Speaker 1: This is Bloomberg Business Week from Bloomberg Radio. I'm Jason Kelly.
Speaker 1: Welcome to the Bloomberg Business Week Extra. It's our weekly podcast,
Speaker 1: bring you an in depth interview you won't hear anywhere else.
Speaker 1: And this week I got to catch up with Don
Speaker 1: go gil He's a legend in the private equity world,
Speaker 1: been investing for more than three decades. He's ending his
Speaker 1: tenure as the CEO of C D n R Clayton,
Speaker 1: Dubillieri and Rice, one of the best known firms out there.
Speaker 1: They've owned a whole host of businesses. It was a
Speaker 1: wide ranging conversation about the markets right now, about the
Speaker 1: history of private equity, where it may be going, even
Speaker 1: some of what he's learned from working with some of
Speaker 1: the world's most famous CEO s here he is. So,
Speaker 1: Don go Gell, You've seen some things in your time
Speaker 1: in the private equity business, and I want to talk
Speaker 1: about your career in a few minutes, but let's start
Speaker 1: safe to say I think very few would disagree that
Speaker 1: we're in a period of cast right now across the world.
Speaker 1: Um politically, economically, we've got protests in Hong Kong, we've
Speaker 1: got a trade war, with China, we've got breggsit going on.
Speaker 1: We've got a political environment here in the United States
Speaker 1: that is volatile, to say the least. What's the role
Speaker 1: that private equity plays right now in August nineteen. I
Speaker 1: think private equity can be a bit of a buffer
Speaker 1: during these periods. Now. To be fair, private equity firms
Speaker 1: virtually all of them right or not foolhardy and they
Speaker 1: don't say, well, we're just gonna buy on a downturn.
Speaker 1: And in fact, one of the challenges that private equity
Speaker 1: has now to play that buffer role is it's harder
Speaker 1: now to deploy capital than it's been in a while.
Speaker 1: And I say that because, notwithstanding the chaos, valuations in
Speaker 1: private equity transactions, as you know, have remained stubborn lee high.
Speaker 1: Now they've been growing over the last four or five years.
Speaker 1: You can't reverse the laws of supply and demand. And
Speaker 1: with all of the money that's been raised, as you know,
Speaker 1: the phrases sort of uh, this sort of dry powder
Speaker 1: that's available, and the animal instincts of good private equity
Speaker 1: firms to try to put it to work. The equity values,
Speaker 1: the valuations have moved up and up and it's harder
Speaker 1: to put money to work. The only way you justify
Speaker 1: it is if you see this not unbroken but long
Speaker 1: term trend up. And given the chaos in a number
Speaker 1: of industries caused by factors that we don't need to
Speaker 1: Imnumemeber right now. All you need to do is watch Bloomberg.
Speaker 1: You find out all of those factors. It's just harder
Speaker 1: to put money to work. Some of the technical factors, though,
Speaker 1: are still favorable. Although high yield fund flows have been diminished.
Speaker 1: In fact, I think there's been thirty eight straight weeks
Speaker 1: of people taking money out of high yield funds. They're
Speaker 1: still available capital. It's a profit product line. There's still
Speaker 1: investor demand, so the capital will still be there. There's
Speaker 1: planning of equity there. So it's a matter of selectivity.
Speaker 1: But in these periods of time, there is a rush
Speaker 1: to businesses that seem to have a lower risk profile,
Speaker 1: and that then the price gets bit up. So for
Speaker 1: us and I'm sure many others, navigating your way to
Speaker 1: find the right transaction with the right risk reward, the
Speaker 1: right capital structure, of the right management team, the right prospects,
Speaker 1: the right path through regulatory maze. If it's a business
Speaker 1: like healthcare where we invest. Often it's complicated, but I
Speaker 1: still view it as a flexible buffer that can normalize
Speaker 1: economies and companies when needed. You have the ability and
Speaker 1: probably the need, to be talking to CEOs all the time,
Speaker 1: both CEOs of companies that you control, CEOs of companies
Speaker 1: you might want to control of a whole network at
Speaker 1: your disposal. If you can generalize how the leaders of
Speaker 1: big companies and maybe small companies are feeling right now,
Speaker 1: what would you say? There's high anxiety um and and
Speaker 1: appropriately so anxiety about the economic and macroeconomic political conditions
Speaker 1: that you described. But I think public company CEOs feel
Speaker 1: under more pressure than ever to show at least some
Speaker 1: level of performance improvement. And it's of course a function
Speaker 1: both of stock market which gives you a report card
Speaker 1: every day, activists that come in and let you know
Speaker 1: exactly what you're doing wrong and what they think you
Speaker 1: should be doing right, boards that feel that they have
Speaker 1: to respond to a lot of those pressures. And then
Speaker 1: if you look at the statistics, I mean you when
Speaker 1: I'm gonna phrase it in a way that sounds shocking,
Speaker 1: but it's just just math. If you recognize it, about
Speaker 1: one fortune of SMP five CEOs change every year. That
Speaker 1: means that there's a CEO change in the SMP five
Speaker 1: about every four or five days. Wow, that's just it's
Speaker 1: just math, just math. So if you're the CEOs, you're
Speaker 1: looking at those numbers, and you're looking to the left
Speaker 1: and right, and you'd like to have eyes behind you.
Speaker 1: And and it's not that you don't trust your board
Speaker 1: or that people are not going to give you some time,
Speaker 1: but it's just a measure of the environment that it's tough,
Speaker 1: and CEO tenure therefore is being reduced in CEOs. Really,
Speaker 1: I think I have a tough job in public companies.
Speaker 1: It's tough everywhere. Leadership is always hard. I just think
Speaker 1: now the scrutiny social media activists, shareholders twenty four by
Speaker 1: seven global makes it very hard to be a public
Speaker 1: company CEO. Right. So, speaking of CEOs, you are the
Speaker 1: chairman and CEO of CD and R right now. The
Speaker 1: CEO title you will relinquish uh at the turn of
Speaker 1: the year. Succession in private equity is historically a pretty
Speaker 1: tricky thing. Your firm has done it several times now,
Speaker 1: will have done it several times now successfully. Why is
Speaker 1: it so tricky? Well, it is tricky. Uh. Private equity
Speaker 1: firms generally you're organized and operate, at least initially most
Speaker 1: of them as partnerships. And I say that not in
Speaker 1: the legal term, as much as it's a group of people.
Speaker 1: People are complicated, they change, they're they're obtain people knowing
Speaker 1: not a lot of wallflowers. The men and women in
Speaker 1: private equity have strong opinions and they should right. The
Speaker 1: way that you succeed in private equity is to have
Speaker 1: high conviction in your investment ideas and what you think
Speaker 1: is the right way to run a company and who's
Speaker 1: the right CEO for a business. So keeping that mix
Speaker 1: and keeping that balance is really important job. You know,
Speaker 1: when I became CEO, I thought that my most important
Speaker 1: job was to continue to do make good investments. Joe Rice,
Speaker 1: who preceded me, one of the founders of the firm
Speaker 1: and he held that job for twenty years, said, well,
Speaker 1: you got to do deals. But let me tell you
Speaker 1: what you really have to do is keep this partnership
Speaker 1: and culture working together to maintain sort of collegiality support
Speaker 1: at well at the same time, the competitiveness, the challenge,
Speaker 1: the animal spirits, and how you balance that don is
Speaker 1: a full time job. Ye, well he was more right
Speaker 1: than wrong, as Joe typically is on everything. Yeah, And
Speaker 1: what has been if you look back on your tenure,
Speaker 1: what has been sort of the mark of one of
Speaker 1: those cultural things that you've done. What have you instituted
Speaker 1: that you think really helped maintain that collegiality number of things.
Speaker 1: I think we've been able to have a multi generational culture.
Speaker 1: We have people at Clayton douber Leer if I include
Speaker 1: Joe Rice in their twenties, thirties, forties, fifties, sixties, seventies,
Speaker 1: and eighties. Uh, and getting people to sort of crosswalk
Speaker 1: among those generations, to share experiences and energy. And it's
Speaker 1: not that people in their sixties have to sort of
Speaker 1: do it their way that. I think it's a culture
Speaker 1: that says best idea wins. And that is a reason
Speaker 1: that I think we've been able to hold people for
Speaker 1: a long time. It's a very constructive culture. Although it's challenging,
Speaker 1: and it's competitive, and you work too hard and there's
Speaker 1: too much anxiety, but I think people generally find that
Speaker 1: supportive winning helps, right. I mean, people like to be
Speaker 1: part of a winning team. And if you can develop
Speaker 1: a performance culture. You don't have to post who's doing
Speaker 1: what in the firm or who's successful. Everybody knows we're
Speaker 1: in a fish bowl, you know. I mean, one of
Speaker 1: the things that's remarked upon less in private equity than
Speaker 1: it probably should be. We are held to account in
Speaker 1: an extraordinary way. We have investors who we report to,
Speaker 1: of course, and every five years or so when we
Speaker 1: raise a new fund, they scrutinize everything we did, every
Speaker 1: investment we made, every investment we didn't make, the people
Speaker 1: that we hired people in our case, few that left,
Speaker 1: and they want to know everything about it, and they
Speaker 1: vote with their dollars, and they vote with their dollars.
Speaker 1: There they can get out and uh, you know. The
Speaker 1: best firms, of course, have a long history of loyal investors.
Speaker 1: We've been fortunate with university endowments and pension funds and
Speaker 1: a lot of other private foundations to have very long
Speaker 1: standing relationships. Some of our investors go back plus years.
Speaker 1: You have chosen as a firm to stay essentially, for
Speaker 1: lack of better term, sort of a mono line private
Speaker 1: equity firm at a time when some of the biggest
Speaker 1: and best known names, some of the other longstanding names KKR, Blackstone, Carlisle, Apollo,
Speaker 1: others have chosen to become multi asset publicly traded firms.
Speaker 1: Why this path, Well, it illustrates something that I sort
Speaker 1: of said as the predicate here, which is private equity
Speaker 1: has ultimate flexibility. As you look at these firms across
Speaker 1: the eight thousand of them now across the globe, different strategies,
Speaker 1: different sort of approaches to the market and private equity
Speaker 1: and itself compasses everything from infrastructure, venture capital, early stage,
Speaker 1: late stage, distress debt. I mean, there are a lot
Speaker 1: of strategies. A number of firms have decided that they
Speaker 1: like the cross fertilization of having a lot of different strategies.
Speaker 1: We chose the advantages that we think are substantial of focus.
Speaker 1: We have a lot of industry reads that we invest in,
Speaker 1: we have a number of geographies that we invest in,
Speaker 1: but we invest with one partnership, one fund, one intense
Speaker 1: focus on performance improvement through operations. We staff our firm
Speaker 1: that way. Half of our partners or former operating executives
Speaker 1: from some of the best managed companies in the world,
Speaker 1: and we think it's a great advantage. We know we're
Speaker 1: in the minority of the top twenty uh PE firms.
Speaker 1: I think sixteen of them are multi line firms. It's
Speaker 1: proven to be a successful strategy. But if you what
Speaker 1: you really care about is outperformance in building businesses, We've
Speaker 1: chosen a strategy that works for us. When you talk
Speaker 1: about the outperformance, it naturally leads to how successful many
Speaker 1: of the firms, including yours, have been financially. The work
Speaker 1: that you have done has become more and more public.
Speaker 1: It is drawing ever more scrutiny from politicians and regulators,
Speaker 1: Elizabeth Warren being the most notable and most recent. How
Speaker 1: much do you worry about regulatory and political risk here
Speaker 1: in and going into I worry about it. I'd be
Speaker 1: foolish not to. If I were a public company executive,
Speaker 1: I would worry about it. If I were a university
Speaker 1: president with an endowment, I'd worry about it. There's a
Speaker 1: lot to worry about. Now. That said, I hope that
Speaker 1: scrutiny is going to be fact based, not just emotional.
Speaker 1: The risk is that it's not. But if you look
Speaker 1: at the numbers and you look at the beneficiaries, just
Speaker 1: a couple of examples that will be well known. You know,
Speaker 1: our public pension plans in the United States are not
Speaker 1: in great shape generally, and those firms, those pension funds
Speaker 1: that invest in private equity have a three hundred and
Speaker 1: fifty basis point uh delta positive over those that don't.
Speaker 1: Of the hundred billion dollar investors in private equity, I'm
Speaker 1: looking at the investors now about a third or more
Speaker 1: or pension funds. They're now close to four hundred investors
Speaker 1: in private equity that invest at least a hundred billion
Speaker 1: dollars in the asset class and have reaped wonderful rewards.
Speaker 1: Whether you're a teacher getting your retirement of sort of funded,
Speaker 1: or whether you're university using some of the money to
Speaker 1: pay for scholarships. These are all positives, right. And if
Speaker 1: people look at the substance of job creation, which is
Speaker 1: higher in pe back companies, notwithstanding some of the sense
Speaker 1: that there are cases which there are where people lose
Speaker 1: their jobs, but they lose them everywhere, but total job
Speaker 1: creation of p back firms is higher innovation, notwithstanding some
Speaker 1: contrary examples, private equity back companies end up versus their
Speaker 1: comparables investing more in research and development, and it's focused
Speaker 1: because they end up filing for more patents that are successful.
Speaker 1: So if you look at growth and you look at innovation,
Speaker 1: you look at overall sort of success of these entities
Speaker 1: to the end use customer. One of the thoughts of
Speaker 1: g private equity must make their money by raising prices.
Speaker 1: That's bad for consumers. Well, pretty good database out there,
Speaker 1: since there's so many transactions. Over the last twenty years,
Speaker 1: private equity average price increases about one a year. Now
Speaker 1: that's something, But private equity is not raising prices on America.
Speaker 1: There are other things that are prices on America of
Speaker 1: commodity prices and tariffs and other things, but not private equity.
Speaker 1: So I don't mind the scrutiny. And by the way,
Speaker 1: the asset class does have some outliers and there is
Speaker 1: some bad conduct, and I think there are ways to
Speaker 1: address that. But the aggregate net gain I believe for
Speaker 1: a lot of constituencies that need and want private equity
Speaker 1: is I think going to win the day. That doesn't
Speaker 1: mean there won't be a lot of noise, a lot
Speaker 1: of criticism, and presumably some constructive changes, which would be fine.
Speaker 1: And I think most responsible people running private equity firms
Speaker 1: would welcome that, just as an example the increased focus
Speaker 1: on E s. G. Our firm and many others now
Speaker 1: monitor and report on our environmental activities routinely. We think
Speaker 1: our governance stands up against any textbook. Look at how
Speaker 1: you should respond to your constituencies and our social engagement
Speaker 1: both with the community, using the companies that we serve,
Speaker 1: as well as in New York and London where we
Speaker 1: have our headquarters. I think, you know, we can always
Speaker 1: do better. Uh. And there are some things, particularly on
Speaker 1: gender diversity, racial diversity, UH, that are important to continue
Speaker 1: to work on. But you know, these are all things
Speaker 1: that are sort of a net plus as we go forward.
Speaker 1: And that was Don go Gel an important voice, and
Speaker 1: investing maybe getting more important as there's more and more
Speaker 1: scrutiny as you heard about the world of investing. You've
Speaker 1: been listening to Bloomberg Business Week extrava sire to tune
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Speaker 1: two pm Wall Street Time. I'm Jason Kelly, and this
Speaker 1: is Bloomberg