Listen: Private Markets 360° Episode 11: Private Equity Value Creation (with Ray Carey, Head of NextLevel Operations at Level Equity)

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Jocelyn Lewis

Hello, and welcome back to Private Markets 360, S&P Global's podcast dedicated to enlightening and educating our listeners about the world of private markets from vast vantage points. Your Private Markets 360 co-hosts both sit within Market Intelligence. I'll start off with introductions. I'm Jocelyn Lewis, Head of Private Debt Commercial Strategy.

Chris Sparenberg

And I'm Jocelyn's co-host, Chris Sparenberg, Head of Private Markets Commercial Strategy. I'm a super fan of our corner of the investment industry. We're thrilled to bring our listeners exciting guests every month for discussions about industry trends and other topics of interest here on the podcast.

Jocelyn Lewis

We sure are, Chris. And if you're interested in regular private markets content, hit subscribe and tune in. Ready to introduce our guest, Chris?

Chris Sparenberg

Let's do it. Today's guest is the head of the operating partner team known as NextLevel Operations at Level Equity, a private equity firm focused on providing capital to rapidly growing software and technology-driven businesses. He's also a three-time CEO for successful PE owned businesses. He spent over a decade as a Partner at Azure Capital Partners and was previously an investment banker. He brings first-hand investment and CEO expertise to accelerate portfolio company growth through leveraging Level Equity's team of operating partner experts supporting their CEOs. Ray Carey, welcome to Private Markets 360. How are you?

Ray Carey

I'm great, couldn't be better.

Chris Sparenberg

Wonderful.

Jocelyn Lewis

So Ray, can you start off by providing a bit of context for our listeners on the key objectives of your NextLevel Operations team and maybe throw in how it's a differentiator for a Level Equity?

Ray Carey

Yes, sure. I think our objective is pretty simple. We help portfolio companies try to be worth more when we sell them than they cost when we buy them. But like most good objectives, I think it's really easy to say and hard to do. All of our companies are different, unique snowflakes. But in the end, they're all snow. And there are processes, there are best practices, there's expertise that can help a company accelerate its growth, accelerate its value creation at all these mid-market software companies.

And I think that balance between seeing each of these B2B software companies that are in different vertical markets as kind of unique enterprises, but also seeing those common best practices that combination of bespoke and best practice together, I think, is a real differentiator for Level Equity.

Chris Sparenberg

That's great. We talked about function-specific approaches. And wondering if you can share with us an example of how you've implemented that type of approach to help improve operations and drive value creation at these companies?

Ray Carey

We have a series of experts that have worked in operating companies that have both expertise and experience doing the job that is being done at many of the portfolio companies. Amy Kramer is the partner here that runs our Go To Market operations. She's the operating partner for GTM. She and I were talking the other day and we were talking about that we've never seen a company that's missed bookings. We're like, "What? You've never seen a company that's missed bookings?" Well, you don't miss bookings, you either miss on pricing or you miss on the number of deals that you closed. So it's that next level of detail.

And so Amy has a process to work with companies to drive all the way back to lead sources, all the way back to per rep level math, very detailed framework. And she can do that because she has done it. She's a functional expert before she was here at Level Equity three years ago. And so in working with the company, they can then diagnose exactly where they're missing or exactly where they're winning and then you can build plans to accelerate around that detailed.

Having functional experts that can dive all the way in and help diagnose something as narrow as a lead generation rep show rate and say, "If you improve this, it's going to move the needle at the company and drawing it all the way back to value creation," is really what we mean about functional expertise. We can get in there and ride alongside almost any one of the functions in one of our portfolio companies.

Chris Sparenberg

Are there other practice areas that you have? So go to market, I imagine there's maybe a general management function? Can you describe some of the others at a high level?

Ray Carey

We have experts in finance and financial planning. We have experts in technology and product. We have experts in rev ops. I'm an expert in trying to align with CEOs and making sure that we're building an enterprise value. So that might be the general, but I would say that's really around corporate strategy and value creation.

We're even hiring as you look into next year, we'll be hiring experts in retention. We'll be hiring experts in demand generation, change management, and project management. Really all of the things that help move the needle at our portfolio companies.

Chris Sparenberg

That's fantastic.

Jocelyn Lewis

You just mentioned that you're looking to hire some experts, and you also mentioned about those lead indicators that you're looking at to improve each one of the functions. Is that what you mean by professionalizing or is there anything else that falls into that category?

Ray Carey

Yes. I think the more that you metric a business, the more that you can ensure people are working on the right tasks. We have many businesses where some of the executives are first time doing their job. And I'm a slow learner, but I was better the third time than I was the first time at one of a mid-market software company. We can help accelerate folks that are in their position for the first time and say, "We've been to that movie. We've made that mistake, benefit from the trials and tribulations that we've had."

And so some of it is just lending that expertise and coaching at an earlier stage. If you're doing it for the first time, use our template. We don't sort of force down a template on portfolio companies. We say, "We're hands off, but we have hands." We can do work and we can help them get going on a new business process or a business process that they're not proud of or needs improvement.

Jocelyn Lewis

How do you source the portfolio companies that you ultimately acquire?

Ray Carey

Well, I don't, but it is super impressive to watch and hear happen at Level Equity. About 40% of the headcount at Level Equity is dedicated to sourcing. There's a proprietary tech platform that's called Level Edge that helps accelerate the efforts of those employees. And it's a massive benefit to both sourcing, but also to the portfolio companies. Portfolio companies do add-on acquisitions, it drives partnership opportunities.

So it's not only driving the platform investments for Level Equity. It's driving these opportunities within the portfolio that really gives you kind of real-time information around what's happening in one subsector of B2B software, not only across our 50 or 60 portfolio companies. But the hundreds of companies a month that this team touches. So you have a much, much wider dataset to help you build your operating plans.

Jocelyn Lewis

When you acquire a specific portfolio company, do you go in with the idea that, oh, there are all these other companies in the subsector that might be a good fit from day one? Or is that something that you really learn after you make the acquisition?

Ray Carey

Like most great questions, the answer is yes and yes. And so when we go in, we want to understand the ecosystem. We want to make sure that we have a -- we're investing in a company that has great organic metrics on their own, but we're already doing the work. We've already likely called the competitors and partners in the landscape. And so that we have those plans. But then, every month, every quarter, you go in, the market moves, you get smarter, you can change that M&A strategy.

We have great companies that have great organic growth. They go through, they never buy a company, they're phenomenal investments in projects. And then we have others that have been serial acquirers. So it really depends on the specific company and specific market as to whether that's kind of done baked in upfront or it's something that happens down the line.

Chris Sparenberg

You talked us through this concept that there are two parts to value creation in these portfolio companies. There's the people concept and then there's the math. And that companies generally get one right or the other, but to really create that value, both need to be right. I think our audience would love hearing you elaborate on that concept a little bit and how it plays a role in what you're doing with Next Level.

Ray Carey

Yes, those are like my two favorite things in the world, which sounds weird. I love people, and I love math. [ Fran ] said, you got to remember, momentum is speed in a given direction. It's not just like crazy speed. It's speed in a given direction. And most of our companies have great people. We help them find more great people.

But there's a question like, how do you know those great people are working on all the right tasks and if those tasks are maniacally focused on creating value for the company? And the way you find that out is math. Company values are data-driven. There's an equation that you can build. You can reverse engineer a $0.5 billion outcome. You can have a revenue or an EBITDA multiple.

Companies outcomes are just one number times another number. And then you can build back that number with a detailed hierarchy with math that goes back to revenue is just what you added, minus what you lost. That's it. What you added is what you got from your existing customers, plus what you got from new customers. So you can go all the way back and reverse engineer the tasks that are associated, whether it's a product road map, driving into an ROI to a hopefully increased sales price. Every company has an equation.

If you have 100 people or 1,000 people, you have 8,000 hours of task happening on every given day. And that math equation can ensure that the vast majority of those people are the best to your human capability are working on the right tasks. So speed in a given direction, driving momentum.

So great, great people, but great people need to know the things they're working on, when stitched together or in the hierarchy of the true north of creating a company of value that attrits to them as an employee, that attrits to the customers and attrits to the owners. And all three of those things moving in the same direction.

Chris Sparenberg

One of the equations nestled in that grander equation is something that you do with respect to booking demos. And I think it's really, really interesting. I wonder if you would take us through the approach you have to booking demos for sales.

Ray Carey

In many ways, a lot of a business is, can you tell your story in a way that multitudes of people say, "Yes, I have that problem. And I will listen to you. I will give you the time out of my day to see if you can solve the problem." Can you build pipeline for the part of the world you're looking to improve with your software?

And if you want to do that, it's all about driving that back to either an e-mail or probably a 6- to 7-minute phone call that happens with an entry-level sales professional and really boiling your business down, how many connections can you make in a day? You can train people to make more connections in a day. When they do, how do they convert? And if they convert to getting the right person on the phone, there is a skill.

Before you even talked around, how have you worked to get the right person connected on the phone? If you're connected on the phone, how do you convert to someone taking a meeting? Once someone agrees to take a meeting, what is your show rate? Can you connect? We've seen that people have a 50% higher show rate if they've invited someone else in their business to the meeting.

Now we're making sure they get that call and invite people to the meeting because the math says 50% more sales by literally just making sure the customer invites someone because they will cancel on a vendor, they're not going to cancel on their buddy. So that small thing can move the needle materially in this overall company that's got 200 people in it. And once you fix that, you just start seeing sales move through the conveyor belt.

Chris Sparenberg

It's an incredible insight.

Jocelyn Lewis

It really is. And Ray, I wonder, as you talk through that, when you talk about being so focused and finding these issues to then figure out how can we do this better, what are the metrics we should be looking at? Are there any insights you can share on how you go in and how you determine which are the areas that really need the focus. Is it really that obvious when you go in and make an acquisition?

Ray Carey

When you start working with a new portfolio company, you just start with a long-term plan. You want to make sure we're really aligned, you've gone through a sales process and say, "What do we want to be when we grow up?" So it's a 3-year plan, a 5-year plan. And then you just start working backwards. And you just say, "Are we proud of this as the best we can do?" We also have the benefit. We just did our GTM survey where we survey all the portfolio companies.

So we know what good looks like for other companies. We're just doing B2B SaaS for the most part here. And so as I said, every unique snowflake, but they are all snow. So if somebody is winning at a 30% rate, and you're winning at a 15% rate. I'm like, "Do you think we could win at 30%? If we can, let's build a program. What does it take to win at 30? Is that product features? Is that messaging? Is that sales training?"

There's a lot of solutions. There could be a lot of things that move that. But we know what good looks like across the portfolio. You just keep driving it back until you have a really good plan. And I think half a senior management is once you have a good plan, you just keep shoving, get in more detail and just keep shoving until you make that plan a reality through a combination of a really good plan and a heavy degree of force of will, which is what you have on the people side. People that want to win and have fun doing it.

Jocelyn Lewis

And when we think about the different stages of a company, how does value creation vary across those different stages?

Ray Carey

I have so much respect for folks that invest in and work in pre-product market fit companies because I don't understand it at all. You can probably tell from this call, I need a little data, like two sticks to rub together to start a fire. We sort of come in and fanning the flames, right? We're not that involved in the value creation of pre-product fit companies. We're involved in kind of $5 million of ARR. People have a thing, they've convinced at least a small set of customers they can solve their problem with software.

That's really where we get involved. When companies have less than 100 people, you can run around and you can have what I'll call hero mentality, a small amount of heroes and getting the right heroes that you don't need a ton of process, you can kind of through just force a will get yourself there. Once you start getting more than 100 people, you start violating the golden pizza rule, which is you can't have more than eight direct reports and you start having to build out middle management, you need metrics and systems.

And so you need some different type of people, you need different types of metrics. You need more published math and KPIs across the business. That changes a little bit. Then you might have a milestone of you start buying companies and holy smokes, that's like, the degree of difficulty goes up because you have people that grew up in different cultures, even if they're young companies.

So you have potential for culture clash. You have two people that want the same title. You got three people that think they have the same job. There, you need really good PMO and project management, really delineation of duties. You need that every day in a business, but with M&A integration, it has to be crystal clear. Who has the ball? How are you making decisions? How are you data-driven? And the person's idea doesn't win because they came from your tribe when you're bringing companies together.

And then it also is by the people that you have, the humans you have, we all have backgrounds. We have founders that were product and invention folks. And so the way that we help them build out teams and help them is different than we have folks that grew up in the sales organization before they became a CEO. It's part about the stage. It changes how you engage. It's partly around the people that you have and then these milestones that happen at a company. Do you win your first big distribution partner, you used to selling direct?

Now you have a big distribution partner. I'm working on a project today to make sure, man, if you thought how different an organization is when you're selling through the hands of a big distribution partner, and it's the first time that company has done it. But it's not the first time anybody has had a distribution partner. We can bring in experts that have done it before and help them reduce the risk that it's going to go off the rails or increase the risk that that's going to materially move the revenue of their company.

Chris Sparenberg

You also have this concept of honeybee-ing across portfolio companies to get ideas. And I imagine leverage expertise that may be sitting in different parts of the portfolio. I imagine that plays a role here as well.

Ray Carey

The goal is to get the best business practices at the best, collect them so the NextLevel operating partners are engaged with all of these different companies. We have pure mentoring circles so that we don't have to be the ones always doing the honeybee-ing. We can get all the portfolio companies together. And it's really just leaning on each other. The good ideas come from all sorts of places. And our goal is to kind of honeybee and cross-pollinate those best practices across the portfolio. We're not in the invent and wheel business. We are in raise the tide to lift all ships business.

Chris Sparenberg

And does that extend to the tremendous data ecosystem that you have from across the portfolio? Can you use that to leverage your own decision-making, how you equip maybe certain portfolio companies with the broader knowledge of other things happening in maybe, adjacent PortCos?

Ray Carey

Yes. I always want to be super careful with the customer data, the European GDPR data. The data of a portfolio company is its own data. But I think what you're talking about is the data about the portfolio companies. The data about the portfolio companies, the financial ratios, the key metrics, even compensation design, those things are things that we can leverage.

I was on one today, where we were trying to really build a long-term profitability plan for a company. How much do we invest in development? How much cushion do we leave on the bottom line for things going awry? What are like-sized companies in this space spending? What does good look like? Am I overspending? Am I underspending?

And every once in a while, people want to look around and say, "What are other people in this situation. It's kind of hard. Heads down to the company, banging away. Is there anybody else whose that I can benchmark against?" We were just doing that today. We can benchmark. We have the financial ratios across all of these companies.

We have the -- creating these detailed metrics allows you -- somebody said, "I don't think SDRs could do $100,000 a day." And I'm like, "I used to [indiscernible] companies where they're doing it." I call it sometimes, you're looking for like the 4-minute mile. And a company wants to know what's the -- if you're asking someone to run a 10-minute mile. It's like, "Come on, you're an athlete."

But running a 2-minute mile? It's kind of depressing. So what's the [indiscernible]? What does awesome look like? That data allows us to tell people, for a given metric, what does really good look like? And it's not just like anecdotally, what we think. It's backed by what is actually happening real-time, right now in other companies that look like you.

Chris Sparenberg

That's great.

Jocelyn Lewis

Very insightful. Thank you, Ray. Before we close, is there anything else that you wanted to chat about today?

Ray Carey

No, this was it. I love talking about this. I hope the focus of who we are, that combination of letting companies organically be what they are, but kind of having real -- I say, "We're hands-off, but we have hands." We are happy to roll up our sleeves and work with these companies, get on a common mission. It's an awesome job. It's like just interesting Sudoku business problems all day, every day. I'm a lucky guy to have it, and I appreciate you guys want to talk about it.

Jocelyn Lewis

Well, absolutely. We were thrilled to have you on this episode as our guest. It was a really insightful discussion about your differentiated operating model at NextLevel Operations that brings a breadth of expertise together in what seems like a bespoke model. We've really enjoyed learning how you're partnering with the leaders at each of your portfolio companies to create value by making the equity of each operation more valuable. So thank you so much.

Ray Carey

Thank you.

Chris Sparenberg

Thank you, Ray. Thank you again to our wonderful guest for a great chat today. I really appreciate everyone listening in. If you're looking for more private markets content, hit subscribe to catch future episodes and listen to our earlier episodes wherever you listen to podcasts. Cheers, everyone.

Jocelyn Lewis

Thank you so much. You can also subscribe to our monthly Private Markets 360 newsletter. The link is in each episode bio or connect with us on LinkedIn. Have a great day.