Today I'm chatting with Peter Bell and Justin Turner from Traction Capital Partners in Tacoma, WA, just south of Seattle. Peter and Justin both reached out over Twitter and the more I learned about their firm, the more interesting to me it became. Traction is a small private equity firm that blurs the lines between a private equity fund and a permanent capital vehicle, which is what made them so interesting to me. They have a handful of long-term investors and seek to buy and hold great companies indefinitely, which gives them the unique ability to make long-term oriented decisions and wait for great opportunities. We begin with Peter telling me about a content idea he has for Traction and move through the topics of starting a private equity fund, lessons learned, what they look for in both businesses and owners, and a few stories. Peter and Justin are both deep thinkers and have been fun to get to know, and I hope that shows in the episode. Links • Hodinkee • GF Data Show notes 1:25 Peter's video/audio content idea 2:50 Firms using content to attract deal flow and find business owners 4:28 Backgrounds and early days of Traction Capital 6:10 Justin's jump to private equity and general views on investment banking 6:45 Founding of Traction in April 2017 7:26 Peter's background and work in investment banking and BlackRock 8:38 Team at Traction, division of labor 9:28 Balance between using Traction as an investment firm and offering a service to the seller 10:20 Traction's operating philosophy compared to traditional private equity's perception 10:50 Group of investors and their philosophy 12:26 Evolution of Traction's source of capital 13:43 Benefits of being a permanent capital vehicle with closing deals 15:10 General discussion on current valuations 16:06 GF Data 16:44 Lessons learned in starting Traction 18:40 Lessons learned in operating companies in that first year after acquisition 19:25 Importance of people in small companies 20:20 Perception of private equity 21:34 Growth of Peter at Traction 22:22 Looking for intellectually curious people, private equity is designed for insatiably curious people 23:49 Frustration with deals not closing 25:38 How small can private equity funds invest?, Economics of investing in small deals 28:18 Traction fits between private equity and search funds 29:16 Backgrounds of Traction partners and benefits of having operating backgrounds 30:29 Differentiation of Traction 31:25 Optimum business owner and ideal characteristics 32:33 Finding passionate business owners who are focused on their people and business, rather than the highest price 33:50 Looking for businesses where the owners has effectively has taken themselves out of the day-to-day 34:41 Questions to ask during due diligence 35:03 Red flags that come up during research and due diligence 40:09 Importance of background checks on management 41:02 Relationships with intermediaries and the evolution of those relationships 42:29 Establishing credibility and a reputation at Traction 44:40 Will Traction go upmarket or remain in micro PE size? 44:57 What class in college would you teach? 47:30 Mental models used in private equity 50:09 Most fortunate event to have happened to you by chance 54:02 Best business you've ever seen   I’m also the founder of The Operator’s Handbook, a print publication where small company operators share their insights and ideas for building more effective and profitable companies. Articles focus on process improvement, sales, hiring and training, managing culture, and all responsibilities within operating a small company. If you run a small business and are looking for new ways to grow and improve, subscribe today and join your peers in the endless pursuit of better at theoperatorshandbook.com.