London Business School Coller Institute of Private Equity

COLLER PRIZE EVENING | LESSONS FROM TIM PARKER

07 November 2011 by Ann Iveson

• Masters and PhD Prize Winners 2011 announced at Annual Coller Prize Evening
• Tim Parker's learnings from an impressive career

Now in its 6th year, last Wednesday was the Annual Coller Prize for the best case study and management report completed by Masters students at London Business School in the field of venture capital or private equity. In 2010 we also introduced a new category - the PhD prize that is open to all PhD students at any academic institution focussing on research theses in this sphere.

Congratulations to all the winners and runners up. You can find out more about them and their work on our website.

However I want to devote this blog more to the introduction given by Tim Parker an alumnus of the School and now an Industrial Partner at CVC Capital Partners. Although not a hagiography, it nevertheless provided some interesting and useful insights to the essential elements or lessons for running a successful business and why these might more readily exist within private equity owned firms.

Having witnessed, changed and imposed governance at a variety of organisations including Plcs, family businesses and pe owned firms these are his take aways from his impressive career.

• Failure - To fail is good for a career, especially if it occurs early and is not too spectacular.
• Managing People - For success it is critical to develop sound judgement about people - which to motivate and promote and which to remove. The role of the CEO is to pick and trust the right people. He avoids so named "political" people; those that will put their interest and agenda above that of the company or main mission.
• Delegating Power - real delegation creates real power to leverage (not in the financial sense) the organsiation to develop a collective responsibilty. This is different from a blurred sense of shared responsibility. It means encouraging disagreement and promoting a direct feedback to the CEO on problems and disagreements.
• Incentives - They can make the same people have different behaviours. Whilst at least in the financial sector incentives are a bad word, he showed that structured correctly and based on realised results not just valuations they can make those potential recipients to ask tougher, more demanding questions of their and others performance. Most importantly they can make those same same people move at a faster pace to correct and improve imediments to performance.
• Tempo - The speed of decision making is imperative. Opportunities are often lost to procrastination, analysis paralysis or just down right laziness. With volatility a seemingly constant, the ability to make a decision is key. The art is to know when you have enough of the right information. It is, he said, better to make the wrong decision than no decision - wrong decisions can usually be reversed.   
• Execution and Knowledge - Great execution is everything and the catalyst for this is specific indepth knowledge to anticipate and avoid pitfalls.

What about the benefit of the MBA at London Business School - why is this not included above? Definitely it was a factor (although it was MSc at that time) as it transitioned him into general management from a 'career' in the Treasury. It also underlined and engendered a more competitive ambience as opposed to his, self confessed, more relaxed undergraduate years. 

Tim closed his candid and engaging talk on a more serious and poignant note; after a comment on succession planning at pe firms he made an observation on the increasing pressures facing everyone running a business today, explicitly that 'the cake' is no longer growing. Although open to interpretation I saw this as implying a flaw in or a warning on capitalism as the mechanism for empowering wealth creation. Whilst there is an increasing return on intellectual capital the middle classes are not just being squeezed but evacuated he stated.



So may be  he rightly earned his albeit ersatz tltle "Prince of Darkness" and we should tune out this blog to Elgar's Nimrod, a sombre melody, the type which Tim had told us is used by the media to signify, as in some theatrical ensemble, "the bad guy". But there again honest should not be confused with bad just because you don't like the message!

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PRIVATE EQUITY | THE MASTERCLASS | AN INVESTMENT OR EXPENSE?

31 October 2011 by Ann Iveson

• Can you really be taught Private Equity or is it, as Oscar Wilde might have suggested, something you have to experience firsthand?
• Is a Business School able to manage the gap between rigour and resonance?
• In summary what makes this executive education course an investment rather than just an expense?

I last wrote about the MasterClass in the Private Equity Findings Issue 3 and essentially focused on the participants, their seniority and geographic diversity, and syllabus together with some of the course alumni comments.

However I was prompted to revisit it because :

• The time of year - the MasterClass is held in London biannually (March and October) and
• Perhaps more pertinently by an email we received from an US based past participant who wrote to say how directly impactful the course was in (re)viewing and ultimately selling his company

For someone, who has no links to the School other than a 3-day open Executive course, to do that says more than any advert could so I decided to sit in on the current class to watch and observe.

I have sat in earlier MasterClasses and must confess at this point, my allegiance. However, this time to create a level of detachment I sat at the back not in the lecture theatre desks.

It was half way through Day 2 and the sold-out class of 40, divided into 8 groups, were on their current assignment - adopting the role of an LP and deciding whether and in what GPs to invest based on their respective track records. This is a simulation using real, unattributed data.

On paper, the seniority and diversity of this class were no different than other executive programmes; indeed I had to go and check out a few of the flags on name plates which were not immediately recognisable. What's more and despite the sombre economic mood, well at least in the western world, this class was sold out months in advance.

It's accepted wisdom that business school enrolments are negatively correlated with the economic cycle - I think it's the same for books on leadership but I don't have the stats, but is it true for Executive Education?

And this is Private Equity. You might have thought the media coverage and reality of tough fundraising, reduced leverage and barriers to exit may have proved all too much but, no, the interest in the sector remains. Indeed this class is populated with participants from leading GPs and Investors as well as many from corporates and the professional services.

As the class came in I was struck by the positive ambience; a blend of camaraderie and friendly rivalry amongst the teams. I know it's cliched but there was a real buzz in the room. Each team had been set a slightly different task or question on reviewing the data and each presented their findings, seeking out the hidden DNA of each GP.

"Making an impact on how we do business"........has always been the genesis of the School's teaching and now it is the current strapline for all our programmes. So how do we convey this in the MasterClass?

Well what do you get?

• First Rate Teaching - from Faculty and Practitioners. It's a packed 3 days. You have to participate - this is not for observers! 
• Case Studies - tackling real situations co -authored by Professor Eli Talmor, Chairman of the Coller Institute with appearances from many of the cases' protagonists. Here you are in situ, sharing examples of responsible ownership (and not so great ownership) - always a hot potato - where it's about evaluating operational risks, opportunities and capturing those option values. It is not all about the leverage and financial wizardry. It's about stories and experiences which are delivered brilliantly.
• International Private Equity - written by Professors Eli Talmor and Florin Vasvari; the current almanac of the PE industry.
• Simulations - as described above on investing in GPs.
• Technical Input - from lawyers on matters such as Fund agreements
• Networking - a chance to spend time and work with senior professionals from varied business and geographic backgrounds and become part of the Coller Institute network though Linked In connections with current and previous programme participants
• All the above with first rate administration on campus in London!

Learning is good but not enough, it's what you do with it that counts. Whether it reinforces or changes behaviours it should provide the confidence and platform to make an impact.

As I re-joined the class for the concluding remarks and drinks it was clear that lasting connections had been forged. At this level  most of the participants come with a sense of purpose and all were enthusiastic about what they had learned, how the knowledge had been transferred and most importantly how they might use it!

So we remain true to our ethos and hopeful that we will have more stories from alumni and their experiences of how the School and the MasterClass have made an impact on them and others.

Oh and if you want to hear the real stories and secrets behind the deals then look out for our next MasterClass in 2012 !

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PRIVATE EQUITY - A BAD BUSINESS?

27 September 2011 by Ann Iveson

Well according to the FT today that may be the belief of Ed Miliband as he espouses his plans for promoting ethical business behaviour during his inaugural speech as party leader at the Labour Party Conference.

Good ideal we say. However what about execution. I have grave concerns as all that emotive language such as "wealth creators" versus "asset strippers" comes to the fore again.

Creating a forum for debate is a fundamental tenet of the Coller Institute but we hope that those we host have protagonists and antagonists, that are both open minded enough to listen to the opposing arguments, and have sufficient integrity and judgement to question their original positions.

Mr Miliband plans to use tax and regulation to differentiate between "good" and "bad" businesses. Just who will be the arbiter and when in the business' life or cycle will it be decided? Any politician as Dumbeldore with the Sorting Hat is not a good image but worse yet he comes to the debate with a bias for they state that Southern Cross is the definition of a bad company.

To say Southern Cross is a bad company without a debate as to the why,  what and who exactly made it, if indeed it was, does not augur well for many businesses irrespective of their ownership structure. There may well have been governance and operational issues at Southern Cross that could have been better (I am writing a separate blog on this very topic) but to label private equity as bad with one holistic badge is inappropriate and devoid of any analytical rigour.

Take Southern Cross for example. The business was publicly listed since 2006; ample time for so many stakeholders to question the business model. Why didn't they - were they conflicted, ignorant or both? 

Additionally "Sale and Leaseback" the financial tool so heavily criticised for causing the company's demise, is used successfully in many industries such as retail. It is not the tool but the workman in defining the terms of the leaseback that is at fault. In a publicly listed company those workmen are visible and accountable and yet when were they called to account? Some have interpreted Mr Miliband's intention as changing the tax advantage currently enjoyed by debt. What about rentals in sale and leasebacks and payments under PFI?

This week we learned how poor use of the private finance initiative (PFI) by the past government has exposed parts of the National Health System to potentially excessively high future liabilities. However, many PFIs have proven to deliver value for money for governments around the world in the delivery of social infrastructure. Again it is not the tool per se but at least it has been discovered now, with hopefully enough time to renegotiate and restructure.

In the past private equity has been likened to locusts - now they are in the same camp as anti-social tenants and like bankers just after a "fast buck"; the antithesis of grafters. But quick flips were the exception not the norm; indeed the holding period (acquisition until exit) is increasing. Furthermore remuneration methodology within PE is based on realised not mark to market gains and probably more objective with an audit trail than in banking. Time for a response? Should we host an event "PE - Grafters or Predators? Let us know.

Interestingly in his speech the world is divided between "producers" and "predators" the former invest, produce and sell. Okay so you know what to include in your slide pack to the shadow government!

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LEADERSHIP IN PRIVATE EQUITY : A POSTSCRIPT - SPRING CLEANING

29 March 2011 by Ann Iveson

• the IPO would pay them out at par thereby creating a second payout
• they would "cheat" the subordination/ risk element of the note by receiving preferential pay out
• they would leave the senior debt more expensive as an increased margin was agreed by way of compensation for the change in the capital/ subordination structure and may impact the overall capacity with senior lenders
• the PE owners would create different returns on this investment  for their respective LPs, depending on whether the PIK was recorded in the same fund - this creates conflicts and inbalances to the PE ethos of alignment

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LEADERSHIP IN PRIVATE EQUITY

11 March 2011 by Ann Iveson

Last week the Coller Institute hosted an event entitled "Leadership Risk in Private Equity".

• Situations - This is the context in which the leader operates, the business environment, the people around him/her - their capabilities and state of mind and the challenges he or she faces. This context is not a constant but a dynamic and, according to the second law of thermodynamics, a chaos seeking variable. Does the situation shape the leader? This depends on:
• Qualities - This is the leader's character; the will, the skill. These are often difficult to change. Does he/she accept or question the context. Does he/she shape the world around them?
• Processes - These are the styles, tactics and strategies a leader deploys in dealing with "Situations" or how the "Situations" make a leader react.

• The shareholders are different  - more active, demanding and with greater access to data and management
• The information required by those shareholders is often narrower but considerably more in depth and more frequent
• The Leadership balance changes as shareholders have a major impact on strategy and often add/insert new members to management team
• The communication between management and shareholders changes becoming more frequent and often less formal.

• more equity/less leverage (although this is now creeping back)
• focus on the portfolio rather than new additions
• greater focus on downside risk vs 100% on returns
• greater responsiveness to LP concerns

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PRIVATE EQUITY CAPTIVES – ANOTHER REASON WHY THE VOLCKER RULE MAKES SENSE

19 January 2011 by Ann Iveson

I’m hoping you’ve had a chance to dip into the latest issue of Private Equity Findings. It’s all interesting but perhaps this issue’s “Beyond the Abstract” entitled The End of the Captive is worthy of an extra mention here.

Why?


Academics are often criticised for having their heads either in the sand or stratosphere not on what’s happening right now. Not in this case though! The research paper “Unstable Equity? Combining Banking with Private Equity” by L Fang, V Ivashina and J Lerner is spot on given the resurgent wave of criticism levelled at banking models, bankers and their worth.

I should say upfront that these are my opinions, not those of the Coller Institute. However as an Institute focused on Private Equity such criticism provides an interesting distraction. Indeed many in PE would side with those that argue bankers, on average, are richly paid in relation to what they earn for their investors. But that’s not my point here.

Although focused on captives, what this paper is really examining and accumulating evidence on is the much broader and evocative question - the extent to which banking activities are cyclical and whether specific types of activity promote cyclicality within the financial system? This in essence is what the Volcker rule is all about and its sceptics should look at the authors’ findings at least as it relates to bank affiliated private equity businesses.

• The findings are based on a sample of 7,902 unique US private equity transactions between 1978 and 2009. 
• The 14 captives identified during the period 1983 – 2009 were involved in over 25% of all the deals done. Significant as this is, the real issue is that their involvement was pro-cyclical, peaking at over 45% of dollar volume at the height of the market (2006). 
• Overall the amount invested equalled 9.4% of the parents’ total equity (not just Tier 1 !) during this period although it peaked at 23% at the top of the cycle (2005-2006). 
• It is the concentration of exposure amongst the affiliated group that should at least raise a regulator’s eyebrow if not their blood pressure – the top 5 account for 80% of the total dollar value transacted by this entire group and the leading captive – Goldman Sachs Capital Partners alone accounts for 36%! In the non-affiliated group KKR accounts for 15% of the dollar volume and the top 5 transacted 50%.

So what drove the banks to get involved and to such a great extent? Go beyond the immediate knee jerk Gordon Gecko response and think about this strategically. The whole economic study of comparative and competitive advantage in terms of how it might apply to banks and specialised GPs is all really very interesting. However the paper looks at two initial factors; superior knowledge and access to capital, especially debt.

The former if prevalent would be demonstrated by the affiliated deals selecting financially stronger ex ante targets. This they do find but when the parent bank is a lender in the syndicate the targets are weaker.

Who is driving this? – the leveraged loan group, knowing that they can record the fees today, syndicate or securitise most of their residual exposure and book the loan at cost with no mark to market, brings in the prized equity of the captive in order to earn a league table lending position or is the captive in the driving seat? No longer able to find the growth equity transactions it changes focus, wanting exposure to the larger deals to improve their future potential deal flow and so persuades the leveraged loan group. Or is it simply evidence of opportunistic behaviour deployed by banks during boom times. Those appearing in front of the Treasury Select Committee have and will no doubt continue to deny such a stance!

So with no comparative advantage on sourcing better deals, what about access to capital? Here is the edge, bank affiliated deals enjoy much better terms when the parent is in the lending syndicate with the greatest advantage concentrated during the boom years.

• The amount of the loan is increased by US$ 557 million – almost double the average loan size,
• the maturity is extended by 4.3 years - two thirds increase above the average 6 years and
• the spread is reduced 33 basis points – a 10% reduction to the average spread.

But what about the returns? Can average to weaker targets be transformed by significantly cheaper capital? Overall, bank affiliated deals are only slightly worse. However whilst it is accepted that transactions done at market peaks are more prone to distress, this outcome is more pronounced for transactions done by mixed groups - a bank affiliated together with a non-affiliated group.

Whether pushed or pulled apart by regulatory or management pressure is it any wonder then that the incidence of banks shedding their captives has increased. The promise of cross selling revenues from exit IPOs and future lending cannot make up for the increased cost of capital let alone the new regulatory stance.

The evidence provided in this paper does indicate that banks’ private equity in house groups added to the overall cyclicality within private equity and that one of the key factors was the parent bank’s involvement as provider of debt capital. The positive impact of cheaper and longer term financing has not allowed their affiliates to generate superior returns but has created additional and detrimental repercussions as part of the credit expansion.

If this is the case relating to private equity activities one may ask what other businesses have banks created, that a crisis and regulatory shift is required to force a management rethink.

Whether a comparative advantage for banks operating within private equity existed is unclear – they certainly have not been able to exploit it. Indeed the corollary is that non-banks have an advantage; perhaps created by the shift in talent, a more aligned remuneration structure, better information and until now, lighter regulation. However comparative advantage is not static and regulators should be vigilant to ensure that such advantages, comparative or absolute, are not being driven by regulatory and fiscal differences.

Which brings me back to the bankers and one last question - does the absolute advantage conferred by being too big to fail warrant the bonus payments currently under consideration?

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WELCOME TO OUR NEW WEBSITE

03 June 2010 by Ann Iveson

COLLER INSTITUTE LAUNCHES A NEW WEBSITE


On behalf of the Coller Institute of Private Equity I'd like to welcome you all to our new website. Here you will be able to

• sign up for our events
• search for and download articles and research on private equity
• see the latest content and archive copies of our Private Equity Findings
• submit your papers for the Annual Coller Prize
• comment on our blogs
• or just learn more about us.

The search function, found under the Reasearch tab, is multi layered to either select papers and articles housed on the site or to search more broadly.

To get all this just register your details under log in

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