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Leadership in the Private Equity Industry


10/30/2007

U of I alumni and guests were treated to interesting and humorous insights about leadership in the private equity industry on Thursday, October 25th, by Mr. Avy Stein, a graduate of both the University of Illinois College of Business and the Harvard Law School.  Stein served as the featured speaker at the Business Leadership Roundtable, presented by the College of Business and sponsored by PricewaterhouseCoopers.

Stein is currently the co-chairman and co-chief executive officer of Willis Stein & Partners and is jointly responsible for managing the affairs of the company and its three private equity funds.  In discussing leadership, Stein references Howard Haas, Professor of Strategic Management at the University of Chicago, on what constitutes its definition:  1) technical competence in at least one area; 2) competence in listening; 3) perspective; 4) good judgment and character (people will look at you closely); 5) optimism; 6) the ability to provide balance (your strengths diminish if you favor a group); and 7) the belief in vision, as well as knowing the power of change and how to get there.

Leadership, of course, is important in all sectors of business, but right now it might be most valued in the private equity industry.  "It's been an unbelievable period in private equity," notes Stein.  "More money is involved than anyone could have dreamed of, and it's dominated by people raising 10, 15, even 20 billion dollars."  Because the stakes are so high, investors must rely heavily on competent leaders to feel good about the risks they inevitably face.  

"Today public companies are being taken private at a much higher rate than anyone in the business world had projected," says Stein.  Acquisition multiples are at or near an all-time high, and today's credit crunch will likely last a while.  Over $200 billion currently sits in unsold leveraged loans, while outstanding US private equity funds total $400 billion.  Hedge funds control more than $1 trillion, 10-30 percent of which is set aside for private equity types of investment.  Stein predicts that we will continue to see higher prices.

According to Stein, "leadership is the scarcest resource in business today, and the failure of leadership is the most significant contribution to the failure of a business."  And he sees plenty of failure in private equity, which he likens to the shoemaker's children who don't get any shoes, i.e., private equity is not very good at managing its own business.  "We don't manage for accountability, though we ask the firms we invest in to do so."   

Who has, in Stein's opinion, proven to be a good leader?  One is Bob Mariano, who runs the Roundy's grocery store business for Willis Stein.  When starting at Roundy's, Mariano was going from wholesaler to retailer.  He knew the importance of teams in the success of this transition, so he repopulated the management team with mostly those who came with him from Dominick's.  He forced change that was in the best interest of the company and founded the Roundy's Foundation.  

Another of Stein's favorite leaders is Tom Moore, head of Education Corporation for America.  Moore had spent 25 years at Coca-Cola before landing at ECA, a marked departure for the executive.  However, he was willing to take the risk that he could learn a new industry, and that risk paid off.

The founders of Home Depot, Arthur Blank and Bernard Marcus, also shine as leaders.  They both came from Ace Hardware and felt they could create an even better company if they were able to secure an investor(s).  They were excited by the interest of former presidential candidate H. Ross Perot in backing them.  However, after meeting Perot, the men realized that they would not be able to truly realize their own vision of this new company if they had to answer to Perot.  Therefore, they refused his money and waited another six months before going back to Ken Langone, who they had considered earlier.  Their patience and refusal to compromise were rewarded many times over.    

Who strikes Stein as a bad leader?  That would be Stephen Schwarzman, chairman and co-founder of the Blackstone Group, in the news not just for business deals but also for throwing himself a $3 million birthday party and for publicly bragging about the low taxes his company pays due to loopholes.  Schwarzman is indeed a successful capitalist, but he makes a lot of unnecessary noise.  Stein's opinion of Schwarzman is understandable, given how vividly Stein recalls a childhood conversation with his father, with whom he would attend baseball games.  When Stein told his father his opinion that there wasn't a better player in the field than Willie Mays, his father disagreed.  Dad's choice was Napoleon Lajoie because Lajoie "just caught the ball with no sound and fury."  Definitely a smart way to conduct one's own business.

Please join fellow alumni at the next Roundtable, which will cover International Financial Reporting Standards, on November 14, 2007, at the Illini Center, 200 S. Wacker, 4th floor, in Chicago.

Related Information:

Private Equity Industry Update and Trends - Avy Stein (PowerPoint file, 122 kb)

UIUC College of Business