Volume 1, Issue 2 Spring 2010

The Kellogg School of Management ALUMNI NEWSLETTER The and Club

Inside this issue: Introduction Alumni involvement with the Private Equity and Venture Capital Club is the cornerstone of our continued Kellogg Launches 2 success. From hosting students for career treks to participating in speaker events, you enable us to meet Alumni Club our mission and make Kellogg a premier business school for future private equity investors and venture Kellogg Students Visit 4 capitalists. As a ‘thank you’ to our dedicated alumni, we would like to provide an update on 2009 and New York 2010 activities with our annual Alumni Newsletter. Alumni Insights: Robert 5 Berner (KSM ’86) Kellogg PEVC Conference Moves to Downtown Chicago PEVC Conference: 7 Article by Kathy Lai, KSM 2010 Buyout Sessions February 10, 2010 PEVC Conference: 9 VC Sessions The Eleventh Private Equity & Venture Capital Confer- When Deals Dry Up 11 ence marked the first time the student-run conference was located downtown at the University Club of Chi- Ways for Alumni to Get 12 cago. Despite inclement weather, the new location Involved helped draw record attendance of over 350 alumni, professionals, faculty members and students, as well as a high caliber of keynote speakers and panelists.

The Heizer Center for Private Equity and Venture Capital sponsored the Appreciation Dinner for nearly 100 speakers, alumni, faculty members and students the night before the conference. Held at a private venue, and uncertainty facing the private equity and venture the event was an opportunity for alumni to reconnect capital industry and how today‘s challenges present an with former classmates and professional acquaintances. unprecedented opportunity for discerning investors to This year‘s conference program focused on the changes unlock value in a changing landscape. Kellogg Launches Alumni Club for Private Equity and Venture Capital Industry Article by Michael Teplitsky, KSM 2008, Wynnchurch Capital March 18, 2010

The newly-formed Kellogg Alumni in Private cluded student leaders of the PE/VC Club 30 senior alumni. Current membership in- Equity (KAPE) held the launch of the Chicago (formerly known as PEEK) as well as a select cludes over 1,000 alumni across over 300 chapter on March 2. The much anticipated group of alumni. investment firms. launch of KAPE is a result of a Kellogg PE/ Founded in 2009, KAPE is a global networking The KAPE launch in Chicago on March 2nd VC development strategy which was put in and educational alumni club dedicated to serv- featured a lecture by the Marketing Depart- place in 2007 by an interdisciplinary group of ing Kellogg and Northwestern alumni active in ment‘s Professor Richard E. Wilson. Profes- Kellogg faculty members from the Dean‘s the investment of private equity, venture capi- sor Wilson convincingly argued for the impor- Office, Heizer Center for Private Equity and tal, mezzanine, distressed, secondary, and lim- tance of active management of the corporate Venture Capital, Development Office, Alumni ited partner capital. KAPE currently boasts a distribution chain – keeping in mind not only Relations Office, and the Career Management global leadership team that spans 35 global Center. This interdisciplinary group also in- (Continued on page 2) chapters and is advised by a global council of ALUMNI NEWSLETTER

Kellogg Launches Alumni Club for Private Equity and Venture Capital Industry

(Continued from page 1) KAPE has recently formed a Chicago Board (CIVC Partners), David Stott (Wind Point), and the channel partners, but also the ultimate which is led by Ed Lhee (KSM ‗97) of Code Justin Ward (BDT Capital). consumer of goods and services. The event Hennessy & Simmons. The 2010 members The launch was generously sponsored by Code was attended by 30 alumni and five Kellogg of the Board include Du Chai (Northwestern Hennessy & Simmons, Madison Dearborn, Pros- representatives. KAPE‘s membership base in Endowment), Pat Eilers (Madison Dearborn), pect Partners, the Office of Alumni Relations, the Chicago includes 275 alumni. Bon French (Adams Street), Bill Glastris Heizer Center for Private Equity & Venture Capi- (Prospect Partners), Harry Kraemer Jr. Alumni in attendance included Bill Glastris tal, as well as BDT Capital, OCA Ventures, Shore (Madison Dearborn), Matt McCall (New (NU ‗82, KSM ‗84) of Prospect Partners, Capital, Wind Point and Wynnchurch Capital. World Ventures), Jim O‘Connor (MVC Anthony Kesman (KSM ‗88) of Linden, Jeff Capital), Daniel Rosenberg (Sterling Part- Initially, KAPE plans to hold regular events in Gonyo (KSM ‗88) of Geneva Glen, Venita ners), John Stelatto (Pritzker Organization), Chicago and the Bay Area. The organization in- Fields (KSM ‗88) of Smith Whiley & Co., and Reeve Waud (Waud Capital). tends to form a New York advisory board in 2010. Duncan Bourne (NU ‗81) of Wynnchurch To learn more about KAPE and to sign-up for Capital, and Jonathan Leiman (KSM ‘99) of KAPE has also formed a Chicago Auxiliary membership, please visit: http://alumni.kellogg. Pfingsten Partners. Recent alumni in atten- Board which is led by Michael Teplitsky (NU northwestern.edu/KAPE/. Contact Michael Teplit- dance included Justin Ward (KSM ‗09) of ‗02, KSM ‗08) of Wynnchurch Capital. The sky (KAPE – Founder and Executive Director) at BDT Capital, Kelly Cornelis (KSM ‗01) of 2010 members of the Auxiliary Board in- [email protected] with any questions. LaSalle Capital, Todd Van Horn (KSM ‗08) clude Richard Copans (Madison Dearborn), Alumni are invited to join the ―Kellogg Alumni in of Linden, and Erik Zimmer (KSM ‗05) of John Hennegan (Shore Capital), Brett Hol- Private Equity‖ group on LinkedIn. Lake Capital. comb (Prospect Partners), Chris McLaughlin Campus Presentation: Richard Rincon (KSM ‘08), Hispania Capital Partners Perspective on the U.S. Hispanic Market Article by Jason Sondag, KSM 2011 March 5, 2010

The Private Equity & Venture Capital Club is to understand the nuances in the Hispanic a discrete economic unit, it would rank as the third welcomed Richard Rincon (KSM ‗08) from market, such as knowing who your customer largest Hispanic economy in the Western Hemi- Hispania Capital Partners (―HCP‖) to share is and where he or she is located. Much of sphere behind Brazil and Mexico. Many of the his perspective on investing opportunities in the U.S. Hispanic population is concentrated opportunities they see are ―asset-light‖ service the U.S. Hispanic market. HCP has estab- businesses in industries such as education, food lished itself as a leading private equity part- and beverage, healthcare services and business ner to companies that are either strategically services. HCP believes that the non-cyclical na- targeting the U.S. Hispanic market for “...what makes this an attractive ture of these Hispanic demographic trends present growth or are Hispanic-owned or managed. demographic is that it is the largest compelling and sustainable investment opportuni- HCP, which has raised $215 million in com- ties, as these trends are projected to continue into and fastest growing minority group, mitted institutional capital across two funds, the foreseeable future. has completed 17 platform and add-on acqui- with purchasing power of over one The firm‘s mission is to help small-to-medium sitions in the U.S. and Puerto Rico since its trillion dollars.” sized businesses realize their full potential and inception in 2003. generate significant value for all stakeholders. In discussing the Hispanic market in the U.S., Richard explained that growth, rather than lever- Richard highlighted that part of what makes age, is the main driver of returns and that HCP in states like California, Texas, Florida, New this an attractive demographic is that it is the provides portfolio company support by assisting York and Illinois. However, he described the largest and fastest growing minority group, with strategic planning, instilling best practices, market as ―a country within a country,‖ be- with purchasing power of over one trillion augmenting operating resources, and maintaining cause if the U.S. Hispanic market comprised dollars. Richard talked about how critical it thorough board oversight.

Page 2 Volume 1, Issue 2

Overview of the PEVC Boot Camp Article by Frank Fasano, KSM 2011 November 1, 2009

On Saturday, October 11th 2008, the Private Equity and Venture Capital Club kicked off its annual boot camp. The PEVC boot camp is designed to provide students with an intensive and in-depth introduction to the fields of pri- vate equity and venture capital in a single weekend. The boot camp was an all day affair dedicated to help students learn more about leveraged buyouts, lending (especially mezza- nine), and venture capital through eight differ- ent panel discussions. Morning speakers were focused on leveraged buyout while the after- noon was dedicated to venture capital discus- dustry. Participants gleaned a better under- the leveraged buyout process and why mezza- sion. PEVC club leaders Ryan Anthony and standing of the key risk factors and the poten- nine is an attractive investment in the capital Jon Gaunt kicked off the event with an over- tial upside of transactions from the session. structure. view of the day‘s agenda – ranging from deal Founder of KSL Capital Partners, Mike Shan- Following the Maranon Capital presentation, analysis to starting up a private equity fund to non (KSM ‗83), hosted the second session. recent alumni provided career advice to stu- career advice from a recent graduate panel – This session provided interesting stories of dents and opined on the best way to break into followed by a speech from Kellogg‘s Director how he began his investment firm focused on the leveraged buyout and venture capital world. of the Heizer Center for Private Equity and travel and leisure, and also provided students Kapil Chaudhary (KSM ‗07) of i2A Fund and Venture Capital, Professor Mitchell Petersen. with valuable lessons on the pitfalls to avoid Joe Dwyer (KSM ‗08) of OCA Ventures pro- The event was attended by over a hundred first when beginning a private equity firm. vided students perspectives on how best to and second year students in a standing room launch a career in venture capital while Mike The third panel welcomed two recent Kellogg only crowd. Teplitsky (KSM ‗08) of Wynnchurch Capital alumni, Matt Raino (KSM ‘07) of Madison and Justin Ward (KSM ‗09) of BDT Capital In the morning session, the first speaker was Dearborn Partners and Jamie Dimitri (KSM Partners delved into the methods they used to alumnus Evan Gallinson (KSM ‘02) of Merit ‘08) of Welsh, Carson, Anderson & Stowe, to find positions with leveraged buyout firms. Capital Partners. In addition to introducing discuss the current state of the debt and private There were noticeable differences of what Merit Capital, Gallinson led a case discussion equity market. Needless to say, the industry worked best for both venture capital and lever- about the investment evaluation and transac- experienced a dearth of transactions in 2009. aged buyouts; however, a common thread was tional process of a Merit Capital Partners port- Matt and Jamie presented the cold, hard facts that persistence, timing, and hard work paid the folio company. Through the case, Gallinson of how the private equity market lost its steam best dividends. engaged all in attendance and probed the audi- and how the debt capital markets had been non ence to determine what would be the pros and -existent for the majority of 2009. The most The remaining sessions of the PEVC Club Boot cons of investing in the company and the in- compelling statement they made was that pur- Camp Schedule were dedicated to venture capi- chase multiples remained high even though tal. Karen Chung (KSM ‗98) of Nomadic Part- credit markets were in dire states, mostly due ners spoke of the challenges of raising a venture to seller expectations not adjusting to the cur- capital fund in the current environment. Fol- rent state of the economy. lowing Chung, Matt McCall (KSM ‗91) of DFJ- Portage engaged the audience with comparative Following the current state of the market pres- venture capital case studies. The last part of the entation, Demian Kircher (KSM ‗99) of Ma- day was hosted by Bret Maxwell (KSM ‗82) of ranon Capital presented an overview of the MK Capital. Matt provided perspectives and an credit process from the perspective of a one- outlook on the venture capital industry. stop lender. His overview included how his team recently raised Maranon Capital‘s first A selection of presentations from the boot camp fund, the importance of mezzanine lenders in series can be found on our website. Page 3 ALUMNI NEWSLETTER

Kellogg Students Visit New York for Buyout Trek Article by Doug Potters, KSM 2011 March 3, 2010

On February 16thand 17th, nine Kellogg MBA Partner-level professionals and recent gradu- profile in private equity investing. In fact, few students visited with alumni working in the ates working for a diverse group of leading firms cited auctions as a primary source of invest- private equity industry as part of the Private private equity firms kindly shared their per- ment opportunities, and instead pointed to their Equity and Venture Capital Club‘s New York spectives on careers in the space as well as industry-specific networks and industry knowl- Buyout Trek. The trek‘s goals were to edu- their cautious outlook for the industry going edge as critical components in generating invest- cate first year students about a variety of forward. ment ideas. Beyond idea generation, operational firms operating in the PEVC space, to con- expertise was also cited as a means to gain com- Following the breakfast, students began a tinue to build Kellogg‘s brand among these fort about a businesses‘ intrinsic value prior to series of informational meetings at Welsh, firms, and to provide opportunities for cur- bidding; hence facilitating improved success rates Carson, Anderson & Stowe, Peacock Equity, rent students and alumni to meet through two in more competitive processes. Based on the and CCMP Capital Partners. networking receptions. value increasingly being placed on operational While the funds‘ investment strategies and expertise, these investors advised that students The schedule of events began with a recep- industries of focus differed significantly, should focus on building industry specific knowl- tion the evening of February 16th followed by each meeting stressed the importance of op- edge as a foundation for a potential career in in- a breakfast hosted by Pam Hendrickson erating expertise in driving investment re- vesting. Overall, students appreciated the great (KSM ‗84), COO of The Riverside Com- turns. While improving operations is often insights provided by their hosts, as well as the pany, at her offices. The accomplished group cited as a value-driver in private equity re- opportunities offered to network with leading of breakfast attendees was particularly nota- turns, investors in each meeting contended firms in the industry. ble, evidence of the strength of Kellogg‘s that operating expertise also drove differenti- network within the private equity space. ated deal flow and improved the risk-reward

Campus Presentation: David Jahns (KSM ‘93), Galen Partners Healthcare Investing Article by Polly Israni, KSM 2011 December 1, 2009

David Jahns (KSM ‗93), Managing Director seeking financing more often through angel ceutical sectors are less attractive today because of at Galen Partners, visited Kellogg in Decem- investors and less often through traditional substantial competition. He also suggested that ber to present his thoughts about private eq- venture capital funds. Later-stage healthcare the current economic cycle is resulting in a sub- uity investing in the healthcare industry. Mr. stantial need for financing by many young health- Jahns started his presentation with a back- care companies. ground on Galen Partners, a leading health- Mr. Jahns advised Kellogg students on two hiring care PE firm. Galen Partners manages $1 “The key to operating in this pathways for Galen Partners and other similarly billion of capital across 5 funds and has in- space...is investing in a company at structured growth equity firms. One path would vested in 65 healthcare-related companies. be to focus on the healthcare segment through an He explained that Galen Partners operates in its inflection point, where much of role for two years, followed the growth equity space, located in the mid- the technical risk is removed.” by working at Galen Partners for two years before dle of the spectrum between venture capital entering the industry or business school. The and private equity. The key to operating in other path would be to work in a business devel- this space, he pointed out, is investing in a opment role at a healthcare company after receiv- company at its inflection point, where much firms are seeking financing from growth ing an MBA. Galen Partners has historically hired of the technical risk is removed. As it relates equity firms like Galen Partners. Regarding senior investment professionals from both tracks. to the healthcare space, young healthcare current sectors of focus, Mr. Jahns indicated firms require more capital upfront and are that the medical device and specialty pharma-

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Alumni Insights: Robert Berner (KSM ’86) of CVC Capital Partners Interviewed by Spencer Moore, KSM 2011 April 1, 2010

How did you get started in the PE industry? der on the sidelines. There is approximately in Seattle and the company‘s most significant $500 billion of committed capital invested in growth markets were in Asia. We were able to I started working on Wall Street in investment private equity from 2004 – 2007 vintage year deploy due diligence teams in Europe, America, banking in 1983. Most of my career prior to funds. As the typical fund has a six year pe- and Asia in a relatively short amount of time in private equity was spent in M&A at Morgan riod, there remains a massive amount of capi- order to successfully close the transaction. Stanley. During my time there, I established tal available for investment. As a result, there business and personal relationships with sev- Many private equity firms’ business models is a great urgency among these funds to deploy eral private equity firms and one of my clients, are evolving as they add operational capabili- this capital in the next few years, making the Charterhouse Group, asked me to join. ties through various forms of partnerships competitive dynamic for deals incredible. with seasoned operating executives. What is What have you enjoyed about your career in Overall, I‘m lukewarm on the attractiveness of the current state of the market with regard to private equity? the large LBO market over the next couple of operational executive partnerships? years. There will be attractive individual op- First, I have enjoyed the intellectual challenge portunities, but I would not be surprised if Every large private equity firm has some varia- of learning about and analyzing a variety of large LBO funds who invest heavily over the tion of an operating partner strategy. However, industries and firms. Second, I have been able next couple of years produce lower than aver- only about one in three firms truly integrate to put all of my business skills to the test (e.g., age rates of return. those operating partners into the fabric and operations, management, strategy, marketing, culture of their firms. As M&A markets be- etc.), not just finance. Third, I have developed come more efficient, operating partners are great, long-lasting relationships with a broad clearly and unequivocally the smartest path to and diverse group of people over the years. “M&A markets have come back strongly, but most of the activity is improving enterprise value and therefore build- What is the current state of deal activity and ing lasting success. Financial engineering, corporate-to-corporate transactions. the financing markets for large LBO firms which was popular in the 1980s and 1990s, is like CVC? Leveraged finance markets have more or less a commodity today. Going for- improved, but most activity today ward, the firms who will generate above aver- While the financing markets are certainly age rates of return over time will incorporate more robust than they were one to two years remains focused on secondary operating executives as a core element of their ago and appear to have come back, LBO activ- issuers. Financing for new LBOs strategy. Moreover, private equity firms are ity is still substantially lower than several still remains constrained.” utilizing other advanced business improvement years ago. M&A markets have come back tools as well. We are using business intelli- strongly, but most of the activity is corporate- gence and predictive analytics, effectively ad- to-corporate transactions. Leveraged finance CVC has offices and investments all around vanced statistical tools, more and more often to markets have improved, but most activity to- the world. How does a global private equity improve our portfolio companies through opti- day remains focused on secondary issuers. fund like CVC use its international footprint mizing firms‘ pricing strategies, improving Financing for new LBOs still remains con- as a competitive advantage? inventory levels, forecasting demand, and pre- strained. As we speak, the aggressiveness of With 19 offices staffed mostly by locals, dicting customer behavior. The advent of mas- financial institutions continues to grow. In CVC‘s global presence is unique. In fact, of sive information collection because of the cheap fact, some of the extraordinary features of our 32 partners, there are 17 different nation- cost of storing data allows firms to analyze many of the financings in 2007 have re- alities represented. We use this as a competi- information in ways we could not five years emerged, including dividend recapitalizations, tive advantage by selecting deals that involve ago. Private equity firms remain on the fore- covenant lite deals, and holdco financings. multi-jurisdictional and multinational issues, front of business improvement strategies and Also, the current valuations in the market are which we can better assess than other firms. continue to look for better tools. quite high, in some cases approaching 2007 One example of this is a recent acquisition of levels. Another important factor to consider What else makes CVC unique? the largest chemical distributor in the world, regarding the relative attractiveness of buyout Univar. The company was trading on the Eu- CVC‘s global footprint is truly unique both in markets is the substantial amount of dry pow- ronext with a nominal headquarters in the form and substance. Further, what has made Netherlands. Senior management was located (Continued on page 6) Page 5 ALUMNI NEWSLETTER

Alumni Insights: Robert Berner (KSM ’86) of CVC Capital Partners

(Continued from page 5) well with others has been a very important technology. Funds are becoming more and more CVC unique is that despite its substantial part of my career. focused on particular industries and markets. global presence, the firm has been able to Third, do not be discouraged if you are not able to What advice would you give to current Kel- maintain a tight culture of professionals who logg students who are hoping to build a work well together. This has helped us career in private equity? “As the industry landscape continues to achieve top quartile performance for each of change, remember that the person who our funds. I would recommend three things. First, I would encourage students interested in pri- is most successful in private equity is What did you enjoy most about your experi- vate equity to study the industry in detail. able to identify businesses where he or ence at Kellogg? Understand the many different sub-sectors she can assist in improving the I enjoyed all aspects of my experience at and fundamental changes taking place. There enterprise value of the underlying Kellogg. I enjoyed the academics, engaged are many trends, some negative, that may assets.” professors, classmates – really enjoyed all of make the industry difficult for a few years. the fun I had there. I think Kellogg‘s multi- Second, students should think hard about the disciplinary approach was very enjoyable and sub-sector in which they would like to work. land in private equity in your first job out of Kel- has been a huge benefit for me in my career There is going to be substantial growth in logg. There is no clear path to private equity. As in private equity. The culture of group activi- developing countries in Latin America, Asia, the industry landscape continues to change, re- ties and teamwork and the interpersonal and and Africa and private equity will continue to member that the person who is most successful in selling skills that Kellogg helped me further play a larger role in those regions. Also, private equity is able to identify businesses where develop have been critical skills in private think about specific industries in which you he or she can assist in improving the enterprise equity. The ability to influence and work can create expertise, such as healthcare or value of the underlying assets.

Campus Presentation: Zain Latif, TLG Capital Emerging Markets: Africa—The Final Frontier Article by Charissa Lai, KSM 2011 March 1, 2010

TLG Capital, a UK investment fund special- Graduating with a Masters Degree from Lon- costs by up to 50%; so we are already bringing izing in emerging markets, aims to prove that don's Cass Business School at just 19, Mr. costs down and giving people a bit of hope." private equity firms can invest ethically, im- Latif joined HSBC's graduate program in While the risks remain high, Mr. Latif is confident prove the lives of the underprivileged and 2004, which led to stints in trading in New of success in the noble endeavor to tackle Africa‘s still keep investors happy by providing out- York and Hong Kong. Becoming the young- health issues. The talk also highlighted sectors sized returns. Zain Latif, founder of TLG est VP at Merrill Lynch at 23, Mr. Latif was and opportunities that have been overlooked by Capital, discussed the trends and challenges recruited by Goldman Sachs as an Executive larger private equity players in Africa, creating a of doing business in Africa, as well as the Director. Mr. Latif founded TLG Capital in vast landscape of opportunity. role that private equity can play in the conti- 2009. nent for small and medium size enterprises. TLG‘s investing activity thus far has demon- Professor Mitchell Petersen introduced Mr. strated its dual focus on social entrepreneur- Latif by stating: "This is the continent where, ship and generating strong investment re- at the moment, there is probably the least turns. The firm recently invested in Quality amount of PE being deployed. That is chang- Chemical Industries Limited, a pharmaceuti- ing. In three years at Kellogg, I have heard cal manufacturing plant in Uganda. Mr. Latif very little about Africa's business environ- described that the plant expects to be the ment. This visit by Mr. Latif is an example of largest cancer treatment facility in West Af- this change." rica. ―We are going to cut cancer treatment

Page 6 Volume 1, Issue 2

Kellogg Private Equity & Venture Capital Conference: Buyout Sessions Article by Chris Graber, KSM 2010, Doug Potters, KSM 2011, and Joel Stanwood, KSM 2010 February 10, 2010

Keynote Address: Chuck Esserman you‖ foods and PureOlogy pre- mium hair care products. The 2010 Kellogg Private Equity and Venture Capital Conference was excited to welcome Esserman concluded by sharing Chuck Esserman, CEO and Co-founder of some insights for the private equity TSG Consumer Partners, to deliver the private industry to consider. First, special- equity keynote address. Given the overall ized operational expertise matters theme of the conference, Partnering Through more than financial expertise - now Uncertainty: Unlocking Value in a Changing more than ever. Second, restricted Landscape, Esserman explained the unique access to bank debt should be TSG approach to unlock value. According to viewed as a positive thing, since it Esserman, the firm‘s approach seems like a encourages reinvestment into com- primer on how not to do private equity deals. pany growth and reduces investment risk. provisions, such as key man clauses and man- However, the strategy has performed well Third, private equity fund returns will be in- agement fees. through multiple economic cycles. For exam- creasingly correlated with growth rates of ple, the usual private equity investment phi- portfolio companies, and capital structures will As for areas of promise, panelists suggested that losophy is to seek firms with attractive valua- need to change significantly. Finally, struc- distressed investing is still likely to benefit in tions, exchange downside protection for up- tured equity investments versus leveraged the near term and that general partners who are side potential, avoid companies with low mar- buyouts will become increasingly common for able to recapitalize portfolio companies will ket share and seek a controlling ownership the foreseeable future. outperform their peers. Likewise, the ―Volcker interest. In contrast, TSG will pay top dollar Rule‖ may create significant investment oppor- The Limited Partner Perspective for great companies, exchange upside opportu- tunities in the secondary market if banks are nity for downside protection to avoid negative The Limited Partner Perspective panel re- pressured to exit pockets of the alternative in- investment returns, maintain its focus on small flected the opinions of a healthy mix of inves- vestment space. Overall, panelists indicated and medium sized companies that may have tors including Brett Gordon, Managing Direc- that the investment climate is significantly more negligible market share (but always clear, tor at HarbourVest Partners LLC, Jonathan promising today than last year because uncer- differentiated consumer benefits), and remain Harris (KSM ‘99), President of Alternative tainty in the market has declined and capital is indifferent between purchasing a majority or a Investment Management, Ross Posner (KSM starting to flow again. minority ownership stake. Furthermore, TSG '92), Director of the Private Equity Group at Evolving Strategies in Capital Appreciation: provides marketing counsel and operational Allstate Investments and Shawn Wischmeier A Look at the Ovation Pharmaceuticals Suc- assistance for free prior to ownership in some (KSM '02), Chief Investment Officer of the cess Story cases, uses little or no leverage, and invests all Indiana Public Employees Retirement Fund. company profits (or more) in growth. The panel was moderated by Andrew The Ovation Pharmaceuticals panel offered a McDonough, a Partner and Co-Chair of the compelling look at how a partnership between Doing everything ―wrong‖ has worked out Private Equity Practice at Winston & Strawn management and private equity facilitated a well for TSG and its investors. On average, LLP. major private equity success during a turbulent TSG portfolio companies have increased period. Ovation Pharmaceuticals was a bio- yearly operating income by 35% annually According to panelists, there will be a conflu- pharmaceuticals business built by management during the investment period, including 18% ence of fund-raising activity in the back half of and GTCR predominately through the acquisi- and 19% growth in 2008 and 2009, respec- 2010, as funds who pushed out 2009 launches tion of niche, orphan products from major phar- tively. The TSG team possesses a knack for meet those who had originally planned to be- maceutical companies. In 2001, GTCR com- finding products that many would-be suitors gin fundraising in 2010. Panelists suggested mitted $100 million to the firm and ultimately dismiss as fads, but whose brands later be- that there will be a further bifurcation of sold the business to Lundbeck in March 2009 come well-known successes such as Vitamin ―winners‖ and ―losers‖ as LPs decide where to for $600 million in cash with potential addi- Water beverages, Smart Balance ―better-for- allocate capital. Some hinted that the balance tional milestone payments of $300 million. of power between LPs and GPs is moving further toward LPs with respect to certain key (Continued on page 8) Page 7 ALUMNI NEWSLETTER

Kellogg Private Equity & Venture Capital Conference: Buyout Sessions

(Continued from page 7) Geoff Bland (KSM ‘91), a Managing Direc- gest impact on smaller firms that generate the Ovation‘s Founder and CEO Jeffery Aronin tor at Wedbush Capital, a lower middle mar- majority of their revenue from carried interest, and Michael Burke (KSM, ‘94), a fellow ket firm in Los Angeles, Doug Grissom, a rather than larger funds with proportionately member of the founding leadership team, Managing Director at Madison Dearborn higher revenues from management fees. joined angel investor Gidon Cohen (KSM, Partners, the largest private equity firm in On the ―Volcker Rule‖, several panelists sug- ‘82) President & CEO of Highland Capital) Chicago, Ned Villers (KSM ‘01), a Partner at gested that financial institutions should be encour- and Constantine Mihas, a Principal from Water Street Healthcare Partners, a health- aged to keep investments on their balance sheet GTCR, in the panel discussion. The panel care-focused firm in Chicago, and Daniel because it would drive prudent behavior and high- was moderated by Sandy Perl, a Partner at Rosenberg (KSM ‘97), a diversified private quality investments. Kirkland & Ellis LLP and a member of the equity firm in Chicago with significant op- company‘s legal counsel team. erational expertise. The panel discussion Mr. Gatlin stated that before the credit crisis, some covered a variety of topics including how general partners boasted about their ―velocity of Among the many insights on drivers of the firms differentiate themselves in a crowded capital deployment,‖ despite this metric being deal‘s success, the strength of the company‘s market, different internal approaches to value largely irrelevant. Gatlin indicated that the indus- creation and how firms manage their own try needs to maintain its focus on ―absolute returns “...many believe the lower end of internal resources and personnel. The panel to investors‖ rather than how quickly capital is the middle market still offers the was closed to members of the media. deployed. In its recent inaugural fund, Gatlin mentioned that Prophet Equity was able to com- most opportunity for value creation An Industry in Transition: What the Last 24 plete fundraising rapidly and without a placement because of inherent market Months Mean for the Future of Private agent, partly due to several qualitative factors, Equity inefficiencies and dislocations.” including setting a hard cap on the current fund The final panel of the day was moderated by and a hard cap on the subsequent fund, distribut- Andrew Ross Sorkin, author of the New ing carry to everyone in the firm and committing a capital base and management team were York Times Best Seller ―Too Big To Fail‖, significant portion from the GP. featured most prominently. Organizing a and Chief Mergers & Acquisitions Reporter financing syndicate was largely about build- Panelists be- for . Panelists included ing credibility for Aronin‘s business plan. lieve that in- David Chapin, Strategic Development Part- Beyond the initial financing of Ovation, vestors will ner at Ropes & Gray, Ross Gatlin (KSM '93), Aronin persuaded top management talent, continue to be CEO and Managing Partner of Prophet Eq- including Burke, who was a ―rising star at creative in uity, Bill Glastris, Jr. (KSM '84, NU ‗82), Abbott, heading for the comfortable corpo- their approach Founding Principal of Prospect Partners and rate suites‖ to join him. The ability of this to investments Kelvin Walker (KSM ‘86), Partner at 21st team to identify and capitalize on products in the near Century Group LLC. that ―Big Pharma‖ companies had underuti- term. Inves- lized ultimately drove the massive success of The panel included a lively discussion of tors, particu- the deal. As Mihas highlighted, the right controversial topics, such as the tax treatment larly those in space was important, but backing the right of carried interest, the ―Volcker Rule‖ and the middle team helped generate outsize value for inves- whether general partners lost focus of their market, still tors. primary responsibilities prior to the economic have little downturn. Panelists discussed the carried access to senior debt, so they have been innovative The Business of Private Equity: Different interest topic from both a fairness perspective in closing deals by utilizing seller notes and alter- Approaches to Managing a Successful Firm and from a public policy perspective, noting native deal structures. Despite this headwind, and Its Investments that deal structures and fund structures would many believe the lower end of the middle market The Business of Private Equity panel fea- likely adjust if meaningful reforms were still offers the most opportunity for value creation tured panelists from a wide array of firms enacted. Likewise, panelists indicated that because of inherent market inefficiencies and within the private equity industry, including changes to tax structures could have the big- dislocations.

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Kellogg Private Equity & Venture Capital Conference: Venture Capital Sessions Article by Lavi Liddar, KSM 2010, Jason Robinson, KSM 2010, Stephen Windsor, KSM 2011, and Richard Yan, KSM 2011 February 10, 2010

Keynote Speaker: Dick Kramlich (NU ‘57) under-performing firms to liquidate in order to arguing that the proliferation of virtual goods return to the industry to equilibrium. Partici- has raised important ethical questions, particu- The Venture Capital portion of the conference pants also noted the growing emphasis in the larly with the methods used to market these kicked off with a wide-ranging keynote speech industry toward operational expertise and ear- items. Due to the inclement weather, Justin by Dick Kramlich (NU ‘57), Co-Founder and lier returns in the product cycle, particularly in Shaffer was unable to attend in person, but Managing Partner of New Enterprise Associ- less capital-intensive sectors including con- linked in via video conference, sharing how his ates (NEA). Highlighting several hot-button sumer internet and enterprise software. Panel- startup has taken a new approach to social net- issues in the venture industry, Kramlich ists spoke about focusing their efforts on their working. touched on a wide variety of subjects, from the areas of expertise, rather than trying to track impact of carried interest taxation on the VC Digital Marketing & Internet Services: Fu- every trend, such as the recent buzz about model to venture investing in developing mar- tures & Exits clean technology. The audience also ex- kets including India and China. He offered pressed interest in specific aspects of each firm The final VC panel of the day, Digital Market- insights from his wealth of investing experi- that have enabled them to continue to raise ing and Internet Services, was led by Tom Park- ence, including a set of five principles that he funds and weather the current downturn. inson (NU ‘82, KSM ‘85). Thepanel consisted uses in NEA‘s Monday morning meetings to of Jim Dugan (KSM ‘97), Co-Founder and drive rational investment decisions in both Managing Partner of OCA Ventures, Ken Gae- good and bad times. A frequent theme in bler, CEO of Gaebler Ventures, Michael Kramlich‘s talk was the critical role of venture “...panelists described the short term Marasco, Northwestern University, McCormick capital in driving innovation. Additionally, he need for under-performing firms to School of Engineering, Clinical Associate Pro- challenged the conventional wisdom that lar- liquidate in order to return to the fessor and Director of the Farley Center for ger funds will necessarily lead to lower per- industry to equilibrium” Entrepreneurship and Innovation, and Amjad formance by showing IRR performance by Shehade, interactive marketing consultant at vintage versus each vintage average, in 5-year skinnyCorp. increments, from 1980-1984 through to 2000- 2004. His data showed the IRR performance Investing in Consumer Internet: Separating The panelists agreed that digital marketing was difference versus vintage average to favor the the Needle from the Haystack particularly attractive because it enabled com- largest 10% of funds for each time block ana- panies of all sizes to execute a successful mar- The next panel, moderated by Bill Sutter, lyzed. keting campaign in a capital efficient manner Managing Partner of Hopewell Ventures and a and at any scale. Speakers were also interested Industry Outlook: The Impact of the Finan- Kellogg Senior Lecturer addressed trends and in the rapidly growing data on internet users cial Crisis on the Future of Venture Capital investing in consumer internet. The panel and particularly in how this data can be more included Joe Dwyer (JD-MBA ‘08), Senior The Industry Outlook panel was moderated by analyzed and leveraged for additional sources Associate at OCA Ventures and CEO of Brill Craig C. Bradley, a partner with law firm of business. A number of comments discussed Street, Bret Maxwell (KSM ‘82), Co-Founder K&L Gates, LLP and a Kellogg adjunct pro- the ‗traditional‘ marketing model, especially in and General Partner of MK Capital, and Justin fessor. Joining him were participants Scott light of current economic conditions. Panelists Shaffer, CEO of Hot Potato. Chou, Managing Partner of Gabriel Venture also asserted that firms will soon shift a greater Partners, Brian Paul (KSM ‘94), Managing Discussing how he evaluates potential start- share of their marketing budgets from tradi- Director and Co-Founder of Tenaya Capital, ups, Dwyer made a very interesting reference tional media to digital forms, as firms increas- Andrew Perlman, CEO of GreatPoint Energy, to Maslow‘s Hierarchy of Needs, particularly ingly focus on advertising spend that is measur- and Eric Young (KSM ‘80), General Partner how the higher up the pyramid a firm can able and with a clear ROI. As the panel shifted and Co-Founder of Canaan Partners. The reach, the more significant potential for the conversation to the future of the industry, panelists presented their perspectives on the growth. Next, the subject of monetization in especially in light of recent exit events (i.e., recent decline in VC, the future areas of consumer internet led to a healthy debate, AdMob), it was noted that larger firms are be- growth and the importance of creating your where the discussion turned to virtual goods as ginning to view the industry more favorably for own niche in a competitive industry. Several investment areas. While most generally acquisition targets as new platforms are devel- panelists described the short term need for agreed on the investment potential, Maxwell oped to capture ‗eye-balls‘ and information on expressed guarded optimism in this arena, internet users. Page 9 ALUMNI NEWSLETTER

Writing in the Eye of the Storm Article by Chris Serb February 23, 2010

David Stowell had no idea what he was in for lap between three different investment indus- The book includes 10 case studies, some of which when he signed up to write an investment try subsectors. The book, An Introduction to Stowell has taught in his classes for more than a banking textbook a few years ago. But he Investment Banks, Hedge Funds, and Private year. Most cases recount familiar corporations and certainly had the expertise. Stowell, a clinical Equity: The New Paradigm, was released on events — the collapse of Bear Stearns, Procter & professor of finance, had recently joined the Feb. 13. Gamble‘s takeover of Gillette, or hedge funds‘ Kellogg faculty after 20 years in investment ―As an investment banker, I used a communi- banking and four more at a hedge fund. His cation process that tried to make complicated publisher, the Academic Press imprint of concepts clearer,‖ Stowell says. ―Teaching Elsevier, had identified a need for a good here at Kellogg has helped me learn how to textbook that merged academic theory with better convey complex ideas in straightfor- real-world experience. The book seemed like ward ways, and that‘s helped me as a writer.‖ a win-win for both parties. The book outlines Stowell‘s view of the Then the worldwide credit crisis hit; two of emerging, post-crisis new paradigm of in- the world‘s largest investment banks disap- vestment banking, hedge funds, and private role in shaping corporate policy at McDonald‘s — peared; and other large institutions suffered equity. It is a world in which leverage has but from an insider‘s perspective. ―These cases huge losses and struggled to survive. In the dropped substantially, risk tolerance is lower, were all written based on real-world experiences midst of this, Stowell realized he would need and extremely complex financial instruments in the industry, and real transactions that allow the to rewrite the book, which was about one- have fallen out of favor. text to come to life,‖ Stowell says. third finished. ―It was exciting, but distract- ing,‖ Stowell says. ―I had a unique opportu- ―This means a potentially lower earnings Stowell cites the Gillette acquisition case as one nity to write this book during the biggest profile, but also less risk, so this is probably a that illustrates political as well as financial reali- financial crisis we‘d seen in 75 years. It good thing,‖ Stowell says. But this new para- ties. ―The deal almost got derailed because one caused me to work more hours than other- digm also entails legislative and regulatory politician in Boston (U.S. Rep. Barney Frank) wise would have been the case, but the tim- proposals on compensation controls, levels of with a big bully pulpit created scathing commen- ing really helped keep the book up to date leverage, and trading rules that could affect tary that the newspapers picked up,‖ Stowell says. and fresh.‖ areas far outside these industry sectors, hin- ―That kind of conflict gets students to see different dering liquidity in equity markets or eroding points of view, and encourages them to debate Writing in real time allowed Stowell not only shareholder value in buyouts. ―This book within the framework of the case paradigm. When to explore the industry-related causes and gives students a foundation for understanding I saw students connect and debate and have differ- effects of the financial crisis, but to re- the impact of additional changes as the indus- ences of opinion, that‘s when I knew I had more conceive the book around the emerging over- try continues to evolve,‖ he says. here than just a dry textbook.‖

Kellogg Distinguished Lecture Series: Promod Haque (KSM ‘83) Article by Amy Trang March 17, 2010

Venture capitalist Promod Haque ‘83 had a that he can build anything, but he needed the ―The mistakes we‘ve made in funding start-ups moment a few years ago that reaffirmed his product to be defined because ―a product is (have occurred when) we get excited engineers understanding that consumer appeal is the useless if nobody wants it.‖ working together and thinking they understand all key to successful product innovation. Haque the needs of the world. They build something but relayed a story about an executive, an engi- no one wants it,‖ said Haque, a managing partner neer, who asked when a product-management at Norwest Venture Partners. ―They didn‘t go over executive would be hired by one of the com- a product concept with anyone; they‘ve been panies in which Haque was investing. The working in a vacuum. They weren‘t talking to the engineer‘s reasoning behind the request was customers.‖ (Continued on page 11) Page 10 Volume 1, Issue 2

Kellogg Distinguished Lecture Series: Promod Haque (KSM ‘83)

(Continued from page 10) maker on the annual Forbes Midas List for company invests in is growth equity companies — Speaking with Interim Kellogg School Dean the last nine years and was named No. 1 Ven- firms that have been in business for a few years Sunil Chopra in a question-and-answer for- ture Capitalist by Forbes in 2004. and need capital for expansion. mat, Haque addressed the future of the ven- To stay ahead, Norwest Venture Partners Cloud computing and startups in developing coun- ture capital industry in a March 11 Kellogg diversifies its investments — both geographi- tries are other areas that venture capitalists are Distinguished Lecture at Northwestern Uni- cally and by sector. It invests in companies moving toward as well, Haque said. ―Customers versity. In addition to his Kellogg education, from China to Israel, as well as in firms spe- don‘t buy technology because it‘s a cool thing to Haque is a Northwestern engineering alum- cializing in software applications to con- do; these products have to deliver value,‖ he said. nus who has been recognized as a top deal- sumer-focused services. Another area the

When Deals Dry Up Article by Matt Golosinski December 7, 2009

Fewer and tougher deals. That‘s how a leading industry knowledge and a passion for invest- billion invested in about 600 companies world- private equity expert described the road ahead ing. wide, said Neary, citing signature deals that for his industry during a Dec. 2 lecture at the include BEA Systems Inc., Zentiva, Bharti and Of course they also must deliver results. Kellogg School. Arch Capital. The bottom line is still the bottom line, Neary Negotiating transactions will be much more ―You don‘t read a lot about us because we don‘t said: ―Private equity is a meritocracy. Per- complicated — ―like pulling teeth,‖ said James want to be read about,‖ Neary told the Kellogg formance is all that really matters.‖ Neary ‘92 — with firms more often resigned audience, adding that Lionel Pincus always to being minority investors in deals for 20 or During his talk, which was sponsored by the believed that ―a day in 30 percent of a company. And even getting Heizer Center for Private Equity and Venture is a bad day.‖ that done could take two or three years, he Capital, Neary traced his professional career, Nevertheless, the Kellogg alum said that his added. telling students that he intended to leave bank- firm is the leading private equity investor in ing after the 1987 stock market crash. ―It was ―We‘re not going to repeat 2006, 2007 any- India today, and one of the biggest in China. By a really miserable time to be a banker,‖ he time soon,‖ said Neary, a managing director at employing a ―very active‖ approach to working said. In fact, he enrolled at Kellogg, planning Warburg Pincus, referring to the record spike with the management of the companies it in- to switch to brand management. He soon dis- in transaction values that resulted in deals vests in, Warburg looks to create businesses covered that he was not cut out for marketing totaling more than $1.3 trillion for that period. that are relatively balanced along three dimen- and ―ran back into the arms of finance.‖ Prior ―Over the next several years, ours is not going sions — technology, services and data. to joining Warburg, he worked as managing to be a growing industry. Most likely we will director at Chase Securities and was part of the Neary predicted that Eastern Europe would contract. Firms that used to hire 12 people will likely continue to emerge as a strong investment now hire four.‖ landscape, although doing so ―in fits and starts,‖ But Neary, a media, technology and telecom- while Russia remains a very difficult environ- munications specialist who joined Warburg in ment to negotiate. 2000, said there are still opportunities for For those Kellogg students looking to succeed those who want to launch a career in alterna- as private equity leaders, Neary advised them to tive investments. They just have to be pre- acquire broad knowledge across disciplines. In pared to look beyond the top 10 elite firms. addition to finance, insights from marketing, With more than 2,000 private equity compa- leveraged finance group at First accounting, strategy and organizational theory nies worldwide and more than 1,000 in the Boston. all play an important part in his daily life as a United States, Neary said candidates have In his remarks, Neary also outlined the invest- senior executive, said Neary. reason for optimism — if they can position ment strategy of his firm, which was founded themselves as formidable experts with deep ―Everything that you guys are doing [in all your in 1966 by Lionel Pincus and Eric Warburg. A classes] matters,‖ he said. Page 11 pioneer in private equity, Warburg has $36 ALUMNI NEWSLETTER

Ways for Alumni to Get Involved Article by Lylan Masterman, KSM 2010 and Emal Dusst, KSM 2010

Many alumni have inquired about how they PEVC Boot Camp series is held during the fessionals, academic leaders, alumni and current can do more to assist Kellogg in its on-going fall quarter and is designed to provide stu- students to discuss trends and issues in the private effort to improve its brand value in PE/VC. dents with an in-depth introduction in the equity and venture capital industry. As such, we have summarized below the field of private equity and venture capital. Conduct Informational Interviews. Current most effective ways to get involved, regard- Training courses focus on the fundamental students might contact alumni to request informa- less of whether you are in the Chicago area or issues associated with the investment process tional interviews – some are by phone while oth- elsewhere. If you are interested in contribut- and are led by a group of volunteers consist- ers are face-to-face. These interviews help facili- ing to Kellogg’s private equity and venture ing of alumni, professors and students with tate student understanding of the private equity or capital students, please email us at pevc- relevant experience. venture capital career path. [email protected]. Attend Alumni / Student Socials. Every Offer Internship Programs. Kellogg offers stu- spring, the PEVC Club hosts an industry Be a Guest Speaker. Throughout the aca- dents the opportunity to gain hands on experience networking night in Chicago. This event demic year, distinguished leaders from the through a variety of internship programs. private equity and venture capital community provides alumni an opportunity to welcome visit Kellogg to lecture on industry topics. the graduating class into the industry and Buyout and Venture Labs – These are for-credit The speakers provide students with insight meet alumni at other firms. experiential learning courses offering students a 10-week internship with a PE or VC firm. Stu- into their fund‘s investment style, industry Join KAPE (Kellogg Alumni in PE). dents typically work 1-2 days per week to experi- focus and recent transactions. In addition to KAPE is an external alumni organization ence the day-to-day activities of a local fund, al- informing students about recent market formed to strengthen the relationships among lowing them to assist with industry analysis, deal trends, guest speakers often provide career- Kellogg alumni who are active in the private selection, due diligence and investment efforts. related advice. equity industry. It also serves to strengthen Host a Trek. Each year students participate the link between alumni engaged in the pri- Part-time/Summer Intern – Throughout the in educational treks organized by the club to vate equity industry and the school in a way school year and during the summer, firms in the meet with private equity and venture capital that is relevant and compelling to private Chicago area and across the country hire Kellogg firms and learn about different types of prin- equity professionals. To learn more about students to assist with work and gain valuable cipal investing. The goal of the treks is for KAPE and to sign-up for membership, please industry knowledge. These internships can be students to get an understanding of the visit: http://alumni.kellogg. northwestern.edu/ structured informally where students take on pro- trends, challenges and opportunities in pri- KAPE/. bono projects throughout the year or you can structure a paid, summer program. vate equity and venture capital directly from Participate in the Annual PEVC Confer- the firms. ence. The PEVC Club organizes an annual Lead a PEVC Boot Camp Course. The conference that brings together industry pro-

Your thoughts?

Would you like to get more involved with Kellogg‘s private equity and venture capital students? Do you feel that we are not reaching out to you in the right way? If so, please contact us at pevc- [email protected]. We greatly value your involvement and feedback.

Thank You,

The Private Equity and Venture Capital Club Kathy Lai, Co-Chair Jason Robinson, Venture Capital Director Patrick Nally, Co-Chair Lylan Masterman, Career Director Ryan Anthony, Buyouts Director Kenny Shum, Career Director Jonathan Gaunt, Buyouts Director Emal Dusst, Alumni Director Soumitra Mishra, Venture Capital Director Adam Hentze, Heizer Center Director

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