2010 Michigan Private Equity Conference
The 2010 Michigan Private Equity Conference is underway at the Michigan Union with plenty of heavy hitters in the industry. The annual conference gives a good read on the state of private equity and what to expect in the near future.
First up is the morning keynote speaker, David Brandon, athletic director of the University of Michigan and former CEO of Domino’s Pizza. He was hired to run Domino’s by private equity firm Bain Capital, which had bought Domino’s from founder Tom Monaghan.
8:40 a.m.: Brandon says when he came to Domino's, he made some major changes. It was clear Bain wanted an IPO eventually so he upped the pace of new product introductions, reduced employee turnover,and made personnel changes. But he had to build a case for change, give people the resources they needed, and give them the right incentives. Brandon says he's starting an incentive program in the Michigan athletic department. The idea may be "heresy on this campus," he admits.
8:50 a.m.: Want to talk about risk? Going on TV to tell people Domino’s pizza had been "sucky" for the past several years was the riskiest thing he's ever done, according to Brandon. But the move produced results. In his last quarter as CEO, sales were up 14 percent. Earlier, when Domino's was still owned by Bain, Brandon was able to keep investing during downturns. They took a long-term view so Domino's was able to advertise, create new items, and not slash benefits.
8:55 a.m.: Brandon is working to improve the Michigan athletic department because he wants it to be the best and "we're not the very best right now." Who is? Michigan fans might not want to hear the answer. "Right now Ohio State is kicking our ass." Fact is, Ohio State's football team has been in the national championship hunt and Michigan's has not been competitive in the Big Ten recently had hasn't gone to a bowl, he notes. And it goes beyond football. Michigan dropped to 25th in last year's National Association of Collegiate Directors of Athletics Directors' Cup after being in the top 10 most of the last 10 years. Athletically, he says Ohio State has handled Michigan "pretty well" in major competitions. He knows the enemy well and he doesn't like it. "I know who they are, I don't like them, and I want to beat them."
9:29 a.m.: The panel up now is Limited Partners: Marketplace Views and Perspectives. Brian Gimotty, managing director of Trinity Equity Investors LLC, says the environment right now is uncertain. Investors used to be able to count on getting money back in a few years when they invested in a fund. Right now, there's very little coming back.
9:35 a.m.:The panelists note there's a lot of uninvested capital sitting on the sidelines. While there are some signs of life, what happens with that capital will determine what happens with private equity in the next few years, says David Evans, chairman and CEO of Leoville Holdings LLC, and chairman and managing director of Glencoe Capital LLC. Private equity funds have a shelf life and the question will be whether the money in those funds is invested, lost, or extended. Evans says private equity is at an "inflection point." Pension funds are under pressure because they're facing a growing population of retirees and private equity fund investments complicate their ability to move money.
9:59 am: The small and middle parts of the private investment market look good. Charles Rial, a principal at Bass Creek Advisors Inc., says most of the private equity overhang is at the big end of the market. About $1.2 trillion was raised between 2005 and 2009. About 80 percent of that went to funds of $1 billion or more. About 9 percent went to funds of $500 million or less and 3 percent went to funds of $250 million or less. That bodes well for the small end of the market, he says. Evans agrees, noting the medium and smaller private equity investments pay off better over time.
10 a.m.: Some signs of optimism: One of the ways Evans is dealing with the economic downturn is partnering with general partners around the world for investments. Glencoe Capital also established the Michigan Opportunities Fund, a partnership between the firm, government, and top business leaders in the state. Peter Chung, managing director of Summit Partners, invests a lot in Silicon Valley and says the mood there is optimistic. The tech industry was fairly resilient during the downturn and the IPO window is opening a bit. But his firm also is investing in the Midwest and finding good opportunities. "I wouldn’t count out private equity capital in the Midwest," he says.
10:35 a.m.: The session up now is Trends in Operational Philosophies. Mark Carroll, managing partner of Superior Capital Partners LLC, says while there are opportunities in the small to middle market, an investor has to face some hard truths fast. Many of these companies have been undercapitalized for some time and took a lot of shortcuts. They don’t have enough talent and physical maintenance, and facility upgrades fell by the wayside. "It is a truth that has to be faced early on." Talent and human capital are particularly lacking at some companies, says J.W. Henry Watson, co founder and partner, BlackEagle Partners.
10:50 a.m.: Thoughts on outsourcing: It is becoming more expensive and it's not the slam-dunk some thought. Carroll says companies used to look over their shoulder at the Asia risk — what do we make that could be moved offshore? Now they’re looking at the Asia opportunity. But if you go that route, there’s a lot to consider on how to protect your intellectual property. Edward Hightower, a director at AlixParnters, says companies are putting much more analytics into an outsourcing decision "and not just assuming it's a slam dunk." Wage rates increase in China and logistics costs are increasing.
11:10 a.m.:What's the read on new opportunities? As for sectors, Watson likes aerospace. Demand is coming back and the industry is full of small players. Consolidation is behind the curve there, he says. But he warns many of them are poorly run and it will take a lot of time and money to get modern business systems up and running. But if you can do that, the rewards could be great. Hightower says it's more important to him that an owner be in the top four in his or her particular industry, no matter what it is. Top four players tend to weather storms better and maintain performance. As for operational opportunities, the low-hanging fruit in manufacturing is pretty much gone, Carroll says. Instead, bringing some of what manufacturing has learned from lean principles and factory physics to new industries is a good idea. His fund owns a publishing company that never thought of itself as a traditional operating business. Carroll says he helped bring some operational expertise to the publisher.
11:20 a.m.:Two concurrent sessions going on. We’re at Interviewing Senior Executives and Hiring Leadership. The other is Private Investment Funds: Negotiating Investment Agreement Terms in the Current Environment. Sorry we could only cover one.
11:33 a.m.:Good opening by Andor Reiber of the Reiber Group Inc. — a clip from "The Office" where Dwight Schrute interviews Andy Bernard for an open position. Classic scene.
11:40 a.m.: Reiber asks how many people in the room hired someone based on a resume. A few hands go up. He suggests an approach with rigor and structure. The first step is building a detailed blueprint for the job. What does success look like in this position? What skills? What will this executive be doing and has the candidate done it before? Find the right fit. A turnaround CEO might not be the best fit for a growth situation.
11:50 a.m.: Next step is screening. Use business and personal referrals as well as help from executive recruiters. Screen the resumes using the blueprint. Selecting from the qualified candidates is the third step. Reiber is a not fan of the informal interview, such as having a chat over lunch. He says it's not a good predictor. Better is a structured interview based on the blueprint. Ask about their past situations, behaviors, and outcomes. He also suggests a personality questionnaire and abilities testing. Also look for red flags. Look for how they say things. Ask about the circumstances of any past departures.
12:10 p.m.: Once private equity owners pick the right executive, the job's not done. Set some clear expectations about what you want the person to do and how you want to communicate with them, Reiber says. That step is forgotten too often. Come up with a 90-day plan that addresses challenges, opportunities, and some quick wins. Help them understand the culture. Past that, agree on a meeting schedule and regular progress checks. Talk about short-term and long-term issues.
1 p.m.: Lunch keynote speaker Michael Goss, managing director and COO of Bain Capital, points out the similarities between college football and private equity, an apt comparison given his audience and location. College football is undergoing a dramatic change with the Bowl Championship Series. It has shifted the balance of power from broadcasters to the content owners like conferences and schools. College athletic departments realize they have brands to build and deals to cut. He thinks that's why Michigan hired an executive like Brandon as athletic director. In private equity, there's a shift in power from the general partners who run the funds to the limited partners who invest in them, Goss says. The main area where they are not aligned is over the issue of fees. The rest of the areas of disagreement can be resolved, Goss says. Still, that means big changes for private equity firms.
1:10 p.m.: So is private equity still a great game, like football? Goss thinks it is. First, he has a hard time seeing a world where the only ownership models are the sole proprietor and public company. Overall, he thinks private equity is a better governance model and the returns still trounce those of the S&P. He thinks it's safe to get back in the water. Deals are up and limited partners are putting money back into private equity. The endowments and high-net-worth people are still overextended in private equity, but insurance companies and pension plans have plenty of appetite for it.
1:15 p.m.: Some advice going forward for the LPs and GPs from Goss, with a football analogy. For the offense, the LPs: Play ball control and stay in the game. For the defense, the GPs: Align yourself with the defense. "Remember, the defense can score, too."
1:24 p.m. The conference has concluded.
For more information, contact:
Terry Kosdrosky, (734) 936-2502, firstname.lastname@example.org