|Drinking from the fountain of knowledge|
Key-figures of the American private equity industry share experiences
"All roads lead to Rome", is the saying. Although in popular wisdom this proverb is quite applicable, in the investment world, where “Rome” would be the nirvana of exceptional returns, nothing is farther than the truth. The road to success in this area is paved with discipline, perseverance, strategy and knowledge, but not all managers can combine these attributes. However, it is fascinating to learn that there are several options to travel this road. This is one of the most important corollaries of The Masters of Private Equity and Venture Capital.
The book gathers first person accounts from ten exponents of the industry, comments from Steve Kaplan, professor of the University of Chicago, and Garth Saloner, dean of Stanford University’s business school. Each one of the 12 chapters of the book is dedicated to a renowned professional, and explores the strategic choices of their companies and how they produced returns. All depositions are from people with over 25 years experience in the business (one of them has 50 years in venture capital), which experienced periods of exuberance and "lean times", like the one today.
In the first part of the book, which presents private equity experiences, strategies range from the operational improvement of industrial companies, illustrated by one of the founders of Clayton, Dubilier & Rice, to the use of generous packages of stock options in service companies to promote the alignment of interests. The text is rich in practical and famous business examples such as the spin-off of Lexmark from IBM, and the investments in the advertising agency Young & Rubicam and in Nasdaq.
Investments in venture capital and strategies focused on technological innovation, its development and commercialization are the subject of the second part of the book. The experience of Steve Lazarus and his firm, Arch Venture Partners, which had its start from an internal initiative of the University of Chicago to take its top academic researchers to the market, is noteworthy.
In 2007, the American private equity industry reached its apogee in terms of funds raised and number of deals, and has been recovering slowly from the excesses of that moment. This catharsis is leading to a natural movement to return to the roots of private equity’s activity, focusing on better governance, transparency and the search for operational efficiency.
The book ends by bringing together best practices such as checklists for hiring executives, and evaluating investments and risks. The common denominator of the ten experiences presented emphasizes that the private equity and venture capital business basically deals with decision making based on imperfect information, risk mitigation and the alignment of interests. These techniques, described in the book, add real value to business, and fund managers with clear strategies and implementation discipline are most likely to prosper in a selective environment. There may be a road to Rome after all.