The CEO Seducer

In a small, corner room on the 61st floor of Chicago's Sears Tower is Bruce Rauner's lair for wooing talented managers. The walls are adorned with mounted, taxidermic birds. Next to the window sits a tall humidor filled with expensive brands of cigars. Perched invitingly on top is a nearly depleted bottle of Macallan scotch. Plush seating surrounds a low coffee table, upon which rests a large ashtray that bears evidence of tobacco-enjoyment the previous evening (you can still do that in Chicago).

What takes place in this room is as important to GTCR Golder Rauner's strategy as the intense industry analysis and deal flow management that goes on throughout the firm's less festive offices and cubicles. Rauner is protective of his firm's proprietary methods for conducting research and recruiting managers, but he is very forthcoming about what he describes broadly as one of the most important and distinguishing element of his firm – people really like hanging out with the guys from GTCR.

“We've got guys here who are brilliant, high-IQ, analytical people,” says Rauner. “But you know what? You'd love to have a beer with them.”

Rauner, a Harvard business school and Dartmouth summa cum laude graduate, has no use for reclusive geniuses: “Analytics are extremely critical, but our franchise is built on bonding. We have a unique ability to identify executives well before they even think they are interested in being identified, bonding with them, and then being enjoyable, personal partners for them. We're fun to work with.”

Referring to his cigar room, Rauner says: “This is a pretty popular place. I use it primarily for a marketing tool. There are a lot of investment bankers and entrepreneurs who love a cigar when they're relaxing and talking about things. I find it a big ice breaker. I've had people call me and say, ‘Bruce, we haven't met in the cigar room for a while.’”

Our differentiating factor is the sorts of folks who are out there looking for executives. That's a big part of our franchise

GTCR's CEO-wooing initiative goes well beyond the comfy confines of the cigar room. The firm has established what may be the private equity industry's most elaborate, intensive process for vetting and recruiting CEOs to run GTCR's aggressive buy-and-build plays.

GTCR, which last year closed its eighth fund on $1.85 billion (€1.54 billion), has invested in a broad range of industries it considered ripe for consolidation, including funeral homes, ATM networks, branded consumer goods and security services, but its modus operandi is always the same – seek out an ideal CEO for a given platform, doggedly pursue him or her until the offer is accepted, then make as much as $200 million available for the CEO to build a company. In many cases, the CEO is hired before a single acquisition is identified.

“We're the only firm I know of in the country that has as its fundamental core model building a company from a CEO and nothing else,” says Rauner.

The firm has a separate team of analysts who do nothing but sector and industry research. GTCR adds a new industry strategy every three to five years, says Rauner. Last year, the firm famously attempted to purchase the American Stock Exchange, in partnership with its chairman and CEO, Salvatore Sodano, after years spent studying and networking in the securities industry.

The most recent additions to GTCR's industry focus-list have been consumer branded goods and entertainment content. For the latter, GTCR last year partnered with Charles Koppelman, a music industry legend who has worked with the likes of Billy Joel, Garth Brooks and Frank Sinatra. Koppelman and GTCR launched CAK Music Holdings to pursue investments in the music publishing industry. Rauner says Koppelman will help the firm “identify underperforming, undervalued music publishing assets. We're working on two very large transactions now.” (Intriguingly, Koppelman last year announced a partnership with embattled pop king Michael Jackson to “advise on a variety of… music and business ventures.” Jackson owns the publishing rights to hundreds of Beatles and Elvis Presley songs.)

Although Rauner declines to give many details of his firm's CEO-recruitment methods, he describes a vast network of corporate recruiters and individual headhunting contractors. The network also includes firms, such as mergers and acquisitions boutiques, that are not traditionally tapped for leads on executives. All these parties are well compensated for their referrals, says Rauner. “Many buyout firms work with brokers to get proprietary deal flow, and we do that as well,” he says. “But our differentiating factor is the sorts of folks who are out there looking for executives. That's a big part of our franchise.”

GTCR also employs a team of in-house professionals who do nothing but focus on identifying and recruiting the right executives for the firm's favoured industry plays. When asked if these professionals come from executive search backgrounds, Rauner declines to say, but concedes: “Yes, they have those types of skills.”

While doing its analysis, the firm's professionals and affiliated contractors intensely network with industry executives to look for CEO-quality prospects. While many of these managers, like Koppelman, are at the pinnacle of their respective industries, others are undercompensated demi-chiefs a few heads down the corporate totem pole. Once a favourite has been identified, Rauner and GTCR turn on the charm. But the ensuing flirtation is not always reciprocated right away. Rauner says his firm once pursued a chosen executive for eight years before he finally acquiesced.

Sans the chosen CEO, Rauner's firm will not move forward with an investment strategy, and he admits his firm has missed cyclical windows of opportunity while waiting for an executive to come around. “Either they had non-competes, or they felt the values were too high and it wasn't the right time, or maybe their family situation precluded them from moving or working as intensively as they knew they would,” says Rauner. “But if the timing is not right for that CEO, we won't go.”

In most cases, patience and persistence has paid off for the firm. To demonstrate this point, Rauner relates two stories of his firm's successful efforts in the funeral home industry. While getting familiar with the fragmented ‘death-care’ sector in the mid-1980s, Rauner (who declined to name names) identified a senior executive at a Los Angeles chain of funeral homes owned by a family group. “We were wooing him and trying to convince him to leave,” says Rauner. “But he said, ‘Gosh Bruce, I'd love to work with you guys. I don't own any of this [business], but the family says it might sell it to me and I don't want to mess that up by quitting now.'”

Rauner agreed to keep in touch. Two years later, the same executive called him to say that the family had sold the business to a giant public corporation without even offering him a chance to bid. He wanted to defect immediately with his entire senior team and build a business with GTCR. Rauner said yes.

On another occasion, Rauner didn't have to wait as long. The CEO of a major public company in the deathcare space asked to meet with Rauner and his team. “They said, ‘We hear you're poking around our business,’” remembers Rauner. “Usually in these meetings the executives want to learn as much as they can about us and also try to scare us out of going into their industry and competing with them.”

During a lunch with the company's top executives, at which Rauner laid out his firm's intended strategy (“we're very open and honest about what we do,” he says), the funeral home chain's head of acquisitions “slammed down his ham and cheese sandwich on the table and said, ‘You know Bruce, there's only one guy in the country right now for what you want to do, and I'm not interested.’”

One evening two months later, the same executive called Rauner at home and said, according to Rauner, “‘Bruce, I was thinking – I'm pretty interested.’”

GTCR built one of its three successful death-care platforms with that executive and his team.

After GTCR finds the right man for the right industry, one successful round-trip deal frequently leaves the firm hungry for more. GTCR, founded in 1980, backs between four and six new CEOcentric platforms per year. The firm has on roughly a dozen occasions backed the same CEO more than once. In several cases, GTCR has invested with the same CEO three times.

For example, GTCR has backed one rehabilitation hospital entrepreneur, Rocco Ortenzio, in the creation of three separate platforms.

There's no distinction in my day between my work and my play

GTCR partnered on two separate ‘non-woven fabrics’ businesses with North Carolina-based Jerry Zucker. The first company, called Polymer, was exited in 2000. The second, Polypore, was exited earlier this year for a whopping $1.1 billion. GTCR and Zucker had created Polypore with an initial $15 million equity contribution.

Another executive, electronic payments pioneer Bipin Shah, is currently on his second venture with GTCR – Genpass, an ATM-services platform. (GTCR seems to enjoy using similar company names with the same executive on board – Shah's previous GTCR-backed company was called Gensar).

That GTCR has track records with certain CEOs going back three portfolio companies points to a long history. In fact, the firm is one of the oldest private equity firms in the US, although its strategy has, largely under Rauner's direction, become refined, and its ownership structure has, largely as a result of Rauner's ambitions, broadened.

GTCR began life in 1980 as Golder, Thoma, Cressey, a spin-out group from First Chicago led by Stan Golder. At First Chicago, Golder had led an early investment in Federal Express, among other important investments.

Golder, who died in 2000, was an important mentor for Rauner. Golder contacted Rauner in the late 1970s while the later was still a student at Harvard's business school, as well as a part-time consultant for Bain & Company, and asked if he was interested in becoming a venture capitalist. In 1983, Rauner became a partner and the firm added his name to the proverbial shingle, along with Carl Thoma and Brian Cressey.

In 1997, Golder began to scale back his involvement with the firm. Thoma and Cressey squared off against Rauner and many of the other partners regarding the size of the firm's next fund. The older partners favoured a smaller fund, but Rauner wanted to be more aggressive on size. A subsequent schism created two new Chicago private equity firms – GTCR Golder Rauner and Thoma Cressey Equity Partners. Six months later, Thoma Cressey closed a $450 million fund, and Rauner's firm closed an $870 million fund. Both firms are headquartered in the Sears Tower.

GTCR Golder Rauner remains one of the few private equity firms to have successfully transitioned to a next generation of partners, granting that the break with Thoma and Cressey made this easier to do.

Rauner says his firm is ‘emphatic’ about structuring itself to create the next, next generation of partners. “Our philosophy has been very much to share the ownership and the wealth,” he says. “We are very much believers in working out logical, long-term transition plans so the firm and the franchise can have a life beyond a couple of individuals.”

Rauner notes that GTCR gives all professionals from vice presidents on up partial ownership of the management company, a piece of the carry, and the ability to coinvest in deals.

What GTCR will look like as the junior partners advance has been a matter of some debate within the firm, Rauner says. The firm does manage an affiliated mezzanine debt fund that invests exclusively in GTCR control deals, but beyond that has not stamped the GTCR brand on any other vehicles.

“We've gone around and around the topic,” says Rauner. “I'm not a believer that the diversified, large asset management firms will be among the top performing firms, necessarily, over the long-term. It's hard to be the best doing a lot of things – possible, but it's hard to do. I think in the end we'll stay focused in our segment and not have a venture or smaller buyout fund.”

A greater question, perhaps, for GTCR is whether anyone can duplicate the unstoppable force that is Bruce Rauner. While all professionals within and connected to GTCR are highly incented to network with and woo top executives, it is Rauner who leads these charm offensives at the highest level.

Rauner is on the road half the year, at times helping with fundraising, but mostly building and maintaining relationships with past, current and future portfolio company managers. He is well equipped for this job. Rauner personally comes off as very amiable and relaxed. Although his schedule is an elusive puzzle of shifting pieces, he is easy-going with visitors during the time allotted. Rauner, well over six feet tall, walks about his office with a mid-tempo gait and appears to inspire, not fear, but calm admiration among his partners and employees.

But Rauner is rarely not performing some duty on behalf of GTCR. A self-described workaholic, he rises early and stays late. He employs three assistants to manage his schedule and deal flow. Oddly, Rauner's office has no computer, and he eschews the Blackberry. He claims this is because the Internet is a time waster and filled with ‘extraneous information.’ Instead, an assistant either prints out his e-mails for his review, or, when he is traveling, reads them to him over the phone.

In fact, Rauner does much of his communicating and firm management via the phone. “I like to hear the tone of a person's voice,” he says. He gives and receives roughly 100 voicemails per day, and has built a system by which he may leave messages for scores of his partners, employees and contacts at the same time.

Rauner has a busy social and family life as well. He is heavily involved with a Chicago education charity, and he is married with, yes, six children. He is a ‘rabid’ bird hunter, and a ‘passionate’ fly fisher and skier. But to wonder how he balances business against personal time is to misunderstand Bruce Rauner – he draws no line between the two. “If I'm doing one of these things that I'm passionate about, I'm almost always doing it in the context of what would be considered business,” he says.

Executives who end up on Rauner's woo-list should know that just because they get invited to go, say, hunting with him, that doesn't mean that Rauner isn't also deeply interested in them as friends. But they should also remember that just because Rauner is now their best buddy, it doesn't mean he isn't still rabidly insistent on building a business with them.

“There's no distinction in my day between my work and my play,” he says. “I'll get to know a CEO on a very personal level. We'll play golf, go out to dinner, have a cigar, go hunting, fishing. Get to know their family. We become friends, which is part of the fun of the business.”

Rauner's says personal relationships with his business partners are rewarding in and of themselves, but they often lead to profitable business ventures. “I find that the personal bonding that comes from fun leads to proprietary deal flow because the CEOs enjoy working with us. The executives we back are successful; they're wealthy; they've done it. They want to work with folks who are fun to be with. Life's too short to work with folks that you're not going to enjoy.”

Rauner's passion for strategic bonding answers the question, what would he do if he weren't running a private equity firm? The answer: run a private equity firm. “I love the process of meeting new people, getting to know their visions and helping them implement their dreams. I would do this work here as a hobby. I'd do it even if we weren't getting paid a significant amount of money.”