Private Equity in Transition
A recent online discussion with three experienced private equity professionals provided a survey of the industry’s development over the last decade, as well as advice for those interested in moving into the field. The participants were Peter M. Schulte ’83, Dan O’Connell ’80, and Sally Rocker ’81. The discussion was moderated by Andrew Metrick, Yale SOM Deputy Dean for Faculty Development & Michael H. Jordan Professor of Finance and Management.
The discussion touched on a number of major trends in the private equity industry.
Private equity has matured tremendously in the last decade, the panelists said. Greater efficiency in the market has meant significantly stronger competition. Valuations, especially to gain control of companies, have increased. Finding a remarkable deal is more and more difficult. “There are very few free-gain opportunities now,” said Peter M. Schulte '83, managing partner and co-founder of CM Equity Partners. “Very few people who have a company for sale or corporations with a division for sale don’t choose to get professional representation, so generally you don’t find something hiding under a rock that’s just free. That has changed a lot over the last eight or ten years.”
Dan O'Connell ’80, CEO and founder of Vestar Capital Partners, noted that not only is finding the right investment harder, it’s also increasingly critical to know what to do with it once the acquisition happens. Firms must show ongoing investment prowess along with operating and strategic capabilities. Generalist firms have found it difficult to meet these two challenges. That has led to specialization becoming the norm in private equity. “We have a specialty focus on financial services,” said Sally Rocker '81, managing director and general counsel of J.C. Flowers & Co. LLC. “That is a differentiating factor for us.” The panelists noted that even the largest firms have sub-specialties.
There has been an emptying of the middle in private equity. “Since the financial crisis, we have seen a flight to quality. That benefits the big private equity funds. They are just getting bigger,” Rocker said. “There has been, and will continue to be, a squeeze on many firms that are in the middle both of the hedge fund and the private equity sides.”
O’Connell echoed that by pointing out what he sees as a bifurcation of the industry. “There are boutique firms that specialize by industry or geography or stage of investment. They have chosen to stay small,” he said. And at the other end of the spectrum, the megafirms have become multi-asset-class, multi-strategy public companies that resemble investment banks to some extent.
Getting Returns in Challenging Times
Schulte pointed out that in a strong economy, when everything is growing, it’s much easier to look good. Now, he said, “Differences are made with what you do with what you buy.”
Those differences often come from putting the right people in charge of portfolio companies. The capabilities and integrity of management teams implementing the strategies are critical. “Ultimately, the business is still about delivering returns,” said Rocker. “You really need talent that you can work with and trust in order to make that happen over the long term.”
That’s also true within the firm, she noted—it’s not enough to just do the analytics. “Private equity is a people business,” Rocker said. “I tell people that to succeed you have to check your ego at the door. Private equity teams tend to be small and collaborative.”
Getting Into the Field
The career path into private equity has changed. Few specialty firms are prepared to train new hires, so they’re looking for people with anywhere from three to ten years of experience. Where that experience is gained may also be shifting. “Increasingly, you’re finding people with an operating background moving into private equity—people who have sector expertise, who understand the complexities and where value is going in that industry,” said O’Connell. “Traditionally, folks in college or business school wanting to get into private equity would think investment banking or consulting, nowadays, starting out in a business whether on the financial side or the operations side may be as good a path, long-term, into private equity.”