Private Equity Must Find 'Businesses That Can Weather the Storm'

Published on February 20, 2009

Despite stormy economic conditions, the current business environment is a great time to invest in private equity, said Peter Kagan, ’97, managing director of Warburg Pincus. “The hard part is finding the right circumstances, finding those businesses that can weather the storm,” Kagan said.

Kagan sat down with Steve Kaplan, Neubauer Family Professor of Entrepreneurship and Finance, for a fireside chat during the Eighth Annual Beecken Petty O’Keefe & Company Private Equity Conference, sponsored by the Polsky Center for Entrepreneurship and the student-led Entrepreneurship, Venture Capital & Private Equity Group, at the Chicago Cultural Center on February 20.

Warburg Pincus is not focusing on any particular industries today but rather businesses with the right characteristics across all sectors, Kagan said.The current environment is challenging but Warburg Pincus was very fortunate to invest only a small amount in leveraged transactions, he said. “There might be less leverage available for a long period of time, but that does not challenge our business model.”

If investors use the right criteria, the current economic conditions could prove exciting, he said. “It ought to be a very interesting time to be an investor if you’re careful and disciplined,” Kagan said. “Vintage investments could be really spectacular in terms of returns. Nonetheless, new deals will be tough.”

In choosing deals, Warburg Pincus hopes to match the risk in its investments with the ideal multiples of return, Kagan said. “I think what our firm is good at is to think through the type of risk we’re taking. Is it execution, production, market, management, or technology risk? And is there an appropriate return in the data for that type of risk? And are their potential ways to get lucky, to get outsized returns?”

Nobody enters private equity with all the skills needed to succeed, Kagan said. “There is no particular type of person we’re looking for,” he said. “We look for people who have capacity and capability in different things. The people I’ve learned from have the ability to really dig deep into the economics and details of a deal and then at the same time have the ability to step back and have a perspective on what happened. That ability to understand but not get lost in the trees can be hard to find.”

Kagan spoke very candidly about the differences among private equity funds and how they plan to respond to the current economic environment, said second-year student Naveen Neerukonda, co-chair of the Entrepreneurship, Venture Capital & Private Equity Group. “He recognized that every company in their portfolio is experiencing a slowdown and that’s just a reality they have to deal with,” Neerukonda said. “That kind of honest overview of their portfolio is very beneficial to students.”

                                                                                                                        — Phil Rockrohr

Read more coverage of this event:

Yes, There Is a Light at the End of the Private Equity Tunnel