Cold call Captain

Laurence G. Hanscom Fields Airport in Bedford, Massachusetts, is familiar to Boston's most prominent private equity general partners because it is the preferred air strip for private jets. Less well known among Bedford's jet set is the fact that some of the planes are in fact flown by chief executive officer of TA Associates – Kevin Landry.

“There's a fleet of airplanes out there owned by Tommy Lee, JW Childs. I'm not the only private equity guy with a plane,” says Landry, adding: “I'm just the only private equity guy who's a pilot. The others are sitting in the back with a martini. I'm sitting up front with a cup of coffee.”

Landry first learned to fly at age 16. His father owned a Cessna airplane. But after entering college he didn't fly again for 30 years. A ride in the cockpit of a chartered jet got him interested in updating his pilot skills, and Landry received certification to fly again in 1991.

Landry now flies himself to all his meetings, of which there are many. This past October, for example, Landry flew to locations in Iowa, California, New York and Minnesota. And that's not counting the flying he does for fun. Landry will often fly one of his jets up to Glens Falls, New York or Bar Harbor, Maine, to practice a new approach or, he claims, just for breakfast.

On business trips, there are usually other members of the TA Associates team in the back of the plane. New employees are told that if they feel uncomfortable placing their lives in the hands of their boss, they are more than welcome to fly with commercial airlines instead. In any case, Landry has all his passengers sign a waiver “so they won't sue me for a gazillion dollars. You can't get enough insurance for something like this”.

I'm the only private equity guy who's a pilot. The others are sitting in the back with a martini. I'm sitting up front with a cup of coffee

Landry's passion for flying could not be better suited for his profession. He and his team go to a lot of meetings – more than is typical even within the frenetic private equity world. Most of the meetings are with companies TA Associates will never buy or with CEOs that will never sell their businesses to the firm. But the unrelenting pace of outbound networking is part of a broader strategy for deal sourcing that is at the very core of TA Associates' strategy. Landry himself is an unapologetic advocate for a cold-calling culture that he says is largely responsible for his firm's many years of success.

THE FUNNEL
Landry, a straight-talker with a preference for informality, wouldn't dream of using a euphemism for the core component of his firm's deal-sourcing process – cold calling. For some, the term brings to mind telemarketers and penny stock brokers. Landry doesn't really care what people think of cold calling, he just knows it yields results. Of the last 16 investments his firm made, he says 14 began with a cold-call.

TA Associates, which focuses on making growth equity investments in successful, later-stage companies, needs to make a lot of calls to end up with the roughly 12 deals it does each year. Landry estimates that in 2004, his firm's professionals will place calls to about 8,000 companies and of those, travel to visit roughly 750. “That should give you some idea of what our funnel looks like,” says Landry, chuckling.

This attrition rate can be extremely frustrating for the TA Associates professionals. Some of the more junior professionals, who spend a majority of their time pounding out phone calls, go years without seeing a deal they sourced come to fruition. “It's pretty easy to get discouraged,” admits Landry. A lack of success “doesn't mean they didn't work hard – there's some luck to it.”

Not that TA Associates doesn't participate in auctions – it does, frequently, just like every other private equity firm, Landry insists. “Don't let anybody tell you they've got proprietary deal flow,” he says. Many of the firm's long-term relationships with company owners begin with a cold call and are carefully nurtured over the years, but by the time many of these owners are ready for an equity investment, they have hired an investment bank or alerted several other potential buyers to the opportunity.

Landry says his firm still enjoys an edge over other bidders because of TA Associates' sector expertise (broken into six industry groups) and by virtue of the pre-existing relationship. “Remember,” he says, “these are people who don't have to do a deal. They're choosing to do a deal. They're usually choosing to take some money off the table and they're choosing a partner. Most entrepreneurs want a knowledgeable investor. We get there first, we develop a relationship and they get to know us.”

Landry also notes that his firm is more than willing to make a minority investment in a company, which he says gives him an advantage over most buyout firms.

Landry contrasts his firm's approach to sourcing deals with a strategy he says is pursued by most other private equity firms – relying on intermediaries and reacting to prospectuses. This model for deal flow he calls “very seductive” and a GP ego booster. “It's easier to call an investment banker and get a deal in,” he says. “We see a lot of companies that we like, but they don't want to do a deal. They don't have to. So you're doing a lot of work that comes to nothing.”

He continues: “If instead I call an investment banker and he sends me a book on an auction deal, gee – now I know a deal's going to happen. You know it's an okay company. And you've got all this data. You can come in in the morning and analyse it, work on it, and feel a sense of self-worth. When you go out and visit a dog of a company, how do you feel?”

It takes an enormous amount of time to work on early-stage companies. We realised we were in the free consulting business. That's not a good business

TA Associates structures its compensation programme to reward those individuals who find needles in the corporate haystack and carry the opportunity through to completion. While everyone at the firm does some cold calling, including Landry, the bulk is done by teams of associates, who systematically move through a database of more than 280,000 names. Leads that gather momentum are typically assigned a team of two senior professionals and an associate, who pursue more detailed due diligence. If this team concludes that the company is worth investing in – and that the company may be willing to accept an investment – a “warm deal memo” is circulated throughout the firm for comment. At this point Landry assigns an investment committee of four to the deal.

But the “sponsor” of the deal remains ultimately accountable for the investment until the point of exit. When the deal is closed, TA Associates professionals are assigned percentages reflecting their respective levels of involvement in it. This deal credit “follows you forever” at the firm, Landry says. “In contrast to other firms, there is much more of a personal responsibility for any investment in a company.”

Individual employee performance is rated based on the deal credit points, and carry is distributed based on this performance calculation.

EVOLUTION
TA Associates' strategy has evolved over its many years in business, and Landry has been there every step of the way. The firm was founded in 1968 by Peter Brooke, who began his career as a private investor on behalf of Bessemer Securities, a holding company for the Phipps family. In conjunction with Tucker Anthony, Brooke founded TA Associates to make venture capital investments. One of his first hires was Landry, who had just graduated from the University of Pennsylvania's Wharton School of Finance. “This is my only white-collar job,” Landry likes to say.

In these early days, Brooke established a pattern by seeking the most robust possible deal flow. “He had a sense that you never go into an industrial park without writing down all the names of the companies,” says Landry of his and Brooke's forays along Massachusetts' Route 128 tech nexus.

By 1982, Brooke had become more interested in international opportunities than his partners, and he left to found Boston-based Advent International. At the same time, TA Associates had begun to formalise its outbound deal sourcing by hiring and training young professionals to handle the bulk of cold-calling.

Although the firm pursued a variety of deals, its initial targets included early stage companies. As subsequent TA Associates funds got larger and larger, the firm's focus shifted away from earlier stage investments. Landry says this has helped returns. Except for the anomaly of the mid-1990s, he says evidence supports his claim that later-stage investments are both less risky and more profitable. And, once the investment has been made, less work.

I hope that having a US investor appeals to European firms, because the US is a large market and they also might hope to go public in the US on the NASDAQ. The US capital markets are a huge, huge asset

“It takes an enormous amount of time to work on these companies,” complains Landry of startups. “We realised we were in the free consulting business. That's not a good business.”

TA Associates deal professionals are ready and able to help a portfolio company complete a financing, find key managers, make an acquisition, build a network, but Landry says the real work takes place before an investment is made: “Our attitude is, the best value we can add to the investment process is to figure out the right, interesting industries for the next five to six years, find the best companies in those industries and get ourselves into those companies as an investor at a reasonable price. If we do that part right, the rest is largely going to take care of itself.”

THE METRICS
TA Associates' most recent significant expansion was the opening of an office in London. As might be expected, this was decided upon after an analysis of what Landry calls the “metrics” of cold calling indicated a favourable outlook for deal sourcing throughout Europe. The firm looked at the results of more than three years worth of its nascent investment activity in Europe, and discovered that the hit ratio from cold calling there was even better than in the States. “Part of our fear was that our success was just because this was fertile ground that we hadn't plowed before,” says Landry. “But we found that those numbers were sustainable.”

Last year, Landry sent principal Ajit Nedungadi and an associate to London to establish a permanent office. That team has since hired two additional professionals.

“We're trying to do the same thing in Europe that we've done here, which is, through cold calling, to find good, profitable companies that we can invest in,” says Landry. “I hope that having a US investor appeals to European firms because the US is a large market and they also might hope to go public in the US on the NASDAQ. The US capital markets are a huge, huge asset.”

The firm's investor base has expanded geographically as well. TA Associates recently held a final close on an $800 million (€614 million) partnership primarily for non-US investors. The vehicle will invest alongside TA IX, a $2 billion fund closed in 2000, as well as a $500 million subordinated debt vehicle raised the same year

Landry says he is pleased with the growth and success of his firm, but sometimes worries that as it grows larger and the private equity deal environment becomes increasingly competitive, the firm's cold-calling system will become less effective. He says he takes some solace in the fact that investment banks and other intermediaries appear not to be eager to “hire a lot more feet on the street” that will reach many of the company owners before his team does. The time between initial contact and deal closing has elongated, he says, and the whole process has become more intense. “It used to be you could find a company and very quietly do a deal in private,” says Landry.

Still, he says, the TA Associates process continues to turn up gems. A recent deal in Europe began with a cold call to the company owner, who first demanded to know: “How did you find me?” The deal pro requested a meeting and was turned down, but haggled the reluctant executive down to a 15-minute breakfast. “That turned into two hours, and six months later we had an investment with him,” recalls Landry with a smile.

Landry can't keep track of the countless tales of heartbreak that emanate from the lower ranks of TA Associates. After all, twelve deals a year from 8,000 cold calls means 7,988 disappointments in varying degrees of intensity. Bitter rejection comes with the territory at the firm. “Everybody in this business wants to work hard and do well and be analytical, and you can do that just working on auctions,” says Landry. “But we say your time is better spent on the road visiting five more companies. They may be five dogs, but maybe they won't be. Maybe they'll be great.”