Speaker Series: Simon Davies, Managing Director, The Blackstone Group, Hosted by: Private Equity/Venture Capital Club

Simon Davies, Managing Director at The Blackstone Group appeared before a packed house of London Business School MBAs to discuss, “Private Equity in a Changing World.” Mr. Davies, who epitomizes a true English gentleman, started the discussion with a quote from Ben Bernanke:

“At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained,” March 28, 2007.

This quote highlights the syndrome existing in finance during the boom years, a syndrome known as “optimism.” As the western financial system was clearly caught off guard by a “fast ball down the middle,” financial investment firms drank the proverbial Kool Aid as debt was readily available at historically low LIBOR spreads and IPO exit strategies were easily materialized through strong public demand. This impacted both private equity funds and hedge funds but in different ways. By prescription, hedge funds suffered the most. Many institutional investors redeemed funds once their short 6-month lock-in periods expired. However, these investors could not redeem funds invested in private equity as their investments were tied to a longer asset realization timeline. Private Equity’s business model has allowed private equity funds to maintain their assets under management. Nevertheless, both hedge funds and private equity funds have recently struggled to fundraise. Blackstone’s fundraising effort yielded 40% less for its most recent private equity fund than it had three years ago. Clearly the trajectory of growth for the private equity industry has slowed, leading to a decline in new hires in recent years.

One key takeaway for MBAs was what Mr. Davies described as reliance on financial models. For those looking to break into PE, the consequences of using too many variables simply leads to bad investments (ie. garbage in garbage out). Investment teams often rely on financial modeling to find investment solutions however, a model shows when investment strategies break down, not when they work, which is a key distinction from Warren Buffet’s investment methodology:

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”

Which follows nicely with another Warren Buffet quote I found:

“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”

Mr. Davies shared his thoughts and predictions about how private equity investors will adjust to the market turmoil going forward. One can expect lower exit multiples, longer exits, a difficult fundraising environment and lower investment returns. On the other hand, investment managers will scrutinize due diligence on new acquisitions more so than before the financial crisis, will focus on running leaner portfolio companies and will use more equity as a percentage of enterprise value then they have in previous recessionary periods.

The evening concluded with a Q&A where Mr. Davies described his function as a Managing Director in Blackstone’s Restructuring and Reorganisation Division and his view on investment opportunities in the near term. Mr. Davies’ role functions as an advisor to investment teams. This requires both pragmatism and “soft hands” as he often handles debt workouts for portfolio companies with capital structure issues. Looking forward, investment opportunities will occur at all levels of high yield debt and in emerging markets such as China. The session ended with an MBA asking Mr. Davies what he would do if he were the central banker of the U.S. I will not reveal his answer here as it is our hope you will come to the next event!

On behalf of the Private Equity and Venture Capital Club, I would like to thank Mr. Davies for an insightful presentation. We look forward to having him back in the near future.

Ryan Brewer, MBA 2012

Success at the Rotterdam School of Management European Private Equity Case Competition

I was a member of London Business School’s winning team at the European Private Equity Case Competition hosted by the Rotterdam School of Management on October 22. The event was fantastic – it brought out the best in the eight competing teams and provided a great learning opportunity to everyone involved. We thoroughly enjoyed the experience and were extremely proud to take the trophy back to London.

As you’d expect from LBS, our team was a diverse mix of professional and national backgrounds – an Italian investment banker (Matteo Masi), an American hedge fund analyst (Chris Steinbaugh), an Italian consultant (Matteo Luoni) and an Irish/American PE associate (me). Our road to Rotterdam started a month earlier, when we won an internal competition organized by the LBS Private Equity and Venture Capital Club (the judging panel included Dunedin Capital Partners’ Jim Strang, Coller Institute Chairman Eli Talmor and Executive Director Hans Holmen).

The case for the competition arrived a week before we were due in Rotterdam. Intriguingly, the organizers structured the case as an overview of the German ice cream manufacturing industry, laying out five different potential targets to analyze. This broad case meant that there were multiple investment strategies on the table.

The preparation week flew by as we balanced our regular class workload with the hours of intense industry research, company analysis and financial modeling necessary to form our investment thesis. We settled on an industry roll-up as the best strategy and focused hard on communicating our rationale and evaluating the key investment risks – we were still making tweaks to our presentation as we flew to Rotterdam on Thursday evening.

The competition itself was set up in two rounds. In the first round, we faced off against the teams from INSEAD, ESADE and IESE for a single spot in the final. The eight judges boasted a range of experience in private equity and related advisory services. Our 20-minute presentation went smoothly, and we felt we handled the 10-minute Q&A session well. We knew that the other schools would be equally well prepared, so we weren’t surprised when the judges announced that the competition in our group had been extremely close. We were able to breathe a sigh of relief when they revealed that we’d made it through to the final, where we’d face Hong Kong-UST.

The final round was just as nerve-racking. We were given a slightly-expanded 25-minute timeslot for our presentation, but in this round the judges were allotted up to 30 minutes for Q&A. After our presentation, they relentlessly grilled us on the industry and financial assumptions underpinning our strategy. By the time it was over we were mentally exhausted, but relieved that we’d been able to defend our rationale and analysis relatively well. The judges took their time deliberating, and again commented on how close the decision between the two finalist teams had been. When they announced us as the winner, we were elated.

The announcement was followed by a drinks reception and dinner hosted by RSM in Rotterdam. We were able to thank the judges and received some insightful feedback on the strengths and weaknesses in our presentation – a great opportunity to learn from industry practitioners. We also got to know the other teams a bit better and traded war stories from our preparation and presentations. It was an excellent cap to the day and further enhanced the great overall experience.

James O'Gara, MBA 2012

Marathon of Marathons - First Hand Reaction

As I boarded the plane to head to Athens, I knew it was going to be a special few days. This past weekend, I agreed to join a group of 250 people from the private equity industry in an effort to raise €2.5 million for various children's charities, by participating in the Athens Marathon.

This year's race commemorated the 2,500th anniversary of the Battle of Marathon and Pheidippidies’ historic run from Marathon to Athens. As the story goes, Pheidippidies ran 26.2 miles (42.2 kilometres) from the battlefield near Marathon back to Athens announce the Greek victory over the Persians, only to die on the spot from exhaustion.

The statistics demonstrate how worthy the cause is:

· Currently 1 billion children live in poverty (1 in 2 children in the world);

· 640 million live without adequate shelter;

· 400 million have no access to safe water;

· 270 million have no access to health services;

· Nearly 11 million die each year before they reach the age of 5 (nearly 30,000 children per day).

I agreed to run the race partly because I believe in the cause, but also because I have always been fascinated by the abilities of marathon runners to clear their mind and stay dedicated to an incredibly gruelling and often lonesome training schedule. It is not surprising that many people from the private equity industry agreed to participate in this year’s event, as I think it takes similar characteristics to become a leader in our industry.

The weekend kicked off with a social, which helped me get an introduction to several people from the industry, including people from Pantheon Ventures, Apax, Coller Capital, and athletes who had flown across the world, from a triathlete, from the Future Fund in Australia, to a couple from San Francisco.

On Saturday, after a large carbo-loaded lunch, and a quick tour of the Acropolis, our attention turned to the task that lay ahead. The Athens course, is a combination of hills and heat, with temperatures touching 26^o (79 Fahrenheit), and a course that goes uphill for the first three quarters of the race.

Due to injuries, I was limited on the course, forced to walk nearly the whole marathon. But I was able to persevere through the heat and the pain, entering the old Olympic stadium and crossing the finish line well ahead of my goal. What was even more amazing, out of a group of 200+ entrants; nearly everyone finished the course, with most running or walking for the first time.

I think this weekend speaks worlds about how our industry can use make a difference in a non-business setting. Each of the participants who ran the race, no matter what time they finished, or how much pain they may be in, can sit back with icepacks on their knees and think about their accomplishments this weekend and the difference it will make for children across the world. I am amazed by the support I received in my efforts to raise funds, and even more amazed by the support of all the people in Athens who have helped us try and reach our goal.

There is still time to donate to this great cause, and we need support to get to our goal. At the moment we are short of our goal and do not plan on stopping until we reach it. Great firms within the private equity community, including 3i, Adams Street, Apax, Arcus, Bridgepoint, Campbell Lutyens, Capital Dynamics, Capvis, Coller, Ernst & Young, Lazard, Meridiam, Pantheon, Partners Group, PEI, Pomona, and Platina have all contributed significant amounts of money to the cause.

You can find out more about the cause at http://www.marathonofmarathons.com/

And you can donate here: www.bmycharity.com/v2/Rishi