Spotlight on Telecommunications
It was a lucky choice that Michael Small, '81, targeted the fast-growing telecommunications industry following his graduation from Booth in 1981. He joined the rural telephone provider Centel that was looking to expand into new telecom services because he thought he could make a difference at a small company. Six years later—at age 29—he was chief financial officer, taking Centel's cable television subsidiary public in 1987. Now, 30 years since joining the industry, he is still on the cutting edge of telecom technology, this time as CEO of Gogo Inc., the leading provider of in-flight internet connectivity.
"The intellectual rigor of the Booth classwork gave me the confidence I needed to operate in a C-suite position," Small said in an interview, before speaking to a regional meeting of the Booth CFO Advisory Group at Gleacher Center in early October.
When Small enrolled at Booth, his business experience was limited to working with his father at the family's fast-food fried-chicken restaurant in the Hartford, Connecticut, area, where he grew up. At Booth, he said, "I learned to trade in truth and intellectual honesty. It's the power of ideas, not power of the position."
Small went on from Centel to serve as executive vice president and chief financial officer of cellular provider 360 Degrees Communications Co. and then as CEO of regional telecom service provider Centennial Communications Corp. Gogo was "love at first sight," he said of joining the Itasca, Illinois, company in 2010 as president and CEO. Gogo was founded in 1991 by Texas entrepreneur Jimmy Ray, who teamed with cellular providers to offer phone service to business jets. Small led an expansion to commercial airliners. Revenues grew to $328 million in 2013, with sales to commercial airlines comprising 60 percent of that figure. That compares to 2009 revenue of $37 million, when the commercial side accounted for $10 million.
Under his leadership, Small took Gogo public in 2013, raising $187 million in the initial public offering. In addition, the company raised $600 million of private equity and about $300 million of debt.
Gogo's target market in the United States is business jets and commercial jets above 60 seats, Small said. US business growth will continue, but the bigger market is in international aviation, according to Small. Gogo has 12 domestic and international commercial airline partners, supplying a total of 9,000 out of more than 40,000 business and commercial planes globally, whether with broadband service (4,000-plus aircraft) or a narrower bandwidth (5,000-plus), he said.
United Airlines uses Gogo's technology on its flights from New York's JFK airport to Los Angeles and San Francisco, two of the carrier's highest-traveled routes, said Jim Compton, vice chairman and chief revenue officer at United. "It's an important product of ours," he said. "Connectivity becomes more important the longer the length of haul." In October, United announced it will install Gogo on another 200 regional jets.
Gogo's "air-to-ground" technology uses cell towers to connect planes, but now the company is starting to use satellites to equip international commercial aircraft. It's also pushing for greater connection speeds. Initial bandwidth was 3MB per second, which was faster than anything else at the time. Gogo expects to increase that to 100MB per second, which Small said "will still be not fast enough for some, but is an amazing 30-fold improvement from launch."—Debbie Carlson
spotlight on Energy
A Power Play in Latin America
What would spur clean energy financier Julie McLaughlin, '13 (XP-82), to leave a successful job at a high point in her career? A keen sense for opportunity, refined at Booth
Julie McLaughlin, '13 (XP-82), hit a career high point in June, when she was named one of the top 10 energy financiers in New York by the trade publication Breaking Energy.
She had secured funding for projects ranging from a five-megawatt hydroplant in southern Chile to a 110-megawatt plant in Indonesia. Her network of industry contacts spanned the globe and she spoke often at industry conferences.
So why would she leave the corporate world to embark on a path less traveled? "My father always says, 'When things are going well is when you need to be the most paranoid and Booth gave me the confidence to take the risk,'" McLaughlin said during an interview from her office in the Tribeca neighborhood of Manhattan.
In June, McLaughlin struck out on her own as a freelance clean energy developer and financier, fast-tracking investments toward energy projects that she believes are overlooked gems. She senses opportunity in Latin America, a region she fell in love with a decade earlier as a Peace Corps volunteer.
"The timing in Mexico is fantastic," she explained. "Electricity prices are high for a lot of customers so you have the possibility of implementing solar projects without subsidies." Add to that the proliferation of manufacturing plants, and the future of solar energy looks bright. She and her business partner, the engineering heavyweight, The Vertex Companies, are raising $600 million to build a portfolio of solar projects that could generate 350 megawatts of energy and deliver returns within three years.
All of which makes for a promising first slide in an investor presentation. The devil lurks in the details. "If you don't know [a data point] within a five or 10 percent margin of error then you can turn an entire project on its head," McLaughlin said.
A number of dynamics can torpedo a seemingly sound solar investment in Latin America, including microclimates, local regulations, taxes, subsidies, and even topography. Chile's terrain, for instance, divides the nation's electric grid into two parts, one of which commands higher rates than the other, a crucial bit of information for a project's bottom line.
Fortunately, McLaughlin has a wealth of regional experience. "She's networked around the highest levels of Mexican business communities and the government," said James Bowen, McLaughlin's Mexican-based business partner at Vertex. "We wouldn't be able to do this project without her."
Her deep well of experience in the region began more than a decade earlier with her Peace Corps assignment in a rural village in Nicaragua. Roads were impassable during heavy rains. Water pipes ran dry for up to six days during the dry season, underscoring the region's lack of infrastructure.
After the Peace Corps, she worked her way through several clean-energy companies, eventually overseeing projects in Southeast Asia for the German utility E.ON. While living in Singapore, she paid a visit to Booth's campus. "I was so set on going to Booth that I didn't apply anywhere else," she said.
She enrolled in the Executive MBA Program Asia in 2011, and began what she describes as, "absolutely one of the most difficult things I've ever done in my life." She logged 80- to 90-hour workweeks and learned the art of the business pitch. "Being in that environment where people are heavily criticizing your idea, and having to respond to it in a calm, neutral, and intelligent manner was a fantastic learning experience," she recalled.
To this day, she looks at every project through the eyes of a busy investor. "I've seen incredible companies or opportunities that are incorrectly communicated and they rarely get investors, even though if you look at the back-up documentation they should be getting investment," she said. "Learning how, what, and when to communicate is very important, and I learned that at Booth."—Dan Kedmey
Killing the Market
The four-year-old equity-focused hedge fund founded by John C. Thompson, '99, is generating outstanding returns
John C. Thompson, '99, was a successful fund manager for Thompson Investment Management, a firm started by his father in Madison, Wisconsin. He grew an equity mutual fund from $5 million to $1.5 billion over 10 years, and boosted a bond fund from $13 million to $3.7 billion. But when he founded Vilas Capital Management in 2010 and started asking people to invest in the fund, which held a number of financial services stocks only a year after the crisis, they "looked at me like I was a serial killer."
Thompson left his father's firm in 2009 to launch the value-based hedge fund. To establish a track record, he has spent the last four years "quietly managing" $5 million for friends and family.
At the end of September, a Morningstar Inc. hedge fund report showed the Vilas Fund had ranked in the top one percent of its category (US Long/Short Equity) with a three-year annualized return net-of-fees of 62.63 percent, beating the market by over 39 percent per year. Only one mutual fund in the Morningstar database did better. In a September 30, 2014, BarclayHedge report, Vilas ranked No. 6 out of 3,224 hedge funds in all categories.
Thompson said his investment philosophy is inspired by his former professor, Robert W. Vishny, Myron S. Scholes Distinguished Service Professor of Finance, whose research found that value outperforms growth. "If you cut the market into tenths or deciles, the cheapest decile on a price-to-book basis outperforms the most expensive decile by something like 10.5 percent a year over rolling five-year periods," Thompson said.
As part of its strategy, Vilas shorts very expensive stocks, something other investors are often loath to do. "Many investment firms aren't willing to suffer through the bad times," Thompson said, "so they often 'closet index' [track a stock index] and investors end up getting index-like returns minus much higher active-management fees."
"This is a fund that does not hesitate to take risk," said Lubos Pastor, Charles P. McQuaid Professor of Finance, who has reviewed the reports on Vilas. "That is a good thing. If I'm paying a nontrivial fee to a manager, I want that manager to take risk. If I don't want him to take risk, I should go with an index fund. Why would anyone pay a fee like this if they didn't want to take calculated risks?"
Among Vilas's positions at the end of 2014: a large holding in Citigroup, one of the top-five credit-card issuers that was trading "extremely inexpensively" in terms of price to book. The fund's biggest short position was Amazon, a stock that that was trading at over 500 times trailing earnings results.
Many traditional investors use backward-looking risk measures such as volatility, which can be misleading, Morningstar analyst Josh Charney wrote in the company's Alternative Investment Advisor newsletter last summer. Instead, Vilas examines valuation and a stock's liquidation value, enabling it to be more forward looking, Charney wrote.
Thompson, who was born in the Chicago suburb of Hinsdale, moved back to the city from Madison to take advantage of the talent pool in finance. Thompson met one of those talented financial professionals, Joe Cortese, '10, at a networking event organized by the firm where Cortese was a senior investment consultant.
The two hit it off and found they shared the Booth MBA. In anticipation of the solid three-year return rankings, Cortese joined Vilas as managing director last year. Investment in the fund has more than doubled in the last year and currently stands at just over $12 million. Thompson and Cortese believe that they are on track to grow it to at least $100 million by the end of 2015 and well over $1 billion by 2018. Cortese said he is in talks with several large institutional investors and his goal is to "take the Vilas message to a wider audience."—Rebecca Rolfes