Justin Ishbia: The Three Traits Required to Succeed in Private Equity | E1119

Intro (00:00:00)

• Justin Ishbia compares private equity to shining a flashlight in a dark room, revealing both the good and the bad.
• Those who are good at their job embrace the light, while those who are less skilled tend to hide from it.
• Transparency and data are crucial when exiting an investment, as everyone can see everything once the light is turned off.
• Justin frequently hears the advice to invest based on recommendations from others, such as Peter at SCS or Neil Mat.
• He believes this advice is often superficial and not based on a thorough understanding of the investment opportunity.

Childhood & Family Influence (00:00:55)

• Justin Ishbia's father, a successful entrepreneur, founded a mortgage company without venture capital and focused on hiring and treating employees well.
• During the 2009 financial crisis, his father's company thrived by avoiding subprime lending and buybacks, teaching Justin to focus on what he understands and not follow trends.
• Justin's father also owned a restaurant, instilling in him the principle of "trust but verify" when managing a business.
• Justin uses a unique method of writing notes on his hand to aid his memory.

Balancing Work & Personal Life (00:06:00)

• Believes in achieving a balance between work and personal life to avoid dying too early.
• Invests in health and regular physical check-ups to take proactive steps in maintaining well-being.
• Aware of family history of heart issues and takes precautions to manage heart health.
• Aims to be present for his children until they are 30, 40, 50, and beyond.
• Believes in finding the right balance between work and play, turning on and off when needed.
• Mixes business and pleasure with long-term friends and trusted colleagues.
• Had his first child at 41, which allowed him to focus on building his career in his early years.
• Views life as a balance and trade-off, with no one-size-fits-all approach to achieving the right balance.

Managing Investor Psychology (00:09:20)

• Justin Ishbia's father, who was in the mortgage business, exemplified persistence and luck.
• Private equity is a hustle game that requires a balance between skill, hard work, and luck.
• Hard work often leads to luck, as demonstrated by an example of a successful phone call that resulted from persistent effort.
• The outcome of a single moment may appear lucky, but it is usually the product of hard work and a well-executed process.
• Consistently following the right process increases the odds of success, while not doing so dramatically lowers the chances.
• The best investors have a combination of both hard work and luck.

Role of Skill, Hard Work & Luck in Success (00:11:32)

• Justin Ishbia, a successful private equity investor, believes that the best investors have both a successful first deal and continued success.
• To manage investor psychology, Ishbia focuses on industry expertise, discipline, and process, while emphasizing the importance of learning from mistakes and identifying risks before making investments.
• Ishbia highlights the significance of not being seduced by price alone and considering other factors when evaluating investment opportunities.
• The three essential traits required for success in private equity, according to Ishbia, are independent and critical thinking, the willingness to take calculated risks, and the ability to build strong relationships with colleagues and clients.

Managing Competition & Capital Supply (00:15:30)

• Unlike venture capital, private equity cannot afford to have zero returns.
• In private equity, control is key, and management changes can be made if necessary.
• Allocating capital to a thesis and having a board in place before making an investment is not unique.
• Setting aside a larger portion of capital for add-ons reduces the loss ratio and provides multiple shots on goal.
• This strategy creates a competitive advantage by allowing for course correction and increasing the chances of success.

Importance of Scale & Efficiency (00:18:25)

• Justin Ishbia focuses on investing in early-stage companies with traction and allocates funds efficiently based on performance and industry knowledge.
• He emphasizes the importance of understanding local competition and nuances in industries like healthcare, where success depends on becoming the dominant local player.
• Ishbia conducts thorough research by engaging with local professionals to gain insights into the industry and competition before making investment decisions.
• When choosing a business to invest in, he considers the industry's respect and reputation, particularly whether people trust the business enough to refer their mothers or children to it for services.

Knowing When to Exit an Industry (00:23:36)

• Justin Ishbia emphasizes the importance of identifying and investing in industries where scale creates value through synergies, cost reduction, and increased pricing.
• He highlights the significance of understanding the industry lifecycle and transitioning from greenfield development to acquisition and industry optimization.
• Ishbia stresses the value of investing in sectors with no third-party reimbursement, such as veterinary, med spas, and orthodontics, where there is more pricing flexibility.
• He explains the concept of "short capital call light switch," where acquisitions immediately become more valuable due to reduced vendor costs and increased purchasing power.
• Ishbia discusses the importance of scale in ancillary services, such as TPA sectors, where larger players can generate additional revenue streams and fees.
• He emphasizes the value of building a platform and network effect, where the addition of new acquisitions increases the value of the entire platform.
• Ishbia mentions the significance of making tough decisions, such as selling or transitioning management teams, when it no longer makes sense to hold onto an investment.

Benefits of Scale & Economies of Scale (00:29:10)

• Scale can lead to cost savings due to increased buying power and better pricing.
• However, scale can be limited by state-by-state regulations, especially in the healthcare industry.
• Different regulations and training requirements in different states can create administrative burdens that outweigh the benefits of scale.
• Scale does not necessarily require high volume; it can also be achieved by partnering with experts in a specific field and focusing on areas where there is low-hanging fruit.
• The goal is to put people in positions where they can work at the top of their license, doing things that are complex and rewarding.

Imparting Advice & Wisdom to Operators (00:33:08)

• Justin Ishbia and his team share advice and wisdom with operators to improve their businesses.
• They partner with operators who are open to implementing suggested improvements.
• Ishbia emphasizes the importance of measuring performance and comparing it to industry norms to identify areas for improvement.
• Ishbia believes in transparency and data comparison to ensure everyone has access to the same information.
• The goal is to help operators reach their full potential by providing them with the necessary tools and metrics.
• Ishbia highlights the importance of continuous learning and growth for both operators and his team.
• They learn from each other and share successful strategies across different industries.

Preference for First-Time CEOs (00:36:31)

• Prefers first-time CEOs because they have a "young and hungry" energy and are willing to take risks.
• Believes that first-time CEOs are not alone in their mistakes as they have a support system of experienced individuals around them.
• First-time CEOs have the potential to become incredibly valuable in the future, making them attractive to other ecosystems.
• First-time CEOs are often individuals who have run large divisions of large companies and have the necessary skills and experience to be successful.

Recruiting & Retaining Talent (00:38:52)

• Emphasizes the importance of recruiting and retaining the best talent.
• Believes that successful division presidents have the skills and experience necessary to be successful CEOs.
• Prefers CEOs who have experience running large businesses, but is open to first-time CEOs who have the right support system.
• Has had success with board members who have run large businesses transitioning to CEO roles in smaller companies.

Mistakes First-Time CEOs Make (00:40:31)

• First-time CEOs often try to do too much themselves and are hesitant to delegate.
• The best CEOs are aware of their strengths and weaknesses and hire people who complement their skills.
• CEOs should know if they are sales-focused or operations-focused and allocate resources accordingly.

Consistently Top-Grading Talent (00:41:38)

• Top CEOs have a process for consistently upgrading talent in the organization.
• They use a "nine box analysis" to evaluate the potential and performance of their reports.
• CEOs should be proactive in identifying and developing talent to support the company's growth.

Sales vs. Ops Focus as a CEO (00:44:08)

• Justin Ishbia identifies himself as a sales-focused CEO.
• He believes his job is to sell the vision and attract the best people to work with him.
• While he values both sales and operations, he emphasizes the importance of focusing on the area where he is less skilled and delegating the rest.

Curiosity & Mental Firepower (00:44:32)

• Curiosity is a crucial attribute for success.
• People who are naturally curious and have a high level of intellectual firepower tend to succeed.
• Three key factors for success: mental firepower, work ethic, and proper training.
• Creating a successful system allows even average individuals to achieve extraordinary results.
• Example of the New England Patriots' system in American football.
• The goal is to build a system where talented people can thrive and be more successful than anywhere else.

Financial Incentivization & Retention (00:47:24)

• Work ethic is the most common area where people fall short.
• It's challenging to assess work ethic accurately, especially through references.
• People tend to overestimate their own work ethic.
• Strategies are needed to uncover underlying truths about work ethic.

Work Ethic & Self-Awareness (00:48:33)

• Justin Ishbia believes that successful people in private equity work extremely hard and are self-aware.
• He emphasizes the importance of working hard and going the extra mile to achieve success.
• Ishbia suggests that young people today may prioritize work-life balance and efficiency over long hours, but they also have access to better technology and tools.
• He believes that the best organizations and people have a rival that they respect and compete against.
• Ishbia promotes creating an environment where people can compete and bring out the best in each other.
• He values category killers, individuals who are significantly better than others, and rewards them accordingly.
• Ishbia believes that the top 0.1% of performers are worth much more than the next 10%, and he focuses on finding and nurturing these exceptional individuals.

Creating a Culture of Success (00:51:43)

• To retain top talent, Justin Ishbia emphasizes the importance of:
  • Market compensation.
  • Positive surprises and rewards for performance.
  • Celebrating wins and recognizing achievements.
  • Rewarding people in public.
  • Providing opportunities for responsibility and leadership.
  • Creating a system that fosters a culture of success.
• Little and often approach:
  • Break apart title, salary, and finances.
  • Continuously provide progression and recognition.
  • People want responsibility and the chance to make decisions.
  • Many talented people would trade a compensation increase for the opportunity to lead a deal.
  • Ishbia provides systems and processes to allow for decision-making within a framework.

Managing Egos & Motivation (00:55:31)

• Justin Ishbia highlights the significance of understanding and managing egos in teams, drawing from Phil Jackson's coaching style.
• Effective managers meet executives' needs, providing resources and confidence for success.
• Honesty and effective communication are essential for motivating individuals.
• Arsène Wenger's approach of individual player motivation emphasizes valuing each person.
• Clear expectation setting with potential investors avoids frustration and relationship damage.
• Ishbia prefers patient, long-term investors focused on the highest return on invested capital.
• Alignment with investors who share Short Capital's values, such as supporting endowments or non-profits, is sought.
• Ishbia fosters a positive work culture, valuing deep relationships and friendships among colleagues.
• He provides career growth opportunities and views vice president roles as long-term commitments.
• Short Capital maintains a database of employee and family birthdays, sending flowers to spouses as a gesture of appreciation.
• Ishbia focuses on the little things that make a big impact, such as personalized gifts and involving spouses in company events.
• He emphasizes caring about employees' families and making them feel part of the company.
• He believes in making things right when mistakes happen and values positive pillow talk in strengthening relationships.
• Ishbia stresses the importance of creating a culture where people enjoy working, feel professionally fulfilled, and are fairly compensated.

Fatherhood & Parenting (01:07:15)

• Justin Ishbia believes being a great father means being present and involved in his children's lives, setting specific goals such as putting them to bed 180 nights per year and having one-on-one time with them.
• He makes a conscious effort to be present when he comes home from work and avoids distractions like being on the phone.
• Ishbia recognizes the challenges of raising children in an affluent family and wants to ensure they understand the value of hard work and passion, believing they should earn their own place in life rather than rely on their family's wealth.
• He prioritizes raising his children to be humble and hardworking, setting a good example through his own actions and recommending watching the National Geographic Channel to learn about parenting from elephants, who provide a good example of leading and teaching the young through observation.

Lessons on Money (01:13:05)

• Focus on achieving success, and financial rewards will follow.
• Money amplifies one's character, both positive and negative traits.
• Use wealth as an enabler and an opportunity to do good.
• Consider trade-offs between immediate charitable giving and potential future returns on investments.
• Efficiently giving away money can be more challenging than making it.
• Make a positive impact by supporting individuals and causes you can directly observe and interact with.
• Justin Ishbia believes the key to success in private equity is making an impact and creating change.
• Start with your own corner of the world and make a positive impact on those closest to you.
• Create a great culture by instilling specific values and practices that can be implemented immediately.

Quick-Fire Round (01:18:05)

• Justin Ishbia believes in the power of direct communication through videos for accurate and efficient messaging.
• Owning a sports team has surprised Ishbia with the collaborative and friendly environment among owners, as they compete against other forms of entertainment for consumers' attention.
• Dealing with injuries remains the most challenging aspect of team ownership, as they can disrupt team dynamics and performance despite careful planning.
• To avoid groupthink, Ishbia recommends having colleagues who can critically evaluate opportunities and assigns a "Devil's Advocate" team during investment committee meetings.
• Ishbia emphasizes the importance of being critical and pointing out potential issues during investment meetings, even if one personally likes the deal.
• He cautions against the misconception that starting a $200 million fund is easy, highlighting the challenges of raising capital, especially for first-time fund managers.
• Ishbia distinguishes between being a fund manager and an investor, recognizing the different responsibilities and skill sets required for each role.
• He expresses gratitude for living in the United States, considering it the best country in the world with unparalleled opportunities and freedoms.
• Despite geopolitical tensions, climate change, and societal challenges, Ishbia believes the United States remains an attractive place to live and do business due to its natural boundaries, friendly neighbors, and strong economy.
• Ishbia draws inspiration from his grandfather's immigration journey and the opportunities available today through education and technology.
• He is passionate about his work at Shore Capital and committed to building a lasting team and ecosystem.
• Ishbia envisions himself continuing to lead Shore Capital in 10 years and witnessing the success of younger team members, mirroring the success of those who joined the firm 10 years ago.