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Interview with David Bonderman

Mr. David Bonderman, the Founding Partner of Texas Pacific Group and an alumni of Harvard Law School, is a keynote speaker at HBS’s upcoming 2004 Venture Capital & Private Equity Conference. Despite his demanding schedule, Mr. Bonderman recently took the time to speak with the Harbus in order to share his insight into the private equity industry and to provide some valuable advice for those interested in pursuing a career in this field.

Harbus: Mr. Bonderman, 2003 has been another terrific year for Texas Pacific Group (“TPG”) in both the US and in Europe. In addition to raising a new $5 billion fund, TPG has made some very large acquisitions and successfully exited several significant investments. What do you think differentiates TPG today from the other large successful players in the private equity sector?

David Bonderman: Well, obviously, there are differences among the big private equity firms. But those differences are probably more of an emphasis than anything else. Anybody who has a substantial fund has that fund because they have a proven track record that investors like – and we’re pleased to be among those. So, I would say that two things are at least slight differentiators for TPG. First of all, we have tried to have a strong operations-oriented bent: about a third of our people are operating professionals, as opposed to deal professionals, which we think allows us to undertake situations where you need to be involved more in-depth with the operations of a company, particularly turnarounds. I think a second differentiator is that we have been willing to undertake complicated and somewhat contrarian transactions. That’s not all that we do, but we’ve been willing to do that in the right circumstances, whereas others have been more reticent to go to those places.

Harbus: Where do you view the opportunities in the private equity sector today? What are your thoughts regarding opportunities in the United States vs. Europe and Asia?

DB: That’s a hard question to answer in a brief statement, and as you point out, we do have an affiliate called Newbridge Capital, which operates in Asia, so we are indeed amongst the most global, big private equity firms. But, private equity capital in each of those markets – while those markets have very different characteristics – fills a niche where either strategic investors or the public markets don’t go, or don’t want to go for some particular reason. I think that’s going to continue to be the case going forward.

We’ve been through a period of time where strategics were basically not buyers and the IPO market was non-existent, particularly in the U.S. – but this is pretty much the case for the rest of the world as well. Obviously the situation has now changed. Public markets have come back on the equity side and have come roaring back on the debt side. So, there is a differential in availability of capital today versus what there was two years ago.

On the other hand, strategics are still more buyers than sellers. That, too, will change, but that provides opportunity. I think there is some opportunity along those lines on all three continents. It is obviously the case that there is a much broader and more liquid market in the United States than in Europe and a much broader and more liquid market in Europe than in Asia. Private equity players in Asia have to therefore be less fussy about being thematic than in Europe or in the United States because there are many fewer deals in Asia and many more deals in the U.S., with Europe somewhere in the middle.

Harbus: As private equity firms are raising more capital and fund sizes are getting larger, one often hears that competition for the larger deals is getting tougher and that there is too much money chasing a small proportion of good deals. Would you agree with this statement?

DB: Actually, I am not in perfect agreement with the underlying thesis. In fact, what has happened is that the average size of private equity deals – certainly in the U.S and in Europe as well – has increased dramatically over the past few years. Actually, the average size of a deal has pretty much doubled. At the same time, while there is no doubt that there is a fair amount of money, there is actually less money now in the private equity world than there was a few years ago.

The result of that, combined with the fact that strategic buyers are effectively out of the market, is that the bigger deals have actually become less competitive rather than more competitive, simply because nobody has enough money to write the check. If you look at some of the bigger deals recently done – whether it’s Burger King, which we did, TRW which Blackstone did, Legrand that KKR did in Europe or SEAT that was also done in Europe – all these deals required so much capital that you need two or three firms to participate. As a result, you almost never have more than one or two bids in those situations. So in fact, the upper end of the market has been less competitive than the middle market, and not the other way around. I don’t expect this will go on forever, because the real competition between the ten or twelve mega-firms is not so much amongst themselves (although there is obviously some competition there), but it is with the strategic players and the public markets. When public markets are soft and strategics are not buying, that’s when these private equity firms have the opportunity to thrive.

Harbus: Where do you see the private equity sector going in the next 5 to 10 years in terms of players in the industry and the overall potential for attaining the level of returns that private equity funds have achieved historically?

DB: I think the right way to look at private equity is as an illiquid equity investment which ought to be competing in the investors’ minds with the public markets. As a result, the private equity firms should deliver returns significantly higher than what the public markets do. You can argue about whether that return should be 500 basis points or 1,000 basis points higher, but somewhere in that range at least. And if they can’t, they probably shouldn’t be in business because, given the liquidity penalties and so forth, that’s what private equity ought to deliver.

What you think of the private equity sector depends on what the markets are likely to be doing going forward. We’ve obviously had a roaring market in 2003, but if you believe that over the long-term public markets should be yielding 10%-11% in real terms, then the private equity firms should be yielding 16%-25%, or they shouldn’t be in business. As the market comes to realize that, what is going to happen – and you’ve seen some of that already – is that the players who are successful and continue to be successful will not have a lot of trouble attracting capital. The people who can’t do that will fall by the wayside. You had one or two big firms already lose their way in that regard. At the end of the day, you will see a collection of larger firms, and you’ll see some midsize firms and you’ll see some niche firms. But over time, you probably will have less than the 85 or so firms at the moment who have $1 billion dollars in capital or more. Probably some of those guys will go away over time.

Harbus: As you probably can guess, many HBS students are extremely keen on getting into the private equity business after completing their MBA. What advice would you give someone considering a career in private equity right now, especially since jobs are extremely competitive and positions are limited?

DB: The private equity world is a relatively small one. There are currently probably a few thousand professional jobs worldwide. In private equity, that’s probably about all there is. So in the scheme of things, the firms are all relatively small. Even the biggest firms such as ourselves have let’s say 50 to 100 professionals. Therefore, people don’t have formal training programs and it’s a little bit of a “catch as catch can”. Traditionally, for young people, go
ing into the analyst or associate programs at investment banks has been thought to be pretty good training. We hire a lot of people that way. I think that most of the other private equity firms do too. Those programs provide rigorous training and an opportunity for us to judge candidates because we have good relationships with those banks.

Obviously, a lot of firms hire people out of business school directly, and that’s a matter of interviewing well, being smart, and knowing what you want. And of course, a little bit of luck of the draw.

Harbus: What do you think makes a good private equity investor?

DB: Being a good private equity investor is more complicated than it seems. I would say that there are a few characteristics that are important. If you look at the skill set that you need to ultimately be a successful private equity investor, at least at the senior level, you have to be, in this business, a good investor. You have to be able to help companies perform and you have to have judgment around exiting investments. If you look at the skill sets there, they include some things you can teach and some that you can’t.

One of them, of course, is being a person who has good judgment about businesses. A second is someone who’s pretty analytical and understands how to deal with numbers. A third one is personality, because in the private equity business, there’s no deal unless you can persuade somebody to sell you their company. And as you say, there are many competitive situations here. So if many of us are all out there competing, and people like you and they don’t like me, they’re probably going to be interested in selling their company to you, and not me. So, you have to have a mix of those talents.

In addition, a very important characteristic is having a nose for value.

That’s why some of the very best private equity people, in my experience, are people who start out as stock pickers – people who really understood value, how to take a company’s financials apart and couple that with good judgment about businesses, macro trends, and where things are going.

It’s a complicated skill set, and probably no one is perfect at all of them.

The more you start out with the right kind of personality, the right kind of smarts and the better the training you get, the more successful you’re likely to be.

Harbus: Mr. Bonderman, you’ve obviously had a very successful career in private equity. What do you enjoy most about your job? What has been the most challenging aspect of your career path?

DB: Let me answer those in different ways. For me, one of the highlights of being in the private equity world is that you need to learn a lot and very quickly about different businesses. So it’s always a continuing learning experience where you can apply what you know, of course, by way of judgment and by way of numerical analysis. You’re always investing in new businesses, which is a learning experience in itself. I think that is a wonderful thing and I think it makes for intellectual challenge and for continued personal growth. That, for me, is the highlight of this job.

You have a challenge every day in figuring out what’s happening in the markets, where your next deal is coming from and so forth. So there is always a continuing challenge – but this is a financial services business, it’s not brain surgery. The challenges are all about getting it right, but in the scheme of things, there is plenty of latitude to get it wrong.

Harbus: If you were to spend a lot more time doing anything you liked, apart from work, what would you spend it doing?

DB: I currently spend a lot of time on the charitable front, particularly in the environmental area. I am on the Board of the World Wildlife Fund, the Wilderness Society, the American Himalayan Foundation and the Grand Canyon Trust. I think that what we leave behind us is extremely important. I therefore spend a fair amount of time doing that, and someday I hope to spend more time on it.

Harbus: If you had to give one piece of advice to students at Harvard Business School going into the real world, be it professional or personal, what would that be?

DB: Don’t do something you don’t like. Look for a job that makes you excited to get up and go to work everyday.

Nobody in my generation ever started out in private equity. We got there by accident. There was no private equity business – actually, the word didn’t even exist – when I started. I got there out of the purest of happenstance and so I think many people find what they really enjoy doing just in that way. So another piece of advice for you is: don’t worry too much about what you’re going to be doing when you get out of business school – life will come your way.

Harbus: Mr. Bonderman, thank you very much for your time.

February 2, 2004
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