Michael Calvey's Interview for Club of Leaders Good2Work (part 2)
Michael Calvey: When There's Maximum Amount of Fear and Pessimism, It's the Best Time to Buy Businesses and to Invest
Michael Calvey 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.
