In episode 50 of the Get Hired Up podcast, I speak with private equity partner David Acharya, managing partner of a private equity firm located in New York City. I met David last month at a mid-market investment event. Join me as we discuss some myths published by some pretty credible sources about private equity firms and the success of their acquisitions. Despite our research at Westgate for this podcast, David challenges the claims of some of the most respected sources of market research today. David and I also discussed due diligence challenges from an investment perspective before the deal closes. David discusses his firm's industry, industry focus, investment criteria and due diligence practices that produced excellent results for his firm and portfolio companies. I hope you enjoy the show!

David Acharya is the managing partner of ACP where he oversees all aspects of the firm's investing, management, and strategic activities. He brings 25 years of investing and transaction experience to ACP. David is a frequent speaker at industry events and is recognized by his peers for his expertise in private equity, capital markets, and portfolio value creation.

He serves on the board for Impact XM and on location portfolio companies for ACP. In 2022, after completing his term as president of the New York chapter of the Association for Corporate Growth, ACG, David was elected as chairperson. Additionally, he was elected to the ACG Global Board of Directors. Recognizing his years of leadership and volunteerism, he was honored with the ACG Meritorious Award. David is a St. John's University graduate and holds a Bachelor of Science and Master of Business Administration degrees with honors. So, welcome to the show, David. I'm going to read a short preamble and then we'll get into our, our questions. So, according to a 2022 McKinsey Report, private equity continued to drive global growth in private markets. Fundraising rebounded across regions and global totals fell just short of the pre pandemic peak established in 2019. Assets under management reached a new high of 6.3 trillion. Driven primarily by asset appreciation within portfolios. With a pooled IRR of 27% in 2021, private equity was once again the highest performing private markets asset class.

Private equity also continues to outperform relative to most public market equivalent measures. So, I thought that was really interesting.

David Acharya

It's a terrific asset class to be in. No doubt about it.

Maureen Farmer

Yeah, we're going to learn all about it today. So welcome, David. I would love for you to tell us a little bit about Acharya Capital Partners and your introduction to private equity investing.

David Acharya

Sure. Well, first of all, Maureen, thank you so much for inviting me. Looking forward to a very robust conversation. So, Acharya Capital Partners, I founded early 2020. We are a lower and middle market focused private equity group based here in New York. We invest primarily in three industries, uh, TMT, business, marketing services, and light manufacturing. And our investment strategy is what's known as buy and build. We find a great platform with a great leader, and then we supplement the growth with organic value creation as well as complimentary acquisition. So, my introduction to private equity really stemmed from my introduction to Wall Street. After graduating from school, I joined one of the largest banks in the world at that time, Chase Manhattan Bank, and was basically learning the ins and outs of leverage finance, senior debt, mergers and acquisitions and this small but growing world called private equity. Back then they used to call it leverage buyout groups. You know, my biggest surprise is just the growth in what was then the cottage industry.

Maureen Farmer

Yeah, absolutely. Yeah. It's a very mysterious industry and many people wonder about how it all works and how one gets into it as an independent operator, and so I'd love to know a little bit about that. I mean, you were on Wall Street, you did lots of learning. I'm guessing you probably identified areas that were more of interest than others. So tell us about that.

David Acharya

Sure. So when you are in investment banking, you are providing a service to a client.

What I found was as time progressed, I enjoyed the transaction. But I wanted to learn more about what happens after a deal closes and get some operations experience. And there's really, I think there's really only one area that, and one industry that I know that you can actually have aspects of both parts of that circle, which is private equity.

So, you know, part of my job is to look for new businesses. Part of my job is to transact and close on new investments, but the other part of my job is to grow, help the management teams grow their business, and a lot of that is really oversight on the board, a lot of strategic discussions and then also bringing resources to help them do their jobs better.

Maureen Farmer

Right. And I have another statistic here that says that studies have shown that between 70% and 90% of transactions are not successful, meaning they don't live up to their investment thesis. And then another one is, a recent Harvard Business Review study reported that more than 60% of transactions actually destroy.

Rather than create shareholder value and up to 90% fail to achieve their investment thesis. I know you have a very concentrated focus on industries and industry adjacent to compliment your investment portfolio. Yeah. What would you say to that, those stats? Like what is your experience and, and why do you think that's happening?

David Acharya

You know, Maureen, I question those stats. Cause if the failure is that high, the private equity industry would not be attracting the growth in assets under management and professionals. So I really don't know what goes into that data. You know when I started in banking and we covered what was then called, you know, the leverage buyout groups, we only really visited three cities in the country, which was New York, Boston, and Chicago. Because that's where the concentration of private equity was. Right now, if you are a financial sponsor banker, you know, you're part of a team of, you know, multiple people, you divide up the country...according to an article in The Economist, I read there were more than 6,500 private equity firms and as far as dry powder is concerned, which is the amount of money that's allocated to private equity, it is now north of nearly 3 trillion, if not more. So, if a lot of these investments destroyed value, you would not be attracting that type of capital. So, I question and I'm very suspect of that data.

Maureen Farmer

Well, thank you you for sharing that because this is what we rely on when we're doing research...is the secondary research. We did do research earlier this year and at the time, I think it was 2017, there were 4,500 and some private equity funds in the United States with a combined portfolio company of like 14 or 15,000...

David Acharya

Yeah. So again, you know, if this was not a great asset class, if they were destroying a lot of value, I don't think it would attract the amount of value that it has.

Maureen Farmer

Fair enough. That's good to know. So, obviously you listened to a lot of pitches over the run of a year, several hundred I'm assuming. And so you need to use your analytical skills and all of the skills that you've learned and the experience that you have to assess whether an investment is going to be a good fit for your portfolio.

And so I would love to know a little bit about areas of due diligence that are obvious and maybe some that are not so obvious as you are making that investment and integrating a management team into your portfolio post acquision.

David Acharya 

So a big trend in private equity is going from the generalist model to the industry specialization model.

Unless you have an extremely large team, I think it's hard to be good in everything in every industry. Over my, you know, 25 plus year career, I really have worked primarily in three industries, TMT, business, marketing services, and manufacturing. TMT is Telecom Media Technology. It's a term that popped up on Wall Street in the late nineties, and it's now, I would say a lot of TMT groups have split up where Telecom Media is now one group and Technology has grown so much that it's now a separate group, but you know, during the early part of my career, they combined both groups just given, you know, they combined both industries just given the synergies between the two industries.

So, looking at these three industries, I think there are a number of advantages. So when I sit down with the CEO, the learning curve for the industry is very short. The second thing is I can have a lot of, I can bring a lot of resources to the table to get smarter very quickly.

So, it puts me at an advantage versus a generalist firm that's looking at something a little more specialized.

Maureen Farmer

What type of resources do you bring to the table?

David Acharya

So, first is investors who also understand what this sector does. My model...it's a growing model on Wall Street called the independent sponsor model.

Unlike private equity firms that raise the capital upfront and then start searching for deals, I search for deals and raise the capital concurrently. There are a number of advantages to investors under that model. Uh, particularly the fact that they will have a say as to what deals they wanna invest in and what deals they don't wanna invest in.

And overall, given the fees that they pay for a private equity firm could potentially be much cheaper for an independent sponsor model because you stop paying fees the day you raised the capital versus you know, you start paying fees when you actually invest the capital. So that is a much more attractive model to a lot of limited partners, ie. Investors in private equity. And so we have an investor base that understands these industries so they can get to the finish line a lot more quickly because they've made their money in these three sectors. They bring a lot of knowledge and connections to help the portfolio companies grow.

A lot of the service providers that I work with, lawyers, accountants, insurance, understand the sectors. So the diligence process is usually a lot less painful than bringing in somebody that doesn't have experience in these sectors. If something does go wrong or needs some attention, we have a network of operating partners and operating partners with the expertise to help you know, solve those issues as quickly and as efficiently as possible. If you're a C E O looking to partner up with a private equity firm, I think the first question, you know, you need to ask yourself is how much experience this private equity firm has in my sector.

Capital is a commodity. There's a lot of capital around the world, so, you know, getting a dollar from one group versus the other is not the value add of the partnership, but really what they can bring to help you grow your company and take it from A to B, to D or E, F and that happens when you are talking to an investor who has a significant industry experience in the sectors that your company is in.

Maureen Farmer

So, typically for the types of companies that you invest in, how long is, and I'm sure it's different for each one, but generally, how long does that due diligence process take?

David Acharya

This is a question where I think if you would ask a thousand private equity partners, you get a thousand different answers or more than that. So I look over, you know, my career, typically the quickest I've ever done a deal from start to end was 45 days. And the longest time I've spent is a little more than a year. But having said that, I think the average is around, I would say 90 days, if not less, 60 to 90 days. And during that time period, you know, you have to get smart about the business, get smart about the financials, get smart about the operations, and then manage third party diligence costs such as, you know, lawyers who draft documents, uh, accountants who do the quality earnings work, as well as insurance companies that'll do the insurance work and, and IT companies.

And another area that I've been spending a lot of time right now is the human capital diligence. You know, especially not just the quantitative factors of it, but the qualitative factors of it, because unfortunately, Maureen, you don't learn this until much later in life. The best investments are the ones that had great cultures, great organizational setups and you know, when you start this business, you know, I've always found that I spent a lot of time on the model putting together, you know, scenario analysis. But you know, fast forward to where I am right now and then, and I realize, I look back and I said, okay, every successful investment I have been involved in, the primary driver has always been having the right capital structure and having the right culture. And every situation where, you know, I had some challenges to deal with capital structure and not having the right culture has always been the driver. So, I have refined my investment analysis to now start looking at, you know, human capital and culture and organizational design.

Maureen Farmer

So, culture means many things to different people. What does it mean to you?

David Acharya

I think it is working with a CEO, developing and finding people who will participate in taking that strategy and proving that out. I'm on the board of a great company called Impact XM. It has had significant growth since we initially invested in it, and, you know, we had to deal with the challenges of Covid.

The one thing I've learned is the company didn't get here by accident. You know, we made investments in the right people. We put in plans and systems and processes where their talent can flourish, and as a result of that, we were able to attract very quality people..

If we didn't have that, I don't think we would've had this, you know, extraordinary growth that we've had since we first invested in the company. But you're right, it means a lot to very different people. You know, if you have a manufacturing company, uh, versus you know, having a marketing services company, your approach to culture can be radically different, but, I just do think in general it's trying to attract the right people to help grow the company and I found that to probably be the hardest part of my job given where I am in my career right now.

Maureen Farmer

I think it's difficult for any organization, especially, you know, given the current, you know, labor market where there's a shortage of talent.

But I think that good employers and good companies attract good people when they know what they want and when they have values aligned,  meaning the workforce understands the objectives of the organization and buy into it.

David Acharya

Yes, Maureen, I think culture eats everything else for breakfast, every aspect of an investment. We look at everything like operation, strategy, you know, financials, capital, structure. None of those will be successful and until you have the right culture fit. It's a hard thing to do, you know, anybody who says they like managing people have never managed. You know, not the easiest part of the job, but it is the part where if you get it right, the chances of you having a much more successful investment has now grown significantly.

Maureen Farmer

So tell me a little bit about your best practices then. How are you finding the right people?

David Acharya

Well, I wish I had a playbook on this. Part of it is having the right network in place, because now you not only meet quality people, but you also meet some people that, hey, you know, I'm never gonna hire this person again. , okay, I'm not gonna work with this person again. I think having a quality network, uh, a big part of its education, you know, sometimes I sometimes feel like an MBA student because I will go out and get case studies.

I'll go out and read books on organizational and leadership. You know, that has been more my training now than, you know, what, what I was doing when I first got out of school. Uh, typically when you get outta school, you know, there's a focus on analytics. There's a focus on. You know, financial and accounting.

You know, fast forward to where I'm right now, uh, most of my, I would say professional reading has really been about case studies about, you know, winners and losers in, you know, in an organization, how to get the right culture in place, how to get the right tools in place. And that's where I, I think if you do a, a little bit of both, meaning education as well as having a good network, you'll work and be in circle of people where you can attract some quality people and then, you know, working with, you know, quality head hunters and also service providers. Uh, I found that some of the, the better employees that I have worked with, have been, and, and leaders I've worked with, have been introduced to me through, you know, my contacts and accounting.

And, and law, uh, insurance and it, cause the chances are the people that they introduced to me were actually their clients and former clients. And they're also very careful on making sure that they introduce you to the right people because they wanna maintain their relationship with me and they wanna maintain their reputation in the marketplace.

Maureen Farmer

Reputation is really important for sure.

David Acharya 

Yeah. So when you make a recommendation, I think, you know, people really think long and hard about it. And I think, you know, just through a combination of those factors, you'll attract very quality people.

Maureen Farmer

You talked a little bit about a playbook a little while ago.

Do you have a documented, sort of, I guess, a list of values. What's important to you as an investor? You have that and do you use that as a, I'm sure you use that as a screening tool for new employees and other parts of your business ecosystem. I think it's really important that when you are working with people in your centers of influence, that you know that, that you're all on the same page and all have similar values.

And if you don't have similar values, sometimes, you can fix that through other practices by, to your point, education, case studies, uh, engagement. So employer engagement and employee employer branding rather. And employee engagement helping to, um, you know, educate your people on what's really important and what success looks like on a regular basis, and that it's repeated often and that it's used in, you know, your marketing content.

It's used in all of the other collateral that you use for professional development, for recruiting, for performance management. I think the communication factor is absolutely key in that sort of human capital business journey, making sure the right people are in the right place, and sometimes when they're not in the right place, we just need to change the place.

We don't necessarily need to change the person, and I think that's important to serving as a mentor and a guide to your employees and aspiring leaders.

David Acharya

I think anybody who deals with me and asks me those similar questions, the first thing I'll do is I'll tell them to go to the Acharya Capital Partners website.

We have all this laid out. We have guiding principles and investment strategy, you know, value creation and how we create value our portfolio companies. And I think the, I I, I've always believed in transparency, communication, and not just transparency and communication, but also. Delivery and usually when I meet somebody, a management team for the first time, I probably spend as much time marketing myself as much as the companies spend time marketing to me and talk, you know, educating me about their business. Mm-hmm. . So, you know, I walk 'em through, you know, the pre-close process, what we need to do, who do we bring in during the process, when do we bring them a time schedule? And also how we do well up, what I like to call the 180 day plan.

Everybody likes to use the words, hundred days, but when you're dealing with smaller companies, you need a lot more time. So I moved it out to 180 days and start that 180 day program before the deal closes because you're gonna find out that a lot of management teams are are set in their ways and they may disagree with you. And, you know, that is part of your diligence because again, you know, in order, I think for an investment to be successful is if you don't have the right culture, it does come out during that. You are gonna learn things about a company that you don't necessarily learn from a file in a data room.

So, I think the biggest mistake some of my private equity brothers and sisters do is they start the 180 day plan as soon as the deal closes. I start the 180 day plan as soon as the LOI gets signed. And so we start putting that plan together you know, what I've found is during that process, you're gonna learn a lot about a company and how a company works, that you can't necessarily pick up in a PDF file that's in the data room or a third party diligence person that can communicate to you.

So, I think transparency, I think communication and as early as possible is very key.

Maureen Farmer

David, in your experience, what have been some of the biggest surprises that you have encountered during the due diligence process? If you're able to share that, I realize that you may not be able to share, but maybe thematically.

David Acharya

Yeah. So, what really surprised me about this industry is just the growth of private equity. When I started, it was a cottage industry. I like to joke that my four year old niece can explain to you what private equity does because it's so widely known in our society.

What has surprised me at the company level, what I find in diligence was some of the things that I think people think they can get away with. Part of it is behavior. Okay. And then part of it is they're putting so much risk to their operations that they don't think too much about it...(employees, leaders, etc.)

You know, for example, you know one company I looked at...they didn't tell me how many customers they had until much later in the process, and I found out that this nice little, what I thought was a 20 million (ish) top line company only had four customers.

So, if you lose one of the customers, the company looks...it's a problem. They look radically different. And the fact that they hid this from me...And you know what? Typically as the diligence process, one of the things that you do ask for is a list of customers and how much revenue that they contributed to the company.

And the fact that they stonewalled me for a little time, they lost all credibility. 

Maureen Farmer

Did the deal close?

David Acharya

The deal did not close. I walked away from it and I said, you know, it's customer concentration. And I said, if one customer leaves, two customers leave...

And then by the way, there was no incentive for them to stick around. You had no long-term contract. You know, you didn't have a long history with these customers, so there is an incentive for them to leave and if they leave, you know, the company looks radically different.  The other thing...sometimes they tolerate employees who may have exhibited some bad behavior. So, for example, employee lawsuits. You know, I don't tolerate any of that. To me, having a safe working environment for all employees is key.

And I have been known to terminate employees due to bad behavior and resisting the talk from management teams...you know, that person generates a lot of revenue for our company. No, you have bad behavior. It permeates throughout the firm, it hurts the firm. You may have this one pocket of opportunity here, but in the long run, a bad employee who exhibits bad behavior is a losing proposition.

Maureen Farmer

I hear you. 100%. One company I was working with a number of years ago had four employees. It was a startup. Well, it wasn't really a startup. They were heading toward like 10 years in business. They had four employees that were sabotaging the company, and I won't go into the details, but the CEO had tried everything.

I said, what have you tried? He said, we've tried mentorship, we've tried training, we've tried feedback. And I said, well, really, the only decision that you need to make is when these people are going to leave the organization. And the following week...a small employee survey was done with the rest of the employees. There were about 35 people, and they disclosed in that survey that they thought it was a great decision. They were glad that the changes had been made and that they otherwise were planning their own exit strategy from the company. So, the CEO was able to, you know, reengage his workforce and increase capacity in the organization and save relationships with key customers.

But he was really reluctant to do that. He was so reluctant. I think he just needed someone, I was an outsider coming in. I wasn't part of the company, but he needed someone just to give him permission to make that decision, you know, and he made the decision and everyone was happy at the end of the day.

But the longer that continues, you know, the more damage is done to the whole organization.

David Acharya

And that's, that's an excellent example, Maureen. I mean, just imagine if those employees were still there, your good employees would've probably already walked out and you would've a much more bigger problem and no doubt, no question.

Yeah. CEOs are, I think, very reluctant because I think we as human beings, Don't necessarily like change, you know, we have a set up. Uh, but if you look at, you know, some of the most dynamic human beings in, uh, in, in, in our society, they've changed. I mean, change is, you know, the only constant, right? Mm-hmm.

And they've changed, they've changed industries. They've changed, you know, relationships. They've, they've changed the way they've done business. You know, training programs and coaching programs are extensive, and it's not just no longer for the, the, the. Person, not, not the ceo, not not a public person, but even if you talk to somebody at the junior level, You know, they, they wanna be part of organizations where there's training and there's coaching.

And you know, if the organizations don't have it, uh, they go out on their own. And that is a big problem for an organization because now that person is now exposed to, to better things out there. And there's a good possibility that you know that person will go someplace where they feel there's a much more better situation for them than where you're right now.

That's how you lose quality employees. I think it's key that, you know, training and coaching occurs and that you have to be very open.

Maureen Farmer

Absolutely. And you know, having resources like that can really, you know, open capacity for an organization. There's no question.

David Acharya

The other thing was just the use of technology and how quickly it has increased the speed of what we do.

You know, in the early nineties, you know, you signed a non-disclosure agreement. It took, you know, anywhere between, you know, two to five days before you actually got the book on the company. Now, you know, you launch a deal at 9:00 AM by 12 o'clock, 50 buyers have their books and already started reviewing.

Also the ability to leverage technology has grown quite a bit. If you look at, you know, what we have on our laptops to make our businesses better, You know, it's a lot more than just Office 365. There's, Customer Relationship Management programs, CRMs, that enables you to communicate to several thousand of people at one time. Social media...I've gotten deal flow from it.

Maureen Farmer

Me too!

David Acharya

I've gotten executives who called me saying, you know, this is what I've done and I'm looking to you know, work with private equity companies, you know, just the speed of technology, you know, if you try to do what we are doing now, in the early nineties, it was really for a very specific individual who is in the right place at the right time.

Now, I think, you know, just given what we have, the tools that we can have, it's easy for somebody to enter into the industry. But you still have to be talented to stay. But I think that barrier to entry has been lowered down. I think the growth of technology and how it's driven the speed of what we've done, it just absolutely fascinates me.

Maureen Farmer

It has democratized access to exclusive markets.

David Acharya

Exactly. In many ways, you know, in 1995, you wanted to invest in a private equity firm, a private equity deal, you'd have to be a fund investor, you'd have to have significant amounts of money. And it was really only open to institutions. Now, you know, you look at private equity, uh, there's a big push among retail investors. There's a big push among family offices. And there's also a big push just to get a much more smaller check. So, I think you're right. That's a great word that you've used Maureen. And I think it benefits all of us because it has attracted a lot of quality people into the industry.

Maureen Farmer

Well, if I think about the journey meeting you through LinkedIn indirectly, you know, uh, a client hired me and then he introduced me to a friend, and that friend introduced me to the Association for Corporate Growth, which we wanna talk a little bit before we sign off, because an organization you have been a part of for a while.

I'm fairly new to it, but I'm a big, big fan of the Association for Corporate Growth. So, why don't you do talk a little bit about that before we sign off?

David Acharya

Sure. So Association of Corporate Growth, probably better known in the industry as ACG is what I like to call a a connectivity company. And they engage members primarily through three ways, and one is media and content. Second is data. The third is probably events. And they create these networking events across the country. Uh, there are about 15,000 members, uh, with uh, various chapters in what I like to call. You know, cities across the country, including New York, la, Chicago, Boston, Charlotte, you know, Dallas and Toronto.

And the members are primarily, I would say, senior professionals in middle market deal making. So private equity, uh, investment, bankers, lawyers, accountants, uh, Uh, rare consulting people, anybody that makes the middle market industry better. Okay. And, and helps make it grow. And I discovered ACG early on in my career. You know, former boss of mine who was a very good boss, you know, told in order for you to, you know, to climb the ladder, I need to go out there and start meeting people. You know, fast forward a number of years later, I realized that, you know, every piece of success I had in the middle market business stemmed from a relationship that was developed.

Another advantage is it creates great volunteer opportunities. So, I decided to give back. I was very active in the New York chapter. We've had a number of, I would say, some great successes. I think you saw a lot of that Maureen, uh, during our middle market week early November...

Maureen Farmer

I have to say the quality of the events were really quite impeccable. The venues, the events themselves, the conversations that I had with people I'm still actually in touch with. Um, I have a whole stack of business cards here and I'm picking my way through them with various discovery calls and conversations.

It's been phenomenal.

David Acharya

You know, it's a great, great environment to meet people who are relevant to your. and uh, you know, I was very active in the New York chapter. I concluded, you know, kind of my leadership term there as chair of the New York chapter. I'm now on the global board working with people in our industry to help, uh, you know, grow a c g and take it to the next level by working with a great management team that they have.

And, you know, the real big event that ACG does every year is an event called Deal Max, where I would say 3000 of our closest friends get together in Vegas for about three days and do what we do best, which is, you know, network source, you know, business opportunities for ourselves and exchange quality information that's focused on the middle market.

So, Maureen, you should think about coming out to Vegas in May. I think it'll be a great, great opportunity for you. Help expand your business and meet some quality people from across the country who do middle market deal making.

Maureen Farmer

Well, it's on my list and just so you know, I've already recruited a member to the Toronto chapter!

David Acharya

Oh geez, Mike Fenton will be really happy to hear that.

Maureen Farmer

Yeah, no, I'm looking forward to all of the events that are coming up. Las Vegas, maybe next year, not quite sure, but absolutely am looking into it for sure. So, we have a really fun project that we're doing here at Westgate. We're collecting names of restaurants.

And so I would love to find out from you, what are your top one or two restaurants that you like to frequent?

David Acharya

So Maureen, that question, asking a lifelong New Yorker...we could have an entire podcast just on that . It depends upon my mood, depends upon where I am. I love a steak and I think the best steak restaurant in the country is Peter Luger Steakhouse, less than two miles away from me. Also because of my Indian heritage, I like to go to Jackson Diner in my hometown in Jackson Height, Queens.

And those are restaurants I really enjoy. And my second favorite city in the world is Miami. I like to go to Amara. It's a great outdoor seafood place right by the water. Amazing views. I think those are three restaurants are ones that I've been to quite often.

Maureen Farmer

I think I read there are now over 9,500 restaurants in New York...when I was there.

David Acharya

That doesn't surprise me.

Maureen Farmer

And we'll make sure that the restaurants that you mentioned make it into the show notes as well in case people wanna look them up and check out the websites for those places.

David, it's been an absolute pleasure to host you today on the Get Hired Up podcast, and I hope we get to do it again.

David Acharya

Well, thank you Maureen. I've enjoyed the conversation and am looking forward to connecting in the near future again.