Martin Gagen: At The Crossroads Of Private Equity And Philosophy –

After more than two decades in the global private equity market, mostly spent among the upper echelon of London-based 3i Group plc, Martin Gagen says he is in no rush to traverse the well-trodden path of industry veterans whove left their firms of origin. Rather than jump at the opportunity to raise his own fund, Gagen feels the time hes already spent as a border-crossing investment practitioner has earned him the right to let loose for a while. Today, Gagen chooses the guise of a behind-the-scenes operator and is currently on the advisory board of WHI Capital Partners, a recently-formed, Chicago-based, buyout shop.

A staunch believer that the strongest returns on capital invested can only be attained through a truly global strategy, Gagen was at the forefront of 3is internationalization. In 1998, he moved to the U.S. from his native U.K. with the goal of providing 3i with a broader footprint in the global venture capital market, opening offices in Waltham, Mass. and Menlo Park, Calif. And in 2001, Gagen made sure that 3i was among the first Western private equity firms to set up shop in China by stationing buyout and growth capital operations in Hong Kong.

Last September, however, when he stepped down as CEO of 3is U.S. and Asian businesses, Gagen decided to take a step back and ponder the marketall the while keeping his mental faculties sharp by pursuing a masters in philosophy and history at Stanford University.

In addition to being topics of immense personal interest, Gagen holds that history and philosophy are extremely relevant to the international private equity market. If you look at some of the philosophy that people in the East have been raised on and compare it to philosophies in the West, you begin to get a much better sense of what China is going through today and the history and issues that Chinese managers are dealing with, Gagen says. Now, Im not saying that that makes you a great investor, but for me personally, I find it extremely interesting to bring some cultural and fine arts background into the business world.

And though he admits that the idea of starting up his own firm is not outside the realm of possibility, Gagen is adamant that it is not an immediate probability. I spent the first three months after I left 3i really fending people off about the fund idea because everybody assumed thats what I was going to do, he says. I left 3i to get some creativity and some change. So to go from working 18-hour days at 3i to doing the same thing somewhere else didnt seem like the most creative thing I could do.

Instead, Gagen feels he can have a greater impact on the market by spreading his wings and taking on advisory roles with small-cap, U.S.-based private equity firms looking to build their brands and strengthen their international strategies. Ive really traveled this road a lot. Ive got all the scars on my back from doing itand if I could stop them from getting bruised as much as I did along the way, that would be helpful in itself, he says.

Gagens advisory roles break into three parts. First is strategic help, which involves assessing the market, how fast the firm should grow, recruiting issues and funding strategies. Second is deal sourcing and deal making. The third part involves taking board seats on some of the firms companies and leveraging his international contacts to help grow them.

Key to Gagens philosophy in private equity is the need to keep things fresh through creative risk-taking, especially in an atmosphere as competitive as todays. I think that financial engineering in buyouts has pretty much had its daywe can all do it, he says. I just dont believe that buying companies and financially remodeling them actually gets you premium returns. What does get you premium returns is to bring some innovation and creativity to companies that are facing an international challenge. Without an international aspect, I dont think you can make premium returns.

Gagens philosophy is the result of participation in, and observation of, the many rungs of the business ladder. The initial 25 years of Gagens business career were focused almost exclusively on the U.K. The first leg of his professional journey was a five-year stint at Arthur Andersen, where he started out conducting audits and eventually moved on to management consultancy, which is when he became interested in the growth issues facing companies, he says.

Pursuing his curiosity, Gagen took a job with a software company he had consulted while at Andersen. It was there that he raised his first venture round and was introduced to the world of private equity and equity profits.

From there, he moved on to join 3i in 1983, at a time when that the firm was focused primarily on European industrial deals, which, Gagen says, allowed him to get a good nuts-and-bolts education. In 1988, he took a brief hiatus from 3i and went to work at Investcorp, where he spent time working at the opposite end of the investment spectrumacquiring luxury retailers such as Gucci and Saks Fifth Avenue. Gagen was back with 3is U.K. buyout team in 1990, and by 1995 he was running the firms buyout and venture capital businesses for all of continental Europe, in addition to holding a seat on 3is executive board. Shortly thereafter he was placed at the head of the firms U.S. and Asian affairs.

Operating today as an independent contractor, Gagen recently joined the advisory board of WHI Capital Partnersthe first of several such positions he hopes to be holding in the coming months. A subsidiary of William Harris Investors Inc., WHI is focused on the lower middle market, which Gagen surmises is the most profitable sector of todays buyout arena.

His favorable outlook for small-cap returns reflects, in part, his skepticism of returns in both the venture capital and large-cap buyout markets. International pressure on new venture startups in the U.S., he says, is coming almost instantly from companies in Asia. And with hundreds of firms that have got to have a homerun win in order to make their funds viableit just seems an incredible statistic to meand I just dont think theyll get there I think the reality is, over the next five years, youre going to see very average and, at worst, poor returns for the majority of venture capital funds.

Meanwhile, The idea of having a $5 billion fund todayfrankly youre being led by the money rather than by the opportunity, he says. If you look at the overhang at the mega end of the buyout market, and you look at the firepower that exists all the way down through the mid-market, it all has lent itself to strengthening the auction business. The ability to buy a company cheap today I just dont think exists.

So for the time being, Gagens calendar is booked between classes, exams, deal sourcing, board meetings, etc. But how long can a private equity veteran in his mid-40sarmed to the teeth with experience and knowledgego before the urge to get back in the drivers seat takes over? The answer, in Gagens case, may be about as long as it takes to earn a masters in philosophy and history. In a year from now, who knows? I never like to mislead people, so dont be surprised if I do turn around and start a fund of my own. My interest right now is in the China-U.S. link, and if I was to put a fund together, it would be in that area.