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Book Review of The Masters of Private Equity and Venture Capital by Robert Finkel

Book Review of The Masters of Private Equity and Venture Capital

Finkel’s book includes interviews/profiles with PE and VC leaders.  Not as well known a book, it does a great job of profiling some truly great investors who are not typically in the spotlight.

Joseph Rice – Founder of Clayton, Dubilier & Rice

Operating perspective is for us the single most important aspect of our investment model
Firm reviews 100 offering books per 1 deal completed
Their best known deal was the carve-out of Lexmark from IBM. They made 4x return
Their early successes set them up for a rough patch “because we thought we were better than we really were.”
In order to improve performance, we instituted two organizational and investment process enhancements: the operating review and the investment screening committee.
OR – brings all operating partners and portfolio company management together
ISC – quality control measure for deals

Warren Hellman –Chairman of Hellman & Friedman

“A key measure in our analysis is ‘return on tangible capital.’ We prefer to invest in companies that can afford to operate and grow inexpensively.  If the business does require capital to grow, we expect the business to earn a significantly above-market return on that capital outlay.”
“discipline means constantly re-evaluating investments. In fact, every one of our portfolio companies periodically goes through an in-depth evaluation process in which we re-assess our original investment thesis and re-underwrite expected performance.”
“we learned much of what we now know about private-equity investment and the management of portfolio companies through experience, through trial and error as owners or major investors in our portfolio companies. The errors have hurt, but without them, we would not have learned the vitally important lessons by which we have built a record of success.”
“I have said for years that in my work, I have a simple rule of thumb: I decide how the old guard at Lehman [Brothers where he used to be a partner] would have behaved and then I do the opposite.  Hoarding of power, internal intrigues, lack of accountability, and intellectual laziness are all unacceptable to me.”
Started the business doing advisory work – ala Blackstone before doing deals
Key principles
“Every potential investment should be considered guilty until proven innocent.”
Every team member invests in every deal – skin in the game
Return on tangible capital
Have to account for future capital expenditures in your analysis of a deal
We do not like companies with double leverage
Financial and operating leverage can be toxic
Do not just invest because the security offered seems to promise a good return. The health and prospects of the underlying business count far more.
The race goes to those who persevere, no matter how long the run or how unexpected the competition. In the end, to finish is to win

Carl D. Thoma – Founder Thoma Bravo

One of their earliest deals was PageNet, a paging company. In the 1980s, they invested 8 million and netted $800MM for their limited partners.
For platform businesses, the management-centric approach is extremely important. We always asked ourselves how much of a difference management could make.  We answered that question using a simple technique.  We would look at an industry to see what sort of performance gap existed between companies in the first quartile and the third quartile.
With higher initial multiples paid for transactions, execution is critical to get the purchase price down as fast as possible.
“anticipating the worst possible outcome and taking steps to avoid it- [this mindset] is one of the reasons why I typically do not expect salespeople to become CEOs.  Salespeople simply do not worry enough.

John Canning – Chairman – Madison Dearborn

“When a firm is well run, the professionals can concentrate on their chief purposes of deploying and managing their limited partners’ capital. The fewer the distractions from that essential activity, the better.”
Almost has flat carry distribution for partners
“We learned that it is a mistake to get too excited about inordinate success. It is equally an error to overact when markets turn against us.”

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