IVCA Feature: Highlights of the 2023 IVCA Spring Luncheon … ‘Establishing a Private Equity Firm: Then, Now and in the Future’

The season felt in full swing as the membership of the Illinois Venture Capital Association (IVCA) met for their annual Spring Lunch Luncheon on April 11th, 2023, at the Chicago Club. The event was sponsored by advisory and assurance firm Baker Tilly and the law firm Ropes & Gray, featuring the topic “Establishing a Private Equity Firm: Then, Now and in the Future.”

Opening remarks were given by the new IVCA Executive Director Christie Pruyn, and she began by acknowledging her ongoing transition with the outgoing Executive Director Maura O’Hara. Ms. Pruyn then introduced the expert panel on the topic … moderator Johara Farhadieh, Executive Director and Chief Investment Officer of the Illinois State Board of Investment (ISBI), who led the discussion with Justin Ishbia, the Managing Partner of Shore Capital Partners and Paul Finnegan, the Co-Founder and CEO of Madison Dearborn Partners.

The highlights of the subjects discussed … with Mr. Finnegan representing the history of Private Equity then and now, Mr. Ishbia with a current take representing his firm, and Ms. Farhadien making the inquires. The presentation is outlined below …

“WHAT WAS THE ATMOSPHERE IN THE BEGINNING?”

Paul Finnegan: Madison Dearborn spun off from First Chicago Bank Venture Capital in 1992, but with other partners we were fortunate to raise that first fund. With 14 people we established a track record, to build credibility and expand the network to ultimately raise the first fund. That was the experience. It’s interesting how our LP base evolved, we’re now 30% international, whereas our first fund was all domestic.

“WHAT IS THE CURRENT ENVIRONMENT? HOW DO YOU COMMUNICATE TO LPs?”

Justin Ishbia: We try to be as transparent as possible, and establish a timeline two years out. LPs have calendars on who is going back to market at which time, so if you can communicate when you’re likely to be fundraising … when it’s a great time to fundraise, it’s hard to invest, and vice versa. We operate on the philosophy of ‘no surprises,’ good or bad. And finally, people want to be social, and it goes miles when you do social events with certain LPs that want to, those moments create bonds. Also, talk to people when you’re not necessarily raising funds, tell them your story. I’ve found the best timing in fundraising are the times when you’re not fundraising, but communicating.

Finnegan: You have to be strong internally to be strong externally. And we have to acknowledge that the world has significantly changed … rates are up, multiples are down. So we have to be on the same mindset in terms of current environment, and making sure the liquidity within your portfolio companies is solid, so when you have challenges you’re on top of them. In putting my investment committee hat on, when you get together with LPs, they want to know that you are on top of your portfolio.

“HOW DO YOU MAINTAIN YOUR REPUTATION OVER MULTIPLE INVESTMENTS, ESPECIALLY IF THERE ARE PROBLEMS WITH ONE PORTFOLIO COMPANY?”

Finnegan: Going into the transaction, you want to identify potential risks like that, and we have support groups who analyze and evaluate the risk factors. Certainly when we’re communicating with our LPs, it’s about being upfront and vigilant. It’s identifying the risks, whether it’s regulatory or labor or whatever.

Ishbia: I always say you have one reputation, use it wisely. I’m looking at a long-term reputation, and I’m not going to stake that on one deal.

“IN A POLITICIZED ENVIRONMENT, HOW DO YOU MANAGE THE DEFINITION TODAY OF ESG … ENVIRONMENTAL, SOCIAL & GOVERNANCE, AND DO YOU FACTOR ESG IN YOUR DECISION MAKING PROCESS?”

Finnegan: Looking at the three elements … E, S, and G … E gets the most publicity. At Madison Dearborn, we are very active civically and philanthropically … we gave over $40 million to non-profits around Chicago. So that is the S part for us, to better the community. We have specialized teams for ESG with every transaction we look at with the deal team, and we have a rubric and a checklist around those issues. We release an annual report to our LPs as to what our management teams in our portfolio companies are doing in that regard, as well as an internal report card. This formalization has occurred within the last three years.

Ishbia: I believe that Private Equity has been ahead of the curve on Governance, but Environmental and Social are areas for improvement, and that’s for everyone. We have established a policy in our current fundraising, but in previous ones we did not, and we were truthful in that statement.

Finnegan: Maybe it’s staying away from the term ESG, but establishing similar policies that in the end save money, then it becomes a net-net value creation, but we don’t necessarily say it’s part of our ‘ESG.’

“WHAT IS THE STATUS OF YOUR FIRMS IN THE PROCESS OF DEI … DIVERSITY, EQUITY AND INCLUSION?”

Ishbia: Our approach is top down, bottom up. Networking is important, we target those on our boards who are involved in DEI initiatives, and would know others in the space. From the bottom up we recruit from historically black colleges to our intern programs, and our last analyst class was half female. Are we perfect? No. But do we want our culture to do better? Yes. I believe the results of DEI policy lead to better outcomes for all.

Finnegan: We created a DEI lab for our portfolio companies, which shares best practices with our Chief Human Resource Officers. We monitor what the boards look like in our portfolio companies and what their employment base looks like. Internally, we’re expanding our pipeline to candidates, and because we like to promote from within, our associate classes are much more diverse today. To the credit of the LPs, they’re saying we have to do this, period.

“WHAT ABOUT SUCCESSION PLANNING?”

Finnegan: We have a mixed report card on succession planning. I became Co-CEO in 2007, and beginning last year we named co-presidents, which will become the new Co-CEOs next month, and I’ll shift to Chairman. We’ve found that transition periods are the best way for new leaders to get acclimated. And of course, we stay in communication with our LPs.

“WHAT ARE YOUR LESSONS LEARNED?”

Ishbia: Whenever we close a transaction, we have a session called ‘what we learned.’ The deal team essentially goes over the mistakes, and what we can do better. Overall, make sure you document when you own, and how you call out mistakes, so as not to make the same mistake twice. And secondly, never put someone in charge of a portfolio company who is not on board with a performance improvement plan [PIP] or to stay too long with someone who is not following through on the PIP.

Finnegan: There is a sports quote that I’ve heard which I believe is also true in evaluating each other and our managers … “if there is doubt, there is no doubt,” in other words there is no need for uncertainty. Secondly, in each firm there are different teams on a roll at different times. It’s about deference, if a deal team is hot, do you defer to them? Inevitably, that runs into trouble. But we want all our teams to do well, and it goes in cycles. There may be an element of overconfidence, so what becomes the right decision is part of creating governance.

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