Friday, February 03, 2006

Prologue - "Disillusioned."

whore Life seemed pretty dismal in June.  Like many of my ilk I had been lusting after a position in "private equity," to many the Holy Grail of finance endeavors, since before even applying to business school.  It is hard to explain to the unwashed the draw those simple words pull on a young and somewhat naive finance mind with.  Even their rhyme and meter serve to build a shining image and marketing sheen the likes of which DeBeers might envy.  "Private" smacks of smoky back room deals and silent professionals all "in the know" before the rest of the street.  "Equity"?  Well, it just sounds better than "debt" doesn't it?

Demand for positions in private equity outstrips by orders of magnitude the supply available to hopeful business students.  One sage advisor consolingly told me that for every private equity position available there were nearly 2,500 applicants.  I have no idea where this figure came from but it was delivered with such authority that it gained instant credibility in my mind.  Most employers in the field, he added, were looking for investment banking experience.  Perhaps a tenure in the "Dungeons of Investment Banking Analysis" would be the best stepping stone to a private equity position, he suggested.  Given my dismal record to that point in securing the interest of, or even a response from, a single private equity firm, I took his advice to heart.  What the hell else was I going to do?

And so I was on the path to a, hopefully brief, career in the mergers and acquisitions department of a large investment banking firm.  Still, I kept my eye out for private equity slots that turned up and threw a carefully polished resume at every opening I thought I saw.

It is one thing to have little or no success in running for the gold medal, but failing even to place in the qualifying rounds at the state level is another blow entirely.  So it was that, despite all my earnest, even desperate, efforts, I had managed to slip through the entirety of recruiting season- shades of prostitution, dress up in your best garb, sell yourself to an older man (or occasional woman) for 30 minutes, then on to the next John- without even a serious nibble from any of the major investment banks on which I had by then mortgaged my future (and probably the future of my children given the direction the interest rates on my loans were heading).  Consulting, in which I had no interest at all, was beginning to look like an important option.

BankWeek was just a ragged version of the New York Marathon, only it took place in the dead of winter with the participants in dress shoes and business suits.  LondonQuest would have been more fun, but it was called EuroTrek by then and a brief tenure as the significant other of a Marin County dilettante meant that I now possessed an, admittedly illogical, blind and raging hate for the many Stanford grads that seemed to haunt the proceedings.  I'll tell them what they can do with their on-campus golf course, believe me.  Not that I really had any faith in securing a position by that point anyhow.

Most of us had an uphill battle in the effort to convince skeptical European recruiters that we were actually committed to remaining on the continent beyond the few years it would take to visit every nearby pub and still manage to ski in St. Moritz a few times.  They could smell an MBA tourist at 50 meters.  I suspect that no one believed my honest protestations that I wanted to remain in Europe long-term.  Then again, I'm not sure how honest they were in the first place since my endgame was a spot in a buyout firm.  In any event, even if they did believe me, they certainly didn't express themselves in the form of offer letters.

My deepening disillusionment is easy to quantify by example.  I met Cindy, a smartish and quite elegant looking fellow hopeful during EuroTrek.  Well, I first saw her at EuroTrek.  I didn't really meet her until the aftermath of EuroTrek.  For some reason I didn't really seem to know anyone well at EuroTrek in the first place.  I don't think I was particularly alone in this as we all spent a lot of time in the first few days sitting or standing around in presentations not talking to each other and waiting for the chance to verbally demonstrate how witty and sharp we were at the expense of our peers.  Of course, appearing to be distinctly witty proved difficult when visiting banks staffed primarily with Londoners and it was important to apply at least a thin veneer over your barely contained hostility for anyone who might stand in the way of your clumsy efforts at flattery.

I was near to drifting off in the back row of one such presentation, delivered by a somewhat beleaguered looking VP in pinstripes and hearing for the sixth time in three days how "entrepreneurial" the bank's culture was, when I caught a misplaced hand out of the corner of my eye.  Cindy, looking as prim and proper as any eager MBA student from almost any angle, was none the less, being tactilely entertained by the equally formal appearing, chiseled featured Richard seated immediately next to her.  They must not have had any idea I was behind them, or that the angle afforded me far too revealing a view of their extracurricular activity.  For a minute I was stunned into staring.  Then I was offended.  How dare they debase this critical process?  What a poor example it would set if they were caught.  All of us would suffer reputationally.  Then something occurred to me.  In some fundamental way, these recruiting events are a farce.  Only the terminally dour, or intensely desperate, could take them entirely seriously.  No one cares about witty comments.  In a world where the wrong tie can ruin your chances it was folly to think that these employers were looking for unique and interesting.  They are looking for worker bees.  Worker bees with the potential to be managing directors one day, sure, but today, worker bees.  It was definitely an employer's market.

Taking things a bit less seriously might not have improved anyone's chances, but it sure made it easier to endure the process.  EuroTrek wound down slowly and towards the end I found myself standing at the bar in some club somewhere talking to a fellow hopeful.  The conversation had drifted to a review of the blandest company presentation when, across the room in a not-so-dark corner I recognized Cindy, lips clamped on the mouth of the still pinstripe clad, beleaguered looking VP.  Richard was nowhere in sight.  Later I would learn that she had been offered an associate position in the M&A group at the VP's bank.

Would it surprise you to learn that she was a Stanford grad?


Sunday, February 05, 2006

Prologue II - "At What Price, Honor?"

slut Before even fretting about what it was to be a jobless second year, it might be helpful to understand the jading process that was first year on-campus recruiting.

As a first year business student it is not long before you realize the importance of the second years.  That is to say, it is not long before you are made by one twist of fate or another, to believe in their importance.

The on-campus recruiting process is a dismal one and, right or wrong, the perception is that small edges make large differences.  Most banks, one is told, hire for their full-time programs from their summer programs.  This makes one's acceptance to a summer program a critical element in career path.

It is not that second years are necessarily any smarter when it comes to the recruiting process, rather that they often sit in on the recruiting discussions their employers have following interviews.  You can hope for three things from them in this respect.  First, there is the mostly empty hope that they possess some dark and hitherto unknown secret code to gain admittance.  That you need only complete the right challenge-response phrase, as if you and the recruiter have together parachuted at night behind enemy lines.   "Flash!" "Thunder!"  A friendly fire incident narrowly averted.   Many second years, for entirely unaltruistic reasons, play up the importance of this illusion.  "When they ask you to name a personal flaw, and they will, tell them you lose track of time when engrossed in a project, and forget to eat or drink."  Because it never occurs to you that you aren't the only recipient of this critical secret, the baffled recruiter ends up wondering what kind of robots your MBA program is minting.

Beyond the secret codes, if you do enough kissing up, and here as elsewhere the competition is stiff, the second years might put in a good word during the whole 35 seconds in which your candidacy is reviewed.  Of course there is no way to know if they ever even made a peep during the review session, or if anyone bothers to even listen to summer interns during the discussions.  Still, in such an opaque process even faint hopes are hopes.  A few first years, having identified what they think is an edge, turned up all their seductive charms, figuring perhaps that this was the only currency in their possession and of sufficient value to trade for career admittance.  I must admit that I too fell for this trap, and while I did not go as far as some, I found myself looking up to people I never would have given the time of day to a year earlier.  My own machinations were, however, slight compared to those undertaken by some of my contemporaries.

Allison, a tallish blonde from California, was perhaps the most flagrant example of the perils of this carnal approach.  Within weeks of deciding that a famous Swiss bank was her first choice, she had identified the second years who had "summered" there, cross referenced them against the facebook of second years and shamelessly thrown herself at the two she regarded as the most attractive.  Of course, there were more than enough liquor inundated social events to lubricate her task and by the end of the first month she had gotten to Colin, her man on the inside.

We all politely looked the other way, well most of us did, but her overtures had been so overt it was hard to pretend not to notice what was going on.  If Colin knew, which we all suspected he did, he didn't let on and instead placated her with gentle wooing mostly revolving around what an excellent fit she would be and how perfect the Swiss bank would be for her.  It wasn't a week after they "met" that Allison could be seen daily getting a "ride home" in Colin's BMW, as if the two hour wait she often endured from the end of her classes until the end of his was convenient to her.  One can easily imagine the tone their nightly pillow talk took.  Easier, perhaps, the content of the mutters her many detractors frequently intoned.

I suppose the more old-fashioned among us might have been affronted by these sorts of shenanigans, but there were dozens of reasons not to be.  For one, such liaisons were not particularly uncommon.  Just in my class I can call forth three engagements and five marriages that were left on the rocky shores of business school antics when one or another classmate was awarded the none-too-rare Master of Infidelity Administration degree, and that's just off the top of my head.  I might add that my recollections include one couple who entered the program together married, and left the program engaged, both of them, to third parties.  I sat between them in a marketing class and was often the conscripted purveyor of the notes, filled with angry scrawls written with loud scratchings towards the end of the term, they exchanged.  That quickly came to an end when I, tired of being a runner by the 15th such note since the beginning of that class, flagrantly opened it and read it.  I could feel their hot and hateful but helpless stares as I absorbed the words, "No FUCKING way."  The "fucking" was underlined.  They stopped passing notes through me after that.

The end of Allison's tryst took a predictable route.  Though I was not there myself I heard from others, everyone heard it from someone else it seemed, that the same evening the callbacks came and Allison had not been invited to the second round she threw a drink into Colin's face and called him a "manipulative cocksucker" before storming out of the event and never, it was whispered, speaking to him again.  A more clear sense of irony in her choice of pejorative nouns I don't think I could have dreamed up myself.  I heard that Colin had an undergraduate soothing his ruffled feathers within a week.  Allison, who, so sure of her chances with Colin's employer, had not bothered to pursue any fallback plans, found herself entirely unemployed, and without another bedmate, that summer.

After all the antics the usefulness of the second years was confined to feedback on why one had failed at this or that bank.  In one case I heard a distraught first year pleading with his mentor, "My tie?  What's wrong with my tie?"  Admittedly, it was a pretty ugly tie.  One could, in theory, be shocked ("I am shocked, shocked to find that gambling is going on in here!") at the trivial strikes which could cause an intern candidate to be tossed from the game, but then in such a rarefied environment it didn't, in the end, really surprise anyone.

My feedback boiled down to three things.  Firstly, I was too intense.  Second, I wasn't driven enough.  (This comment from the interview where I refused to accept the recruiter's highly forward invitation to meet for drinks after the interview).  Third, I didn't seem committed to banking.  So arbitrary and capricious were these comments that it became clear to me that the selection process was more about popularity, and a strange version even of that, than merit.  Genuine effort was pointless.  Sleaze was the order of the day.  This last point was driven home brutally when I heard the tale of the three first years who had taken the entire recruiting team, minus the women, of a highly sought after bank out to a strip club after the interviews.  Unsurprisingly, all three were awarded summer positions at the same bank.

Nearly despondent, I slouched into summer with a middling internship in the mergers and acquisitions department of a large corporate.  In a way this was gratifying.  If this was the culture I was idolizing, perhaps I needed to revisit my assumptions.  I wasn't sure if I was happy I hadn't lowered myself to the level that seemed required to command a position, or upset that I had failed to capitalize on a clear opportunity.  At what price, honor?


Tuesday, February 14, 2006

Prologue VI - "The Bounce"

upThough I had the coveted "Mergers and Acquisition Intern" catchphrase on my resume after my summer in corporate development, it seemed to count for little when it came to my continuing job search.

By the end of the recruiting season I was high and dry without any semblance of gainful employment.  My classes seemed to get harder- the professors lightened up on the students a little during recruiting only to buckle down with a vengeance once the official season drew to an end- and the many tales of other dream-come-true offers that passed from the lips of my colleagues had a brutally demoralizing effect on me.

The impending approach of Graduation almost felt like an impending doom.  The career services department did not help with their constant publication of the running "percentage of second years with an offer for full time work" statistic.  (By the week before graduation those figures stood at 90something percent).

There was definitely a certain subliminal pressure lurking under the surface of things.  Parents started flying in.  Exams had to be completed.  Papers written.  And all under the constant reminder- which the dean of students office actually took the time to mass email to the students one afternoon- that failure was, literally, an option.

The buildup of pressure had two effects, really.  First, it caused some of us to spend even more time out drinking.  It was tradition at the business school to go out each Thursday to a bar selected randomly by the committee appointed for this purpose.  Sometimes you almost felt sorry for the poor, totally unsuspecting patron of the bar.  Going to be a slow Thursday.  No, Tina, you don't need to come in.  We only need one bartender for Thursdays.  Then, between 9 and 9:30, *Wham*  150 business school students descend from the heavens like thirsty paratroopers into the French countryside.

I attended my share of these in the final days of my MBA career, but I found no solace in them.  Everyone, it seemed, had scored a decent position and they were all to happy to tell you exactly where that was going to be.  I, on the other hand, was going nowhere and I wasn't about to share that fact with anyone.  Instead, I invented a destination.  The foreign office of a respectable bank in particular.  Enough to prevent sneers but obscure enough to avoid running into someone else destined for that office.  I just couldn't handle being thought of as a washout or some kind of failure and at these kinds of events you were supposed to be jolly and carefree.  Grade non-disclosure and graduation just around the corner was supposed to be second-semester-senior style inspiring.

Not all the effects of those last weeks were so benign.  The week before finals one classmate's girlfriend shot herself in the head in his apartment building while he was out with friends.  I heard that he had broken up with her a few days before after dating her for more than two years.  I'm not sure what it means that he was in class the next day.  It was the review session for the final.

I celebrated graduation just like everyone else.  Well, perhaps with a tad less enthusiasm.  They all seemed to be heading somewhere important.  On the verge of realizing big dreams.  I was on the verge of... not very much.

I went to visit my friend Kim in New York about a month after graduation.  I was going stir crazy back home and I needed a break from the job search.  She had landed a spot in the investment banking group of the bank that had been second on my list of favorites.  On getting to her apartment I was stunned to find a pale and drawn looking Kim hunched over a bunch of finance textbooks.  She had her degree already.  Why the textbooks?

"I have to study," she replied without looking up.  This was delivered totally deadpan.  She was serious.  "The bank has a training program and there are exams after each section."  I couldn't believe it.  I must have stood there for 3 minutes with my mouth open because she continued, "It's pretty tough stuff.  A lot of the class is spooked out."  The "class?"  I looked around the room.  Pizza boxes.  Empty Cup'o'Noodles cups tipped on their side with forks still in them.

"Do they actually fail people or something?" I asked.

"No, they fire you."  This was beyond preposterous to me.  I couldn't believe people put up with a second round of "financial accounting."  She continued.  "Just imagine you're some French language major for undergrad and you head to business school but don't take any serious accounting classes.  You're fucked.  We've lost 2 people already."  She'd only been at the bank for four weeks.  It was true though.  You could get through business school without really mastering many of the fundamental banking subjects, like statistics, accounting or financial modeling.  Why you would try to go into banking after that is sort of beyond me though.

"They fire you?"  I still couldn't get my arms around it.

"Yep.  Well, if you were really close you can retake it.  So sometimes people vanish from the classes but then mysteriously show up again after a week and a half or something.  You know they almost failed and got a 'talking to.'"  That sounded suspiciously like a euphemism for an abusive husband to me.

I had envisioned a week of at least a few outings to local pubs, or a night for Italian or something between old classmates.  Nothing doing.  Kim didn't once leave her apartment while I was there except to creep out to her mysterious, and cut-throat training program.  In a strange way this turned out to be a very lucky thing for me.

I had almost given up on ever finding a suitable position.  Like when you're looking for parking, the longer you look for a spot the wider the circle you drive in to find one.  By the fifth lap around your neighborhood the radius of your search area is 5 blocks wide.  The radius of my job search had descended into purchasing departments of middle market companies by this time.

Mostly out of despair I did something I swore I would never do.  I asked my mentor from undergraduate to meet me for lunch in Manhattan to give me career advice.  My pride was so battered by that point I didn't even care what anyone thought anymore.  And here, an odd thing happened.

My mentor had joined the board of a private equity firm in Manhattan.  This news was delivered over dinner at The Palm with almost emotionless nonchalance.  "I could make an introduction maybe."  I recognized the name of the firm immediately.  Buyouts.  The founder was famous for having started it with an interest free loan of $100,000 borrowed from a relative and creating a billion dollar private equity firm in less than a decade.  Thereafter he had steadfastly refused to lend his relatives even a single thin dime.  There was a price to pay, however.  The firm was famous for chewing up, sucking dry, and spitting out the bones of young associates before grinding them up into powder used for absorbing the coffee spilled by the partners.  Partner coffee desiccant seemed like just a dandy thing to be at that moment, however.

I shook through the entire dinner.  It took me a week to work up the courage to put in a reminder call to my mentor.  Sure enough, a meeting was arranged and days later I was at lunch with Ron, a former employee of the firm who had left to become President of one of the portfolio companies.  Ron began to discourage me from applying for a position from the moment I sat down.  I would be treated like a slave.  Sent to make copies.  Bind PowerPoint presentations.  Hole punch.  I wouldn't so much as see a client for the first three years.  I didn't care.  I even said so.

"Really, I don't care.  I want to break into the industry."  Ron was persistent.  He insisted that buyouts had become commoditized enough that associates were used and exploited without any chance of making partner in the big firms, as those rolls were all but closed.

About halfway though the conversation, he brought up an alternative.  A friend of his was 15 months into starting up a new buyout firm.  Maybe he had an open slot.  Why not join on the ground floor instead of hitching my future to a cart that had already left and was halfway to Idaho already?  A startup buyout firm didn't seem very interesting to me.  I was looking for experience in the industry.  A big name for my resume and to gain the experience I needed to one day start a fund of my own.  None of that was part of the deal.

"You're never going to get that at a larger fund," he insisted.  "You'll be lucky to work on two deals in a year.  And then, your involvement will consist of checking a spreadsheet or two for errors.  With a new firm you'll be in the thick of it from day one.  Plus this place I have in mind actually needs you.  You're going to love the founder.  Trust me."  Before I knew it, Ron was actually refusing to make an introduction to his old employer at all.  He had talked himself out of it in 75 minutes flat.  Instead, that weekend I found myself in the car with Ron, who I had spent an aggregate of 85 minutes with up to then, driving up to a multi-hundred acre estate in Connecticut.  And there, on the front lawn with a pair of champion whippets by his side, is where I first met my boss.


Wednesday, February 15, 2006


Boss It is quite difficult to avoid judging people by their possessions in our culture.  The way we define people has more to do with their surroundings, and the surroundings they create around themselves, than it does with who they are.  This was just not a problem with Armin.  Armin is a tall EU citizen of about 52 and though he was standing in the midst of the most remarkable estate I think I have ever seen, there was this light about him that made his surroundings just that.  Surroundings.

There was such a high contrast between him and everything and everyone else.  The things around him looked like mere accouterments because they stood out as so bland in comparison. Certainly he was very wealthy, but in the end those were just the rewards of doing very well what he did.

What he did for the past 15 years of his life, as I would later find, was serve in the senior executive corps of one or another Fortune 500 company, including presiding over two of the more spectacular breakups in U.S. corporate history.  Just to hear him talk about finance you could tell he dreamt in capitalization tables.

I can't even remember what any of the other people there that evening, his wife, his daughter, one of his employees, the housekeeper even said.  I was that lost in listening to him.  I had heard of Bud Tribble's "Reality Distortion Field" before, but Armin was the first person I had ever met who possessed one.  Granted, it wasn't hard to talk me into a private equity position, or any job at all, by this point, but he was so adept at the art of persuasion and I felt under his spell so naturally that later I would wonder exactly how voluntary it all was.

Everything around him had a sheen of perfection to it.  His wife was beautiful, and young.  His estate was the envy of even the more rarified segments of the local demographic.  His dogs were perfectly behaved, obeying three sentence verbal commands as if English was actually their first language.  He was in private equity.  I suppose it shouldn't have been surprising that he was also a gourmet chef.  Still, he might not have even bothered with dinner.

I had pretty much accepted the job before it was even described to me. It grew later and later.  My chauffer, Ron, showed no signs of departing and after his fifth glass of the most wonderful red wine I had no desire to be in the same car with him anyhow.  Armin didn't miss a beat. "You'll stay the evening, of course," he said.  What the hell else was I going to do?

Thursday, February 16, 2006

Location, Location, Location

Ga "The nice thing about being the founder," Armin was telling me, "is that you can put the company anywhere you like."  I was trying to play off as if I wasn't particularly impressed with all that I had seen since my dinner the night before.  I wasn't, I think, succeeding very well in my efforts at deception.

Some months after the attack on the twin towers, Armin's wife had literally drawn on a map of New York a 50 mile circle around Manhattan, where they had been living on 9-11, and said "anywhere outside here."  Armin actually took the map to the realtor who had proposed several options culminating in the property I was, at that moment, standing on.

It had been quickly, and quietly purchased from a quite famous "raider," still in the business today in New York, a name you would no doubt recognize, from the glory days of 1980s junk.  Though Armin claimed to hate going into New York because of the traffic and such, I suspect it had more to do with the serenity of surroundings here.

The estate was so big that every other room had one of those Motorola two-way radios sitting on a table in a charger.  If ever you went anywhere you would just grab one and take it with you around the grounds.  The result was that an intermittent beeping accompanied Armin around the grounds as he back-and-forthed with the staff, gave directions and otherwise managed the day to day affairs of the estate by remote control.

It is impossible to overstate the impact the estate had on me.  When I was younger my family were close friends with a well-known author and his family who had a similar, though admittedly smaller, estate I used to play on when I was young.  The kind of almost primeval spark that Armin's place set off in the lizard portion of my brain was potent.  In combination with the picture perfect weather Armin had managed to order down through whatever level of contacts are required to get that sort of thing done, it jolted me into a sort of suggestible trance or something.

He was going on about his motivations for starting the firm (a lust for "the deal" and a disdain for large corporations as a vehicle for growth), the firm's acquisitions philosophy (acquire majority stakes in midsized firms where there was an opportunity to positively adjust the capital structure and apply real management supervision), and what he was looking for out of a new member of the team (a "hunger" for "the deal," potent modeling skills and an interest in "having some fun together.")

As I looked around the estate, caught sight of a far off deer in the woods and began to fall into the favor of Lord Mountbatten and Admiral Nelson, Armin's two whippets, it all seemed like a dream come true.  By the next evening I was talking about timing for my start date.

Friday, February 17, 2006

The Final

Tick Armin had two other general partners, and although they both had only minority interests in the firm, Armin treated them as equals for the purposes of major decision-making within the firm.  That included new hires.  I discovered this when Armin dropped a 5 inch sheaf of paper in front of me.  It was a deal.  Names were obscured.  Details black lined.  But it was definitely a deal.

"Of course, if it were up to me," he said, "I would have hired you already.  My partners are, well, they find people more opaque than I do.  But then, they are both former CFOs.  It is hard to blame them.  And, to complicate things even more they are not here to be charmed by you, like I am," he smiled at his own joke with this last.

After I picked the stack of paper up, it seemed to get heavier and heavier as Armin continued to speak.

"We prepared this case for you.  It is a real deal that we looked at about 6 months ago.  Run though it.  Put together a presentation.  Concentrate on creative deal structures.  Remember that we are a smaller firm and we have to be more nimble.  Smarter.  You'll present your conclusions to my partners and me via telephone on, oh, shall we say Wednesday?"  5 inches of mergers and acquisition case.  In 3 days.  Suddenly Kim's studying for her investment banking training program in her closet sized Manhattan apartment seemed benign, even desirable.

I had only planned to be gone the weekend and my welcome with Kim, who was a terrible hostess in her current state anyhow, was effectively worn out.  I had to go home.  I started reading the case on the way back to the airport but by the time I arrived I was so panicked and absorbed in its complex detail that I walked right through the terminal without even checking in and took the train from Newark airport to the city.  I checked in to the Hudson Hotel and I did it so blindly driven with fear I don't even remember having heard the room rate.  It didn't matter.

There was no way I was going to sit on a plane, deal with loud, flu carrying children back in coach class and try to salvage my intellect enough to work on a case for a shattered day before flying right back.  No.  Instead it was room service for 3 nights in a row.

The case was a complex LBO.  The target had a badly muddled capital structure.  Uncooperative shareholders who had to be bought with ever increasing amounts of increasingly expensive debt.  I was on the third theoretical tier and putting warrants underneath them to meet the stated IRR goals of the mezzanine fund before I had enough capital to do the deal.

I emerged from that marathon session with what I thought was some of my best work.  Time constrained.  Incomplete.  In some places not as polished as I would have liked, but still, all considered, some of my best work.

Presentation slides arranged.  Attached to email.  Sent to three addresses and I was on the phone with Armin & Partners.  I launched into the first 5 slides, my summary and introduction and then I hit the natural pause before I delved into the first detailed section.

"No," Armin said.  "Wrong."

Tuesday, February 21, 2006

To LBO or Not to LBO

Cb My LBO case was a small light manufacturing company.  I should say, actually, it was an assembling company.  They had outsourced all their component manufacturing and did only detailed quality assurance and inspection and assembly at their facilities in Northern New England.

I concentrated on three things.  First, doing a good discounted cash flow analysis.  This shouldn't have been difficult because there weren't a long series of non-recurring charges to pull out of the financials.  It was a pretty clean-cut and clear business this way.  The problems with my model were more subtle.

The company was only around $100 million in revenue.  At first I wasn't going to call it an LBO because it didn't fit the typical model.  Boring firm.  Lots of machinery or assets on the books to leverage against.  Steady cash flow.  Undervalued industry.  Here we had 5 years of 15% annual growth in revenue, positive, but hardly steady or consistent, a balance sheet with barely $12 million in assets to leverage, and most of these nearing the end of their useful life.  It was an expensive deal though.  Nearly $20 million in EBITDA and a banker for the seller who wanted 5x-6x EBITDA, or $100 - $120 million in cash.  The discounted cash flow I did was cumbersome.  How do you pick a beta to determine a discount rate for a small, totally privately held firm with no obvious industry peers?  Wild ass guess, that's how.  It came out to around $135 million.  I shaved that down by applying a "liquidity penalty" rather arbitrarily to the firm of 30%.  Nearly $95 million.  That was close.

Even at $95 million, an all equity deal would be painful, and it would make returns very difficult.  I doubted the firm could maintain 15% growth for another 5 years now that it had $100 million in sales.

I solved my quandary when I remembered a Wall Street Journal article on hedge funds and their increasing domination in the cash flow based leveraged finance business.  Large balance sheets weren't critical to an LBO, provided the lender could get comfortable with the cash flow.  Such "cash-flow" based leverage made it possible to do significant LBO deals on firms with weak balance sheets, albeit at more severe rates.

I threw myself into the LBO model with On-Demand movies playing in the background to keep me company in the hotel room.  Committed to the LBO model, I had to take some guesses as interest rates and how much a hedge fund with a leveraged finance desk, about which I knew quite little, would want to see.

I ended up with $30 million in equity and three "and a half" tiers of debt.  The Senior Secured with $40 million (two EBITDA turns) at 400 basis points over LIBOR.  The Senior Secured B with $20 million (one EBITDA turn) at 800 basis points over LIBOR.  The Senior Secured C with $20 million at 950 basis points over LIBOR and half of the interest payable as "payment in kind."  Below this I added some penny warrants so that the total return to the hedge fund was closer to 15% than not, figuring this was the kind of IRR they would need to do the deal.  This seemed like a reasonable structure and there was enough EBITDA to go around even with mandatory payments on the debt.

I threw in a very conservative 3 stage growth model, pulling revenue growth in year 5 down to 5%.  Even on this conservative model the equity was showing IRRs of nearly 27%.  Any decent sales performance would pay off more debt faster and boost those IRRs even higher.

I was confident I had the right answer, and I wasn't sure how any investor could snicker at those returns given how conservative I had been with growth.  Even with a rather severe contraction in revenue the debt holders were still made whole in the first several years.  Figure in a refinancing in year 4 or 5 and it was a pretty good looking deal.

I put all my arguments together, got a smattering of sleep and pitched the deal the next day.  Armin stopped me cold on my sixth slide.

"Your model looks fine, but this deal would never work."  I was frozen.  "Did you consider the ownership?"

"Well," I was at sea here.  "Yes.  I felt that this level of payout would convince all the shareholders it was a compelling deal.  I left some upside in the model and I think we could add another $10-$15 million in purchase price in order to..."

"No," Armin intoned again.  "Think PAST the numbers.  The purchase price is just one part of the story."  I was stuck.  There was a long pause.  Armin finally broke it.

"What percentage of the firm are we buying?"  I hadn't considered anything other than 100%, figuring that leaving old minority shareholders in was a bad idea and that a clean slate would be better."

"I guess I figured 100%."

"No.  Take another guess."


"No.  Tell me, what is the motivation of the seller here?"  I was stumped.  "Did you read about his family?"

"No," I admitted.

"You should have.  How old is the owner?"  I was about to try and guess when Armin answered for me.  "Seventy six.  He has five daughters.  All about one year apart.  What does that tell you?"  I was alarmed by this direction of the discussion.  The other partners were totally silent on the phone.  The silence continued.  "It tells you he probably wanted sons.  What are his daughters doing?"  I didn't know this either.  "Well, it doesn't matter, except that none of them want anything to do with the family business."  This had been in the materials, but I had ignored it.  "He wanted sons, instead he got a lot of minority shareholders, two of which have made a habit of suing him.  Do you think he is ready to retire?"  Again, I didn't get the chance to answer, "He's got three sailboats, two planes and a house in the islands, he's seventy six and he's still working at the business he built full time.  This guy is bored.  He isn't going to retire.  He wants to relive the glory days.  He's selling because the minority shareholders have driven him to madness.  He needs a partner again.  He needs... heirs."

"I... I see."

"Yes, I think you do now.  Let me tell you what really happened with this deal.  By hook and by crook we bought out the seven minority shareholders for $20 million in equity.  That got us around 30% of the company.  We then structured the rest of the deal as an earn out, slowly buying out the owner but letting him run the company and stay on the board.  We ended up paying about 80% of what you suggested.  If we kicked him out we'd have had to put in a whole new management team.  You have to think first about the people.  About the parties and their motivations.  Why are they selling?  How can you give them what they want without just throwing money?  Sometimes you can't.  This time we could.  All he wanted to do was be the big cheese for a few more years.  It was the lawyers telling him to sell."  I was crestfallen.  I had totally blown it.  "Your model was excellent.  We might even have done this deal as an LBO, but we didn't have to.  That was the key.  Well, we'll talk and I'll get back to you tomorrow."

That night was the longest of my life.

Wednesday, February 22, 2006

Crash and Burn

Pl I was certain I had blown my big chance.  All those hours of learning how to construct complex models for every conceivable financial situation for naught.  Maybe I wasn't cut out of this sort of work after all.  It was about more than being a great analyst with a gift for modeling and little in Business School seemed to emphasize much else.

Sure, there was the occasional practitioner professor who would tell old "deal war stories," but nothing on the craft of the deal.  Nothing on what could be gleaned from the fact that a seller had 5 daughters and no sons.  Or that he never sailed on his boat.  These were the pieces of the puzzled I needed.

I was suddenly angry at my alma mater.  They were quick enough to pester me for money.  Why hadn't they given me the tools to ace this interview?  Had the Harvard people learned these "soft skills."  What was that class called?  "Deal making 202: The Inside Track?"

That night I emptied the entire minibar of those mini booze bottles.  My last remembered moments were highlighted by a spinning whirlwind of ugly upholstery, eye straining, power saving tube-bulb lighting and high traffic carpeting.  Somewhere in there I apparently drunk-dialed my ex too.  (I know this because the hotel bill the next afternoon included a $65.40 charge to that embarrassingly familiar number).

In the depths of my dreams I heard my cell phone ringing somewhere.  Because I was unable to muster forth sufficient clarity or conscious thought to compel my dehydrated body to pick it up, annoying, chirp like rings punctuated my dreams until 1pm the next morning (I changed my ring tone the next day) when the much louder and more insistent hotel phone began to take over with the front desk on the other end asking when I planned to check out.

I staggered out of the hotel, broken and beaten and into a grungy taxi to the airport.

I was dead asleep as soon as the plane was taxing.  Then, suddenly and without warning, I was jarred awake in terror when I heard the engines suddenly roaring unusually loudly as the captain firewalled the engine for some reason.  I felt the plane banking hard enough to press me against the window to my right.  I almost cried out in horror.

A part of me was resigned to this grim fate.  How fitting to die in a flaming crash after my flaming spiral interview crash.

Bracing myself for whatever we hit I felt something was wrong.  I glanced around the plane in a panic and saw that no one else in the entire plane was reacting as if anything were wrong whatsoever.  I looked quickly out the window and realized that the plane was not yet airborne.  The pilot had put on the power during the tail end of his left turn onto the runway, to get a running start, I guess.  The combination of the turn and the sudden roar made me think we were headed for certain death.

I tried to regain my composure but two people in my row were staring at me.

I was not much better once at home and finally lucid enough to listen to my voicemails.  The first one was Armin.

"We'd like you to come back and start work on a trial basis as soon as possible."  The other four messages were hang-ups which my phone reported as also being from Armin.  I had done it.  At least for now, I was in.

Saturday, March 04, 2006


In So somehow I've been roped into reviewing the candidates for summer associates here at the firm.  We are planning to hire 3 or so.  We started the process late.  But, since the job is educational for me, I thought I would present you with:

Ten Brutally Honest Application Suggestions for Private Equity Hopefuls
(As Taken from Actual Applications).

#1:  If your resume says "Fluent in English" or you claim a TOEFL score of 99%, please do not make four verb tense or subject verb agreement errors in your cover letter.

#2:  If forwarding your resume electronically to a buyout firm the filename should probably not be "Consulting-Resume-Draft.pdf."

#3:  Please get my gender right in your salutation, or display the cleverness to craft a gender neutral salutation.  "Dear [first name]," is a good start.

#3a: "To whom it may concern:" is not a wise choice of salutations.

#3b: In today's day and age, "Sirs-" is not a wise choice of salutations either.  (Particularly if you are a female hopeful).  Maybe if you explain that you are a rabid Economist fan I might understand.

#4: If the firm is hiring for three totally different positions, please make sure you pick one.  No, the criteria for "Aerospace Industry Analyst" is not the same as "Generalist," but then you should know this because you read the job posting carefully, right?

#5: Yes, I will hire an ex-consultant.  No, not if their mission tagline is "To obtain a challenging and rewarding position in consulting."

#6: The last lines of your resume, if they are under a section called "personal interests/hobbies" should probably not describe "animal husbandry," "daytime television" or "true crime."

#7: It is wise to have earned a college degree when applying to a position that requires an MBA.

#8: I can add.  Accordingly, I will, in fact, notice if you got your undergrad in 2003 right after high school, your MBA is expected in 2006 and you have "6 six years of professional work experience."

#8a: I don't know what "professional work experience" is.  I do know exactly what "unprofessional work experience" is though.  6 years of "unprofessional work experience" will get you hired as a partner.

#9: Active verbs in accomplishment bullets are good.  "Plowed through institutional resistance," "conquered last minute reticence," and "penetrated tight inner circle" are a bit much.  (Though you had a few of us laughing for an hour, and I would probably hire you just for giggles, I would also probably be fired for hiring you after the first harassment suit and so you're just not on the right side of the risk/reward curve).

#10: If you are from Stanford and don't have a lick of banking experience, listing "Golf" as a hobby and "Stanford Golf Team Treasurer" as employment experience is probably a bad idea.  Try the left-coast VCs.


Wednesday, March 22, 2006

HBS Grads Under the Counter

veritas Interesting piece from last week on cool, newish Wall Street gossip aggregator "Under the Counter" on HBS grads lusting after private equity (and buyouts!)  No surprise here. I'm so happy the Stanford grads seem to have resigned themselves to toil in useless start-ups instead.  We got two applications from Stanford grads which others in the firm rejected before I had a chance to.  Damn it all!

Thursday, May 11, 2006

The Interns Are Coming

role model or cautionary tale?Our two interns have been selected.  Offers have been sent.  One, "Alexsis," I was rooting for.  The other, Craig, well, I just don't know him well.  I am both wary and fascinated by the potential here.  I am thinking about adding an "Interns" or a "Monica" category to Going Private.  I definitely get the sense that they will take up a lot of type.  They seem young, full of energy, and maybe even fun.  How dangerous is it to go out drinking with the interns?  Fairly, I suspect.

And now, the questions have been filtering in.  "Can you suggest affordable housing alternatives in Manhattan?"  Not really, no.  "Is there a document on the dress code?  My former employer had 3 pages of guidelines but I don't see any in the orientation documents."  We have orientation documents?


Wednesday, November 29, 2006

The Running of the MBAs

put your hands up for detroit... er cambridge Each year thousands of MBAs searching for positions in venture capital or private equity nearly go without large salaries, bonuses and positions with responsibilities far beyond their experience level.  Worse still, many of them, in their despair, enter the field of management consulting.  Hi.  I'm Equity Private, author of the hit financial blog "Going Private, The Sardonic Memoirs of a Private Equity Professional."  Together, with your generosity, we can reduce the horror of management consultants by placing an MBA in the world of venture capital or private equity and preventing the spread of the BCG Box of Four.  You can help strike a blow against the growing and terrifying epidemic of McKinsey alumni.  For the small gift of just $175,000 per year and a reasonable carry, you can save an MBA from the horror of Booz Allen.  That's less than $480.00 per day.

PEHub's 4th annual recruiting drive seeks to place first year MBAs with venture capital or private equity positions and prevent their interns from enduring and inflicting on others the horror of strategic management consulting.  Won't you please give?  Operators are standing by.

Friday, January 26, 2007

Twisting the Four Screws of Private Equity

ouch! There is more than just a taste of conceit buried within the ethos (pathos?) surrounding my decision to conduct a job search even while gainfully (richly?) employed.  I am, after all, currently possessed of a position that would doubtless be the envy of any young woman my age who entertain even a passing interest in a career in finance.  It also seems pretty clear that I was hired at a level beyond what my experience would otherwise have commanded and that I enjoy the fruits of my current position in large measure due to luck and the intervention of one highly placed individual in my firm- Armin.  True, in the three reviews since I have been awarded the firm's highest performance rankings and then rewarded with consummate bonuses, raises and praise, but even these accolades do little to instill in me any kind of career satisfaction.  Less so given the less than warm reception the city of London, its driving public (and, indeed the United Kingdom) has purveyed thus far.  (Perhaps I would have a brighter view of the locale if my experience of it included scenery more diverse than the surgical ward and the inside of a hospital room).

So, after even the most trivial reflection, searching for something "better" seems the height of arrogance and pomposity.  Still, I have my reasons.  In fact, over the last several months I feel I have been as pointedly locked into a course pressing me to explore new career options as my right wrist is now locked into the awkward and ungainly position required to bring it back to something resembling a full range of motion (a development which, incidentally, no fewer than four licensed medical professionals have assured me is characterized by a probability which quickly approaches zero).

Faithful readers will be well aware of my views on the importance of "long-term" and operational foci in the practice of buyouts.  "Pure" buyouts are, in my noclamenture at least, suited to two roles.  First, mechanisms either to effect change in corporate governance or corporate strategy that the public markets, or indeed the current ownership structure be it public or private, have not the patience or contrarian wit to support.  Second, capital and governance structures useful for imposing radical fiscal, personnel and strategic disciplines of a sort not viable in more conventional ownership contrivances.  Clearly, a Venn diagram of these classifications endures a non-trivial area of overlap.  These same faithful readers will be acutely aware of my disdain for the use of leveraged buyout transactions to extract "value" by use of leverage alone.  If there are no operational or structural gains to be had or, indeed, if the transaction's sponsors lack the ability or desire to effectuate the transformation to capitalize on these changes, leverage needlessly increases risk and returns little fundamental improvement in the underlying firm.  These "structure only" transactions are opportunistic speculation, not true value enhancing transformations.

The four screws drilled into my bones that both hold my grotesquely swollen wrist in its present position and inflict upon me extreme pain when tampered with (even the most ginger manipulations cause an inadvertent shriek and 5 minutes of uncontrollably pathetic sobs to issue directly from the darkest reaches of my Id) are taunting analogies for my current career paralysis.  They might as well described the quad factors I think essential to private equity targets.

A fundamental structural issue with the target firm.  Be that in the revenue model, the cost structure, the logistics of supply, distribution, or collections, or personnel structure.

A marketplace, product, strategy or investment path that requires a long-term view to effectuate.

The absence of incentives towards fiscal or strategic discipline.

And, finally, the inability of the current capital structure to make radical changes or endure the long-term needs of the firm.

Tamper with any of these elements in the universe of Sub Rosa targets and shooting pains run up and down the cramped arm of my private equity career satisfaction- an, admittedly artificial, construct as painfully immobile and inflexible as a limb perforated in multiple places with pins of surgical steel.

If the first two of the last three transactions undertaken by Sub Rosa pulled at these screws, the last took a hammer to the entire apparatus.  The IRR source for the transaction could be described in a single word:  Leverage.  Not to mention my reticence to leave New York, where I felt I had barely begun to be acclimated, for the likes of the United Kingdom.  Not, mind you, that the United Kingdom is an intrinsically undesirable place, but I spent much of my younger life getting away from Europe.  To be pulled back is distressing.

Of course, the urge to ignore any kind of moral center one is possessed of when surrounded in the buyout business is highly seductive.  Compensation is beyond generous, the business is sexy in the extreme and any dozen score of young professionals with no moral compass at all would be happy to slide in under the lofty altitude of my ethical perch and take my position for 50% of the salary.  Still, it has been enough of a jar to send convulsions through me- the kind that cause me to forward resumes and attend day-long firm interviews.

I've pestered two kinds of firms.  LBO shops with reputations for turnaround projects and hedge funds with activist strategies centered on corporate governance improvement.  Activist funds seems uniquely reserved in their hiring practices.  Recruiters in the business seem steadfastly unhelpful.  I've managed two meager interviews.  My last such, just before my hop over the pond, ran from 8:30 am until 6:00 pm with dinner following hard upon and was chiefly accentuated by one Vice President's pontificating aloud to the effect that women had no place in private equity as they were forced to negotiate with primarily male sell-side types.  I wish that comment would have emerged early in the process so I would not have had to endure 8.5 hours of interviewing to discover the firm a bastion of misogynistic ex-bankers.

As for the others, surely, they talked the "operational talk," but then all LBO firms now-a-days do that.  Most are quite practiced at it, given the many tries they have had during the road show.  It is quite difficult to tell where the philosophical belief ends and the marketing begins.

A close friend and colleague of mine who has on occasion featured in my entries here and has been my lexicon like resource for all things activism, is also searching for a spot in activist hedge funds and, despite being literally the smartest person I know and easily twice as qualified as I would be for an equity analyst position in such a fund, has been frustrated in his efforts for going on 4 months now.  I fear, therefore, that there is little hope for me.  (Job leads and referrals to recruiters actually worth the salt in my tears much appreciated).  I will, I therefore suspect, have to endure Sub Rosa and its new found love for the abandonment of principles in pursuit of the almighty IRR at any cost (including the undertaking transactions with a paltry .75% of interest rate headroom before the breaking of covenants will ensue).  Well, at least I have my health.  Sort of.

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