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