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Money Masters of their own universe: crack team set to shake up private equity

19:01  15 april  2018
19:01  15 april  2018 Source:   smh.com.au

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Lessons from Private - Equity Masters . Paul Rogers. Tom Holland. Often, the management teams own up to 10% of the total equity in their businesses, through either direct investment or borrowings from the PE firm.

Lessons From Private - Equity Masters . Uploaded by wegr. For instance. the management teams own up to 10% of the total equity in their businesses.

Illustration: Joe Benke© Joe Benke Illustration: Joe Benke

It was early August when Ben Gray, in Los Angeles for a board meeting, sat down for dinner and a glass of wine with his old university pal Sarah Harden at the trendy Wally’s Wine Bar in Beverly Hills.

The pair had a near 30-year history; they had attended Ormond College at Melbourne University together in the early 1990s, been in the same study group at Harvard Business School, and crossed paths in Asia while Gray worked out of Singapore for the global private equity giant TPG. But it had been a while between drinks.

As the duo chatted, Harden – now based in LA as head of Reese Witherspoon’s media company – asked the question on everyone’s lips.

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Two years earlier, Gray had stunned the buyout world by revealing plans to quit TPG, where he had made billions by buying and selling businesses such as the Myer department store chain and Inghams chicken business. Gardening leave almost complete, he had spent recent months assembling a crack team for his own soon-to-be-launched fund.

“I did ask him, “Why would you choose to leave TPG? That must be one of the best gigs in the world,” Harden recalls.

That same line of questioning has no doubt been put to former Macquarie rainmaker Robin Bishop. Bishop quit the millionaires factory in December 2016, ostensibly to spend more time with his young family, then promptly joined Gray’s new venture. At Macquarie, he had been touted as a successor to Nicholas Moore, Australia’s highest paid chief executive of a listed company, with annual pay packets around the $20 million mark. Outside Macquarie, his reputation was such that he is understood to have been offered at a very senior role at Perth conglomerate Wesfarmers.

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11 As a life coach, it is easy for me to help others achieve the same results in their own lives that I have achieved in She was thinking about how to fix things, instead of how to give up . 20 Mastering Yourself. The private equity fund he was running wasn’t going to provide the equity we’d agreed on.

Ben Gray, founding partner of BGH, a new private equity firm.© Suplied Ben Gray, founding partner of BGH, a new private equity firm.

“Ben has always marched to the beat of his own drum,” reckons Harden. “He’s got this quiet confidence. And he’s an optimist.”

Gray’s optimism has paid off big time. Later this month, his fledgling private equity house, BGH, is expected to announce that it has raised more than $2.5 billion – a record cash-call for an Australian-based fund. This makes the newcomer a genuine rival to Pacific Equity Partners, a bastion of the local industry with a 20-year history.

Bishop and Gray refused to be interviewed for this story because they are banned by regulators from speaking to the press until their fundraising has closed. But it is clear their cash-call comes at a critical time for Australia’s small private equity industry, which aims to buy underperforming businesses, turn them around, and sell them five to seven years later for a large profit.

Three of the biggest domestic funds – BGH, PEP and Quadrant – are cashed up like never before (and Archer Capital announced on Friday it is shutting up shop). But competition for deals is fierce, pressure on returns is intense and investor cynicism is high after a lacklustre 2017, when there were several failed private equity tilts at companies including Fairfax Media, publisher of The Sydney Morning Herald and The Age.

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Described by friends as razor sharp, Gray and Bishop will now get a large wad of green matter to go with their grey. A $2.5 billion fund would typically deliver them (along with Simon Harle, the lesser-known “H” in BGH) a multimillion-dollar pay cheque – and that’s before the 15 per cent to 20 per cent they would usually get on any gains in future investments BGH makes.

The Rolling Stones played at David Bonderman's 60th birthday party.© Paul Jeffers The Rolling Stones played at David Bonderman's 60th birthday party.

Gray has seen first-hand how premier private equity houses mint billionaires. His old TPG boss, David Bonderman, worth an estimated $US2.6 billion, famously celebrated his 60th birthday with a Las Vegas party featuring live performances by The Rolling Stones, John Mellencamp and Robin Williams; his 70th party starred Paul McCartney as well as an ostentatious $1 million charity give-away. It must surely have irked Gray then that his pay at TPG was lower than his personal buyout track record warranted, with the profits from his highly successful Australian deals offsetting lemons in other parts of TPG’s Pan-Asian platform.

But those close to Gray and Bishop doubt that greed was a prime motive for striking out on their own. Both are described by friends as understated, family men, even as they enjoy the trappings that come with being two of the most powerful dealmakers in the country, like living at top Melbourne addresses and sending their children to exclusive private schools.

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“With most finance guys, there’s a lot of bravado and a lot of look-at-me,” says Harden. “Ben was never that guy. He just isn’t cut from the same cloth as your typical finance guy.”

Instead Gray and Bishop are more likely to have been driven by the lure of opportunity and autonomy. The dealmaker who looks and acts like a master of the universe often turns out to be a captive – to bosses, to clients, to investors and to the bureaucracy of large organisations. After years of answering to head offices in Fort Worth, Texas and Sydney, the idea of being masters of their own destiny must have appealed to Gray and Bishop.

Then, of course, there’s the small matter of their sizeable professional egos and competitive streaks. Why would they continue to seal major deals on behalf of TPG and Macquarie, when they have the personal brands to do it for themselves? Case in point: although a handful of global private equity firms are named for their founders - think Kohlberg Kravis Roberts, Clayton Dubilier Rice or Hellman & Friedman - no other Australian private equity fund has dared be quite so self-promoting. (Then again, Bishop and Gray may have a point. A recent Duke University study found firms that bore their largest shareholder’s name enjoyed a return on assets that was three percentage points higher than other companies.)

With the capacity to leverage up and spend $6 billion to $8 billion on underperforming companies, Gray and Bishop have told investors they will be targeting deals as small as $300 million or as big as $3 billion – but private equity players believe it is in their nature to hunt whales.

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Masters of their own universe : crack team set to shake up private equity . Sydney Morning Herald 13 Apr 2018. Ben Gray, founding partner of BGH, a new private equity firm Illustration. Joe Benke “He’s got this quiet confidence

Since hawking their smoothies at a jazz festival over a decade ago Now Balon is dipping a toe into the world of private equity , having become an adviser to London-based private equity firm Piper. “A lot of the time, that’s the most important thing: does this great team have the get up and go, the drive

“They don’t strike me as guys who would be interested in buying a $60 million turnover business where you are having to sit down with an individual and make detailed judgments as to whether he’s good enough to be a sales director,” says one. “They are much more comfortable at the big end of town.”

Their new offices, on the 23rd floor of 101 Collins Street, the heart of Melbourne business, would suggest as much. Sub-leased from Macquarie, and eight floors below TPG’s Melbourne offices, BGH’s swanky new digs suggest a determination not to be outclassed or outsized by Gray’s old firm. Although Gray has maintained strong ties to TPG, there is known to be little love lost between him and his successor, TPG’s new Australian head Joel Thickins.

“Private equity is not known for having shrinking violets at the top,” says another. “The danger for Ben and Robin is that they both have massive egos, they are both ferociously intelligent, and they are personal friends. They are smart enough to have talked about what this new venture will mean for their friendship, but you never really know until you are in the trenches together, do you?”

Parallel lives

Ben Gray and Robin Bishop both attended Melbourne University's prestigious Ormond College.© John Lamb Ben Gray and Robin Bishop both attended Melbourne University's prestigious Ormond College.

In a Venn diagram of the lives of Gray and Bishop, there are several major intersections: they both attended Melbourne University’s prestigious Ormond College; they both have connections to Tasmania (Gray, the son of former Premier Robin Gray, was raised there; Bishop’s wife hails from there); they have long-standing marriages that have borne three children apiece; they are both former investment bankers with killer Rollerdexes; they have worked together on deals including the Myer float, the Healthscope acquisition and the Inghams chicken purchase; and they are both outsiders to Melbourne who scaled the city’s dizzying heights to be regarded as business royalty.

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(Bishop sits on the AFL Commission and is chairman of the National Gallery of Victoria’s Business Council; Gray was one of the inaugural presenters at the master of entrepreneurship degree at Melbourne University and is a director of the Australian American Leadership Dialogue.)

Robin Bishop, the 'B' in BGH.© Supplied Robin Bishop, the 'B' in BGH.

But while Bishop climbed the corporate ladder by assiduously identifying, and then diligently targeting, those to whom one ought to be connected, Gray’s approach was less scalpel, more sledgehammer.

“Ben has a reputation for being a bull and being quite discourteous,” says an industry insider.

Several people who have worked closely with Gray on deals confirm that he is a “bulldozer” who “never takes a backward step”, “always gets what he wants”, and is “extremely difficult to work with”.

But how then to explain the decision of Harle, who worked intimately with Gray at TPG for more than a decade, to jump ship with his boss? And how to reconcile these descriptions of Gray with the views of his old university pal Sarah Harden?

“Sure, Ben used to annoy me at business school because he would look at my work and after about 40 seconds, he would say, ‘That’s wrong. You need to do this and this and that’,” she recalls. “But he was always right. And he was never mean-spirited. He’s just razor sharp, he’s got this great, biting sense of humour, he’s cool and he’s laid back.”

Laid back does not appear to be Gray’s default setting. Friends and rivals alike remark on his formidable work ethic. Although Harden acknowledges that as the son of the Premier, Gray’s childhood in Tasmania must have been relatively privileged, she adds, “You never felt like he was this person who had been given it all. He worked his arse off.”

An investment banker, who knows both Gray and Harle well, agrees that they could outwork anyone. “They were the hardest working team on the street,” he says. “And in my experience, there’s a strong correlation between hard work and success.”

Gray’s success at TPG was striking. Private equity firms are guarded about their performance data, but his annualised rate of return on Australian realised investments – including Myer, the hospital group Healthscope and the Inghams Enterprise chicken group – is understood to be between 50 per cent and 60 per cent.

“They showed themselves to be very clever, commercial and innovative,” says an investment banker. “On deals like Myer, they were the only party in the process that did the work to be able to buy both the operating business and the property business, which gave them that huge opportunity in the end.”

Yet his rein at TPG was not all smooth sailing. He copped a public flogging when Myer’s shares hit the boards at a 5 per cent discount to their $4.10 listing in 2009, continuing to head south until they closed at just 37¢ yesterday. Although the float was a personal triumph for Gray, netting TPG a $1.4 billion profit, critics say the buyout’s success had more to do with financial engineering than a business performance turnaround under TPG management. As one commentator noted, “It was clear that they were doing the retail equivalent of blackening the tyres and chucking sawdust into the diff of an old lemon”.

Then there was matter of the Australian Tax Office, which tried unsuccessfully to recoup a $452 million tax bill it alleged TPG owed on the Myer buyout. Although TPG, which transferred the proceeds from the deal to shelf companies in the Luxembourg and Cayman Islands tax havens, argued throughout the Federal Court case that it had "met all of its Australian tax obligations" and "at all times has complied with Australian taxation laws”, others offer a harsher assessment.

“Really it was very poor tax planning and showed a cavalier attitude to local tax regulation,” says one rival. “In a risky business, like private equity, that’s a worrying thing for his investors.”

In the dog-eat-dog world of private equity, it is hardly surprising that rivals are lining up to take pot shots at BGH. Competition for investor funds and acquisitions is fierce, and Bishop and Gray have combined social skills, media savvy and their formidable networks to give investors the impression they are so well connected that the best deals will fly through the doorway of their fancy new offices. The high stakes increase the bitchiness of the game.

“Ben has an exceptional track record, but he’s as much defined by the deals he did as the ones he tried to do and didn’t manage to get done,” says one, pointing to Gray’s failed tilts at the national carrier Qantas, the Nine Network and RAMS, which would have been “unmitigated disasters”.

A former CVC Capital Partners deal guy even jokes around town about how TPG and CVC were “neck-and-neck” in their chase for Myer and the Nine Network. TPG emerged with the department store chain, CVC with the media business. “And that’s why I live in the house that I live in and Ben lives in the house he lives in,” comes the punch line, a reference to the mansion on South Yarra’s sought-after Avoca Street that Gray shares with wife Paulette and their three children.

It would, of course, be farcical to judge Gray on the outcome of deals he never actually did. After all, he also tried in vain to buy the Treasury Wine Estate in 2014 at $5.20-a-share. Should he be given credit for the fact that the stock is now trading at $16.86?

And yet there does appear to be a valid concern about the deal pace that Gray will need to sustain at BGH. As part of TPG’s Pan-Asian fund, he could do a buyout every couple of years and still provide a “decent clip” in terms of the investment deployment rate. At BGH, he will need to do two or three deals per year to justify his hefty management fee. Gray and Bishop have been telling investors they expect to look at about 150 potential deals, take a closer look at 30, and actually seal two deals per year.

“At TPG he could sit back and wait until he found something he really fell in love with,” says a rival. “At BGH, we will get to see how good he is at pulling the trigger a lot more times, a lot more quickly. When he has to do that, are some of his near misses – like Qantas and Nine – going to get hit?”

Another rival agrees: “Firms that amass too much money, too quickly can feel compelled to rush out and pay too high a multiple for companies.”

Nevertheless Gray’s formidable track record has turned BGH into an all-Australian fundraising juggernaut, as pension funds, institutional accounts and wealthy individuals seek to capture a slice of his dazzling returns. Among them are TPG and its traditional investor base, which has been reluctant to sever ties with the former utility player. There are even unconfirmed rumours that Bonderman himself has tipped money in.

BGH, meanwhile, has been highlighting the investment credentials of Bishop and Harle to balance investor fears that they are putting all their nest eggs into Gray’s basket. At Macquarie, Bishop led more than $125 billion of deals – including Wesfarmers’ $16 billion takeover of Coles and more than $40 billion in capital raising assignments – but it is his balance sheet investment experience at Macquarie that BGH has been drawing attention to. Macquarie Capital, which he headed up, is believed to have made roughly a third of its capital from its principal investments, with Bishop personally leading two of its most significant private equity investments, Dyno Nobel and Boart Longyear.

But that hasn’t stopped the critics from questioning Bishop’s ability to parlay his investment banking prowess into private equity success.

“It’s not in a senior investment banker’s skill set to understand how profits are generated - that’s left to the analysts,” snipes one senior private equity executive. “As a senior investment banker, you are paid to sit in a boardroom with good hair and plenty of hair product and tell directors why it’s such a great deal.”

Another industry insider disagrees. “When I first met Robin a dozen years ago, he was very, very senior, particularly for his age. That was because he was able to put together the numbers, the strategy and the people and devise a path forward – and that’s a real skill. When I look at Robin, my view is that he’s far more suited to being a private equity guy than most people in the private equity industry.”

That so, Bishop’s friends say that his path from investment banking to private equity was not predetermined. Of course, over the years, there had been the odd wine here and there, where he and Gray had entertained the thought of their own private equity outfit. But at the time of his departure from Macquarie, Bishop insisted he was retiring to spend time with his three sons, having tired of the weekly 6am flights to Sydney and weekend phone calls.

“He honestly thought he could fill in his time doing pick-up and drop-off and maybe catching the odd afternoon movie, while giving Jess the chance to step up professionally,” says a colleague of his wife, Jess Walpole, who returned to work full-time at Macquarie last year.

But apparently, the Macquarie kingpin wasn’t quite up to the task of stay-at-home dad; Jess complained to colleagues that their sons’ school lunches regularly went unmade. Even so, she was said to be annoyed by Bishop’s decision to join BGH, because of the huge amount of time they had both already devoted to his career.

The problem when there are two big personalities like Bishop and Gray in the room is that everyone else comes to be viewed as a spare wheel. Enter Simon Harle. Despite jointly leading investments in Asciano, Petbarn, Healthscope, Inghams and DTZ, Harle has been overshadowed for years by Gray – to the extent that many of the country’s top private equity players know little about him.

“Of course Ben will be running around and saying to everyone, ‘All the time I was running TPG Australia, he was the number two,” says an industry insider. “He’s just trying to offset the ‘key man’ risk. But I would doubt very much it's a 33 per cent, 33 per cent, 33 per cent split between Gray, Bishop and Harle.”

BGH declined to comment on the compensation split, but a source close to the firm admitted that Gray and Bishop had put more equity into the venture. That said, a banker who knows the trio well warned against underestimating Harle. “I suggest you be careful about Simon,” he says. “He’s less well-known because he has never courted the press, but that doesn’t mean he’s not their equal founding partner.”

“Simon doesn’t talk to anyone,” agrees a friend. “He just works. But the fact that he’s been with Ben for 10 years speaks volumes.”

Beneath Gray, Harle and Bishop, sit seven partners and a dozen juniors, mostly mined from Goldman Sachs, Macquarie, UBS, and JP Morgan. But the firm’s star recruit to date is former Wesfarmers finance director Terry Bowen, BGH’s head of operation, who collected total remuneration of $6.7 million from the conglomerate last year.

With all this raw clout piled into one office, it remains to be seen whether BGH can deliver on its hype.

“The problem for them is how many $1 billion-plus LBOs [leveraged buyouts] are there in Australia?” says one private equity player.

Confident, connected and flush with cash, the trio will no doubt try to ferret them out - and, in the process, reshape corporate Australia as we know it.

Nadal eases past Nishikori to claim record-extending 11th Monte Carlo title .
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