Coulter: Private equity's evolution continues

True value creation plus a focus on sector dislocation and emerging markets have become crucial given the 'flat, low growth' environment, according to TPG co-founder Jim Coulter.

The private equity industry came through the credit collapse and financial crisis better than expected, but even if it is “on the right track” it must adapt and evolve, said Jim Coulter, co-founder and managing partner of TPG.

“We as an industry need to challenge ourselves to do better,” he told more than 400 delegates Tuesday at the Quebec City Conference, an annual gathering of international investors.

A deep bench of operating expertise enabling GPs to truly add value to companies is now more than ever an absolute must, given today's “flat, low growth” economic environment, Coulter said.

 

We’ve moved private equity from cuff links and conference rooms out to Double Shot Liquor and Guns.

Jim Coulter

He gave several examples of how TPG had recently added value to portfolio companies including Harrah's Entertainment. The casino and hotel operator was purchased for roughly $27 billion in 2006 by TPG and Apollo Global Management and has been struggling under its $22 billion debt load. The private equity owners applied lean production techniques to the way hotel staff operate, for example tracking the movements of housekeepers to figure out a more efficient way to clean rooms. That alone has been saving the company $50 million annually, he said. Another $20 million is being saved from a similar exercise with kitchen staff.

To illustrate how the private equity business has changed over the years, he flashed up a slide showing the cover of “Barbarians at the Gate”, the classic business book detailing the 1989 leveraged buyout of RJR Nabisco. The bulk of the story “takes place almost entirely in New York with guys in cuff links”, he said, then told delegates he would show a photo one of his partners sent in recently while visiting a portfolio company. The photo – taken across the road from a TPG-backed plant in Texas that manufactures gas compressors – was of a mini-mall store sign that read, “Double Shot Liquor and Guns”.

We have to be willing to wade into industries, even in developed markets, where wild and sometimes dangerous things are happening.

Jim Coulter

“We’ve moved private equity from cuff links and conference rooms out to Double Shot Liquor and Guns,” Coulter quipped, implying that GPs now venture beyond Wall Street and its financial engineering to find deals and add operational value.

That Texas portfolio company tied in to another point Coulter raised: GPs must seek out sector dislocation in individual parts of the economy to generate returns. “We have to be willing to wade into industries, even in developed markets, where wild and sometimes dangerous things are happening.”

He listed four “wild” areas interesting to TPG at present, including healthcare, media, cloud computing and energy. The latter sector is changing dramatically because of shale gas plays in the US, made possible by horizontal drilling; he joked, “Never has a right-hand turn changed so much.” While TPG isn't “playing the fields”, it is making investments based on the expectation there will be more gas compression and pipelines, Coulter said.

He also discussed specific opportunities to be found in various emerging markets as well as lessons TPG has learned since it began investing in them in 1995. Among those lessons was one he dubbed “avoid the new kid in high school syndrome”, explaining the first people who want to be a new kid's friends often turn out to be the wrong crowd. “The first deals you see and the first partners you meet are not the people you want to partner with.”

More of Coulter's insight into emerging markets will be featured in the December/January issue of Private Equity International.