Annotations (16)
“30 years ago, you didn't really need to know the three or four things you wanted to have happen at the diligence stage. When you're paying five or six times EBITDA for an asset, you could put some leverage on it, and as long as the asset did pretty well, you could cash out and make a lot of money. Now that the average multiple is 12, not five or six, that margin for error is gone.”— Hugh MacArthur
Strategy & Decision Making · Economics & Markets
DUR_ENDURING
High multiples eliminate margin for error
“Post-GFC, many GPs figured out that they needed strategies themselves because LPs became skeptical of performance. The strategy and accumulated history of the private equity industry had generally been make your next deal a good one. That was fine as a strategy with a cottage industry, where there was enough of everything for everyone to succeed. In an era of constrained capital, competition for deals increasing, competition for talent increasing, you need strategy.”— Hugh MacArthur
Strategy & Decision Making · Economics & Markets
DUR_ENDURING
Maturation forces strategic differentiation
“We need to figure out the three or four big things we think we need to do in order to win. One might be for a consumer product I need to figure out how to sell at a profit online. That involves a whole number of large things, but if I don't do that and online is growing as a share of the business, I'm not going to be able to make my revenue numbers at a cost level that means my EBITDA is going up. It may mean I've got a supply chain in the wrong place, and I need to reorganize it.”— Hugh MacArthur
Strategy & Decision Making · Operations & Execution
DUR_ENDURING
Three to four big moves create value
“We do more expert interviews in different industries than any firm in the world. We thought, why don't we transcribe all of those interviews, compile them over time, and then ask GenAI to summarize what's going on in an industry from all of the thousands and thousands of interviews we're doing globally? You can get a three bullet point summary, a three-page summary, or a 30-page summary. This would've been impossible two years ago. With GenAI now, we can.”— Hugh MacArthur
Technology & Engineering · Operations & Execution
DUR_ENDURING
Proprietary data from accumulated interviews
“On a due diligence cycle, we had to figure out how to do things in a few weeks that we'd normally spend a few months doing for a corporation. It required different staffing, different pools of people, different ways of working. In corporate consulting you look at a company from the inside, they give you all their data. In the private equity world, you're looking at a target. You don't have all of their data.”— Hugh MacArthur
Operations & Execution · Strategy & Decision Making
DUR_ENDURING
Outside-in analysis under time pressure
“We're at an inflection point in the private equity industry. At a macro level, we see continued penetration of private assets. With public markets, you've got 90% of the world's money chasing 10% of the world's investment opportunities. Private markets are the opposite. We have 10% of the money chasing 90% of the world's investment opportunities. There's going to be a rebalancing of that over time, which means that the private markets are going to be supersized.”— Hugh MacArthur
Economics & Markets · Strategy & Decision Making
DUR_ENDURING
Capital misallocation creates opportunity
“Investors are building their own sourcing pipeline. If I am investing in software and there are 50 different subsectors, and I invest in eight of them, I want to know what properties in my check size range in those eight sectors might come to market over the next three to four years, and understand a lot about them before they come to market.”— Hugh MacArthur
Strategy & Decision Making · Operations & Execution
DUR_ENDURING
Pre-market research creates speed advantage
“There are about 30,000 companies right now being held globally in buyout portfolios worth about $3.6 trillion, and about half of those companies have been held for at least five years. Five years is sell time in the private equity world. We're talking about 15,000 companies and $1.8 trillion worth of value that LPs are expecting to see back really soon. For comparison, the entire TEV of the global buyout world last year was 600 billion.”— Hugh MacArthur
Economics & Markets · Strategy & Decision Making
DUR_CONTEXTUAL
Three years of activity to clear backlog
“A client came to us and said: We do pretty well at private equity ourselves, but we noticed that Bain Capital seems to be doing really well, and the biggest difference we see is that they have 100% of their employment staff come from Bain & Company. Could you do for us on an outsourced basis what they seem to be insourcing, which is hiring lots of Bain people? We thought, huh, that's an interesting question. Maybe we could find an app for that.”— Hugh MacArthur
Business & Entrepreneurship · Strategy & Decision Making
DUR_ENDURING
Customer articulated the product before firm did
“The world has specialized and even hyper-specialized to the extent that the notion of getting 1,000 random CIMs in the door and picking from that has become very antiquated. People are organizing firms, funds and talent around subsector expertise, not just sector expertise. We do healthcare, but we do healthcare IT, and within healthcare IT, it's these areas of software and not those areas.”— Hugh MacArthur
Strategy & Decision Making · Economics & Markets
DUR_ENDURING
Knowing least at table guarantees loss
“I remember walking up and down Park Avenue, which is where all the GPs are located, visiting GP after GP. The conversation went the same. They'd say, well, we know why we need an accountant to do a deal, and we know why we need a lawyer to do a deal, but why the heck do we need a consultant to do a deal? Why would we ever hire you? We'd explain, would you like to know these kinds of external contextual facts about businesses? Fortunately, the reaction was they were blown away.”— Hugh MacArthur
Business & Entrepreneurship · Psychology & Behavior
DUR_ENDURING
Create market by showing unknown value
“Last year, distributions to private equity LPs as a percentage of their net asset value was 11%. Historically, this number is between 20 to 30%, which matches up with a four-year cash recycling cycle. 11% is more like 10 years, and no LP has a model that says I'm getting my money back in 10 years. The last time that number was 11% was 2008. 2008, we were entering the worst recession for 75 years.”— Hugh MacArthur
Economics & Markets · Business & Entrepreneurship
DUR_CONTEXTUAL
Four-year liquidity crisis without recession
“Back in 1992, there were no practice areas in consulting firms at all. If you went and hired Bain to do something, you could literally get anybody from Bain on the case, regardless of their background. My first few cases: I worked in food, consumer products, corporate charge cards, a utility, and life insurance. That would be absurd and impossible today, but back then it was normal. There was no internet, no requirement for industry expertise.”— Hugh MacArthur
Business & Entrepreneurship · History & Geopolitics
DUR_CONTEXTUAL
Generalist consulting died with internet access
“Nine or 10 straight job interview rejections gets you humility pretty quick. I did some introspection and figured out that I was going about this the wrong way. I thought I needed to prove to people how smart I was and that I could solve all their problems. I probably came across as someone who was ignorant of things I was interviewing for and a little bit too arrogant about how smart I was.”— Hugh MacArthur
Leadership & Management · Psychology & Behavior
DUR_ENDURING
Rejections teach humility faster than success
“Back in the day when we started this business, the average transaction size was $100 million total enterprise value. We thought no company was ever going to be big enough to hire Bain once they were a portfolio company because they were so small. Now the average transaction size is a billion dollars, so that's a whole new product line.”— Hugh MacArthur
Business & Entrepreneurship · Strategy & Decision Making
DUR_CONTEXTUAL
10x scale growth creates new products
“I do believe that very often it's better to be lucky than good. We were at the very beginning of this great wave of private asset growth that has continued over the past 30 years, and we're the beneficiaries of that by being the first ones in on the ground floor with a lot of GPs.”— Hugh MacArthur
Strategy & Decision Making · Business & Entrepreneurship
DUR_ENDURING
Better lucky than good applies
Frameworks (2)
Outside-In Due Diligence Under Time Constraint
How to evaluate a business you don't control in weeks, not months
A systematic approach to rapid business assessment using external data sources when you lack internal access. Developed for private equity due diligence, the framework prioritizes speed to insight through industry dynamics analysis, competitive positioning research, technology and regulatory assessment, and customer perception studies. The method relies on creative information gathering from public sources, expert networks, and specialized data providers rather than company-provided materials.
Components
- Define the Information Aperture
- Map External Data Sources
- Conduct Industry Dynamics Analysis
- Execute Rapid Validation
Prerequisites
- Access to expert networks
- Subscriptions to specialized data providers
- Team trained in rapid research methods
Success Indicators
- Decision made within timeline
- Post-close validation of key assumptions
- Speed advantage versus competitors
Failure Modes
- Spending time on low-impact research
- Missing critical industry inflection points
- False confidence from incomplete data
Proactive Deal Sourcing Pipeline
Building deal flow before deals hit the market
A methodology for generating competitive advantage in deal sourcing by identifying and researching target companies before they formally come to market. The framework involves defining precise investment subsectors, mapping the target universe within those subsectors, conducting pre-market research and relationship building, and maintaining readiness to move quickly when opportunities surface. This approach converts sourcing from reactive pipeline management to proactive opportunity creation.
Components
- Define Investment Aperture
- Map the Target Universe
- Conduct Pre-Market Research
- Build Relationships and Monitor
Prerequisites
- Clear investment strategy and subsector focus
- Research team or capability
- Industry network access
Success Indicators
- Percentage of deals that are proactive versus reactive
- Time from deal surface to term sheet
- Win rate on competitive processes
Failure Modes
- Pipeline too broad to maintain effectively
- Research becomes stale
- Relationships not cultivated consistently
Mental Models (4)
Competitive Moats
Strategic ThinkingSustainable competitive advantages that protect a business from competition, named after the water-f
In Practice: Discussion of PE firm strategy and competitive positioning
Demonstrated by Leg-hm-001
Opportunity Cost
EconomicsThe cost of an alternative that must be forgone in order to pursue a certain action; the value of the next best alternative. In the context of the podcast, MacArthur discusses how specialization in private equity creates opportunity costs: by focusing deeply on eight subsectors within software, a firm explicitly foregoes opportunities in the other 42 subsectors. The discipline of saying no to other opportunities is itself a strategic choice with a calculable opportunity cost.
In Practice: Discussion of specialization and focus in PE deal sourcing
Demonstrated by Leg-hm-001
Margin of Safety
EconomicsA principle of investing that suggests buying securities at a significant discount to their intrinsic value to provide a buffer against errors in analysis or adverse events. MacArthur explains that when average PE multiples were five to six times EBITDA, there was substantial margin for error; deals could succeed even if value creation plans fell short. At 12 times EBITDA, that margin has disappeared, requiring precise value creation execution.
In Practice: Discussion of how higher multiples eliminate room for error
Demonstrated by Leg-hm-001
Windows of Opportunity
TimeThe concept that certain opportunities are only available for limited time perio
In Practice: Discussion of Bain's timing in building PE practice
Demonstrated by Leg-hm-001
Connective Tissue (2)
Rube Goldberg Machine
Jim Coulter described the private equity industry as a Rube Goldberg machine: a massively complicated apparatus that accomplishes something very simple. The reference captures how an industry has layered complexity (subscription documents, K-1s, reporting requirements, LLC agreements) onto a fundamentally straightforward activity (buy companies, make them more valuable, sell at a profit). The metaphor illuminates how legacy processes designed for a cottage industry become absurd at scale, just as Goldberg's contraptions used elaborate mechanical sequences to accomplish trivial tasks like pressing a toaster lever. The insight is that as industries mature and scale, simplification becomes a competitive advantage.
Discussion of industry evolution and need to streamline for retail investor access
Personal Computer Adoption Curve and the Internet
MacArthur draws a parallel between AI adoption and the personal computer's trajectory from 1984 to the late 1990s. When Macintosh computers were introduced in 1984, every college student got one, but for 10 years they served primarily as glorified typewriters because there was no app for that. The transformative impact only materialized when the internet was popularized 10 years later, creating the ecosystem of applications that made PCs genuinely revolutionary. The parallel to AI: we are currently in the glorified typewriter phase with AI, conducting experiments and limited applications, but the iPhone-equivalent breakthrough that will make AI genuinely transformative across every industry has not yet arrived. The lesson is that the full impact of platform technologies takes far longer than hype cycles suggest, but ultimately becomes far more transformative than early skeptics believe.
Discussion of AI impact on consulting and business generally
Key Figures (1)
Jim Coulter
1 mentionsCo-Founder and Partner, TPG
Referenced for his analogy describing the private equity industry as a Rube Goldberg machine
- The private equity industry is like a Rube Goldberg machine: massively complicated to accomplish something very simple
Glossary (1)
CIM
DOMAIN_JARGONConfidential Information Memorandum; document used in M&A processes
“The notion of getting 1,000 random confidential information memorandums or CIMs in the door every year”
Concepts (3)
Due Diligence
CL_FINANCIALComprehensive appraisal of a business by a prospective buyer
GenAI
CL_TECHNICALGenerative Artificial Intelligence; AI systems that create new content by learning patterns
EBITDA
CL_FINANCIALEarnings Before Interest, Taxes, Depreciation and Amortization; measure of operating performance
Synthesis
Synthesis
Migrated from Scholia