Ex-Bain PE consultant Jay Lucas on competition in the market

PEI asked The Lucas Group founder for his thoughts on market competitiveness given the triple threat of high valuations, inflation and tax uncertainty.

Before he started a boutique strategic consulting firm to provide swifter-than-average pinpoint market intelligence, Jay Lucas helped start Bain & Co’s PE consulting practice as a partner in the 1980s.

He then started The Lucas Group, which he describes as “a mini-Bain & Company”, in the summer of 1991. Many of the firm’s senior partners are also of Bain pedigree. Overall, the firm has completed more than 700 due diligence and growth strategy assignments on behalf of its clients, according to a description on Lucas’s LinkedIn profile.

Private Equity International caught up with Lucas to discuss his thoughts about today’s  private equity market and the role service providers have to play.

How would you characterise the deal environment in the summer of 2021?

There is an intense amount of activity right now in the deal markets. We haven’t seen this kind of frenetic activity since the 2006-2007 time period. Everyone is working overtime to get deals done before the end of the year, partially driven by the prospect of an increase in the capital gains rate as well as uncertainty about inflation and the economy.

Dry powder remains at an all-time high. Should dealmakers be concerned about deploying capital?

The amount of available capital is far outstripping the supply of deals – especially quality deals. Right now, this is a particularly important time to be a discerning investor. While it’s probably necessary to pay up for a quality company, the danger is in the overzealous quest of many PE firms who may be bent on deploying capital and are bidding up the price on companies that are just of average quality at best. I believe that investors who have the ability to be discerning right now will be in position enjoy big dividends down the road.

You’ve previously talked about agility with us. How does agility on the part of service providers translate into value for managers?

We find in our diligence practice that one of the key value-adds is agility. In other words, the ability to deploy quickly and then as we gather data, to work closely with the client to course correct, redirect and focus our efforts on the most important issues. This is particularly critical in our one-to-two-week Pinpoint Diligence assignments where the situation is fluid and each time we learn something new, there is a value in fine-tuning or adjusting the focus. Thankfully, our experienced senior professionals not only lead our assignments but spend their time actually “on the field” and deeply involved in the analysis.

What role do emerging data technologies have in the decision-engine for fund managers, and by extension, their service providers?

As a firm, we now have the ability to tap into databases, access expert networks, set up survey panels for quantitative research and more and do all this in a fraction of the time it took even three years ago. This gives us a big advantage so that now we can be spending more time on the interpretation of insights and helping our clients strategise on winning deals rather than some of the more mundane, lower value-add activities. We believe we are at the forefront with these efforts.

Thinking back to the early days of your career, what lessons, tactics and regrets from your work at Bain have influenced your approach to the running the Lucas Group?

Bain is a fantastic firm and I learned a lot there. I think the biggest difference in what we do is that we have created a specialist capability to conduct diligence and assess markets in a very agile, rapid and resource-efficient way. Our business model has a very flat structure, not a lot of layers. Our senior partners not only lead the assignments, but actually help do the work. This gives our clients a big advantage when you can have all those years of diligence experience actually on the field. It helps greatly with speed, which obviously means we can be more efficient and significantly less costly.

Jay Lucas, who was a Marshall Scholar, joined Bain & Company in the spring of 1981, where he helped found the PE consultancy. In 1991, he departed to found the boutique consultancy The Lucas Group, of which he has been the president for 30 years.