1. In light of the recent financial crisis, how much risk does the private equity industry poses to the economy?
I don’t think the private equity industry presents a lot of risk to the economy, certainly not the systemic risk that the banking system or the derivatives market pose. There was a bit of a bailout for private equity firms in the fact that it wasn’t a prolonged recession. What happened is that there was a lot of buyout activity pre-recession, and a lot of loans were made that were probably not economic. There were a lot of companies bought at prices that were going to be tough to make a return on.
2. What would you say is an untold story of the crisis and recovery?
A story that hasn’t really been told yet is that there’s going to be a refinancing that will [impact] some of the companies you’ve all heard about or read about. There’s no liquidity crisis, but at some point their debt will have to be refinanced. So I think the other shoe will drop on some portion of those companies, and the question is whether the economic recovery will be enough to help them get back to where they need to get to.
3. It’s been more than a year since you were in the market raising a fund. I’m hearing it hasn’t gotten any easier, and that LPs are pushing hard on terms and fees. What is your view on fund economics as you look to your next fund?
We’re about 60 percent invested, so we’re not going to be fundraising immediately. But I think fundraising is going to be harder. There is going to be a spread in performance among buyout shops, and at the end of the day it comes back to results. The LP-GP relationship is partly about the economics to the GP, but it really should be about the economics to the LP and what kind of net returns are you delivering, and how are your LPs getting them. LPs also want to know whether you are generating returns in a way that they can understand and that is going to be replicable and consistent going forward. They want to be assured that what you did in the past is applicable to the market that’s coming.
4. Can you tell us more about what your portfolio looks like today?
Our portfolio is in great shape, knock on wood. On a relative and an absolute basis, it’s doing very well. It grew faster than the S&P through the recession. We had many companies that continued to dramatically improve profitability despite the recession, and we are now benefiting from the very beginning of the recovery. We buy a lot of distribution businesses, a lot of multi-location services businesses. We like to buy industry leaders that face fragmented markets, which give them an opportunity to take market share in an economic downturn. And we like to buy businesses where we can improve productivity, improve the cost structure, improve sourcing and improve the mix and margins. We really are a kind of grind-it-out, drive-execution type of business. And because of that, we spent a lot of time on sourcing. We know what kind of companies we want to buy. And in a sense, it makes our job easier because we know which businesses fit our model.
5. What is your favorite, unheralded portfolio company, something that’s a bit under the radar?
One business we own, which remained a public company when we bought it, is Sally Beauty, a $3 billion business that is the country’s leading distributor and retailer of beauty supplies. Sally Beauty is geared to people who want to buy professional beauty brands that you can’t get at the supermarket or drugstore. One nice thing about it is that we don’t have to build up a research following, and we don’t have to build credibility. It’s a company that is already public and knows how to be a public company.
Edited for clarity