how, that? It's super dramatic and scary, and, you know, uh, Orwellian. But you sort of see how technology, the unintended consequences can often, uh, come to bear here. So, um, you know, there's lots of ones like education and you know, just things that were technology you'd used to be. I remember when we were, you know, in in finance, there was, like, the internet group, in banking. Uh, right now everything is just like technology. It's a hundred percent of the GDP as a technology bent to it to some degree, right?

So that's something that is just going to continue to be part of everyday life.

And the first day she has the app, she goes in the car with her friend's dad, who apparently has a bit of a lead foot. And so she, she immediately goes into a panic because her like first score was was an f.

So and so she went into a panic mode about this kind of like, you know, you know, population management system, and, uh, you know, as any good, you know, I guess she's Gen Z. She very quickly figured out there's a way to go in and amend the score by saying, I was actually a passenger, and so now I think whether she's driving or not, every score is an A.

But but what you bring up, I think, is really profound. You mentioned the internet group. Because I think the time that we're in right now is a lot like the introduction of the modern day internet in 1995. Like when Netscape came out, and, like you said, there was like, internet groups. And you could go to Wharton and get a co-MBA in the internet, you know, like, this is crazy and and and just like everything, I think we're all trying to figure out what these things are, and usually what it means is they're. They're efficiency tools, they can do what people can do, but they can do them faster. And that's what the internet did, and that's what these LLMs are doing. And it'll be really, I think, if we had this conversation a year from now, you know, I think people are going to realize that, you know, it's just going to enable us to do the more human things more often. But it's also going to change the way that people go through apprenticeship models and have to live and learn and grow. And even, you know, as I think about our team right now, you know. The big challenge for everyone is the world's going to change really quickly, and we can either change with it or we can resist it. You know, it's, if you've ever read this book who moved my cheese. It's a great book. And so we're really, you know. I think every company in in in the in the world right now is is going through the things that you talked about. With this change and displacement. If you lean into it, embracement, it can be a good thing, but you know, it's scary in the meantime.

I'm like, No, we don't keep them, it'll stump their growth. And I was once again, for good reason, you know, I was, I was vetoed on that.

So thanks so much for joining us.

You know, it's a it's nice when you've got good friends doing good things, so, uh, you know, wish you guys the best of luck and likewise.

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