Private Equity: Creating Value Against Increased Competition

please welcome your panelists for private equity creating value against increased competition moderated by managing director and group head of leveraged finance group at Capital Markets Jim Moglia so good morning I also want to thank the Milken Institute for introducing me I found when I have subjects that are particularly exciting I'd forget to tell anybody in the room who I am and where I work so we're going to come back to the subject in a second but I want to first introduce our panelists today certainly worth the time if not four or five times the time we have this morning to talk to cover the subject over on my far right the versioning more gone from she's a CEO of euro zio and then to my direct right John Rotolo who is head of private equity in real assets the bearings to my left Scott Sperling who's co-president co-chairman of th Lee David Wasserman to his left at Clayton Dubilier he's a partner there and then at the far end a my my far left is Andrew Weinberg who's founder and managing partner at bright star Capital Partners so fact is I had started at drexel burnham a long time ago and worked with mike and at that time and for much of my career i was extremely excited that i was a founder of one of the transitional products in capital markets and capitalism and I have to say humbly that the private equity business of the various types has really despite maybe giving some credit to high-yield bonds except for for being part of their founding has really changed significantly what's going on in our world and will be a significant part of what goes on into the future any capitalist will tell you that we create social value by moving money to people that know what to do with that money and and then and we're to put that money and I'm very proud today that these five as well as some of the others that you'll meet at the conference are significant catalysts the movement of money to where it makes the most sense now that's the good news one of the things we're going to talk about today is is maybe some of the the tough parts of that job and I want to direct everybody to slide number one this slide we have it up shows what happens when you deliver for your investors is your investors want to reinvest and more investors want to put money in with you so there's been a significant amount of private equity fundraising this is the fundraising for the LBO side of the business but it's much wider if you go beyond just LBOs if you go to slide number two this is one of the things that people are becoming concerned about which is has there been a buildup of dry powder out in the marketplace and you know you don't have to get beyond second grade to know that your mom would tell you that money burns a hole in your pocket so does money burn a hole in their pocket we'll have to examine that a little bit more and then I'll take you to slide number three and slide number three shows what's been happening to purchase multiples for acquisitions in the marketplace obviously there's a there's a desire to try to find causality that if you give these guys more money and gals more money then eventually they bit up the prices of everything to crazy levels and and there's a decent case that that's worth examining I want to go to a headline that brings that up is there too much dry powder too few deals this is a headline from private equity spotlight really hits the subject of the day oddly enough that's from September 2013 so this seems to be a subject that's been hot for a long time so perhaps the way to start this is I think that there is a combination of subjects one is there's too much money too few deals a problem but most importantly how to our panelists today dry value creation value proposition so that they'll prove out that it's not the case that they should be feared when they are liquid and maybe with that their one go back to a quote that Scott here this should be responsible for back in March 2010 I can't remember I had for lunch yesterday we need to be careful that we do not push pricing beyond what makes sense all right Scott how's that doing for you you can tell it's great it's working out good you know look I let me start with the good news the good news is I've been doing this for about 37 years and during the entirety of that period the headline that you've stated from 2013 has been a headline at least every other year that there's always too much money chasing too few deals and yet over very long periods of time private equity has provided a level of sustainable performance that has been in significantly higher in fact than almost any other asset class that ones invest in so I think over a longer period of time the industry has done a very good job of adapting to the supply and demand dynamics that have occurred and have provided those longer-term returns 3 5 10 and 20 years well in excess of any of the public markets or even other private asset classes that's the good news the bad news is obviously in any given year or any couple of years you can see excess occurs the industry transitions to respond to what has gone on and we do have to be very careful about all the reasons that we can come up with about why pain very high multiples for businesses that have sustainable growth rates that are significantly lower as a percentage than the multiple that we're paying for those businesses and that is one of the things that I think was problematic in the middle of the last decade and one of the things that we have to be careful about today there is an intrinsic value long-term to businesses that intrinsic value we believe is related to the sustainable growth rate of that business at least in terms of the nature of the cash flow and the nature of the business model at any point in time market comps whether they're public market comps or private market acquisition comps can be well in excess of that and that will help determine what the pricing is that one's willing to pay the industry has responded to that partly by looking for growth ear things so I think as you look at the nature of the sectors that the industry is invested in we've migrated to growth year sectors so that we can find companies that have higher sustainable growth rates and the belief over the last 15 years that we can add significant value operationally to companies in order to accelerate the growth rate of the company that we bought and help make it a better company you know see DNR has been doing that for a very long time it was part of you know back to Marty Deauville ears concept of the company most of us have created operating groups that we believe can add that value at this point but and I think that generally has worked but nonetheless you look at those charts and you say this is a time to be particularly careful as you see that creep up in the purchase price multiple disciplines so David maybe I'm gonna go to you next pretty much the same subject but one of the things that that that your firm gets a lot of write-ups about is the ability to make EBIT happen and even making EBIT da happen goes a long way to making multiples at the purchase date seem a whole lot smaller when you're exiting so when do you go through that for us a bit well look I agree a lot with what Scott just said I think and well says look no operating capability world fixed really out you know overpaying for a business but they advantage this that private equity has in the marketplace and will continue to have in the marketplace is that it's incredibly flexible and creative capital its patient capital and it's active capital right we can be actively involved in our businesses and especially in today's world we have this bifurcated world where public equities or moving mainly towards indexed investing right which is incredibly passive we're trading is happening through an algorithm right if you think about the the way we invest in the capabilities we have we can play a very powerful role in investing not to say that people won't make mistakes today right in a place where you pay high multiples and where where there's more there's a lot of supply of capital but there's extreme opportunities to still a lot of opportunities to make money and if you just think about you think about corporations that wanted to invest businesses we can play an enormous role in that you think about a family that wants to transition ownership alright that's the place where private equity can play a really important role you think about a company that's got some innovative product but doesn't want to be public yet but needs capital right and wants to build out a team right a lot of what's you know Scott's firm does you're right we can play a really important role there or a company that wants to make an acquisition and doesn't want to source the public markets right so increasingly you know we're not just a little business anymore private private capital can play so many different roles in the marketplace it's a drive value and obviously as as was mentioned one of them is post investment and how we can interact with companies post investment how we can bring the best governance to a business like I always say one you know we have a huge advantage in private equity in that when we buy a business right we start with us and the management team on the starting line together right everyone's got options at the same place you're right you know bought stock and have options at the same place where I'll have a three five seven year time horizon and we're trying to think about how to make a business great if for all of you who've been in public company some of you work in banks that are public some of you you know working corporations are public think about how much more complicated life is there right everyone's got options and got different motivations and things at different places right worse in our business we have this huge advantage right that we start to at the very beginning and then we can add operating talent and real governance to that right we can apply you know our firm when we have the benefit of having guys like Jack Walsh and Jim McNerney and you know other Terry Leahy and other great leaders that we can apply to a billion dollar business you know when how often do those guys really go spend time in their old career right they spend time on 50 billion dollar businesses but now we can go buy a billion or two or three billion dollar businesses and these guys can be intimately involved and trying to think about how to help grow that business so those a huge advantages in today's world that will I think will allow private equity continue to outperform now as Scott said there will be mistakes made now to me it feels a little bit like 2006 it's not quite you know really heady peak and we're not all gonna benefit we you know we all look like geniuses over the last six seven years right because you could buy business at eight times then you could sell it at 10 then you could buy to ten you could sell it twelve times you could buy at twelve and today you could sell it at fourteen times but the question is you know when you go buy business of fourteen times they what's gonna happen right and so you got it but you got to be smart and you got to be thoughtful you I think about how to be creative and using your capital not just a buy a business at a high price but help solve a problem to solve it solve a solution for someone and maybe do an innovative transaction and we can talk more about that as we go on well one of the things is you note CDN are where you guys have think in the past argue to our claimed with with a lot of evidence that about 80% of your value creation is in EBIT die even if you're buying a company at fourteen times if you're exiting north of ten you're coming out with your money because of the operational improvements I want to turn to slide six to to point out a little bit of what we discussed beginning here so this would be the number of public companies that are listed I'm in the US and you see a pretty much I having over the last fifteen twenty years as that money is gone to places that are more patient and and bring more active management and if you look at the companies that are still public where the there's a significant amount of the public markets that are now passive index funds ETFs etc so private equity is becoming the one place we put your money for a longer period of time and we're active management is still important so I want to go to version II a bit and and have her address the general question but also your 0 has been advantaged by patient capital you guys have been around you know through family four hundred and thirty years and the way you're structured today gives you an angle that perhaps is missing in the public markets generally yeah I look way younger than he is yeah I think our industry a we became an industry we had the largest employer in mature markets in the and in Europe and time is long gone since we were some of us were just making the money on higher leverage and you know just cash flow of the companies I think we we can be proud of what we bring to companies in you know across across the globe because as we've pointed out we have long-term capital that's how Eurasia was born historically ambition expertise transformation we're working on buildups digitalization going more global and I think you can you can support management team in their own ambition to concur the sort of the world and be very disruptive because you have access to this amazing pool of talents and capital at the same time and you're seeing the world from you know a big perspective because we are collectively investors across the board across industries across sizes also of companies very interesting to be very early on which we do at year 0 so we are venture investor up to you know way bigger companies like multinational type of companies so permanent I mean the way I see the industry going in the future unless you know something big happens and change the world again I think you'll see a lot of convergence between [Music] permanent capital and third-party money this is happening as we speak so you've got long term investors the pension funds the sovereign funds the family offices as well or we are getting way more professionalized hiring people from our industry and willing to invest through GPS but also through their own you know their own team so this is happening as we speak it's it's likely to evolve and converge in the next years there will be more public private equity companies there's already a number of us either we were born public that's the case of uracil and then progressively we've grown into being the partner of reference of European French first and then European and there are now American companies but I think our industry has to become more global it's maybe sort of a bit counterintuitive to say that but when you look at our industry 95% of the players or domestic you know amazing super strong super connected in China I see some of my friend on the first row in China in Europe in the US and it's only a handful of players who have become very global and we know their name you know they're top of mind but our companies have to be global day one you know the small ones the bigger ones there's very few industries where you can only think of your country on domestic basis and that's an enormous change from 2005 or 2007 so I think I mean we're sort of mid mid mid sized players here around the table and what we all try to do is to become global and be able to support our you know companies our investment in a global approach sometime you know going global opening offices you know in in other countries sometime you know having partners locally and you have to be innovative in that and that's what we've mentioned earlier you have to make it happen with your own tools and you know partnering we've got a number of partners in China because most of our investments hospitality consumer luxury for of course education you have to be Chinese you know base and and grow in China and the best ways either your local and strong or you have local partners and I think this industry will be you know we're surprised you going forward by becoming even more professional in the way we adapt to how our companies have to adapt themselves to this some amazingly changing world that we're facing which is volatile uncertain you know stressed a big stressful environments but what we provide as long-term capital or you know is that ambition and that vision of the world I think this is an exciting time to be an investor I think 2006 and 2007 we're very different time it's probably the same amount of dry powder for me the big difference is that you've got three big engines producing rows US continental Europe and China that's an enormous difference for our companies that we are we're supporting well I think one thing you bring up is the the upside or the future of more interactivity the community of private equity being integrated more rather than being silos and different absolute judgment opportunities and if you look at back in in telecom and and the value of networks the value of a network goes up at the square of the number of members in that network so if you think of the financial sponsor private equity community as a group of members of a network as they begin to talk to each other and contribute towards each other the value of that entire asset class actually starts to go up geometrically so John there a couple of things that the trend that we've been covering through the the panel intro has been a little bit of going longer-term and bearings is affirm that as longer term capital capability and then as I just introduced maybe the the integration of different products or of different mindsets towards making value greater talk to us a bit about about both of those at your shop yes sure now so a lot of things that the the panels hit on really really relevant to the things that we're talking about every day I guess but first you know I think just going back to slide two I think it's a really interesting slide in that there's there's something key that's that's missing there and it's obviously one of the bigger trends in private equity and that's co-investment when so when you think about the sort of shadow capital that's out there on the sidelines waiting to support investments alongside these fund commitments it's it's a it's a really meaningful amount of capital and so that's something we're spending a lot of time thinking about is how big really is the industry and how do we how do we think about taking advantage of that so I guess in terms of globalization I think it's it's one of the more exciting things that we're dealing with everyday so we really have a two-pronged approach so the first is thinking globally but then also a real local to local approach and depending on what the business is or what the assets are that you own you really need to have that local to local presence to be able to effectively manage those assets but you still need the top-down overlay to make sure that you're getting best practices applied across territories and that you're taking advantage of evolve the opportunities for us that you know sort of the ability to work across different asset types together really is driven by that idea of networks and so a lot of the investment theses that we're thinking about are networked driven a great example at bearings we've my team have been very active in the logistics space so we own a number of businesses that are providing services or logistics equipment within the US economy where there's a very significant trend happening driven by the Amazon effect changing how goods flow throughout the US and who's involved in that flow of goods we also have a very substantial real estate business at bearings and so obviously the industrial part of the real estate businesses is also being exposed to those same themes and so we're doing a lot of work together across the real estate team the private equity team and trying to think about how can we leverage our platform to deliver better solutions to the large companies in that space so for example can we go to a UPS or FedEx and say not only can we deliver trailers containers lease airplanes but we can also provide new build or logistics facilities that are in our portfolio today and how can we do that on it in an integrated way to help them achieve the outcome that they're doing so I think thinking about where those where those networks have need for capital and trying to be creative and flexible as private equity investors are is really you know it's a fun part of the job right now you have you have some business and intangible assets right we do so historically about a third of our portfolio roughly has been investments in intellectual property based assets or or businesses which would cover the media space so think about film and television music copyrights we've accumulated over the last 10 years probably the largest independently held catalog of music rights and includes over 4,000 rights of everything from The Sound of Music to Michael Jackson to Creedence Clearwater Revival's some amazing things in there and then we've also been active in the the technology space in the pharmaceutical sector as well an intellectual property based investments as a financier type person you know I've always had some interest in intangible assets but I've tried to avoid what turned out to be intangible liabilities when companies didn't do as well as I was hoping okay so Andrew you know a lot of the character of the financial sponsor world is private equity world is they're the big guy and the management kind of is a little guy so it's a kind of a me and mini-me relationship but you guys in your fund and your strategy isn't an honest relationship and as we've gone through the panel into extending the whole period as maybe a trend that we're seeing over at bright star bright star your hold period becomes maybe as long as necessary because you're really partnering up right with families and entrepreneurs well I'd say this and I'll give you a little bit of a approach we um for those that don't know us newer fund just closed in over 70 million dollars in our first fund program we very much take the US in US model we've we've learned a lot from the market that the middle market company in the u.s. oftentimes cares as much about values as valuation and when you look at the number of public companies you've seen 7,000 go to 4,000 well there are 3,000 companies that are private or got consolidated in the market we play in there were 32,000 private companies roughly about 16 times as many as public companies and when we sit down to talk about the proposition of being partners it starts with the need for a capital partner and then it goes beyond that talk about how we can help grow the company together and we talk about the capabilities of our partners many of whom started life in operations c-level executives some of those iconic companies similar to the ones you referenced David and some of us started in finance and learned how to become an operator and we think having that dialogue with that middle market company which sometimes gets forgotten in that mix and being that first institutional capital we think there's a chance to do some great things together we do think though it's important not to overstay our welcome so once we've accomplished our mission achieve the objectives we do think there other sources of capital other companies who might admire those companies maybe every different cost of capital so we think we play a part of that process I think all of us play a role in that entire process and I do think when you look let's say the top level 25 to 30 trillion dollars of wealth transfer in the next 20 to 30 years from those middle-market companies to their heirs right Adam all the capital in this stage were a fraction of a fraction of a fraction of the need for that but I think the private markets have become relatively developed to address those needs okay utilizar is going to say you know what's obvious with those charts that you show the show all the capital flowing in it's that obviously a lot it not only dollar capital it should float in but a lot of intellectual capital flowed into the private equity world I mean it's very different than it was 20 30 years ago and so you think about the amount of talent financial talent operating talent not just as see DNR but across all the different firms you think about the global capabilities of firms and so the ways that are the private capital can add value in the marketplace say it's so much greater than it was 20 or 30 years ago the innovation that guys are doing and you know what I find too is that we tend not even to compete they share their moments of like big competitiveness but if I think about my career at 10 or 15 years ago I mean I used to run into Tom Lee all the time or I used to run into the scene you know I'd beat every part I'd go to I see the same four or five guys showing up right that's not really true as much today people have really tailored their strategies around where people need capital and how to supply capital in a way that's different and so I think it's again an evolution of the business of you know the intellectual capital and the business the way the strategies of the business the capability said of the business has really changed again not to say the industry won't make mistakes we will but but we're at a different point in our life cycle today then clearly we were 10 or 15 years ago and then you compare that to the public market investors right we're as I said before most of them you know think about all the money managers you knew a fidelity or I mean many of them are gone right and it's now passive run money and even the hedge fund community which has so many great hemin was great talent but that's been a hard place to invest too and a lot of talent has left that industry and so you just think about the opportunities that exist in private capital today it's a it's gonna be a continue to be a very meaningful part of you know the world capital markets yeah and your way you know you're way better supported your private owner to make the you know the big move the ball moved and if you're a public publicly quoted company we all know dance you don't go to a public market once you know you have to be really ready for this I mean in the u.s. you can be private easier you know come out of the markets but in some countries in Europe as an example once you're public you're very likely to remain public for a long period of time it's extremely difficult to delete the company so things may change but I mean you know an entrepreneur and management team they know that well supported by long-term capital you can be bold and make you know the big change you know the big movements which are game-changing for your company in a way sort of more comfortable you know environment and if you're a public company by far well some of my worst personal investments turned out to be very long-term capital and while it was so there and I'm not sure what they were doing with my buddy while they had it but I think if you got the money for a bit of time you have a responsibility to make something happened I think the David you have the 2x2 or the Noah's Ark thing you've referenced in in the past you guys have it Scott you have the strategic resources group could you guys if you go back 15 years ago I'm sure there were less operating partners on you know as part of your rolodex they were it was less the business back then when was financial engineering can you both talk about sure that part starting with you Scott one of the things that we found starting the late 90s when we bought companies ranging from what's now called Experian but the time care to have use credit business to a houghton mifflin or Warner Music and the various parts of the media world is that we were buying a really good asset in an industry that had very attractive characteristics to it but we're we're we fundamentally needed to turn over the business plan of the company and elements of the business model in order to take full advantage of the opportunities the industry itself presented and that were inherent within the strength of the asset that we were buying and I would say that arts our own experience was that we applied that to about half the things back in the late 90s that we did and we always utilize people who are in our broader network but we're not employees to execute against that strategy and those turned out to be very successful approaches to investing and so by the time you fast forward to the early part or mid part of the 2000s we had decided that not only would our historical strengths of sourcing be an advantage but for lots of reasons the world in terms of the intensity of competition was such that we wanted to be able to add value operationally entities companies as we had done with a handful of our investments and so we brought in house that capability with a focus on hiring people into it who would be treated just like our investment professionals would be compensated just like our investment professionals and would work hand-in-hand on deal teams but their job was to help companies identify projects that we think would significantly improve the key business processes of the company allowing it to improve its competitive position and advantage and therefore accelerate both revenue growth and improved the efficiency of the business model those are all lots of nice fancy words but what it really means is you need people at companies working with managers helping them think outside of the box of their industry so bringing the experience base that we have looking across lots of businesses to bear on that company with a real focus on implementation we can all pontificate with CEOs about what great strategy is but what it really comes down to is being able to understand how you would implement those big thoughts into something that will make a difference at the market level of which that company participates and so over the course of the last now almost dozen years this has become a major focus of our firm and that part of our firm has grown very significantly and you know it's now hard to think back to a time that we didn't have that capability but it wasn't always a natural thought for people coming out of private equity like us where the the biggest thought was how do we figure out how we can source deals such that we don't have to fully rely on the auction market we're not against auctions but just happens we lose a lot so we need to have an alternative Gil sourcing and where our thought was always that management is our key partner and management is a key partner and oftentimes it is the management you enter the deal with but sometimes it's the management that you can bring in to effectuate the changes that I've just talked about CDN are saying it was there a different angle on them well Scott said you know we grew up this way so our firm was founded by Marty du Blair and Joe Rice bridge so we had an operating on a finance guy that's the reference to Noah's Ark I would say we walked two-by-two wherever we go right we're always we're always combined of what we do but yeah the work but the world again has changed a lot and you know if you think about 20 years ago was a lot about cost-cutting right could you take could you buy a business and take margins from 5% to 10% make money that way and that game still exists at times but that's not enough right to win and so a lot of what our operating guys and partners do now is think about how do we innovate and how do we really grow the top line right so what what new markets can we attack what new products can we get into how do we drive growth in the business and that's you're both strategic but it's also how do you build great teams and so our operating partners spend a lot of time trying to think of when we buy business right job number one is how do we make sure we have the best team there possible even if we have a good CEO and a good head of HR how do we make sure we have a great you know CFO and a great person the supply chain and a great head of sales right because great teams win right and so you spend a lot of time on that we we bring in our companies and we do a lot of stuff with our portfolio but we bring them in twice a year we they meet with with jack and and McNerney and Terry and we spent three hours where we spend the first hour literally just talking about the team do we have the right team on the field to go attack the issues that we want to go attack and then we spend the next couple hours talking about strategy you get in that rhythm every six months right you can you can start improving the team the other thing I wants to go back to what Andrew said is that you know private equity used to be very much of a win-lose game you know I'm gonna be competing in auction I'm gonna win and you're gonna lose right our industry's changed in that respect some too you know we can be we can really be solution capital to companies right to management teams or to big corporations you know we've done seven carve-outs now in the last six years we've bought businesses and the corporation's of state in an own forty percent and it's a real partnership transaction right they weren't looking to just sell the business and maximize the last dollar right they were looking to solve a problem that they had right and and then we you know we would carve out a business they were still on 40% we'd be on the board together and then we might be able to do some things that they couldn't do right we obviously could reset the incentive plan in a way that they can't right we can bring in new management team we can do acquisitions we can supply capital to a business where they didn't want to supply capital too so we've done that with John Deere we've done it with Tyco we've done it with Ingersoll Rand ITW a whole bunch of large companies and if you went and talked to Sam Allen at John Deere he'd be the first to say like private equity did something for me that I couldn't you in my own business because this was a small subsidiary and that these guys by carving it out and and supplying the right incentives and management team could go do something different so all those factors I think allow private equity to add value and allow the operating capabilities yes Jim I might add to that that I think that the twist and we observe the great models that Scott and David have put together and the success of those models and I think the twist is when we looked at it we saw what we thought let's just have partners let's not call each other operators or investors you're a partner of the firm and when you go talk to that middle market company that entrepreneur that family let's talk about how we can add value to your business before we talk about valuation our observation is it's a big market to play in that companies are looking for that value-added advice whether it's at larger sized companies or that mid market company who haven't had the benefit of someone who was a CEO of a larger company saw my partner Tom Meredith walk in the room I mean did some amazing things for Dell and their supply chain and those lessons when you extend them side middle-market company or pretty pretty valuable so I think we all kind of find our way to the almost similar path a little different way to get there I will say for our model usually it's kind of bust or nothing it's not us versus four or five others it's a decision of do I want a partner or not and if so hopefully we can visit position ourselves as a partner of choice so I do want to compliment the entire industry for not doing everything that's possible to be done in every deal so that you've allowed there to be a whole secondary lbo market as among each other so John well a large part of what benefits some of these organizations is or is they're certainly chasing whole companies and buying whole companies now a lot of what bearings is doing is financing companies that need money for things or projects infrastructure is very different than doing a an LBO of a retail concern how and what kind of network and how do you originate those opportunities yes so we have a superior billion dollar asset manager we can provide capital up and down the capital stack whether it's short-term capital that you need or private equity capital and everything in between and we have a big part of the business is private debt which comes in a number of different forms it can be a very traditional corporate private placement where we're working with a large corporation who needs to get a financing done quickly and they don't want to take it to the market or we can provide financing to sponsors other private equity firms who are looking for capital to get a deal we have a growing infrastructure debt business as well and so you know I think that that means a lot of things for us I mean it certainly means there's there's a number of potential conflicts within the business that we need to manage but it also means we're seeing a lot of deal flow and we're seeing trends across a lot of different industries that are were really focused on capturing that data and using that to drive our thematic research where do we want to be going where do we see other people doing interesting things or to see other people doing things that looks a little scary to us and and so I think having the the capabilities within one firm to provide a number of different capital types lets us expand the universe of companies that we're touching and ultimately be really thoughtful about creating the risk return within any one investment opportunity that we think is going to deliver the best outcome to our investors okay you know related questions so at your firm there's about seven if I remember right about seven different investment product types if you will yeah you've acquired you see them as as a range across the capital structure or a range across the lifecycle of these companies or baby combinations of risk and reward so that you have a full menu for investors how do you how do you manage that why sort of all of the above I mean we were born as an equity investor I mean that's that's our DNA we we like to be partner of reference whom management team entrepreneur if you go into you know the death business I think volume matters so we we were born as an equity investor and we felt in order to provide to our shoulder being a publicly quoted company the full span of you know possible returns we would then be you know able to start you know small in terms of partnering with venture type of companies while you know being a partner all across the lifespan of a company possibly but it's a very different ecosystem to be investing in large cap or investing in venture and growth you need different talents talent pool it's a different echoes it's a different way of supporting managing even diligence in investments and we felt we would be better equipped with dedicated investment team and talents so that we would you know across the large span become the partner of reference out of fifteen billion which is what we are today both balance sheet and third-party money seventy percent of that is you know equity investment direct in companies either minority or majority that doesn't really matter if it's venture by definition you're a minority partner because you're one amongst a number you don't want to be on your own financing you know a start-up you want to be partner and actually it brought to us different mindsets I think in mid to large cap we used to be pretty competitive and you know being owning companies on our own although DNA in CDN are we made some investment together years ago in 2005 as Co partner I'm a great believer of partnering on those you know it was investment you're way stronger not too many cooks in the kitchen though because when it starts to be difficult you have to be two is already you know something to manage but I think being partners has brought a lot of you know power and vision to the companies I think very dedicated to equity investments we've been able to add another layer of competence which has not yet been touch based in this panel which is digital every investment that we've made we've made now we've completely changed where we're diligent seeing the analysis of those companies at least we are trying to we're trying to have new partners new new new tools to understand you know how strong a company is doing you know go on you know social network get as much data as you can and you would be surprised of what you actually access then the question is the judgment that you have on that data as soon as we investor in a company the first question we asked you know the management and our cell how can we disrupt the way that the company is effectively doing its business so the disruption that you have you know - - you have to drive the disruption rather than you know be the you know be the you know the object on the disruption itself it's a complete change of mind we've hired you know digital talents at Euro zero because you have to you you can't continue so I think all the building blocks that we were describing earlier are you know essentially part of our industry now operations supply chain international build ups and there's this new layer now which is probably digital and ESG as well that you have to bring to the table big time to your companies to yourself as well but to be you know winners rather than you know being disruptive what thing a goal that that I have and because I think it's just bringing truth is how hard the private equity industry has to work to do what they do because they've been so successful for so long outside of having economists wonder what they missed in class about perfect markets catching up with you because they've been so good we begin to think of the businesses as a money money printing machine but in reality there's a lot of work there I want to go to a slide which is slide 4 which might be an eye-opener for people which is the gold at the bottom is the amount of M&A activity that's represented by financial sponsors or private equity and the rest of the bar is what's going on with corporates so one of the things that you think about when you're talking about dry powder driving up multiples you know spending money on stupid stuff is that you're blaming the people in the headlines for doing all that when the majority of the acquisition activity out there is still there's still corporate M&A and so one interesting statistic and I might have been a Bane study and if not I'll just say it was a bunch of smart people that less than 20% of the acquisition or investment opportunities that private equity should be seeing they're seeing that's an indictment of my entire profession as being an agent in this field so maybe starting now with David are you do you feel that you have enough access to the opportunities out there or do you feel that it's a little bit of you got to get lucky once in a while well look we would always love for bankers to bring us more proprietary ideas so wants to do that that would be great for us you know I think look that chart the chart that you just showed about the M&A to us we love corporate M&A because corporate M&A is gonna lead to divestitures right and to us as its CEO change incorporated many of those tend to be the two things that lead to the most divestitures in the marketplace and so the fact that there's a lot of M&A going on right now we think is gonna be very beneficial to the private equity industry over the next four or five years because you're gonna buy things that either you're they're gonna buy things and then divest the whole thing we see that all the time right we kind of laugh we'll see someone do a deal will say well that'll be that'll be a private equity deal in a couple of years or they'll buy a bigger business and they'll say well we don't really need this piece right can we get rid of it so so you know we tend to think that M&A is very good and we'd say you know we work hard sourcing trying to find activities that's you know if you think about what you know what the skill set of all of our firms are right one is we've got to be really good at sourcing now we all take different approaches right we tend to spend a lot of time with corporates and trying to find situations where they might want to invest in acid or we spend a lot of time with families trying to figure out if they would want our capital to provide but every one of us on this stage and every private equity firm spends you know could always get better for sure but a lot of times sourcing obviously you know we got to be good investors so we got to be good at judging the value of businesses and structuring transactions and then we got to be good owners right we got to be great owners of businesses and try to drive value in the ownership and look the last thing that private equity has to is we ought to be good sellers right I mean that's part of the way you make money in private equity right and again harder in the public markets but there I'm sure there have been many times in Scott's history where you know he's made he's made an extra turn or something because they were really smart in the way they exited a business and you know versus just selling a stock I mean obviously we all exit through the public markets but we ought to be smart sellers as well and if you think about those are multiple levers right that we have in our business to try to make money for our investors and that's what we're trying to do we're trying to buy the right businesses at the right price we're trying to drive value and those businesses every day that we own them and then we're trying to be really smart about when we get out of those businesses and try to maximize maximize value which I think begs an interesting question around these long-dated funds that are kind of cropping up in our market and and potentially gonna cause some disruption because they're you know there are lower fees there people expect or have kind of given permission to have lower returns on them and and with this idea that you know you can you can compound money for 10 years of 14% versus 5 years of 20% you know you'd rather have the 14 10 years of 14 but that's not that easy either right and it'll be it'll be interesting to see how that plays out over over time well I've been waiting to become a private equity guy if the trend was to expect lower and lower returns at the same fee level but unless that happens I'll just have to stay about courage do you have anything they add to what David yeah you know III think David exactly right I think as we look at the business model of our industry it is much labor-intensive than it was when actually any of us started in this business the need to be able to identify interesting opportunities first by trying to figure out where there really is secular growth in this economy is something that is labor and labor intensive exercise the see DNR's perspective or any of our firms perspective the ability to go out be their first be their often as we we like to say and provide a solution is something that requires an enormous amount of work in time as we look at it the average deal that we did in our last fund had gestation well the range of gestation periods was one to five years I mean it's not a simple exercise anymore of just bidding and auctions we we bid in lots of options I have nothing against them as I said we unfortunately have been losing a lot but you know we'll we'll continue to do the work that we need to identify things and that that has a high labor of intensity on the sourcing side which when you add it to what we talked about earlier on the operating side means the business model of our firms has had to evolve the the needs provide co-invest for our LPS that's now part of our core business model and that is another positive in many ways but it also requires another form of labor intensity in order to make that a successful exercise so the business model the industry has evolved a lot since the really early 1980s when sellers hadn't figured out that if you sell something at six or seven times and somebody puts ninety to ninety nine percent leverage on it they're gonna make a lot of money that was a that was a great period but that's not the world that we live in today and then the last thing I would say is as you look at that chart of M&A and that shows the supply side of companies available to the demand that private equity has it's not clear to me where people put the acquisitions that are executed by the companies that we own and you know one of the things I think private equity has gotten very good at is being able to help companies create the capability to successfully integrate acquisitions and do so in ways that allow you to synergize down and not just use the words but actually achieve a much lower effective entry point than the price that that you see on those multiple pages and I would say that throughout the industry that has become a very important element in terms of marrying operating capability and sourcing in order to mitigate the price issues that you showed on that very first chart you put on maybe sad just to give you ever in a sense of the world we live in and picking up what Scott said talking a very senior person in one of the banks were working with on a transaction and said how's it going and said great since we are you paying a 13 multiple with an 8 leverage III said no I said I said we're we're paying like a seven ish multiple with four ish leverage and he said that's great what's wrong with the company so so just to give everyone a sense of the world we live in today versus the world I think Scott when you were pioneering the business and a lot a lots changed and and I think it's very interesting to see that evolution but I but I do think you know there's a lot of opportunity out there at different parts of spectrum well the addre you just sorry go ahead very natural way to some time we're known for what we've done that's a good thing like they did they've not heard about your SEO or CDN are but they know what what investment we've made and they you know some realize that you were the one to take that company from A to B you were the one to do some you know the build up so we're we're mentioning and that's the best way to nourish your deal flow because you're known as you know the owner who made that you know change in an industry or for one company and that's that's how a number of an entrepreneur and madman team come to you as an investor because they they've heard about what you did so I think the more you spend time in a sector or an industry the more you should continue to spend time in that sector on or that industry unless there's a big change which then completely change the way you see the opportunity and your capacity to make the change you're way more knowledgeable you ask the right question you can be you know on the go and make a decision in a very short period of time because you become maybe not an expert but you certainly know what to look for in your own due diligence and you know how so you your natural in the fields and it's your natural in the field then you know they they come to you as the reference share order or partner that's you know that's an interesting in the future I spend a lot of time in an area where you've already been successful and demonstrated your success no it's always been we talked about this you and I earlier there's a European cultural approach to recognizing the longevity of a family brand for example and and the continuity and your and your when you're investing you're investing in that person so you know Andrew sometimes that person goes from Lindsay Goldberg and then starts a new fund so you have a couple of things that that you could bring to the to the audience as well as the rest of us up here how much of the brand travels when you're leaving one firm and you're starting your new one and how much does the starting of a new new fund is it an opportunistic play to to fill in a gap that the bigger funds have left sure so look I'm grateful to to all those had a chance to work with who have mentored me I see a few in the audience here it's people like Tom Meredith sitting here in the middle our vice-chairman a bright star Court but is not here today Marcelo Clara who's emerging his company with t-mobile folks at Lindsay Goldberg so really grateful for the opportunity to be here and I think look I think it's many of the firm's you see today are our outgrowth of something else that happened before them as well and there was some need for it we identified a need in the market for that middle market company not not to be lost in the shuffle that family business owner those 32,000 private companies in the US I can tell you we're having a lot of fun doing what we're doing we don't we don't we have we have a big a big funnel but a limited number of transactions we want to do and frankly our life as it was before continues with the relationship as the start not the deal the investment comes out of the relationship but it starts first you know with a really strong relationship and do we share common values are we looking to grow together so we're we're grateful to be here and feel honored to be on the stage with the greatest deemed colleagues and so John just to maybe tie that back which is a partnership partnership with your your customer talk a little bit about the partnership but you guys try to bring whether it's you know in the debt fund whether it's in the real estate fund or whether it's the private equity fund with the customers that you have yeah so I guess being part of a big platform part of the reason to have a big platform I think today in today's market is to be oriented towards trying to deliver outcomes to investors so an investor comes to us and they have a need for one part of their portfolio can we give them a broader solution so you know something we talk about a lot in the fixed income side of the set of houses you know we can offer high-yield private credit infrastructure debt in a multi asset approach to somebody all once on the equity side we can offer you private equity real estate private equity other types of capital all in a multi asset approach for investors can we deliver that more cost-effectively can we help them get scale in managing their relationships I think everybody's resource constrained and so if you can ration your relationships with investment managers and get an outcome oriented approach delivered by one global platform is that interesting to investors and it is interesting to a lot of investors work you know we've also got a great parent in MassMutual and so very often we're in a position where you know we talked a lot at the beginning of the panel about governance a big part of governance for private equity investors is alignment of interest most often our parent is putting in capital alongside of our investors showing that that alignment of interests is there in addition to the team's investing alongside of investors I'm gonna because we're watching the clock a little bit I'm gonna start over on the far left with the and we're gonna go across and Andrew what buna maybe leave the audience out here with the one wisdom or the one thing that you think they might not have got to so forth today common sense prevails someone's arrogant avoid them do business people you want to do business with a fortune cookie author you know I was thinking about what Steve Newton said yesterday about how he feels like we're gonna stay in this Goldilocks economy for at least another couple years but the reality is at some point it's going to break and I think you know hopefully the private equity community will be very well positioned for one of when it broke and you know as hard as 2007 and 8 and 9 were for all of us I think the lesson learned from then from that time was most of our businesses made it through right so private equity was able to react provide liquidity for the businesses hunker down take out cost whatever it needed to do to keep the assets alive and there been many stories in the industry that we're successful and in addition to that if you think about that dry powder chart that was shown at the beginning that dried powder becomes enormous ly valuable in the marketplace right enormous ly valuable capital when the world kind of tips over a little bit and that will happen sometime in the next five years and they're not that many of the places right that have that kind of dry powder that can go react and invest at that time heard there is Scott lightening round so be very concerned when people start talking about how this time it's different and let's not underestimate serendipity as a key driver of success and that old phrase I'd rather be lucky than good is very under appreciated in many industries all right John I would say price the world that we're living in if somebody on my team brings me a model and it doesn't have a stress test for a recession happening over the next five to seven years refinancing costs going up exit multiples being lower than entry multiples I just hit delete in my inbox and you know they come back and ask me what do you think about my model and I say try again we got a price the world we're in right version a clean up I would say beacon tryin I love to be on my own on a situation the more I'm heavily criticized the more I think I'm right you know be be proud of what we do and then returns will come out of that all right so I'll finish up in front of us we have five people that'd be a decent sized jazz band in honor of Gibson violin bankruptcy I want to remember that the nature of private equity is the orchestration of a song which is effectively playing the asset the economy to make music out of what's out there and when you look at these these investors up here as well as the others that are not up here today think of them as playing different instruments in different ways and the orchestration comes together to make beautiful music thank you very much [Applause]

Channel: Milken Institute

Views: 11,132

Rating: 4.96875 out of 5

Keywords: private equity, investment opportunity, pe

Id: eRcMUL46RT0

Length: 61min 5sec (3665 seconds)

Published: Fri Jul 06 2018