2007 Distinguished Alumni Awards
William Conway Jr., ’74
Image by Matthew Gilson
William Conway Jr., ’74, became one of First Chicago’s youngest VPs, negotiated some of MCI’s biggest deals, and then launched one of the world’s largest private equity firms that now has more than $54.5 billion under management.
For Chicago Booth Magazine, professor Steven Kaplan queried Conway about the liquidity in the market, how Carlyle adds value to its investments, and whether private equity will go public.
William Conway Jr. had plenty of experience before he and four partners launched their private equity firm, The Carlyle Group, in 1987. He held several posts at the First National Bank of Chicago, starting as a First Scholar trainee, then becoming a loan officer, vice president of bank operations, and finally a loan group head. In 1981, he joined MCI Communications as vice president and treasurer—again, the youngest member of the management team—negotiating some of MCI’s most significant acquisitions and divestitures. When Carlyle opened, “its first attempt at a buyout turned into a painful learning experience,” said BusinessWeek. Its fortunes turned as Carlyle invested in the defense industry.
Thanks to diversification, Carlyle has become one of the world’s largest private equity firms, with more than $54.5 billion under management, an achievement that has earned Conway the 2007 Distinguished Entrepreneurial Alumni Award. He recently fielded questions from Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance, an expert who is often quoted in the media on private equity deals.
Kaplan: You have been quoted as being worried about the frothiness of the current private equity market. Does that mean private equity returns will turn out to be disappointing?
Conway: I’ve been quoted mainly on the amount of liquidity in the system, which has led to higher and higher prices being paid for buyouts. I think it’s excessive liquidity in the system and I don’t think it’ll continue forever. Having said that, does that mean private equity returns will turn out to be disappointing? I think they will be less in the future than they were in the past. I think sophisticated investors recognize that returns on all asset classes—not just private equity but real estate and high-yield bonds and venture capital—have been going down. Whether they’re disappointing is a function of what people hope for.
Kaplan: Private equity firms claim they add value to their companies. Can you give an example or two where Carlyle has added such value to its investments?
Conway: Sure. We bought Hertz about two years ago from Ford Motor Company. It turned out to be a fantastic investment for the three financial sponsors. Each of us may make two-and-a-half times our money. Carlyle had about $800 million invested in the transaction.
To add value, we invested a lot more capital into a new fleet for Hertz’s equipment rental business. With the car rental side of the business, we moved away from the agreement to turn cars back over to Ford and GM for a set price because of the relatively liquid market for used cars. We brought in the CEO of a New York Stock Exchange company, and he brought a fresh perspective to the business and its costs. Those things led to a pretty dramatic increase in the value.
The other is a company we bought from AstraZeneca called AZ Electronic Materials, which makes chemicals for the semiconductor business. It’s number one in the world in what it does, although most people wouldn’t have heard of it. Before we bought that company, we had our teams in Japan, Asia, America, and Europe working together to perform the due diligence because the semiconductor business is global. We made nine times our money on the company in about three years.
A third example is Dunkin’ Donuts. We’ve worked hard with the management to internationalize the brand. We helped them line up 100 additional units in Taiwan. Frankly there’s a lot of opportunity at home, as Dunkin’ Donuts is very strong on the East Coast of the United States and not nearly as strong throughout the rest of the country. We think there’s lots of opportunity domestically. Most of the money is made on coffee, not on donuts.
Kaplan: Where do you see private equity in five years?
Conway: I think it’s going to be less private. Fortress has already gone public; Blackstone is trying to and highly likely to be public. And a lot of these firms are going to have made so much money that it’s going to attract a lot of attention in Congress on changing the tax laws or the way the firms are regulated. Private equity will be more transparent, more open.
I don’t know that Carlyle will go public. There are a lot of advantages to being quietly private and doing a good job for your limited partners. That’s what we’ve been doing for about 20 years. I think there will be an enormous amount of money continuing to flow into what we’ll call private equity, whether the underlying asset manager is public or private, because the risk-adjusted returns of private equity exceed those available in most of the other asset classes. Money flows to where it’s going to generate higher and higher returns.
Take the University of Chicago. I’ll bet its funds are invested more in private equity today than they were 10 years ago, and I bet they’ll be invested more in private equity 10 years from now than they are today.
Kaplan: Will there be more or less money in private equity?
Conway: Definitely there’ll be more. In private equity firms like Carlyle, the underlying investors are frequently the pensioners of the State of Illinois or State of California, or General Motors or General Electric, not so much mega-millionaires who are investing in these funds. The indirect beneficiaries of private equity are a lot of people whose pensions are invested with us.
Kaplan: Will there be many more private equity firms that go public, like Blackstone and Fortress?
Conway: I think if Blackstone and Fortress stocks trade well, yes.
Kaplan: You took a circuitous route to private equity. What is the best way for our MBA students to enter the private equity business?
Conway: I’ll tell you, the number of people who want to get into private equity is enormous! I would say the best way is to go to Wall Street and be an associate or analyst in one of the largeinvestment firms. Those firms are equipped to give people good training, a lot of which can be relevant for business, although private equity is different and not all of them are masters of the universe. Still, I look at the number of people we’ve hired at Carlyle, and I’d say more of them take that path than any other.