PE | Portco Value Creation | Building the largest collection of value creation case studies
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About to talk with one the largest global asset managers... On the subject of designing value creation teams.
No one has it figured out except a few.
Key questions I would ask myself:
1. How close are you to influencing an outcome (direct majority, direct minority, LP / co-invest, etc.)
2. What are the 1-2 things you can and want to control? Who can you hire for it? (Revenue, shop floor, AI, data and information)
3. How do you map to your fund setup to drive real impact? (I.e., diversified funds need a different approach and focus than thematic)
Key principles I keep in mind each time I design a VC team:
1. Design the team close to impact that is measurable
2. Design the team around the level of influence and control you actually have
3. Design the team to solve 1-2 highest impact problems
4. Design the team to share incentives with both the portco mgmt. and fund
5. Design the team for execution, not thought leadership
I'm failing to see what Poppi founder learned at all here...
The $300m doesn't matter, it likely got the over $2B deal done which has now been written down.
Sounds like Poppi won
Poppi's founders just learned the most expensive lesson in M&A!
When they sold to PepsiCo, the deal was for $1.9B plus a $300M earnout (a future contingent payment based on the performance of the brand for some period after closing).
And PepsiCo just announced that it is valuing that $300M at a “paltry” $12M.
That stings!
I've negotiated a lot of earnouts in my career. Here's what most sellers don't understand until it's too late:
1. An earnout is a future bet on a business you no longer control.
After closing, the buyer sets budget, pricing, hiring, marketing, etc. Every lever behind whether or not you get your earnout belongs to someone else.
2. The incentives can flip the day you close if you’re not careful.
As a seller, you want to do everything to hit the targets. But as the buyer, you pay less if they're missed.
Ideally, the earnout is structured so that both parties win or lose together.
If performance tanks, the buyer earns less overall so it pays less to the seller.
If performance improves, the buyer earns more so it pays more to the seller.
Incentives are aligned.
What you absolutely cannot allow to happen is an earnout structured so that performance can improve allowing the buyer to earn more, but still pay less to the seller.
How on earth could that happen?
I'm so glad you asked...
3. The accounting decides the outcome.
How you define "revenue", "EBITDA" or any other measurement metric used to determine the earnout is what ultimately drives the payout.
So things like how corporate overhead gets allocated or what happens when the Seller’s product is folded into a larger brand with competing products becomes unbelievably important.
Again, remember the incentives.
With a poorly structured earnout, a company like PepsiCo could be incentivized to buy a brand like Poppi and purposely underinvest in the brand in order to eliminate a key competitor to its other products.
So PepsiCo could earn more by driving more revenue to products other than Poppi, while simultaneously reducing the earnout payable to Poppi because Poppi's direct performance declines.
PepsiCo wins -> Poppi loses.
Sellers have to be very careful about how the accounting for the earnout is defined and whether it causes misaligned incentives.
4. The reasons above are why earnouts are among the most litigated terms in M&A.
Sellers often sue buyers claiming the buyer sandbagged performance. And Buyers defend by saying “The contract gave us full discretion."
Courts will generally enforce whatever terms the parties agreed to in writing, so an argument that Buyer acted in “bad faith" rarely saves a seller who didn't negotiate adequate protections.
5. If you agree to an earnout, protect it at all costs!
> Tie it to metrics like revenue, which are subject to less manipulation than metrics like Adjusted EBITDA.
> Include strict operating covenants around things like required budget, sales support, and no diverting customers to other products or business lines.
> Push for audit rights and a dispute mechanism.
> Demand acceleration of the earnout if the buyer or product line is sold, merged, shut down, or deprioritized.
> Keep the measurement period short! The longer the period, the more opportunity it gives a Buyer to game the system.
To be transparent, I don’t have any background into what happened here. I have no idea if the earnout was poorly structured or if PepsiCo acted in a way to purposely reduce the earnout.
That's not the point of this post.
What I do know is that a $300M earnout that is written down to $12M is a tale as old as time and almost certainly to end up in litigation.
And even if not the case in this particular instance, in most cases where this happens, there's often things that could have been done in the transaction documents to avoid it.
My advice to every seller I represent who is considering agreeing to an earnout is simple:
Value the deal based on cash at close and treat the earnout as a bonus. If you get it, great. But don’t count on it!
On the other hand
This week I actually had to tell an analyst to NOT use Claude when modelling.
It had links in formulas that didn't do anything, rows of calculated numbers that had no impact on the model results.
This can be fixed with better prompting, but what annoyed me is that I had to review, catch it, and fix it.
Makes me worried for new grads out there
I really can't figure out if Logan is serious or not.
Regardless, seems like the CPA community is split in the replies.
Quite the drama
AI-generated content is exploding, while the amount of attention we have is basically fixed
It's hard to find good data on the total volume of content being produced online
But this chart is an interesting proxy for how much easier content is to produce
And we've all seen the proliferation of AI slop
Meanwhile, time spent on social media hasn't really budged
Incremental value is increasingly shifting from content creation to distribution
Getting known and in front of people is getting harder.
Fully agree with every point. Awesome list.
However, I've noticed a lot of PE firms won't entertain a deal if founders don't rollover equity (and they plan to stay on and lead).
PE firms will want incentive alignment with executives.
Private equity will offer a “second bite of the apple” with rollover equity
PE will say they’re targeting to 3x your equity
Before you roll 20% of your $10M deal into the next PE-backed platform, here’s a couple of things you should ask about:
Pari Passu? Understand if the equity class is junior to the sponsor’s preferred stake. Preferred gets a liquidation preference + 8%-10% compounded before common gets a dollar.
HoldCo or Subsidiary? Understand which entity issues units and where your ownership sits in the event of a sale/exit for the platform. HoldCo could receive a different outcome vs subsidiary in the waterfall.
Entry Valuation? Understand the value per unit for your rolled equity and how it’s marked internally going forward.
Tag-along? If the sponsor sells and you can’t join along in the liquidity event, you’re making a bet on another sponsor.
Drag-along? Sponsor will force a sale, which is normal, but make sure you’re getting the same per-unit price and you’re not getting burdened with new indemnities worse than the first deal.
Lock-ups, calls, forfeiture? Rolled equity should vest immediately and should survive termination. Call rights at fair market value, not cost.
Cash at close is the only thing guaranteed.
Rollover equity is a bet on a levered platform you don’t control.
I work with owners in the trades on this topic all the time and every situation is different.
SchryverCo.com
I am going to pile on here.
Entry price is often the most important factor in a PE deal (prove me wrong)
You know how a lot of PE Partners get the best outcomes?
Being LIKEABLE
Turns out if you are likeable you don't have to be highest bid
It has always baffled me more PE guys don’t take John’s approach.
Way too many try to show how smart they are by asking skeptical questions and “diligencing” the business in the first meeting.
That is a terrible idea. I’ve watched founder/owners completely shut down. They are not impressed.
Make an affable first impression. Be likable. Get the seller to talk about himself.
You don’t have to buy the business, but being liked increases your odds of winning if you do want it.
And this
Bringing this back up given $NOW popularity.
They've spent years entrenching their position with customers.
Nice, an actual hot take and I disagree.
Gotta get to the top of the list somehow. And - if you are qualified, they aren't going to care at all if you reached out them personally.
However, I would instead always recommend you get a referral or a warm introduction from a current or former colleague
For those wanting to know more, I'd state this slightly differently for clarity:
“Secondaries” is the umbrella category:
1. LP-led secondaries: an LP sells an existing fund interest (LP or GP stake) or co-invest interest to generate liquidity
2. GP-led secondaries: the sponsor initiates the liquidity event. Continuation vehicles are one form, where assets are transferred into a new vehicle and existing LPs can typically cash out or roll
Either way, the mechanism is useful to generate liquidity, among other incentive reasons.
I have a recent, fun value creation story for the PE folks out there.
Customer-backed CAPEX
A firm I know bought an industrial storage business with room to expand on adjacent land.
They owned a strategic site with basically no competition, and their customers needed more storage capacity to grow.
So before building, they secured a 5-year customer commitment for the new capacity, with extension options. This along with some customer contribution secured 100% of the financing needed for CAPEX.
The company gets long-term contracted revenue and retains the value of the new asset, and the customer gets the capacity it needs to grow.
In some industries, great way to create EV through greenfield expansion.
One of the easiest ways to predict what a person or business will do next is to understand their constraints.
It's one of the mental models I find myself using constantly.
A few examples:
Salary bands: If compensation is fixed by level, the path to materially higher pay is usually promotion or leaving.
Market size: If you have 40% of a $50M market, you aren't becoming a $200M company by selling harder. You need a new product, geography, market or acquisition.
Plant capacity: If the plant is full, more demand doesn't create more volume. You need to add capacity, outsource, de-bottleneck or increase price.
Mortgage rates: You can't do anything to change prevailing interest rates. But they will influence your down payment, location, purchase price and how much leverage you take on.
Borrowing capacity: Hit the leverage ceiling and your next deal requires deleveraging, equity or a different structure.
Regulation: If you don't have permission to operate in a market, the quality of your sales team is basically irrelevant until that changes.
Decision rights: Imagine hiring an amazing executive, but every time they want to invest more than $50K they need approval from a 6-person spend committee. Wouldn't be very effective.
Geography: Imagine you have the best nail tech in the city. Most customers still aren't driving an hour to see them.
The important takeaway for me is that constraints tell you what can't happen. And there are usually only so many rational moves left one you have identified them.
That's useful for deciding what I should do next. It's also useful for predicting what someone else, a company, an employee, or even a competitor, is likely to do next.
Legacy consulting firms are in really, really big trouble.
PE-backed Anthropic JV Ode acquiring consulting firms and deploying them across their own portfolios. Portfolio companies get AI implementation from a company their PE sponsor partly owns.
Why would you call McKinsey when the firm that owns you has the solution?
OpenAI doing the same. Legacy consulting will have to move FAST.
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Hiring anyone Senior Manager+ in consulting without prior consulting experience fails 95% of the time.
That's one of about five hiring rules I've learned the hard way. Here are the rest.
1. In PE, hiring a Partner or MD of value creation and expecting them to move revenue or EBITDA is the wrong expectation. Their job is systems and processes. If you want someone to actually grow the business, that's an operator, not a value creation hire.
2. In the operating partner world, hiring a career consultant to run an HVAC company is - although obvious, not likely to work out.
3. Role titles are wildly misleading. You would be shocked how many Chiefs of Staff are schedulers, event planners, budgeters, and note takers... while others are strategy, right hand, operational, and genuinely in a position of power. Same title, completely different jobs.
And, my most important rule
4. Constraints matter more than anything else.
If you are part of a value creation team and a minority owner in a portco - guess what - your ability to change the portcos outcomes substantially is slim to none
If you are a board observer, you are going to find it pretty hard to influence material events without a voting share (real story, one PE firm I worked with had 40% share in a company and two observer seats)
Your position, function, and power are really, really important factors when it comes to being able to exert hard and soft influence.
When interviewing, dig into what people have actually done. Titles tell you almost nothing.
And for those interviewing, be sure to clearly ask the right question to assess your, your boss, and your groups ability to influence and meet their goals, and seek out the potential immovable objects.
I firmly believe the one true source of value creation comes down to PEOPLE
Say what you want about revenue, cost, working capital, industry expertise, etc. etc. etc.
Everything roles up to the quality of the management team you hire and their ability to get shit done
Many people villianize a salaried job on @X
Meanwhile it's definitely the fastest way to increase income (or in other terms: "business revenue")
People should do this right now: go back five years and look at your salary and calculate the annual growth rate to your salary now (CAGR)
I bet many of you will find your returns way outpace the stock market average