BOOKS: Inside Private Equity, by Bill Ferris

Bill Ferris is sometimes referred to as the ‘father’ of private equity in Australia. Now he’s written a book about the lessons he’s learned during his 40-year investment career. James Taylor reports

Bill Ferris may not be quite as famous as some of the big US buyout titans. But in his own way, in his own country, he’s been just as influential. In 1970, fresh out of Harvard Business School, he established Australia’s first venture capital fund. In 1987, he teamed up with Joe Skrzynski to start AMIL, the country’s first institutionally subscribed private equity fund in a unit trust structure. And in 2000, he launched CHAMP, the country’s first dedicated buyout fund. So within Australian private equity Bill Ferris is pretty much royalty (though he probably wouldn’t appreciate the description, being a staunch Republican).

Now, as he hits his mid-sixties and starts to wind down a bit at CHAMP, he’s taken the opportunity to get on his boat and write a book. ‘Inside Private Equity’ is part-way between autobiography and business book, recounting some of the lessons he’s learned from his long career in the investment world.

It’s an enjoyably bouncy read, and at times, admirably frank. The first section (which, just to warn you, is basically a rehash of his earlier title ‘Nothing Ventured, Nothing Gained’) opens with a section called ‘Some Deals That Went Badly Wrong’. He does the same thing when he gets to the section on buyouts. In an industry where people are generally so reluctant to admit that they’ve ever made a mistake, that’s pretty refreshing – even if it is immediately followed by a section called ‘Other Deals That Went Wonderfully Right’.

Ferris tells PEI that he always learned more from his mistakes. “I do think that the disappointing deals deliver more important and indelible lessons than the great deals. At least for me.” 

All told, he pulls out some 13 lessons, such as: “Have the courage to know when to stop flogging a dead horse”, i.e. when to give up on an investment. “I think knowing when to stop flogging a dead horse is tougher the younger and less experienced you are,” he says. Why? “Because you hate to give up too soon, and be seen to do so, and you hate to face up to the disappointment and embarrassment of a dud deal when just a few extra million dollars might salvage something. But you must also remember your responsibility not to throw your investors’ good money after bad. Getting that balance right will usually involve mature judgement and a dose of good luck.” If you’re not sure, ask your most senior colleagues for an objective view, is his advice.

Another of his bugbears is the idea of “no brainer” synergies. “Too often the promised savings in back office and supply chain costs fail to emerge due to differences in cultures. You have to learn the hard way that spreadsheets will rarely substitute for shoe leather and lots of contact time with people at multiple levels throughout the entities contemplating a merger.”

The book also includes a short but enlightening section called ‘Creation of the GP manager’, where he looks at issues like fundraising, getting the right talent mix and – perhaps most interestingly – succession planning, an area where private equity has traditionally been weak. At CHAMP, Ferris and Skrzynski have clearly done a lot of work in terms of handing over both investment decision-making and economics to the younger members of the firm – and while the timetable and motivations for that are hard to appreciate from afar, they seem to have come a long way, at least relative to many firms in the industry (including, as Ferris points out, Castle Harlan, the US manager who was their joint venture partner for the launch of CHAMP).

But is he actually planning to retire any time soon? “Both I and Joe are in our 60s and are enjoying our roles of actively engaged mentors and advisors to our younger – and brighter – partners. We hope and expect to enjoy this role for many years to come.”

Private equity’s reputation is another key preoccupation for Ferris, as you might expect from a man who spent so many years battling to establish it. And the buyout era in particular got off to a bad start, with CHAMP’s first investment in Sheridan Sheets: the firm lost all its equity, but only after shutting down Australian factories and offshoring all their jobs to China. Not exactly the best PR story for the debut deal from your maiden fund. 
Ferris admits it was a challenging time. “The performance of this fund was always going to be watched and be important to how the sector might be perceived. [So] the difficulties we encountered with [Sheridan] did test us. Closure of high cost Australian manufacturing plants, offshoring to Asian textile suppliers, job redundancies, and ultimately failure of the investment were hardly poster pin-ups for the buy-out story. However, we were successful in finding a trade buyer who enabled the business to continue, [which] ensured creditors and other stakeholders were not damaged.” And its subsequent deals – including successes like Austar and Bradken – were enough to start persuading people that the model really could work in Australia.

Speaking of reputational issues, the recent court case in Australia over the quick flip of Norcast Wear Solutions will have been uncomfortably close to home for CHAMP and Ferris. Castle Harlan, CHAMP’s US affiliate, bought the business from Swiss group Pala and then flipped it to Bradken, a former CHAMP portfolio company, within a matter of hours – and Ferris’s old friend Nick Greiner, a long-time CHAMP associate and chairman of Bradken (who’s lionised several times in this book), was identified as a prime mover in the arrangement. In finding against Bradken and Greiner (and, by proxy, Castle Harlan), the judge delivered a damning verdict, concluding that the defendants made “misleading or deceptive representations” to the vendor. 

Has this unsavoury episode tarnished the CHAMP brand in Australia, or indeed that of private equity’s behaviour in general? He swerves the question. “The reputation of private equity in Australia has been tarnished by some of the activities of the guerrilla funds,” he argues, going on to criticise some of the deals done by the global funds in recent years (for the benefit of our lawyers, we’ll leave the specifics to your imagination). 

By contrast, the homegrown Australian funds enjoy a “sensible reputation”, he insists. “Our sector has not really told its story well enough – of business building, jobs creation, export growth and innovation. But the proof is in the pudding: the Australian banks are keen to lend, investors continue to support the leading GPs, the professional service providers have all expanded their private equity practices, more and more young people are seeking jobs in private equity, and importantly more and more vendors believe that private equity offers an appropriate and credible exit option. These are the ultimate measures of reputation that matter.” ?

‘Inside Private Equity’ by Bill Ferris is out now, published by Allen & Unwin