32. How do PE-backed companies differ from VC-backed businesses?

In this episode we discuss what operators in PE and VC backed companies can learn from each other. We are joined by Sam Smith, the founder & MD of PepTalks, training for PE CEOs and leadership teams.

2/29/20245 min read

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We chat about the following with Sam:

  • What are the types of PE companies?

  • How are company valuations determined?

  • How does the commercial model work between PE companies and LP’s?

  • Can you shift track and move from VC-backed to PE-backed?

  • How does a PE firm structure funds when they invest in an organisation?

  • How does that structure impact the ability for the management team to make money?

  • How do share options work in VC-backed companies?

  • What happens to the management team's equity when a second PE company buys the company?

  • What does a successful COO look like in PE-backed companies? How does that contrast versus VC-backed?

  • How do VC-backed companies successfully ramp up headcount so quickly?

  • How do you engage and motivate employees in PE-backed companies versus VC-backed?



Sam Smith is the founder of PepTalks, a peer to peer training provider for private equity backed CEOs and Management teams.

Founder of Marble Hill Partners an exec search and interim management consultancy which was sold to Henley Insights Group in September 2021.

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  • Career relevance and identity after unexpected death. 0:05

    • Bethany struggles with processing unexpected death of a friend, leading to a difficult weekend.

    • Bethany and Brandon discuss feeling less relevant in their careers as they age, with millennials taking over management positions.

  • Identity, ambition, and financial freedom. 3:35

    • Bethany: Realized identity wasn't tied to work after leaving peak role, causing discomfort & self-reflection.

    • Brandon: Ambiguity of mattering in work life vs. personal identity, with age & finite time, leads to essential questions.

    • Bethany and Brandon discuss the importance of financial freedom and its impact on their lives, including the ability to think long-term and prioritize personal growth.

    • Brandon highlights the importance of allocating time for networking and learning, even when not directly relevant to work, to maintain personal direction and growth.

  • Entrepreneurship, private equity, and networking. 9:02

    • Bethany and Brandon discuss networking and success in business with Sam Smith of pep talks.

  • Private equity fundraising and investment strategies. 11:07

    • Sam Smith explains the commercial models of private equity, including the need for return on investment and the importance of valuation based on EBITDA multiples.

    • Bethany asks about the recurring revenue of a 20-500 million enterprise value business, and Sam provides examples of private equity funds for different transaction sizes.

    • Sam Smith outlines a plan to raise £500 million for a private equity fund, highlighting the importance of having a clear investment strategy and track record of success.

    • The fund aims to secure commitments from 20-30 institutional investors, with the remaining £450 million coming from the general partners' own pockets.

  • Private equity investing and expectations. 16:12

    • Sam Smith and Bethany plan to manage a private equity fund for 10 years, investing and returning money to investors over that time.

    • The fund will have a lifecycle of 11 years, with 3-5 exits within the first 5 years, and then raising another fund in transition.

    • Brandon: Has seen venture-backed companies transition to private equity ownership, but rare due to cash generation and profitability requirements.

    • Sam Smith: Private equity investors expect at least a two times return, unlike venture capital which takes a higher risk for potential astronomical returns.

  • Private equity investing and debt structures. 20:41

    • Management teams in private equity firms can make significant sums of money if they deliver growth and meet targets, while VC firms have a higher risk of failure and lower potential returns.

    • Sam Smith discusses raising £500 million for private equity deals, with £40 million going to banks or debt funds and £59 million structured as a loan note with compounding interest.

    • Smith explains the importance of capturing senior debt and structuring loan notes to minimize interest payments and maximize returns.

  • Private equity investment and returns. 25:33

    • Sam Smith explains how private equity firms structure deals to incentivize management teams, typically offering a sliver of equity worth 10-20% of the total valuation.

    • Four years later, the business has grown EBITDA, improved its multiple, and paid down some senior debt, increasing the valuation to 170 million.

    • Sam Smith explains how private equity firms can generate returns through investments, highlighting the importance of valuation and cash generation.

    • Brandon expresses interest in joining private equity, but Sam cautions that returns may not be stellar and management equity may erode in value.

  • VC-backed business growth strategies and employee incentives. 29:37

    • VC-backed businesses prioritize market creation and share options for management teams.

    • Bethany explains that employee stock options are typically structured as a percentage of salary with a vesting schedule, and employees must exercise their options within 90 days of leaving the company to avoid paying the strike price.

    • The strike price varies depending on the set of shares or option grant, and employees must decide whether to hold onto their shares or pay the strike price as part of the sale.

  • Private equity investing and leadership. 33:34

    • Bethany and Sam Smith discuss the importance of vesting for management teams in private equity deals, with Bethany highlighting the need for incentives and Sam Smith explaining the benefits of rolling equity into subsequent transactions.

    • NewVoiceMedia raised money every year, with a focus on deploying and returning funds in a 3-5 year cadence.

    • Bethany: Valuation increases with each funding round, providing opportunities for early investors to cash out or continue investing.

    • Sam Smith: Private equity firms look for entrepreneurial leadership teams with strategic strength and psychological resilience to drive growth and capture market share.

  • Private equity talent acquisition and growth strategies. 38:51

    • Sam Smith emphasizes the importance of operational expertise in CEO candidates for a mid-market company.

    • Private equity firms often overlook experienced VC executives as potential hires due to cultural fit concerns.

    • Private equity firms prioritize hiring experienced executives for faster growth.

  • Talent acquisition and onboarding in private equity firms. 44:33

    • CEO emphasizes importance of talent acquisition and onboarding to ensure aligned focus on value creation.

  • Entrepreneurship, strategy, and talent acquisition. 46:06

    • Venture businesses struggle with identifying and sticking to focus due to market disruption and entrepreneurial excitement.

    • Bethany and Sam discuss talent acquisition strategies for scaling startups, including building a talent team, leveraging referrals, and preparing managers for growing teams.

  • Setting up new managers for success. 49:18

    • Brandon emphasizes the importance of effective line management to ensure new hires are set up for success.

  • HR strategies for scaling businesses. 50:30

    • Bethany emphasizes the importance of investing in L&D and people analytics to improve manager performance and DEI.

    • Sam Smith notes that venture-backed businesses are stronger in HR function, with a focus on people strategy and organisational design.

  • Incentivizing and engaging employees in private equity-backed companies. 52:46

    • Brandon emphasizes the importance of efficiency in talent acquisition and onboarding, highlighting the need to balance rigor and speed to ensure the right candidates are hired.

    • Sam Smith and Bethany discuss the value of analytics in private equity, particularly in understanding employee dynamics and incentivizing employees in PE-backed companies.

    • Brandon: How do PE-backed companies incentivize talent? Sam Smith: Use a similar model to engage employees, educate them on PE ownership, and create a sense of purpose.

    • Sam Smith: Private equity vocabulary can lose engagement quickly, so use language that resonates with employees and emphasizes the business's impact on society and community.

    • Sam Smith emphasizes the importance of purpose and emotional engagement in business, citing private equity's focus on incentivizing and equity for management teams and employees.

    • Sam believes private equity should expand their talent pool beyond traditional sources, including the venture world, to uncover great talent.