Popular long-running event offers premier forum for Chicago-area venture and private equity professionals
4/3/2008 - Highlighting the Kellogg School’s multidisciplinary strengths and providing another opportunity for its students to put their leadership skills into action, the Private Equity Conference on April 2 brought together top practitioners and scholars for a daylong discussion about emerging issues in the private equity and venture capital industries.
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| In its ninth year, the student-led conference is among the school’s most popular, attracting several hundred attendees to the James L. Allen Center for keynote speeches, panel conversations and a chance to network with their peers. This year’s topics included an exploration of how private equity and hedge funds have recently converged, the rise of clean technology to combat environmental degradation, and ongoing investment opportunities in the public infrastructure space.
Kellogg alumni began the day with a breakfast session where Reeve Waud ’89, founder and managing partner of Waud Capital Partners, provided an engaging overview of his 23 years of experience in the private equity world. He shared best practices and strategies that have helped his Lake Forest, Ill.-based firm acquire more than 120 companies and manage more than $500 million.
“Great private equity people understand risk in real-time,” said Waud. These are professionals, he said, who can walk into a room with little more than pen and paper and convey a deep understanding of the variables that create value around an investment. Structuring, negotiating, sourcing, closing, realizing return were among the many skills Waud noted as critical for those in his field.
The Kellogg graduate pointed out that soft skills were important too, since private equity entails being “arbiters of human capital.” In addition to all the analytical abilities required to excel in the venture space, Waudoutlinedmany “rules of the deal” and related management frameworks that he said were key. Among these were:
* Hire a CEO who has worked in the kind of company you are acquiring
* Obtain an exceptional CFO
* Create a 100-day plan to guide the venture
* Put a financial reporting structure in place quickly
* Find leaders who have the ability to attract relevant industry talent
Waud also said not to overlook details like the CEO expense report, since this can reveal a lot about the person.“Are they real partners or just in it for themselves?”
He cautioned attendees not to “make a deal,” but to pursue an “investment” and to make sure they could drill down to the handful of economic drivers behind thatinvestment. Articulating these points can bring clarity when framing and discussing the investment. Waud also advocated rigorous strategic planning, trend analysis and putting the right metrics in place. “What gets measured gets managed,” he reminded the conference participants.
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| Raj Atluru |
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| Keynote speaker Jack Bovender Jr., chairman and CEO of HCA, traced the history of his healthcare company, including its record-setting leveraged buyout in 2006. |
| Photo © Nathan Mandell |
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| John Pfeffer '91, partner at Kohlberg Kravis Roberts, delivered a keynote address at the April 2 Kellogg Private Equity Conference in which he explained the roots of today's credit crisis. |
| Photo © Nathan Mandell |
With respect to fundraising challenges, Waud said that “great mentors and a couple great lead investors” can influence success, even in a tough economy. In today’s market, he added, “there is [still] a ton of capital out there.” Private equity professionals just need to know how to access it, according to Waud, noting that smaller deals seem to be more popular now.
The formal conference began with morning keynotes from Raj Atluru, managing director at Draper Fisher Jurvetson, and Jack Bovender Jr., chairman and CEO of HCA. Atluru discussed global trends in private equity, including opportunities in China and India, which he said were among the markets forcing venture capitalists to “rethink their principles” and come to grips with the globalization of what used to be almost exclusively a Silicon Valley export. Not anymore, said Atluru, citing a range of companies like Skype, Alibaba, TCS, Pharmasky and Naukri.com.
“The nexus of innovation is shifting,” he said. Alongside the United States, India, China and Europe are all fast-growing players as the globalization of information continues to drive greater collaboration and foster “economic revolutions [that are] dwarfing the industrial revolution.”
Professionals who cling to old ways of thinking are likely to miss out on emerging opportunities, said Atluru. Among these, he indicated the rise of cleantechnology, the multitude of products and services that aim to improve operations and productivity while reducing costs and pollution. While some contend the sector is in its infancy, clean tech investment in 2007 reached a new high of $3 billion, in part, said Atluru, due to rising energy costs, like $100 oil.
While “going green” offers enormous investment potential, Atluru also cautioned about challenges, such as global regulatory drivers and the complex, global nature of energy markets. Investment in this area will also mean working with new sets of partners and demand new skills. “There’s no going back on cleantech,” concluded Atluru. “It’s here for the next 20 or 30 years.”
Later, Jack Bovender Jr. delivered a keynote that traced the history of HCA, the Nashville, Tenn.-based leading provider of healthcare services in the United States. In particular, he noted the decisions and strategy leading to the 2006 leveraged buyout of HCA by Kohlberg Kravis Roberts, Bain Capital and Merrill Lynch — at $33 billion, the largest LBO ever.Taking only 231 days from start to finish, the deal, said Bovender, was “remarkable and speaks to the commitment of a lot of people to get this done.”
Bovender compared the favorable market in 2006, when the HCA buyout was consummated, to current market conditions, saying that the transaction could not be done today. “It’s a wonderful feeling to be private in a time when public markets are in such turmoil,” Bovender said, adding that the company can take a long-term view and align strategy and growth accordingly, without pressure to respond to quarterly demands from public shareholders.
Providing a gloss on the financial circumstances that have created the current market conditions was Kellogg School graduate John Pfeffer ’91. The Kohlberg Kravis Roberts partner delivered a keynote that traced some of his company’s history, and the history of private equity, while sorting out strands of the present credit crisis.
“The circularity of history can be both disconcerting and reassuring,” said Pfeffer during an address that touched on the challenges and benefits brought about by financial innovations, including securitization and junk bonds. Securitization — a financial process that involves pooling and repackaging assets that are then sold to investors — began about 40 years ago as part of the real estate market before later spreading to many other sectors, Pfeffer said. Today, ironically, the practice has been at the center of the subprime mortgage crisis.
But like yesterday’s junk bonds that returned as today’s high-yield bonds, Pfeffer said securitization “is a valid technology,” albeit one “taken too far.” Eventually, though, the current “distrust” of securitization should wane, said Pfeffer, resulting in securitization once more regaining its stature as a legitimate tool.
In the meantime, the Kellogg alum advised conference participants to appreciate the global nature of today’s market to understand new risks and opportunities, as well as the scale of global markets, which provides risk diversification.
Also addressing the conference was Professor Sunil Chopra, Kellogg senior associate dean for curriculum and teaching, who noted the growth of student interest in private equity in recent years. In response, he said, Kellogg has continued to build its curriculum to meet the demand, including by introducing more experiential learning options, such as
Venture Lab and
Buyout Lab, which offer students intensive, hands-on exposure to real-world investment challenges.
