Ganesh Rao, Managing Director and Head of Financial Technology and Services at THL
In today’s episode, Ally Rae McCloskey sits down with Ganesh Rao, Managing Director and Head of Financial Technology and Services at Thomas H. Lee Partners (“THL”). THL is a middle market growth private equity firm investing exclusively in three sectors: Financial Technology & Services, Healthcare, and Technology & Business Solutions. Since 1974, THL has raised more than $34 billion of equity capital, invested in over 160 companies, and completed more than 500 add-on acquisitions representing an aggregate enterprise value at acquisition of over $210 billion. Specifically within Financial Technology & Services, THL has invested $5.7 billion in 28 companies.
Ganesh joined THL in 2000 from Morgan Stanley’s Financial Institutions Group. He is currently a director of AbacusNext, Black Knight, Dun & Bradstreet, Ceridian HCM Holding Inc., AmeriLife Group, Auction.com, Hightower Advisors, Insurance Technologies, Nextech, Odessa, and a board observer at Guaranteed Rate. His prior directorships include Optimal Blue, Comdata, Nielsen, MoneyGram International, ServiceLink Holdings and Ten-X Commercial.
In this content-packed episode, Ally and Ganesh discuss:
- The key ways Private Equity has changed over the past 2+ decades:
“The industry keeps growing and maturing. Back when I started in 2000, we had 3-person deal teams, and a lot of deals, 75% or so, you’d get from bankers. It was meaningfully less competitive back then because there was not the number of private equity firms there are now”
- How THL is structured, where its latest 5.6 billion dollar fund will be deployed, and what its differentiators are:
1. “Number one is specialization. The first form of specialization we did around 2006, which is moving into verticals. So we have 3 verticals, Financial Technology & Services, Technology Automation Business Services, and Healthcare. The second change we made was about 5 years ago and now we’re not just investing in 3 verticals, we only focus on what we call ISOs, identified sector opportunities, within those verticals. So within Financial Technology & Services, we do not try to cover all of it, we specifically cover 5 ISOs…we think being more specialized and focused, being very deep and narrow, is extremely important to be successful”
2. “Number two is our operating team, which we call the Strategic Resources Group…we think this has been a huge enabler for our portfolio companies to drive growth, whether it’s human capital and recruiting in additional executives, creating M&A platforms, improving sales teams and go-to-market, but it’s a huge selling point for our firm with management teams and has been a huge enabler of success and returns”
3. “And the third thing is our partnership focus. Everyone at the firm is viewed as a partner and owner of the business, we have a mentorship approach, so people start young and our goal is to keep them forever, and a lot of us have had a lot of continuity at the firm…Our partnership focus is also how we treat management teams. We view ourselves as partners with them and co-owners of the business with management teams. We have a point of view and a process, but we want to do it together and work with the management team to get to the right outcomes and help build a great business”
- Why THL deeply believes in specialization and the 5 Identified Sector Opportunities (“ISOs”) Ganesh focuses on within Financial Technology & Services:
“One of the key reasons we’re so focused on sub-sectors is to become industry or sub-sector specialists and know the trends because our point of view is you can’t fight a bad industry, no matter how great your operating or management team…It’s a really hard uphill battle, so you have to get the industry right, and have to get an industry with growth”
- THL’s sourcing and relationship-building process with target partner companies:
“We’re looking for an ability to bend the growth curve; are there certain things we can do with our operating team or additional capital to help accelerate growth either organically or via M&A?”
“Everything is outbound. We are trying to create deal opportunities; we will call on CEOs of companies oftentimes 2–3 years before there’s an investment. Our goal is to get in front of every business that we think could be interesting in our size range well ahead of an investment opportunity arising so that we can get to know the management team and the business”
“We have a Business Development team and their job is to start top of funnel and landscape the market, e.g. where within insurance software do we want to play, what are the companies that fit our size range? That narrows the 5,000 companies to maybe 500 or so, and then we try to narrow it, narrow it, narrow it, and then cold call; call a bunch of CEOs, call a bunch of PE firms or the owners of those businesses, and then figure out which one we think is interesting, which one could fit, and then which ones could be transact-able”
- Explaining the vertical software with integrated payments ISO through the lens of THL’s investment in AbacusNext:
“At the end of the day, payments is a commodity. It’s somewhat simple, there’s a lot of people to accept it from, but what is not a commodity is your practice management software. And that’s a software that if you’re in Abacus’ case, that serves lawyers and law firms, think 5–50 employee law firms, that’s the software they use to basically run their business. They use it for scheduling, for CRM for their contact database, for billing, for case management, and our point of view was, we have a great software business with Abacus, a bunch of customers rely on them to run their business, but they were partnering with someone else to provide payments and not getting any economics off of it, and our point of view is, actually bring payments in-house and offer payments yourself. You have to invest in that and build up the capability and technology to do that, but by doing that you not only provide a better customer experience because you’re integrated and built into the software, you also generate additional economics off of the interchange”
- THL’s role after a deal is inked:
“As a director of a company, you’ve got responsibilities to the business, and how I think about it is you’re responsible to the business to do whatever you can to make it a great company. It always first starts with the management team and human capital and making sure we have the right leaders in the business, the right organizational structure, making sure we have the right culture and values and then it goes down the board of what can we do to make this a better business, technology, sales, product, so it’s a pretty all-encompassing role”
- Ganesh’s forward-looking thesis on Insurance Tech & Services:
“One of the key stats we look at to prove it out to ourselves is looking at the public markets, and the largest Banking Software business is in the $100 billion range enterprise value and the largest Insurance Software business is about $10 billion. Back in 2004 we bought a stake in FIS, it was one of the first banking software deals done with leverage back then and that was a $4 billion deal back then, today FIS is somewhere around $80 billion. We see that same trajectory happening in the insurance space, maybe 15 years later”
“The ones that have not done well are insurance companies that are tech-enabled, but still at their core are insurance companies. We have not been looking at those — our real focus is looking at software businesses, not insurance companies, so there’s no balance sheet, no insurance liabilities, but they’re powering the existing insurance companies oftentimes honestly to help them compete against what are phrased as the InsurTechs, or the tech-enabled insurance companies of the world”
“We’re looking at software that helps the carriers become more efficient as well as software that enables the brokers, i.e. the distributors of insurance products to be more efficient. We have Business Insurance Technologies that serves both of those markets in the life insurance and annuity space and we’re seeing a lot of additional opportunities, including the in data & analytics catering to insurance companies”
- His most memorable deal, Ceridian, and spending an atypical 13 years with the company before exiting:
“The deal closed November of 2007, so if you go back and recall back what was happening in the world then, it was one of the worst times possible — we signed the deal in May when the world was doing well and then in November by the time we closed the deal, there were starting to be real issues happening in the economy, obviously with the housing crisis, and so, usually you say deals have some ups and downs, it was an investment that had some very massive downs as the financial crisis in ’08 happened, and we’re at the outset of doing this very large investment for us, but thankfully with tons of blood, sweat, and tears, from the company side and from THL, it’s been an unbelievable success story and the one I think personally I’ve been the most satisfied with…We fully ultimately exited in 2020, so 13 years, which is unusual, as we typically hold deals 3–5 years, so it was 13 years of owning the business, I’m actually still on the board, and it ultimately went public in 2019…probably the shining moment was going to the NYSE and doing the opening bell and all that. It wasn’t about the financial returns, but about seeing the people and the management team and how proud they were”
- Thoughts on whether blockchain is becoming PE-investible
- Why THL prioritizes smart, hungry, and humble talent
- and a WHOLE lot more
Ganesh B. Rao is a managing director at Thomas H. Lee Partners. Prior to joining Thomas H. Lee Partners, Mr. Rao worked at Morgan Stanley & Co. Incorporated in the Financial Institutions Group.
Mr. Rao is currently a director of AbacusNext, Black Knight, Dun & Bradstreet, Ceridian HCM Holding Inc., AmeriLife Group, Auction.com, Hightower Advisors, Insurance Technologies, Nextech, Odessa and a board observer at Guaranteed Rate. His prior directorships include Comdata, Nielsen, MoneyGram International, Optimal Blue, ServiceLink Holdings, and Ten-X Commercial.
Mr. Rao holds a B.A., summa cum laude, in Economics from Duke University and an M.B.A. from Harvard Business School.
About Thomas H. Lee Partners (“THL”)
THL invests in middle market growth companies exclusively within selected Identified Sector Opportunities (ISOs) in three industry groups: Financial Technology & Services, Healthcare and Technology & Business Solutions. The firm couples deep domain expertise with dedicated internal operating resources to transform and build great companies of lasting value in partnership with management. Since 1974, THL has raised more than $34 billion of equity capital, invested in over 160 companies and completed more than 500 add-on acquisitions representing an aggregate enterprise value at acquisition of over $210 billion.
Its global investor base includes some of the world’s leading public and corporate pension funds, sovereign wealth funds, financial institutions, endowments and high net worth families, which THL considers to be a valuable asset, providing additional co-investment capital as well as insight and relationships useful to its portfolio companies. Since 2015, the firm has raised approximately $15 billion for its Flagship, Continuation and Automation Funds and over $5.5 billion of LP Co-investment vehicles.
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About the Author
Ally McCloskey is a second-year MBA Candidate at The Wharton School and Co-President of Wharton FinTech. She fell in love with the rapidly evolving FinTech ecosystem during her years in both wholesale and retail FinTech Strategy, Incubation, and Partnerships roles at JPMorgan Chase & Co. Nowadays, Ally is focused on becoming a best-in-class advisor, partner, and occasional angel investor to early- and growth-stage FinTechs. On ‘campus,’ you can find her sourcing/dilligencing pre-seed — Series A startups as a Venture Fellow for Pear VC, hosting episodes of the Wharton FinTech Podcast, and scouring the Seed — Series A FinTech universe for compelling full-time Growth / Sales / Biz Ops roles upon graduation in May. Originally from Connecticut and a Vanderbilt alum, Ally enjoys staying active (yoga, snowboarding, Peloton’ing, ice hockey), experiencing new cultures, and crafting. To get in touch, you can reach Ally on Twitter, LinkedIn, or at email@example.com.