On 17th November 2021, we were delighted to welcome Don Gogel, Chairman of private equity firm Clayton, Dubilier & Rice (CD&R) for a fireside chat with Professor Florin Vasvari, Academic Director of the Institute of Entrepreneurship and Private Capital (IEPC). Following the event, Varun Rekhi MBA2023 shared with us his key takeaways from the talk. Read below.
When Professor Florin Vasvari opened the floor with Don Gogel, I was excited yet uninspired about how the next one hour would unfold. Excited because CD&R is a name familiar to a lot of us who follow private markets and uninspired because it’s a particularly challenging month for MBAs. One hour into the close of that conversation, I am ebullient, lucky, and privileged to have attended the webinar and share my top takeaways from what would be termed as insightful tête-à-tête that was open to the public.
1. On a challenging socio-economic environment
To address the Black Swan event of last year, Don was empathetic in addressing the fact that even though business recovery has been astounding, main street recovery across the world is still a work-in-progress and managers of private capital must be cognizant of this.
2. On the pace of deal recovery
The rebound in deal-making in the PE world has been astounding, partially because of some key structural differences in the way the 2020 global health crisis differed from the 2008-2009 crisis. However, Don pointed that PE may not always recover faster and that the ups and downs may be longer drawn out or quicker than those in public equity. After all, the risk, reward, and volatility associated with managing private capital is a key characteristic of the job description.
3. On the flexibility of private capital
Private capital does not operate with a myopic lens. The structure allows more agility and flexibility to help a company achieve the next stage of growth as compared to public equity. Themes of strategy alignment, correct staffing choices, incentive-based compensation packages and the prudent use of leverage without short-term performance pressure were discussed in detail.
4. On current valuations
Addressing the elephant in the room. While the low cost of capital on the back of a dovish monetary policy has spurred deal-making in the last 20 months, Don expects private capital managers to tread with caution. There has been a gradual resistance to the multiples paid in some of the most recent deals even as valuations continue to be hitting higher highs, particularly in the tech sector. However, getting exit multiples on selling these assets 3-5 years from now may be an entirely different story as the next 5 years may not necessarily look like the past 5.
5. On PEs role in Environmental, Social and Corporate Governance (ESG) policies
“If you expect to raise serious capital in the US, [the UK or Europe], you have to be serious about maintaining your ESG credentials”. This was a highly debatable topic, but it was interesting to hear that PE is using its structural advantage to position itself ahead of public companies in their response to a changing ESG climate. PEs can theoretically afford to invest in green initiatives because of their long-term outlook and lack of short-term shareholder reporting. Thus, policies can take more time to play out and ESG infrastructure can be scaled without the pressure of time.
6. On PEs role in the United Kingdom
“With roughly $200bn of public-to-private transactions taking place last year, 25% of them took place in the UK”, said Don in a response to Professor Vasvari. Firms such as CD&R believe that private equity is not about financial engineering but about pattern recognition skills. These skills give the firms the confidence to advise management on how to scale and drive efficiencies. CD&R believes that its success lies in the deep industry-expertise its created and the advantage of having lived through multiple economic cycles. This pedigree along with a contrarian strategy of constantly driving its PortCos toward the North Star has helped the firm sail the tide during periods of economic distress. In fact, in 2020, CD&R was advising its PortCos to go on the offense instead of cutting back and scaling costs. We can’t wait to see what’s in store for Morrison Supermarkets, CD&Rs latest acquisition in the UK.
7. On the democratization of private capital
While access to sophisticated private capital products such as PE may still be a distant reality for retail investors, Don believes that equity participation by employees will be a growing trend in the coming years.
If you’ve made it till here, you’d recognize how this was a high-octane conversation that put the private capital landscape into perspective. The CD&R veteran ended with an anecdote of how a former student recently met him 10 years later and reminded him of his views on private equity from a decade ago at a conference. Here’s hoping these top takeaways continue the tradition!
About the author: Varun Rekhi is a full-time MBA student at London Business School, working towards a career in growth equity and venture capital. Previously, he was the Founding Member of the PwCs Capital Markets Advisory team, responsible for developing the go-to-market strategy and co-delivering equity story advisory to some of the most notable sponsor-backed IPOs in the US. Varun spends a lot of his time writing about trends in private capital or working with founders on investor outreach, pitch deck formulation and fundraising strategy. You can find out more about him here.