The following Wharton PE Conference coverage is from Daniela Stefovska, a first-year MBA student at the Wharton School. She sat in on two keynotes, from John Megrue of Apax Partners and Dalip Pathak of Warburg Pincus. Prior to Wharton, Daniela worked in the Global Treasury group of Merrill Lynch, where she helped create the Liquidity Risk Management platform.
John Megrue, CEO of Apax Partners U.S., gave the morning keynote speech at last Friday’s Wharton Private Equity Conference. He began by discussing changes in the PE landscape over the past decade, including:
- Increasing level of sophistication – e.g. due diligence budgets went up 4-6 times from mid 90’s
- Legal sophistication – more complicated transactions
- Speed of transactions and increased competitiveness now require more tactical intensity
- Institutionalization – the “cowboy investors” from the 90’s, great dealmakers who could be hired and do well in any firm, now ceding way to greater institutional power of funds
- Greater LP sophistication – whereas in the past LP’s decision to invest was much more relationship driven, today it is based on very sophisticated analysis, auditing and data requirements
The trend for the next decade of PE investing is “value-added.” Whereas in the past the returns were driven primarily by financial engineering, future returns are going to be made by operational value improvement. This will require heavy investment in operating partners with deep industry expertise.
Megrue gave an example of the “heat-mapping” process used at Apax to identify attractive investment opportunities. Twice a year each global sector group gets together to review current trends within each subsector to identify the most promising areas to focus on for the next six months. When a deal follows, it is pursued only if it falls within the predetermined heat map.
Megrue also touched upon the importance of relationship skills as a differentiating factor both at the individual and institutional level. He shared his view that leadership presence and communication style is a much underappreciated skill in PE, far more important than technical expertise.
Finally he concluded with some thoughts on the evolving role of business in the world and the idea of values-based management. Up until the 1970s, management was by coercion (carrots and sticks), then replaced by management by motivation (stock options and bonus plans), which now needs to be replaced by management by inspiration. He believes we do not need new rulebooks but leadership to set the tone and lead with values.
There are big challenges facing the world, beyond the ability of deficit-burdened governments to cope, so corporations need to step up and play a more active role in driving value. It is time for business leaders to play a broader statesmanship role.
Lunch keynote by Dalip Pathak, Head of Warburg Pincus Europe and India
Pathak emphasized three key points that define the PE business:
1. PE is an upside-oriented business, unlike banking and accounting which are downside-oriented
2. It’s all about management
3. Liquidity s key
He then went on to discuss recent trends in Europe, including how dealflow is being driven by a large backlog of assets that were waiting on the sideline to be sold over the past two years. The financing environment has improved somewhat but is still constrained by banks deleveraging. S
ome firms like Warburg Pincus are willing to fund 100% equity deals. The short-term outlook is that there will be fewer irms who will manage smaller funds and higher number of equity deals. Still Pathak was optimistic on the investment opportunities in the region. He sees opportunities in the following areas:
1. High-growth subsectors such as healthcare, business services and environmental
2. Emerging Europe
3. Privatizations by overleveraged governments
4. High-growth, export –driven businesses
5. Balance-sheet distress
In terms of structure he sees opportunities in follow-on investments, minority positions, growth capital, PIPEs and buyouts without leverage.
Finally, he echoed John Megrue’s point about the importance of relationship skills. Pathak noted that the PE business is not just about IQ, it is as much if not more about EQ. Therefore when he hires he looks for a balance of intellect, personality and empathy as well as a cosmopolitan mindset, particularly important in Europe.