On February 22, 2008 Silicon Flatirons hosted a one hour public discussion with David Bonderman.
On February 22, 2008 Silicon Flatirons hosted a one hour public discussion with David Bonderman. Bonderman is a founder of the private equity firm TPG Capital (formerly Texas Pacific Group) and its Asian affiliate, Newbridge Capital. TPG has such companies as J. Crew, Burger King, Ryanair, and Seagate Technology among its portfolio. Mr. Bondermann has been, among other things, the COO of the Robert M. Bass Group, a partner at the law firm of Arnold & Porter, and Special Assistant to the U.S. Attorney General in the Civil Rights Division. Bonderman also serves on the boards of The Wilderness Society, the Grand Canyon Trust, the World Wildlife Fund, The University of Washington Foundation and the American Himalayan Foundation.
Bondermann was introduced by University of Colorado School of Law Dean David Getches. After the introduction by Dean Getches, University of Colorado Professor of Law Phil Weiser introduced the topic of private equity. As background, he noted that private equity is used to perform a leveraged buyout and restructuring of companies. He also noted that over 25% of mergers and acquisitions, 33% of junk bonds, and 33% of IPOs are funded by private equity. As an example of the recent increase in the use of private equity, Professor Weiser noted that 634 U.S. companies were purchased by private equity firms in 2006, more than 18 times the number in 2003.
Professor Weiser began by noting that private equity firms and their well compensated founders have received some negative press recently and asked Bonderman why this negative view of private equity exists. Bonderman replied that there will always be skeptics of new forms of investment, especially in government and by private individuals. He noted that congress was wary of private equity because they did not fully understand how the business worked. He also remarked that Americans are generally skeptical of people who make a lot of money quickly without producing or selling tangible goods.
Weiser then asked Bonderman what he thought the future holds for private equity. He responded that the newness of the business model will wear off and people will begin to worry about other things. As an example, he noted that much more attention was being paid to sovereign wealth funds and the credit crises than to private equity. He mentioned that, due to the private nature of the business, historically private equity firms had been content to operate in the background. Now that more attention is being paid to private equity, there has been a larger public relations effort to educate the public about the business model and good deeds of private equity.
Bonderman next related one of the early large deals that TPG did in the acquisition of TXU, a publicly held Texas utility. At the time, it was the largest deal which had ever been done. TXU was targeted because it was very well run from the perspective of its shareholders, but not from a political standpoint. It did not deal well with price increases, environmental issues, customer relations, and it was facing much opposition to proposed coal-fired power plants. TPG saw that taking TXU private could get a lot of political support since it was a way to fix these political problems. The plan was taken to the Texas legislature where they met some strong resistance. However, there was significant Union support and a coalition was eventually assembled which pushed the deal through.
Bonderman next explained that there are four things he looks to do in making a good deal: first, he looks to exploit over-reactions in public markets which can arise from general financial circumstances, caution regarding a particular kind of business, and because public markets are most interested in the short term stock price, not long term gains (a good example is Harrah’s: the stock price collapsed because they spent a large amount of money purchasing and renovating Las Vegas hotels); second, he looks to use higher amounts of leverage than public markets are used to; third he looks for companies in good industries which need a change in management structure (such as Continental Airlines, Burger King, J. Crew, etc.); fourth, he looks to become involved in a major process in some way, such as helping Lenovo to integrate with its newly purchased IBM PC business.
Bonderman gave some advice to people (students) who might be interested in pursuing a career in private equity. He said that it may be difficult at first to get involved, since there are no internship programs at these firms and the business is still very entrepreneurial. His advice is that investment banking will give one a solid background in that it will help develop a keen eye for value. He also mentioned that just like many other professions, one needs to be intelligent, possess good interpersonal skills, and to make contacts and look for opportunities.
The discussion next turned to economic policies the next U.S. administration should consider implementing. Bonderman noted that legislators do not realize that the U.S. is a large power in decline, much like the British in 1916. He said that the way to more prosperity is to have good regulations which are not too restrictive, good tax laws, and to retain and attract financial markets. The U.S. needs to work harder to attract and keep talent in the form of corporate headquarters, public offerings, and people. He noted that in the past the U.S. did not have much, if any, competition in these areas. However, not there is competition from Tokyo, London, Moscow, and Dubai.
In the course of answering questions from the audience, Bonderman was able to give his opinion on many different matters. He thinks that the largest venture capital firms will likely follow the lead of Blackstone and go public. He sees a potential downside in that being concerned about stock price will encourage a short-term view of earnings. He thinks that hedge funds have had to take a more short term view, since investors are finicky and will pull their money at any time. This may lead to hedge funds becoming less effective. He feels that newer financial devices such as CDOs, CLOs, and SIBs are good for democratizing credit and spreading liquidity, but that only a few of these will be good enough long term to survive.
He gave advice on how to put together a good management team: the best way is to purchase a company which already has good management. Also should employ very solid recruiters to identify good managers. It helps to have a short term operations group to send in. Private equity firms which own many different companies have a lot of in house talent to pull from in establishing management teams.
On the subject of sectors which TPG Capital avoids, he noted that they are not involved in two areas on moral grounds. The first is the gun and defense industries and the second are industries which do massive environmental damage, such as strip mining. He noted that while TPG Capital has an environmental bent because he believes in it, it is also good PR these days as well.