The Changing Nature of Private Equity

Reflections of a Summer Analyst at Accordion

My summer at One Vanderbilt Avenue

Never, ever let a crisis go to waste.

I was first introduced to this idea by a friend who travelled to places right after a disaster. Their rationale was that it was cheaper, less crowded, and more security measures were usually in effect. This led to an opportunity for a somewhat safe, under the radar experience even in international spotlight. While I’m not sure if I share that view, I acknowledge there is a method to the madness. In fact, I think it can be applied to exploring ideas, not only places, at inflection points.

So, allow me to rephrase: never, ever let a crisis go to waste. Observe. Understand. And then, when the time comes, ACT!

I applied this mindset when I decided to intern in financial consulting this summer. While I knew that working in finance at any point of the business cycle, whether a peak or trough, would undoubtedly yield interesting insights, I was willing to bet that 8 weeks at the end of Q2 2023 would be an especially valuable learning experience. After all, it seems we’re in the most uncertain economic times in recent history. As the dust settles, there will undoubtedly be new leaders who have taken advantage of this uncertainty to develop new structures. I wanted a front row seat.

Photo by Adam Nir on Unsplash

Therefore, as my friends were having their internship offers rescinded due to lack of funding or deal flow, I kept hopeful, battling the storm, and eventually found myself at Accordion Partners on One Vanderbilt’s 24th floor in the heart of Midtown. From there, I was able to peek into both the public markets on Wall Street and private markets on Park Avenue. I cannot begin to explain how much I learned this summer — I like to joke I got an accelerated degree in finance — and this reflection will hopefully serve as a testament to my growing interest in the field.

The Current Financial Landscape

The events of 2008 were a forcing function for changes that might have otherwise taken much longer to initiate. Since then, migrants from firms like Bear Stearns, Lehman Brothers, and Arthur Andersen have had over a decade to start building their own industry giants. They faced hurdles posed by ever-evolving changes in:

• technology with the fall of crypto (some say TBH TBD . . . ) and the boom of generative AI
• demographics with Gen Z entering and Boomers leaving the workforce
• and in finance with the revaluation of valuation processes, the era of endless credit transforming into a credit crunch, and inflation headlines, sometimes in contrast with economic indicators, pushing endless talks about recession.

Expanding upon the last point, the general consensus in PE circles is that people know a lot of things that might happen, but nobody knows what is actually going to happen. For instance, are we in a financially or psychologically induced, self-fulfilling prophecy of a “recession”? What will trigger the IPO floodgates to reopen? Will the middle market continue to outpace the big guys and leave emerging fund managers struggling to keep up? As I tried learning how sponsors and companies would react to debt maturity, private credit opportunities, and dry powder deployment, I found the most useful resource to be Hugh MacArthur’s Bain Dry Powder podcast, closely followed by the content made by attendees of Berlin’s SuperReturn conference.

Some highlights:

• $3.7 trillion dollars worth of global dry power sits across all private asset classes, with $1.1T flagged for buyouts. 75% of it is fresh capital, meaning it is less than three years into an investment period.
• Deal value is tracking down 45%, while deal count is off by 40%, with add-ons or companies bought to bolster an existing business accounting for only 11% of value, but 60% of deal count.
• There is a backlog of 26,000 portfolio companies sitting in buyout funds making $2.7T in unrealized exit value. ¼ of them have already been held by GPs for 6 years — no wonder LPs want their money back, ASAP!
• Notedly, there is a distinction between liquidity that comes from assets that are sold versus the money that can directly be returned to LPs. Therefore, fund managers are increasingly looking at secondary market solutions (continuation vehicles, NAV loans, portfolio strip sales), or partial exits or creative recapitalization that can ameliorate their cash flow situation.
• Given the increasing cost of debt (read — rising interest rates), company earnings must go up to drive up EBITDA. Companies are increasingly asking, “Do I need a value creation plan? What pricing opportunities can I exploit?” Waiting things out is no longer acceptable.

These are important metrics to keep track of, being that a whopping seven percent of the US population works for PE backed companies, with the number of public companies steadily declining over the past few years (down by half since 1996).

Financial Consulting for the Office of the CFO

🏎️ Zoom-ing into a meeting 🏎️

So what does Accordion actually do? When I first heard the phrase “financial consulting,” I admit I chuckled. At Yale, there’s a stereotype that after college, you’re either the type of person to go into investment banking or the type for management consulting. So what was I doing trying both at once? It turned out to be the best decision for learning how various business models really work.

Accordion is a fairly young and agile company — it was started in 2008, but has already grown to over 1,000 employees serving the needs of the Office of the Chief Financial Officer in private-equity backed companies. Throughout this rapid growth, it has provided white-glove project delivery, while simultaneously maintaining a startup culture with the following core values:

You can probably tell this wouldn’t be your typical “9 to 5, get me a coffee, would ‘ya?” internship. I note this because culture truly has cascading effects across an organization (and that’s not just a corporate catch-phrase). Most importantly, it affects the value a client gets by boosting individual consultant productivity and fulfillment. Since most Accordionites have a background from the “Big Four” or “Bulge Bracket” banks, they speak from experience when they say Accordion really is the better way to work in finance.

In order to survive and grow, as Accordion has done, you have to remember about predictable threats to scale. Atul Aggarwal, President of Accordion, puts it well: “Sometimes you have to leave revenue on the table to maintain culture.” Furthermore, for companies which offer services, rather than products, your frontline is going to be the most important part of your organization. Think about it — do you associate Starbucks with the CEO or the sweet barista who actually spelled your name correctly? The leadership’s duty is to make sure that the barista has everything she needs to provide the best service she can.

You also have to maintain insurgency without trying to do too much at once. For instance, we recently witnessed how some investment banks expanded their customer scope beyond institutional and retail investors to everyday consumers. It backfired for some like Goldman Sachs’ Marcus which was launched in partnership with the Apple Card, but was ultimately deemed a pitfall in David Solomon’s strategy for the behemoth.

When something like this doesn’t work out, I learned of two responses from Accordion CEO Nick Leopard. The first one is being careful between “cutting muscle, bone, versus fat”: you don’t want to cut the energy or foundations of your company. The second one is “to a hammer, everything looks like a nail,” so choose your tools and advisors carefully before you take a swing. (I also really liked his take that if you need something done, give it to a busy person, haha.)

Careful strategy has shaped Accordion’s structure into the following practices:

• Operational and Technical Accounting Advisory (“O&T”)
• Strategic Financial Planning and Analysis (“Strat Fin)
• CFO-Driven Transformation (“Transformation”)
• CFO Technology (“CFO Tech”)
• Transaction Execution (“TES”)
• Interim Leadership
• Data & Analytics
• Turnaround & Restructuring (“T&R”)

Together, they provide an end-to-end suite of services for a portfolio company aiming to meet a private equity sponsor’s vision. As someone who had to teach themselves the basics of fundraising, investing, portfolio management, consulting, and operating within a short time frame, here’s how I think of all these moving parts.

Companies start off being owned by the founder and employees. As they grow, they often need money to scale the business, whether to hire more people to keep doing what they’re doing well, or to do research and development into new areas. They get this money by selling ownership or “equity” to other parties OR borrowing it and accumulating “debt.” Accordion works as an advisor to a specific type of owner called a private equity fund. These owners get money from limited partners or individuals or institutions who’ve pooled their capital for a limited amount of time, usually 10 years, to “buy out” companies. As owners, these PE funds now have to work with the companies they own, jointly called a portfolio, so that they can sell them for a higher price at the end of their holding period and return money to their LPs. Then, they raise another fund and do it all over again.

In the past, increasing how much a portfolio company was worth was possible through financial engineering or employing leverage to expand valuation multiples. This is where PE got it’s reputation for aggressive cost-cutting measures. Over time, though, this became harder because of increased competition and now, as valuations become a lot more scrutinized, money will no longer be made through multiple expansion. Funds will, therefore, have to rely less on dealmakers with purely banking backgrounds, and more on operational folks who understand specific industries.

This also changes the nature of CFOs, or the people who run a company’s finance function with the help of a Controller and give a sponsor visibility into the company. These roles were quite quantitative to ensure a company was meeting 2002 Sarbanes-Oxley Act strict accounting, audit, and investor relations guidelines; that’s why in 2014 about half of American CFOs were CPAs. However, over the past two years, it has become a less sought after title and career path with over 300,000 U.S. accountants and auditors leaving their jobs. On top of that, 75% of CPAs reached retirement age in 2020. This accountant shortage and exodus, paired with the increasingly operational and changing nature of private equity, means more firms will have to rely on strategic-oriented CFOs, contract workers, and consultants.

The view towards the Hudson River, Times Square, and Comcast building, sadly featuring the yellow pollution :(.

Accordion sits in the perfect spot to support these CFOs. For example, consider a PE fund that has just bought a company. Their revenue is in the millions, they have hundreds of employees, but have grown so fast that their finances are kept track of in scattered Excel files and QuickBooks. Furthermore, current KPIs (Key Performance Indicators) are sparse and OKRs (Objectives and Key Results) are vague, leading to miscommunication between the CFO and the sponsor.

The sponsor might initially prod the portfolio company to employ our CFO Tech practice to consolidate reporting into live dashboards via Anaplan. This might reveal discrepancies in past reporting, leading O&T to step in to go over historical balance sheets. Once that’s organized, they might seek out help from, say, Transformation to roadmap the future of the company. (TES usually works with the team on Days 1–100 after a transaction to ensure survival, while Transformation thinks more long term). This team would analyze their financial operating model, i.e. the company’s data, tech, processes, and human capital organization. Once they have a grasp of that, they can determine which levers to adjust to increase cash flow drivers, and ultimately, profitability. There are three main categories for these levers:

• Strategic reduction of overhead and direct costs
• Revenue and margin enhancement through industry re-evaluation, channel management, and pricing strategy
• Working capital optimization of CapEx, credit terms, order to pay cycle (incoming cash), procure to pay cycle (outgoing cash))

Strat Fin could help implement this vision. However, if the sponsor choses to forgo working with these practices, they can come back to us in a few years once the company is ready to be exited and we can support them in a strategic sale or public company readiness assessment.

Another example would be a recent transaction that left a CFO underperforming because of the different expectations and procedures for a privately owned company rather than a public one. The sponsor might hire us to retrain the CFO or step in as Interim CFO.

If you can’t describe what you are doing as a process, you don’t know what you’re doing.” — W. Edwards Deming

Finally, consider a company that a sponsor bought a while back, but due to misalignment between the two teams and inadequate use of data on hand, is a mess heading for bankruptcy. They bring in our consultants to act like firefighters running into the flames and putting them out, while everyone else is hurrying to an exit. Afterwards, they also task our T&R practice with rebuilding the business. This might mean shutting down operations of the part of the business that isn’t bringing in revenue or spinning it off (that is, leaving one part private, and taking another part public while maintaining majority ownership). These methods can be thought of as “addition through subtraction” strategies.

Some analyses that T&R could do to understand the urgency related to a company’s financial health relate to leverage ratios, depreciation, aging analysis, positive/negative convents, as well as debt amortization. Though grouped together, the two processes that the “Turnaround and Restructuring” practice is named after are quite distinct. Turnarounds are mostly oriented around operations and financial performance as measured by P&L, while restructuring focuses on the capital structure of the balance sheet. Therefore, restructuring is more aligned with business cycles, which in turn are defined by and dictated by interest rates.

As I was gaining a grasp of sponsors’ various needs, I was surprised how many different types of consulting and specialized vendor services existed across the financial landscape, from IT to managerial. In fact, when some companies were considering acquisitions, they could outsource sourcing and valuation, especially when they lacked the manpower or capabilities to calculate the value of a potential target’s intangible assets like patents.

Day in My Life on The Consulting Ops Team

I liked working out of empty conference rooms, leading people to call the corner one, “Ula’s Office,” haha!

Within Accordion, I was a member of the Consulting Operations team. Sounds kind of funny, right? Consulting consultants in a financial consulting firm? But yes, that’s what we did, and we did it well! In the same way that Business Development teams rely on Sales and Marketing teams, the mandate of our team was to support our consultants as they joined client teams. Therefore, in a way, I gained operating experience in a professional services firm, rather than a portfolio company.

To fulfill this mandate, our projects revolved around building and scaling best in class delivery toolkits to address group pain points. This came in the form of process improvement and product innovation. (In the future, this will expand to product integration as we acquire more companies with their own products/services, client bases, and engagement management techniques.) These three core responsibilities are essential in a fast growing company as they professionalize our firm without bureaucratizing it; without our team, there would be misalignment as everyone freestyles or improvises processes they learned in previous workspaces. Therefore, scale means quality SOPs.

This interdisciplinary nature of our team and our duties meant I had to quickly understand how everything, and I mean everything, at Accordion worked: whenever someone stopped by my desk (strategically chosen to be exactly between the kitchen and Bloomberg news screens), they saw my three screens opened with endless tabs and post-its arranged in seemingly chaotic, but actually meticulous piles.

Here’s how I applied this knowledge:

1. My first project had me performing market research that could arm business development professionals with the TL;DR on all things industry, deal flow, and what we were hearing from clients to better sell and deliver our services. While it was difficult given everyone’s different predictions for what the next few months would bring, this gave me the incredible opportunity to have senior exposure and communicate the CEO’s vision for 2023 to 2024 — I am so grateful for my team’s trust to execute in this capacity.
2. My second project was similarly entrepreneurial in that I was tasked with designing our preliminary competitive intelligence processes. No comment on that ;).
3. Lastly, my CS major came in useful when I put on a product manager hat and supported the design, development, and launch of the company intranet. This required an immense team effort to collect content and train content owners, since the intranet is basically a digital twin of the IRL company. I also learned a lot about change management; after all, consultants are so busy with client work, what’s in it for them to spend time helping build and test this new tool? We had to sell on them on its long-term value-add.

Supporting Take Privates & IPO Readiness Projects

My favourite spot for reading and lunch

In between my Consulting Ops duties, I used Slack to message people in the O&T practice about what they were seeing in the public markets. The news was full of headlines about upcoming IPOs like Cava, Stripe, and Arm and I was curious how we were preparing for when the floodgates would open. A Managing Director ended up taking me under his wing for a few projects and I got the chance to learn about the geo-economic angle to going public. After all, a company should choose a strategic location in a market that will provide a favorable valuation or even offer exposure to new customers. They should also consider initial listing fees, corporate governance requirements, and admission criteria to the exchange. My good friend worked at NASDAQ this summer, so I got the chance to see this in action in person, too!

At the same time, I also learned about a special kind of transaction — namely, take privates — which was recently happening en masse. According to EY, take-private deals “accounted for 81 percent of the value of all transactions [thus far] in 2023, compared to the 20 percent seen in a typical year.” Theses transactions are preferred in tough economic conditions, since they allow companies to institute cost saving measures that come with the reduced scrutiny of quarterly reporting. They also have the chance to adjust their business model to meet evolving market needs, outside of the spotlight.

Thanks to these projects, I got the chance to learn about learn about healthcare, mining, and e-commerce in Australian and South American markets. By keeping up with what other players in the space were struggling with, I also contributed a potential lead on a new accounting engagement with a bulge bracket sponsor.

Conclusions

I can honestly say I loved my internship this summer and I have no clue how it’s already August. I’ve already been joking to my team not to cancel my swipe access so I can come visit them. I also want to figure out how to get equity in the company, even as an intern, but I’m afraid I’ll have to wait a bit for that, haha.

Caught mid-sentence trying to explain why I’m listening to a “how to conquer the world” playlist

As I head back to school, I will fondly look back at how I took the Uptown 6 train each morning, walking through the majestic Grand Central, observing the bustling crowds around me on the crosswalks. (It might seem so obvious, but I find it very thoughtful to snag an address right by Grand Central enabling an easier commute for people living in the suburbs and letting them spend more time at home with their families.) I’ll miss saying ‘Good morning!’ Or ‘Here’s to another day, eh?’ with a chuckle to other people in the kitchen, or being able to hear the hum of elevators zooming up and down the skyscraper while walking through the halls. I had tears in my eyes as the lobby security guards called “Goodbye miss! You’re gonna be real successful one day!” as I left that final day.

I also bid “adieu” to my walk home, where I wove between Bryant Park and Union Square to get to the Downtown N, stretching my legs, resting my eyes, and enjoying the warm evening and city architecture after a busy day at my desk. Coincidentally, I had a few friends who similarly worked or lived along this route, so I often had good company on these walks.

The right picture looks dystopian, but hey if you can make it here, you can make it anywhere . . .

Not to get too philosophical, but strolling through the avenues of office buildings, I’ve realized “it” all makes sense: as Yuval Noah Harari explains in Sapiens, humans’ advantage over nature lies in being able to organize themselves. NYC sometimes appears to be the center of the universe because so many things, people, and ideas get organized here and then permeate out to the rest of the world.

As for the future of private equity as it becomes a more mature asset class, I have a few hypotheses.

• Firstly, the generation currently entering the workforce is going to make discussions about lifestyle front and center. Rex Woodbury has excellent reporting on this. Though work-life balance is important, I worry that Gen Z is not very resilient as the whole and will be surprised when their unwillingness to compromise and indulgence in quiet quitting affects their long-term employment potential.
• Secondly, digitization will continue until software will no longer be considered an industry, but a business model.
• Thirdly, a new frontier of value creation lies in treating portfolio companies as an ecosystem in which companies with a shared owner can link and cross-leverage their products, accessing relationships their competitors don’t have access to.
• Lastly, a new fundraising frontier lies in developing products to attract wealthy retail investors who hold roughly half of all global wealth but account for a much smaller share of private capital AUM. This can come from fundraising from ultra-high net worth individuals or accessing pooled capital through communities like Moonfare.

In the future, I’d like to learn more about:

• growth equity which sits in between venture capital and private equity
• the history of asset classes and how academia approaches the study of finance
• corporate and startup law (shout-out to our lovely in-house counsel and the lawyers at DLA Piper for giving me a crash course!)

A lot of people in corporate America say you can only choose two: family, friends, work. I would argue that for young people the list is actually choosing between family, friends, work, and the self. I think college forces you to prioritize working on the self while making beautiful friendships, but I haven’t given up trying to balance all four. Thank you to the Accordion family for all the illuminating conversations and a truly wonderful summer.

🎉 The Accordion Intern Class of 2023 🎉

All sentiments expressed in this post are my personal views and do not reflect the opinions of my employer.