Tom Wright enters the Albemarle Gallery in London’s Mayfair on a clear evening in October to meet some of the up-and-coming dealmakers and venture capitalists who will help shape the future of private equity. Fittingly, this ‘Next Generation’ party (thrown by law firm Edwards Wildman) takes place amidst an exhibition called ‘Destinies’, a collection of portraits of young people.
Wright is a 30-year-old manager at Better Capital, the private equity turnaround specialist. He has worked on a number of take-privates, including City Link, an unprofitable parcel courier that Better acquired in 2013 for £1.
Many of the young dealmakers in the gallery started their careers during the worst financial crisis since the 1930s. Even as funding sources dried up, the industry was going through a time of intense political scrutiny, branded in some quarters as ‘locusts’ and targeted by regulators desperate to avoid a repeat of past mistakes.
These young dealmakers are well aware of the challenges they face – and also the opportunities ahead as the economy improves.
Clearly they care about making money, after a number of difficult years. They’re well aware that the industry has changed; that the proposition for new entrants is no longer what it was in the good old days. But they say that private equity firms are still renowned in business schools for the rewards they offer via salary and carried interest.
And they see plenty of opportunity in an era when many companies are still struggling to access capital. For instance, they’re excited about investing in the new frontier of digital business, as the internet and mobile phone applications provide access to billions of new consumers across both developing and developed countries.
Yet many of the new dealmakers are also quick to express an ethical motivation. Some say they’re driven to create positive change, both at their portfolio companies and in the wider world. And they want to be more open and less secretive. At the very least, many believe that it’s important to be seen to be responsible investors in the wake of the crisis.
MONEY, BUT NOT AT ANY COST
The idea of private equity as asset-strippers first entered the public consciousness in the 1980s, when Kohlberg Kravis Roberts’ takeover battle for RJR Nabisco inspired the book ‘Barbarians at the Gate’ – a high-stakes corporate struggle that revealed little thought for the concerns of customers or employees.
Don’t get Wright wrong. He’s highly motivated to make money. He just doesn’t want to get rich at any cost.
“I want to be able to sleep at night, and if I felt like I’d been screwing people over then it wouldn’t really be worth it,” Wright tells sister title PEI at the Next Generation party. “We like to think we aren’t doing asset stripping; [that] we are going to do things that in the long run will create jobs.”
Wright’s words are in stark contrast to some of the sentiments previously expressed by his boss, Better founder Jon Moulton. The veteran dealmaker – and inveterate controversialist – has said more than once that “insensitivity” is one of the qualities that helps him sleep at night.
The son of a vicar and a teacher and one of five children, Wright says he wasn’t born into wealth. He attended a private school thanks to a bursary, where he mixed with children from more affluent families. “There wasn’t loads of money going around,” Wright says of his childhood. “I was getting picked up in a battered old car. I thought: I don’t want to do that when I am older.”
He went on to study economics and finance at Bristol University, working one summer at Morgan Stanley. “It’s pretty basic schoolboy thinking: ‘I want to make money, [so] I’ll do economics’.” After graduating in 2005, he qualified as an accountant at PwC; he moved into transaction services in 2010, where he worked with private equity firms like Lion Capital and Doughty Hanson, before joining Better in 2011.
Inside the gallery, Wright is once again amongst a well-heeled crowd. One of the portraits, by artist Louis Boudreault, is on sale for £38,000. Smartly dressed women and men – hailing from Beijing to Boston – eat canapés and sip drinks as they swap tales of how they ended up working in private equity in London.
As Wright talks, Ed Kingsbury listens attentively. Kingsbury is the general counsel of Wheb Partners, which invests primarily in cleantech companies. He insists private equity is about more than making money and that many young dealmakers want their investments to positively impact the world.
“They are in this business because it is a vehicle to utilize capital for specific aims, like tackling climate change, sustainability or medical and biotech development,” Kingsbury says.
Some firms have mission statements that young employees say they find appealing. Take the Business Growth Fund, which was created after the financial crisis by the UK’s biggest banks to invest in small and medium-sized companies.
“Compensation is an element of how you measure success,” says Rodney Appiah, 29, who joined the fund from Merrill Lynch. “When you join an organization like [the BGF], you need a wider objective. I genuinely believe in what we are trying to do here.”
This interest in business ethics shown by the likes of Appiah, Kingsbury and Wright suggests that Sir Ronald Cohen, another veteran private equity dealmaker, had a point when he said last year that the younger generation “wants to make a difference”.
In the eyes of many of these young practitioners, the future success of the private equity and venture capital industry rides not just on their ability to maximize financial returns – it’s also about the social and environmental impact of their investments too.
PR SAVVY
Another area where the younger generation often strikes a different note to some of their predecessors is around transparency.
That’s handy, because the industry needs to come up with some more convincing answers to questions about who benefits from private equity, says Francesca Cornelli, professor of finance at London Business School.
“Private equity used to be really private and could ignore what the world thought because the world didn’t know about them,” Cornelli says. “[But] I think they can win the argument. There is a need for people that turn around companies and improve corporate governance. There is a need for more equity capital, as governments are retrenching.”
Therese Lennehag, the 33-year-old director of investor relations and responsible investment at EQT Partners, encourages dealmakers to engage in debate. She chairs the Europe Private Equity and Venture Capital Association’s responsible investment roundtable, which was created last year.
“A lot of players feel that some criticism has been unwarranted and unfair,’” Lennehag says. “They are keen to address that and also to try to be part of finding a solution. There is a fundamental belief that private equity has a lot to add to society.”
Wright is certainly convinced of that. Better’s recent purchase of City Link angered trade unionists because of plans to cut costs and change employment contracts. In September, the RMT union voted to strike at City Link, describing Better as an “aggressive, anti-worker outfit”. General secretary Bob Crow said the protest was “an important battle for the whole trade union movement against private equity companies who think they can treat their workers like dirt”.
Wright argues that lay-offs aren’t automatically bad for companies or for society. City Link lost money for five consecutive years before Better bought it from Rentokil Initial and agreed to invest £40 million ($66 million; €49 million), he points out. “When people are let go, it’s because the business isn’t making money and can’t afford to keep them.”
What’s perhaps most interesting about Wright’s defense of his investments is that he’s being allowed to make it. In many firms, young executives aren’t permitted to speak publicly. For instance, four employees of the Canada Pension Plan Investment Board at the Next Generation event were not “senior enough to be spokespeople,” according to the pension fund; similarly, Permira declined an interview with Christina Zhang, a young Chinese employee with an engineering degree from Cambridge University, on the grounds that “junior people are not authorized to speak to the media as a matter of company policy”. So however good the intentions of some of these dealmakers might be, it’s not always easy for them to influence the debate.
On the flipside, the large firms are often very good at giving young executives the chance to get involved in pro bono projects – something that wasn’t widely available in the industry a decade ago. Permira, KKR, TowerBrook Capital Partners and Bain Capital helped create the Private Equity Foundation (recently merged with venture philanthropy group Impetus), which provides charities with funds and advice to help poorer children find education and employment.
Giving back is an important part of the life of many young private equity dealmakers, says Marijana Kolak, Bain Capital’s chief of staff in Europe. “Our employees are global citizens and they want a purpose beyond the economics,” Kolak says. “Because of the kind of people we have, there is a lot we can give back.”
NO MORE ENTREPRENEURS?
Many of the guests at the party in the art gallery were not even born when pioneering investors like Jon Moulton and Henry Kravis founded their original firms thirty or forty years ago. Now firms such as KKR, Blackstone, Carlyle and Bain Capital have evolved into huge institutions that offer corporate ladders for the brightest graduates to climb.
Some dealmakers question whether this institutionalization of private equity has really changed the nature of the asset class – and those choosing to work in it – for the better.
“For the most part I find individuals entering private equity at the moment are not entrepreneurs,” says Lyndon Lea, the 45-year-old founder of London-based buyout firm Lion Capital. “They are concerned about their salary and bonus rather than carried interest. That’s a shame, and a change from the past. [But] we’ve done it to ourselves with the institutionalization of the industry.”
Lea started Lion Capital after co-founding Hicks, Muse, Tate & Furst’s European unit in 1998, aged 29. He made almost four times the firm’s investment in champagne brands G.H. Mumm and Perrier Jouet when he sold them within 18 months. According to Lea, he was “born to do” private equity.
However, he says he would now advise his son to work “in the digital world”.
Others share his enthusiasm. Across London, from Mayfair in the west to the cluster of technology companies at Old Street’s ‘Silicon Roundabout’ in the east, venture capitalists are already diving deep into the digital world.
“The UK is having an entrepreneurial renaissance,” says Tim Levene, the 40-year-old founder of Augmentum Capital, which invests in internet and technology companies. “Entrepreneur used to be a dirty word. Where did you go in 1998 for funding for a juice bar? Where was the advice? It just wasn’t there – and it is today.”
Levene has founded a number of companies, including a juice bar in Canary Wharf and online betting site Flutter.com. He now focuses on backing financial technology companies (like online lending platform Zopa.com), while advising the Royal Foundation of The Duke and Duchess of Cambridge and Prince Harry on digital strategy and innovation. Today, he says, more and more people are starting businesses – in part inspired by television programs like Dragon’s Den – but he sees a new generation of more “sober” investors, who are all too aware of boom and bust cycles.
At Hoxton Ventures, Hussein Kanji, 37, closed a $40 million fund in December for new investments. An American in Europe, the former Microsoft employee is bullish on the prospects for his adopted continent. Kanji believes App Store economics – the ability to create an app and sell it worldwide – creates a unique opportunity for European companies to grow.
“In Europe, there are great startups and few venture firms,” he says. “The best mobile gaming companies in the world today are European – Rovio and Supercell. Today, these ideas can come from anywhere. In the past it was difficult for these companies to scale, but that’s now possible because of the App Store and Facebook.”
BORN IN FIRE
At Amadeus Capital Partners, Jason Pinto, a 37-year-old partner, is scouring Europe for business ideas that can serve customers in emerging markets. Amadeus last year raised a $75 million fund targeting technology companies that provide services to developing world consumers. Pinto, who helped develop the Kindle in a previous life, sees mobile phones as gateways that will provide services to billions of new consumers. As an example, he cites M-Pesa, a mobile phone system in Kenya that allows people to transfer money via text message.
“In 2012, the dollar value of 30 percent of Kenyan GDP was transferred via M-Pesa. It’s staggering,” Pinto says. “The upside is enormous.” He cites Visa’s purchase of South African company Fundamo in 2011 for $110 million.
London is a great base to scour the world for deals, he adds. This venture capitalist from Trinidad is currently analyzing a company based in South Africa, which has one competitor is in the Netherlands and another in the US.
“There’s no question that London is the place to be,” Pinto says. “There is a unique confluence of a massive number of people starting businesses. There is a ton of talent for people who have been in start-ups and want to do it again. Lots of VCs are here chasing that.”
Pinto and his peers are well aware that raising new funds would be challenging. But they believe the recent lean years will have some benefits, too.
“We have seen very difficult times,” he says. “It’s very, very hard to raise a first time fund. [But] I think being born in fire – which is, I guess, the time I joined the venture industry – you don’t forget lessons you learn about capital deficiency and managing cash.”
Mounir Guen, the founder of advisory firm MVision, agrees. “It’s an era of people who have gone through huge hardships. Financing was tight. Regulators were all over them. Investors were scrutinizing every aspect. When you put that all together, the group of pros who are about to make it through this current cycle will be the most exceptional to emerge.”
Better Capital’s Wright is among those who hope to raise his own fund and demonstrate this point one day. He and his peers will also be keen to prove to the likes of Lea that the next generation of dealmakers do in fact share their predecessors’ entrepreneurial flair – although they may choose to go about making their money in a slightly different way.
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