Michael Calvey's Interview for Club of Leaders Good2Work (part 1)
Michael Calvey: I'm More Like the Coach of a Team or the Trainer of a Team than I am the Lead Player on the Field
Olga Yudina
Michael Calvey, Co-Managing Partner of Baring Vostok Capital Partners, claims that passion and energy are the most important qualities a successful manager should possess and also mentions the capacity to motivate and inspire other people.
1. What is your strongest leadership quality?
Baring Vostok is a private equity investment company. It's not an operating management company but we are holding that manager capital and manager underlying portfolio companies. My role as one of the co-managing partners is to be the main decision-maker within the partnership but it's a kind of partnership that has very autonomous partners. You have brought responsibility for their industries and their underlying projects. So I'm more like the coach of a team or the trainer of a team than I am the lead player on the field. For me, I think, the key requirements or responsibilities are to manage interaction of very strong-willed different partners who sometimes have very different ideas about what to do, and to cultivate talent within the organization. It is also important to be able to make hard decisions from time to time about people that need to go or changes that need to be made. But I think it's very different from an operating management company which is more about managing a daily routine. My role is more strategic and coaching.
2. Is it difficult to build partnership relations in Russia?
It's more difficult but it's much more empowering and it gives you much more capability. Baring Vostok itself is a very small company, there are only about 60 people who work here but we manage and control seventeen businesses with 15 000 employees doing different things ranging from Internet and media businesses to oil and gas production businesses and manufacturing companies. It will be very difficult to manage this with a corporate structure, while a partner structure where you have individuals with deep experience within different industries but with common economic interests is a very powerful model. It gives us the capability to manage much more diverse group of businesses than it would be possible in any other type of organizational format.
3. Do you have any trouble in keeping people together?
I guess it is a challenge for a lot of private equity firms. We had been lucky in some ways because our early funds were very successful and profitable. We had a very significant pool of equity which had real value to be able to allocate to people. There is a very strong reward mechanism and very severe penalties if you leave. As a result, the problem that we've had is that no one wants to leave. In the history of 15 years of Baring Vostok we've never had someone leave and go work for a competing firm. We have people who've grown complacent or some people who really just wanted to retire. So we've dealt with transitions in this sense and it has always been a very positive thing. When one person has left under those circumstances, we've been able to bring in one or two or three new people that are hungry and that want to grow. These kinds of changes are necessary if you want to be a firm which provides opportunity to young and ambitious people and not just old guys who've been around for the longest time.
4. Can you name some day-to-day things which help you maintain discipline?
Inside the seventeen businesses that we own, the operating businesses that we own there are intense daily decisions and intense daily disciplines that need to take place and which are definitely being reinforced. I think that most of the companies that we own are market leaders but even some of the market leaders grew complacent in recent years; they were able to grow at 50 percent annual growth rates even with inefficiencies and even with sloppy behaviour. So, this is an environment where no inefficiencies can be permitted or allowed. Change is more possible than it would be in normal economic times here. You can implement restructure, you can implement costs, changes, you can renegotiate contracts, you can renegotiate the regulatory environment for your businesses - all these things are possible today. They were not possible a year ago and they probably won't be possible one or two years from now. So even if you are market leading business that's got a dead free balance sheet and you are still profitable - if you fail to seize the moment right now, you' re going to regret it a year or two from now. So that does require daily and detailed involvement and decision-making today.
5. You mentioned that you work more as a coach to your team. What does this word mean to you?
I guess it's like if you have a football team or a basketball team - you have to decide which players are on which positions. Some of the players are obvious and natural on the positions that they have. There should be someone who is in role of the oversight to be able to see when problems are happening on specific projects or investments or businesses, when we need to change, when we need to take someone off of something, out someone else on. Also, there should be someone to be in the position to make decisions among partners about priorities where we're allocating the capital. So that's historically the role that I've played for different reasons. But I don't think there are knowledge transfers, probably the other way around because many of my partners are much more experienced than I am. But there has to be someone who plays that role.
6. Is it more about keeping people together and putting right people onto right places?
Yes, and also I think decisions about allocation of resources and priorities, allocation of economics and compensation, decision-making, I guess, within the firm of a partnership. There are two other senior partners, who have the same seniorities, same ownership and economic interests as I do, and also seven other partners. There are certain things which can't be decided by committee but most other things we do by consensus. Whenever we make an investment or sell something it should be decided by consensus of all the partners. Once we made an investment though, the partner who takes ownership for this investment has broad responsibility for implementing our plans, for making decisions, because you can't make ongoing operating decisions by consensus. You have to have someone who is broadly and deeply empowered to do that.
7. What can you say about the human aspect of your business?
Most important things are energy and passion. It has to be somebody who wakes up early in the morning with a burning desire to make his business a success and who has difficult time separating his business from his life. It has to be someone who has the capacity to motivate and inspire other people. We have grown the businesses which can really be run by one man as a dictator no matter how talented he could be. There are a lot of businesses that we buy or we invest in which need to institutionalize the business and broaden the management team if they want to go from where they are when we buy them to the stage they can be. That is the path Baring Vostok has gone down many times, we have a lot of experience doing that. It doesn't mean we know all the answers but that's something we see as part of the way we create values. How can you institutionalize the business without destroying its spirit and its decisive energy? Besides that, the ability to make tough decisions and to tell people what they don't want to hear and to face reality is nowhere more important than in Russia. You know, here on Monday you can be deeply excited, on Tuesday you can be totally depressed. So being able to relentlessly face reality and manage through these periods is crucial.
8. Can you provide an example of solving problems as a coach?
There were one or two times when we made big strategic decisions. They were based on a conviction but without having any idea of how it is going to work out. For example, at the time of the last big crisis we considered that we were one of the best private equity firms in Russia. But we were very much of a foreign firm at the time. We realized that in order to be successful we had to completely transform the business into a Russian company with a majority of Russian partners. And we basically decided to team up and merge with the team of one of our leading Russian competitors Alfa Capital. Three other partners joined at the same time. We had to let a couple of people go in order to make room. We didn't know how this would work out with the existing sponsors of Baring Vostok. But I had the conviction that it was the only way how we could be successful here in Russia in the long run. We dramatically expanded the horizon of opportunities that we could address instead of just investing through minority stakes. We have more capacity to own an extra-size control of businesses as well. Now we have a dual strategy or hybrid strategy and it's been very successful.
9. You used to be one of the most successful foreigners in private equity business in Russia.Why did you decide to rebuild the structure of the company and take Russian partners?
It was partly a pessimistic or cynical view about the Russian market. We didn't expect that the stock market would ever recover in Russia. We figured that the only way we could generate a decent return for our investors was to take control of the underlying operating businesses and to be able to properly extra size control that required much more depth in operating management skills and also much more capability to interface with Russian government authorities, agencies, legal system, courts and the whole infrastructure which very few foreign investors really have. That's what this merge gave us the capability to do. We fought a number of bitter wars and battles to protect our portfolio companies against the long list of names that I won't mention. We always won and we were able to protect our interests, we learned a lot as well and developed a tremendous experience and knowledge base and how to be able to do it. For us it is a tremendous resource and asset today. I like to think that when entrepreneurs or CEOs of companies decide to work with us as a partner, they think that we bring something beside just money. Hopefully we can help support the business and not just in terms of the organization and additional recruitment of management but also helping to sort out some of the issues and the noise which can distract management teams.
Michael Calvey, Co-Managing Partner of Baring Vostok Capital Partners, believes that poor economic situation is a good environment for putting money to work in investments and tells us about his main challenges.
1. Do you have any basic principles which help you to work, some kind of personal values?
We have Ten Commandments - some kind of organizational rules and principles that we have about being relentlessly realistic, about sharing bad news as fast as possible, about the way we work as a team and not competing and various other key principles that we have. At the same time with the operating businesses we have we don't try to apply this kind of approach because every situation is different. We try to install core principles but we also try to adapt in each case based on the CEO, based on the founder and on the partners because if you try to change too quickly, it's like being imposed from the outside and it will be less successful. There are certain things which are universal and there are certain changes that we always implement. And whether we own a 15% or 20% stake in a business or a 75% stake our approach is often the same. It means working as a partner with a management team and agreeing on some division of decision making and responsibility. Usually the difference depends more on who the management and partners are than it does on whether we own 100% of the company or 20%.
2. How can you successfully combine being realistic and being optimistic?
In 2006-2007 everybody in Russia looked like a genius and in 2009 everyone looks like an idiot. No matter what you are doing in this kind of environment your performance is disappointing compared to what everybody expected a year ago. The first thing you have to recognize is that there is a macro backdrop and you shouldn't have felt that arrogant two years ago and you shouldn't feel depressed for the same reason today. At the same time the thing that makes Russia an attractive place to invest or to do business compared to many other countries is that it is a young market - the private sector has only existed here for about sixteen or seventeen years. Apart from the state-owned companies that are very asset-heavy, in service sector, in consumer sector, in new businesses there is hardly any company that is older than fifteen years old. If you look at most industries, the difference in profitability between the top-quartile companies and bottom-quartile is huge, is much bigger than it is in older and more established markets. What that means to me is that Russia is a much more management dependent economy than the vast majority of other countries and economies in the world. And that's good news, if you're an active owner, you can increase value without investing tremendous amount of capital more easily than you could in a well-established market. We've seen this time and again, it's about having the right team with the right plan and the right alignment of interests and incentives. We have a huge advantage over corporate or strategic investors because we can provide very substantial equity incentives for people that are linked to specific performance and where they can make huge compensation, huge gains at the end of the day that are linked to our own success.
3. What is the biggest challenge for you now?
Obviously, there are three or four difficult situations that we have in our portfolio. Out of seventeen companies there are three or four problem companies on which we're spending a tremendous amount of time right now either working out liability and balance sheet issues or fundamental organizational and structuring which is necessary. The other businesses all have important issues but most of them are opportunities rather than threats. It's an opportunity as a result of the crisis to transform the core structure, transform the regulatory environment and do other things that you don't have to do to survive but which can improve your profitability and also significantly improve the company value in three or four years' time. During time like this it's easy to focus on your worst businesses and you have to avoid your best people and resources being absorbed completely into your worst company. That's one of the main challenges in a private equity firm. I think we have pretty good discipline about that but still it is a challenge and a problem. You also need to have a brave approach about putting new capital to work in environment where there's not great visibility about the future. History has shown us that when there's maximum amount of fear and pessimism, it's the best time to buy businesses and to invest. We have an intuitive belief that now is a good time to be putting money to work in investments.
4. Can you explain how you make money in private equity?
We make money by backing managers and entrepreneurs to either buy back their business from the previous owners or to grow an existing business. We make money mostly by growing the profits of the business over a three or four years' period after we own them usually by implementing a plan that we agree on in advance. Then we sell the business in three or five years and we sell either through a public market listing or to a strategic investor. Private equity firm like ours usually invests a lot of its own money and has partners' money. We are one of the biggest investors in our own fund, our management team. For example we put up 10% of the money, they put up 90% and also give us the share of the equity on their side. It is a good model because our partners know that we have our own skin in the game and we have our own money going into every investment. That's why historically we've invested in a very slow pace, we only made three or four investments a year, it's only one investment decision we make per quarter. All our time is spent working on our existing businesses.
Michael Calvey, Co-Managing Partner of Baring Vostok Capital Partners, tells us about his favourite books and authors.
1. What books have you read recently?
Maybe it's boring but I've been reading a lot of books recently about the Great Depression and about what happened in America and Europe in 1920-s and 1930-s and what happened in specific businesses that ended up becoming very successful afterwards. There are a lot of interesting lessons to learn because we're going through the great recession now. Some of the lessons of that period can be applied today. It's worth spending time to relearn some of those historical lessons.
2. What books would you recommend to read to businessmen?
If you're investing - whether it is on a personal basis or as a professional investor - the only thing you have to do is read every book ever written about Warren Buffett and everything that he has ever written himself. He's the best teacher of investment that has ever existed. I've read everything that he has ever written and everything about him. Everytime I read something that he says I come away with interesting lessons and insights. You don't need time to go further than that, but if you do that's a bonus.
