Q&A with Private Equity Investor at a Large-Cap Buyout Firm

Originally posted on WSO with PE Mentor @Investor X

Investor X background: Investment executive at a global large-cap buyout firm, with a focus on healthcare investments. Former consultant at a strategy consulting firm:

I studied Civil Engineering and a Master in International Finance at HEC Paris. Decent GPA (probably 3.7-3.8 in US standards), but note that GPA is not such a critical point in Europe, as grades are very heterogeneous among universities and countries.

I worked 3 years at McKinsey doing mostly Restructuring and Corporate Finance engagements, and I worked in a small Turnaround PE Firm. Then I did my MBA at Columbia before joining a large-cap buyout firm.

 No academic background in Healthcare, but have done 2 deals in the sector and follow the space quite closely. I know very few Healthcare investors with a background in the space, it is not really necessary. You just need to be ultra-connected in the space.

What are your long term goals? Head of this healthcare group? Start your own fund?

My main goal in the long term is to grow in the industry, close deals and advance in my career within the sector (probably in my current firm). Launching my own firm seems like "everybody's dream", but it is not always a logical step if you are doing well in a large firm. It entails great risk and requires strong relationships (investors, partners, companies, advisors). 

How did you stand out from other Associates such that you made the cut for VP?

You need a healthy combination of quantitative skills, people skills, investment instinct, good judgement. Mostly you need to be a very structured professional and do an excellent delivery on what you are expected to do, and take some responsibility on things you are not expected to do.

What are the benefits of working for a large global firm that may not be apparent when at a MM firm with either one or two offices (eg Francisco Partners)?

We are a very well inter-connected firm. We have a global fund with global carry, so we are all incentivized to be well coordinated. Being a sector-led global firm represents a clear competitive advantage when approaching companies and analyzing investment opportunities. Nobody can be an expert in all geographies and all sectors, and we always get advice from the rest of the teams/offices of the firm.

How do you think about your strategy going forward given how much capital there is competing for so few assets? How will you stay competitive and provide returns investors seek?

Market is clearly saturated and auctions are won by the highest bidder normally. What can help you pay higher prices and still get good returns? A strong value creation playbook, having a dedicated portfolio team, specialized sector teams, fast execution capabilities, global networks, etc.

What type of consulting experience did you have and did it help with the recruitment to PE?

 I did a lot of Restructuring work, which helps you understand how an organization works and how can you dynamize the different departments. You also get a lot of exposure to the Finance function and cash flow monitoring. I recommend doing Due Diligence projects (they are short, they help you understand how an investor thinks, and it can provide you with good methodology and structure).

Any advice on transitioning from consulting to PE?

1) You need to be well connected in the investment space and be well informed. Read financial news, talk to friends in IBD and PE, think about investment ideas, be aware of auctions and opportunities in the market.

2) Talk the PE language. Learn how investors look at deals, what analysis they do, understand the different angles of each deal.

3) As a consultant, try to participate in due diligences and PE portfolio work. Do not only focus on the commercial side. Try to be informed of the rest of workstreams of the deal. This will help you talk about your experience and "speak the same language" with the interviewer.

4) Prepare investment pitches (at least 3). Be original and support well your assumptions.

5) Connect with headhunters. They are the first filter so treat them as such.

How involved are you in portfolio company management in your role (e.g., strategy-setting, special projects, board)? Does your firm follow an active or deferential management style with PortCos?

 Your degree of involvement in a portfolio company will depend on:

1) The stage of the investment: The first year is always very busy (new reporting, get up to speed, strengthen management team, define strategy, analyze efficiencies, etc.)

2) The investment thesis: Build up strategies will require more work from the PE firm.

3) Deal performance: If things are not going according to plan, you will have to spend more time and resources on the portfolio company to find new ways to generate value.

It is key to be engaged with portfolio companies, deliver a clear and unified message, focus on sustainable growth, align incentives, etc.

In your experience, in large-cap buyouts what is the level of value creation that can really be created by operating partners and investment professional's inputs?

As a VP/Principal, and now having seen c. 10 deals develop through their 100-days plan and following BP implementation, I've always been underwhelmed by the actual contribution of such operating experts, and while their support is fundamental during the investment committee's approval process, I now realised that 90% of their input is basically useless once you get inside the company, and that existing management thought about all of those items already and knows exactly why they wouldn't work.

I have now reached my own conclusion that operating improvements are mostly a marketing item for private equity funds, and most of the value creation really comes from other sources (proprietary pipeline through network, ability to provide capital to portfolio companies, picking good companies/management teams, and multiple re-rating through a mix (i) luck (ii) correct industry vision, (iii) better quality of data provided to new buyers and ability to create equity stories, (iv) buy-and-build re-rating).

Caveats: restructuring stories, smaller companies (sub 500m EV) where management is less sophisticated, and buy-and-build where current managers lack vision and/or M&A know-how. However I work at a generalist fund, and most of my network as well, so I'm always curious to hear the views of investors with a more clear industry focus.

I totally agree with you. This is especially true for the large-cap segment and for secondary/tertiary deals. It is difficult to differentiate and to bring value to companies that already have strong management teams and good processes.

However once in a while, I have seen differential impact brought to the table by the investor:

- Learnings from other industries (e.g., apply bots to customer care services)

- Attract better talent

- Align interests with managers and provide good MIP (especially with corporate carveouts)

- Free up resources for long term projects (capex vs distribute dividends for a family business)

Of course, it all depends on who was the previous owner

Are the dynamics are different in HC versus other verticals? I would imagine lots of opportunities in healthcare are in biotech, which leans towards the growth equity side, versus traditional provider buyouts, leaning towards LBO side. Which side (growth vs LBO) are you seeing more action in recently and in the future?

Not all firms invest in biotech (binary outcome, high risk/return profile, need to diversify portfolio). If you exclude biotech investment, a Healthcare-focused team/firm works pretty much like any other firm. We have specialists (but not necessarily doctors) that are well connected in the space. You need to be well aware of the strategy of the different large pharma players, as most of the dealflow depends on their investment/divestment strategy.

Some differences:

- Need to account for ethical risk

- Be aware of the timings/risks around regulatory approvals

- Be prepared to invest in capex and R&D

- HIgh salary inflation in some geographies

 How happy have you been at your fund? Have you enjoyed your experience? Moving from a relatively friendly and collaborative cultural environment like McKinsey to a 'banking 2.0' mentality isn't for everyone.

Very very happy. Especially because I do what I like 100% of the time (in consulting it was 60% of the time). Also not all firms have a "banking 2.0" mentality, especially in Europe.

Why PE and not earlier stage investing - more growth or VC focused funds? Given your consulting background (more coveted in earlier stage investing) and the MBA (allowing you the opportunity to switch or learn about these paths), I'm assuming you considered these roles in your search.

VC is a very interesting space where you can build great networks and think very strategically. However I did not consider because of (i) normally very poor career path opportunities, (ii) very irrational market, (iii) unsophisticated approach to due diligence, projections and valuations. Not easy to extrapolate VC skills to the real world.

 What tips would you give to a consultant starting at a large-cap fund (particularly if starting amidst this work from home situation, making it harder to learn and connect with seniors)?

 Organize virtual coffee chats and try to connect with people. Everyone is in the same situation and they will be glad to talk to you. Be proactive and original.

 Are you concerned about the ability to progress in a large buyout fund (imagine fundraising will be tough post-pandemic, intense competition to make VP, limited space as large funds can be top-heavy etc.)?

Definitely concerned yes (carry NPV probably highly impacted). However, there are firms in a very strong position now: strong portfolios, good liquidity, dry powder, etc. If you are there you have a chance to get out of this crisis stronger than before.

 How do you / your fund see this pandemic impacting returns for large-cap PE, and, more generally, what's your take on PE performance long-term?

 Not enough visibility to answer this question properly. Valuation multiples have dropped, but PE is an illiquid strategy so you can always exit later. Performance-wise most business will probably see their business plan delayed by 1-2 years, so significant impact on IRR. However, this crisis will lead to a significant rationalization of the market and consolidation, so if you are aggressive (and not underwater) you can close very accretive deals now.

What is the importance of European languages in PE recruiting in London? 

It depends on the firm.

- At Blackstone or Bain they rely on a centralized team and they mostly source deals through advisors, so not real need to have local expertise.

- At Advent or CVC, they have local experience and significant reach in each country. This way they manage to source directly some opportunities.

It is good to speak other languages as you get a better connection with management teams and advisors (remember this is a network-based job).

What was the ramp-up like for you? Did you feel like you were expected to hit the desk modelling etc. like a pro or was there some time/resources you had on your side?

When PE hire people for consulting they already assume they will need 1-2 projects to get up to speed on modelling, deal terms, financing docs, etc.

I had worked as an intern in PE for some months so that helped.

Also recommend to speak with friends in Investment Banking and try to learn before the interveiws. 

What online resources/ guides should I follow to get more educated on the Healthcare industry, esp. healthcare private equity and the different verticals to understand dynamics, sector trends etc?

I suggest downloading broker reports from CapitalIQ, Thomson One or FactSet. Banks like JPM are very active in the space and publish reports on the different spaces (MedTech, CDMO, Biotech, Generics, etc.).

Do you think healthcare is a good sector for Sponsors to focus on, for reasons of being less affected by downcycles, secular demands driving the sector instead of market trends etc?

Sure. It has proved to be a very resilient market (look at current performance for some pharma and CDMO companies). Other merits: high barriers to entry, increasing healthcare expenditure, ageing population, large buyers, etc.

Columbia Business School MBA experience

CBS is known for public markets investing. How was your experience there while recruiting for PE?

 It is true CBS is not the best franchise to apply to PE. However, since last year they have a very strong Private Equity program, which provides (i) academic credits to students, (ii) access to a strong network of alumni, (iii) useful offsites and tools, (iv) motivated group with a very collaborative culture.

How did you decide on CBS?

 It was based in NY and a top-3 MBA in my opinion.

Have you heard anything about energy/infra finance at CBS? From my quick search seems like CBS and Stanford are the two schools that have dedicated interdisciplinary coursework in the space.

Indeed. CBS is strong in Energy (Bruce Usher is one of the "celebrity" professors at CBS, he founded a very successful energy trading company and sold it to Morgan Stanley). You can check the different elective courses.

Can you walk through why you didn't stay in the US to do PE? Was it visa issues? Is it possible for international students with an H1-B to break into PE post-MBA exp?

In my case I didn't stay in the US for personal reasons, and I didn't recruit a lot.

My experience is that in the USA PE firms recruit only very standard profiles: 2 years in a bulge bracket bank + 2 years as an analyst in a PE firm + MBA (normally HBS or Wharton). If you diverge from this profile it will be tougher for you to break in.

You need to convince the firm that you have a long term commitment with them and that you will stay in the USA. Also that you are knowledgeable about the industry (deals, sectors, companies).

Mentoring

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