Ludovic Phalippou:
Hello, welcome to Private Equity Laid Bare podcast. My guest today is Vindi Banga, who is a partner at Clayton Dubilier & Rice. And with him, I want to understand what is it that private equity firms bring to the table when they are controlling a business. And I thought it may be most interesting if we think about it with a case study which is basically the COVID crisis, and see what is it that these firms did different, special during the COVID pandemic with a portfolio of companies.

Vindi Banga:
Thank you, Ludo. It's a pleasure to be with you and everybody else today. Why did private equity firms do well during the COVID crisis? Ludo, I think I would like to answer this really from the perspective of my own experience as an operating partner in my firm.

Vindi Banga:
It's hard to speak for the industry. I must say nobody could've anticipated the kind of challenges we have all collectively seen in the business world in the last 12 months. I have to say that all credit to our leadership teams that most of our portfolio companies, and we have about 35, grew earnings in 2020 over the prior year, 2019 and more than half actually achieved their original annual budget.

Vindi Banga:
Now, how did they do this? How did this happen? I think there are a bunch of reasons for that. I think the first and most important thing is that we entered the crisis with what I would describe as a good quality portfolio. We only invest in businesses that are either number one or number two in their chosen area of market segment or opportunity.

Vindi Banga:
Secondly, we typically back strong leadership teams and wherever we feel the leadership, for whatever reason, needs to be strengthened, then we try and do that very early in the investment phase itself. Now, what did these teams actually do through this COVID crisis?

Vindi Banga:
I think the first priority in the first few weeks was to ensure safety and liquidity. Safety for all our employees and customers and consumers, this was paramount. How do you run your factories safely? You had to think very hard about those sorts of things. How do you organize shifts? How do make sure your workers are safe? In terms of retail businesses, wherever they were open, how do you keep your customers as safe as possible? So safety was a very important aspect.

Ludovic Phalippou:
But Vindi, any business did that too, right? So was there something unique to private equity and the ability to keep people safe?

Vindi Banga:
No, I don't think so. I think every responsible business probably did that.

Ludovic Phalippou:
Okay.

Vindi Banga:
Security was another aspect that we looked at very early on. We had to make sure we have enough cash to actually see through the crisis. So we looked at all our companies and said, "Look, can we look through the next 12 to 24 months? Can we make sure we pay the rent, we pay the salaries et cetera?" In some cases, we had to mothball some parts of companies, stop some companies and all of that. So we did that.

Ludovic Phalippou:
Sorry, on this one, again, I'm trying to see what is unique to private equity. So would you say that in a private equity setting, usually, people are more proactive in terms of planning? They are more used to look at cash management than other companies, maybe because they used to operate under a higher leverage and so the cash management is kind of a well-oiled function, which may not be the case in other companies? Or was it again, just normal, like other businesses looked at whether they could pay rent, right?

Vindi Banga:
I think with private equity, I would say one thing, that there's a lot of focus on cash. That is absolutely critical. Every time we make an investment, we are very, very thoughtful about our cash flow, our cash analysis and so on.

Vindi Banga:
There's a very good amount of focus on cash which perhaps exists in the best of public companies, but certainly not in all the public companies that I'm aware of. So the second thing I'd say is within a few months, a couple of months, all the operating skills come into play in private equity. And we move very quickly to take cost reduction. Now, some of this cost reduction is stuff that was temporary. Some of it is more structural and actually will stay right through the crisis, and is giving us much higher operating leverage today.

Vindi Banga:
I think we move very quickly to adopt new technologies, to create efficiencies, either in the supply chain or in terms of customer acquisition, all of that. At the same time, we were very focused on growth. How are we going to restart our businesses when we closed them? How quickly can you get back into gear? How can you innovate to meet the needs of, let's say, COVID?

Vindi Banga:
For example, we had a pizza business which very quickly pivoted into curbside activities. If you can't open your store and you can't have people come in, how can you serve them at the curb? Speed, I think, is really important. And that is one factor which probably distinguishes most private equity firms and certainly, in our firm, I felt that our people moved with extraordinary speed.

Ludovic Phalippou:
And why do you think it is that other businesses do not have this kind of sense of urgency or speed of execution? Because how you speak now, it sounds to me just like as normal management, like proper management, what management should be. And so I'm perhaps more puzzled by the fact that the other people didn't do that, right? Or non-private equity didn't do that. What do you think?

Vindi Banga:
I think, Ludo, one of the things that I've seen is that in private equity, when you make an investment, you have a defined period of about five or six years in which you have to deliver a significant step change in value creation. So you're very focused on time. There is a lot of focus on speed of action and time.

Vindi Banga:
You can't lose any time because if you lose it, you've lost a big chunk out of that five, six years. So I think certainly speed. I would say private equity firms tend to move with greater speed. A second factor that facilitates that is that either you have one shareholder or a handful of shareholders and therefore, when you want to take swift change action, you can usually align very quickly around the course of action and then focus on implementing.

Ludovic Phalippou:
That's right.

Vindi Banga:
One other thing I'd say that we did at that time, is we began to focus quickly on acquisition opportunities. We had strong balance sheets for most of our companies, we had capital and at a time like this, it's really important to double down and see how you can emerge from the crisis much stronger. And therefore, we [crosstalk 00:07:51] several follow-on investments last year itself.

Ludovic Phalippou:
I was going to bring this up because another advantage that people usually think is unique to private equity is the access to the capital market, access to cash, right? So when there is a crisis like it was in 2008, private equity usually have a lot of lines of credits put on business that they can draw upon in case there is a problem, and here there was a problem.

Ludovic Phalippou:
And they have their own funds they can draw from their limited partners pretty quickly and so they can easily acquire some of the businesses and alike. So would you say that there were some opportunistic acquisitions during the crisis?

Ludovic Phalippou:
You gave the example of your pizza shop. You could've acquired quite a few pizzerias during the crisis because a number of them were struggling hard. But I didn't see that many strategic or opportunistic acquisitions during the crisis of competitors, particularly on businesses but have you seen some?

Vindi Banga:
Well, actually, I'll tell you that, and I'll dimensionalize it this way, prior to the crisis, we were investing about $2 billion a year on average, out of a $10 billion fund. In the last year, we have 12 months from now since March '20, we have invested five and a half billion dollars.

Ludovic Phalippou:
Okay. So you have accelerated your drawdowns pretty quickly.

Vindi Banga:
Really accelerated. And that's because when there is dislocation of the scale that there was in the whole environment, business environment, businesses, come under challenge. And our job is we can actually provide solution capital. As you were saying, people need capital.

Vindi Banga:
We can provide solution capital, but we do more than that because we bring with that solution capital operating capability and operating experience. So I'll give you three different types of examples of new investments that we made in the last 12 months. The first was a set of firms needing liquidity, right? So we own a leading furniture retailer in France called BUT. There was another furniture retailer-

Ludovic Phalippou:
Good luck with that one.

Vindi Banga:
... Where it's-

Ludovic Phalippou:
I know them well. I know them very well. I bought stuff there.

Vindi Banga:
... Oh, really? Well, good. I'm glad with that. Now, there's another furniture retailer in France, Conforama, which part of the Steinhoff group. And they were in-

Ludovic Phalippou:
I don't understand why they were not merged together, these two guys. But yeah.

Vindi Banga:
... But there we are. So we stepped in. This business was going into administration and we actually acquired Conforama, we know the industry well. We see an opportunity not just to please our capital but actually an opportunity to improve its operating margin, in particular, through improving the supply chain. So that's one example.

Ludovic Phalippou:
Well, I may take you on this one to do a special session on BUT and Conforama because I would be very, very curious to see how they could compete ever against IKEA. That would be... We would need a special session on that one.

Vindi Banga:
I'm happy to do that, actually. I find that BUT is a fascinating company and it's doing very well actually in the period that we've been associated with it. I can give you another example. There was a food service business in Florida which was facing a liquidity challenge during the first lockdown.

Vindi Banga:
They had high leverage, they had liquidity issues. We understand the food service industry very well, we've invested in it for years. So we knew the industry is going to come back and therefore, we were able to invest with a convertible preferred security and sure enough, the business is doing very well right now.

Vindi Banga:
So solving the liquidity question for companies was one source of opportunity. Another source was companies looking for transformational growth and looking for either capital or partners to help them. And here again, I can give you a couple of examples, we invested in a pharmaceutical services platform called Huntsworth. This is a company that helps commercialize new drugs and we were able to inject capital but actually add growth funds and help it to grow faster.

Vindi Banga:
Radio Systems is another business in the pet care product business in the US and again, they were doing very well but what we've been able to do is to give them fresh capital and fresh growth avenues. So I think that's the second area which is: companies looking for transformational growth.

Vindi Banga:
The third source of investment opportunity in the last 12 months has been carve-outs. A lot of companies, global businesses have had to reprioritize their portfolios and diverse their non-core operations. In the UK, private equity firms have completed more than 10 billion of carve-out transactions last year. And that is up from less than a billion in the previous year.

Vindi Banga:
So you can see that a lot of companies are trying to churn their portfolios. One example, for instance, in the UK that we acquired was a business called Wolseley, which is a plumbing and heating distribution business which was carved out of Ferguson. So there were these three sources of opportunity for us: to deploy additional capital, needs of liquidity, looking out for transformational growth and carve-outs. You're on mute, Ludo.

Ludovic Phalippou:
So I just have a question from Sanjay, who was asking where were the focus sectors and geographies. And Sanjay was emailing us from Mumbai. We have two other questions: one from Ned in Oxford which is a bit difficult, I think the answer will be, "We don't know." But the question was: do we have any proof yet that private equity-owned companies have performed better than others during this COVID crisis?

Ludovic Phalippou:
I think in terms of academic research, we just barely got some answers about how they did during the 2008 crisis. So I think you would have to wait another 10 years to have an answer to your question, Ned. But maybe, Vindi, do you have something about this? You have observed earlier portfolio but-

Vindi Banga:
Well, I have observed our portfolio and as I said, right at the beginning, that our portfolio has performed remarkably well through this crisis in a very agile manner. But I'm aware that there are several studies that have actually shown that at times of distress, private equity firms tend to do better than public market firms.

Vindi Banga:
And I think there is good reason for it as we were discussing, at times of stress like this, you need agility. Agility is very important, speed of action. And I do believe that private equity firms have an inherent advantage in terms of being able to move very, very fast. And that's because they either have only a single or a very small group of shareholders.

Vindi Banga:
Typically, those shareholders tend to be very close to the company. They're very engaged with the company. They tend to know the strategy of the business and the operations of the business very well. And therefore, they're able to quickly align with management and take swifter action.

Ludovic Phalippou:
... Yeah. So we'll talk in a sec about the management. Just to bring up the academic study that looked at the 2008 crisis, the most evidence we have is by Josh Lerner and his co-authors, and they found that indeed it looks like they fared better, the private equity-owned companies, especially in 2009, 2010 mainly because of the access to capital of private equity that they then could do some strategic acquisitions and the like.

Ludovic Phalippou:
I saw as well that I always try to avoid jargon, not specified. So somebody, [Ling Di Ng 00:16:00] is asking us to specify what the carve-out is. It simply means that when you have a company that has different divisions, they are selling one division away to private equities. So they are carving out one of their divisions. So it's as if Oxford University was carving out the business school and we will become independent and fly with our own wings under protection of [crosstalk 00:16:21].

Vindi Banga:
Ludo, I might just add one thing. I think I haven't seen the study you mentioned but I can understand that. I do believe also that I've seen another study and this was McKenzie which basically shows that in recession era, vintages, those firms that have deep operating skills tend to do better. And again, one would understand why that would be the case.

Ludovic Phalippou:
Yeah. There was another question from [Savina 00:16:52] which brings me to the management that you just mentioned. She's asking about to talk about the change in management in private equity-owned firms. So again, there are some studies there showing that it's not that often that they change management but they change it quite often.

Ludovic Phalippou:
And it's usually at the beginning. It's not so much during the life... It's pretty rare that they fire management. It's like they acquire a company and I think it's one time in three, then they just change the management at the inception, and usually stick to the management team. Any experience you want to share on changing the management and the role of management?

Vindi Banga:
Sure. Look, I think actually, that's probably the most important decision that you have to make, the team that you have on the playing field. And that's a very important part of our diligence exercise. And as I said right in the beginning, we prefer to back really strong management teams.

Vindi Banga:
Now where that is not the case, then it's really important to try and put in the team as quickly as possible because as we said, we have a defined whole period of five or six years. And you don't want to lose time with a team that you're not particularly confident of.

Vindi Banga:
So that's a very important priority. I think one of the things that I would probably, here, differentiate again with public companies, in public companies, you tend to appoint the leader and then the leader tends to appoint everybody else. I think in the private equity business, you need to get the whole football team on the playing field on day zero, the day you [crosstalk 00:18:23].

Ludovic Phalippou:
That makes a big difference. I've noticed that, yeah.

Vindi Banga:
A big difference. And therefore, we would actually support our leadership in quickly filling the gaps. Our operating partners have wide networks in different industries and we want to make sure that the whole field is covered with top talent as quickly as possible.

Vindi Banga:
Now you asked about change of management during the investment phase as well apart from the start. That does happen and there are some cases where we need to do that. You know what tends to be is sometimes, the job to be done or the focus changes during the period of an investment.

Vindi Banga:
Let me give you an example: there may be some people who are extraordinarily good managers in the first phase when the company is private. But when you're preparing a company, for instance, to exit into public markets, you need a certain repertoire of skills and you may need a different manager or leader at that point in time. And if that is the case, then we would make the change.

Ludovic Phalippou:
Yeah. Actually, something that has always puzzled me is this narrative and you use these words, and when I read prospectuses from private equity, they often say that, "We invest only in the number one, number two in this sector in the best management teams," and so on.

Ludovic Phalippou:
Actually, the opposite would be better because if you invest only in the number one, number two in the best management team, there is not much value you can add, there is not much you can bring because these companies are doing fine.

Ludovic Phalippou:
So you would pay a pretty high price for them. There is not much margin to improve things. I would have expected that if you have special skills, you buy the [inaudible 00:19:59] and then you make them winners but I never hear the narrative.

Vindi Banga:
Well, I'll tell you one thing, if you buy companies that are typically doing very well, it's unlikely that you can buy them at an affordable price. And therefore, your ingoing valuation will be very, very high. And I think that when we invest, we actually try to invest in businesses which we can bring something too as operators.

Vindi Banga:
In fact, more than two thirds of our investments have been done in partnership, either with a seller or a buyer and that's because they realize that actually, we bring something unique to that particular business at that point in time. Throughout our last couple of funds, our investment ingoing valuations have been [inaudible 00:20:48] less than the industry for that reason.

Ludovic Phalippou:
Yeah. We are getting a question on a slightly different topic. There are two questions of that type. I'm going to take the one from [Marina 00:21:00] in Singapore, Marina [Juan 00:21:01]. She's asking basically where to invest. So that's the question for you. I would have no clue. Any particular vertical markets that would be interesting targets, post the pandemic and also, will COVID change the value creation methodology?

Vindi Banga:
So that's a really good question. I would start by saying where not to invest. I think it's very simple. You should not try to invest in an area that you don't understand or don't know. And that is why our firm is organized in verticals, we focus on certain vertical areas: we focus on consumer and retail, we focus on certain aspects of industrials, we focus on the healthcare sector, we focus on certain aspects of business services and we focus on certain aspects of technology services.

Vindi Banga:
And when we see investments outside that space, we are very, very cautious. So I think it's really important not to extend yourself beyond your own understanding and your own knowledge base. Now different PE firms have different focus areas. Some people would feel very comfortable investing in a particular category where others would not.

Vindi Banga:
So pick your spot. I think pick what you know and from our point of view, it's where we have operating partners and operating advisors and teams that really understand that domain.

Ludovic Phalippou:
Okay. We have a question from Cambodia asking about what was the impact on your fundraising efforts and exit strategy?

Vindi Banga:
So actually, it's quite interesting you ask that question. Last year, in the midst of this entire COVID crisis, as I said, we stepped up our investment rate and deployed five and a half billion dollars which is more than double what we do normally prior to that.

Vindi Banga:
But in the same year, we also raised our 11th fund, which was $16 billion. And that fund again, we raised through these sorts of Zoom meetings and so on and so forth. So we were able to raise funds.

Ludovic Phalippou:
This was sort of an innovation. People didn't think they could raise funds via Zoom, right?

Vindi Banga:
You've gone on mute, Ludo. Ludo, you're on mute. Still.

Ludovic Phalippou:
I'm not the one controlling this. So sorry. So yeah. What I hear on the ground, however, is that it's easier for funds like yours to have fundraised on Zoom because people already know you, so they don't need to come and inspect you in a sense, or do too much. Like for first time funds, it's a nightmare to raise via Zoom.

Ludovic Phalippou:
So for you, it was probably a bit easier. But nonetheless, it seems to be... Do you think it's there to change? Because it was a huge tax on people like you to instead of spending time helping companies, you're flying around the world to meet investors, was pretty taxing, right?

Vindi Banga:
It's part of the job. I think in private equity, you have to invest, you have to deliver a return and by the way, it's only when you deliver a successful return that you can raise your next fund. So it's part of the cycle and we are used to doing that. All of us, of course, we have a specialist investor relations team and group that does that.

Vindi Banga:
But all of us chip in and help where we can and are deployed to meet our investors, to explain our investing philosophy, to tell them about what we are doing and hopefully, raise more money. So we are all part of that effort. Can this work through Zoom? Look, I think that's a much broader question.

Vindi Banga:
It's not just about raising funds. I think that what we've learnt through this last 12-month period is that we can do a lot more on this kind of technology than we had ever imagined. Just think about what we're doing right now. Typically, this would've been in a classroom, only people limited there and today, we're able to talk, sitting in our home offices to people all over the world.

Ludovic Phalippou:
And actually, I was going to bring this up because most of the questions are coming from Asia.

Vindi Banga:
Yeah, it's hugely interesting. Now does that mean that we can continue to work like this only? And of course, the answer to that is no. Because you do lose certain things, for example, I think you lose in terms of building a longstanding culture and meeting new people and so on.

Vindi Banga:
There are some things that only actually happen when you meet in person. Today, you chair a board meeting like this on Zoom and that's fine, it works very well, we're all used to now doing it but then you click it off and it's gone. And in a normal board meeting, you will actually sit around outside and you'd probably have some fresh thoughts and those conversations are as important as what happens in the board meeting.

Vindi Banga:
So I think that the world will come back to some happy mean in-between. I think that we'll have to come back. We won't go back to what we used to do earlier in terms of the level of travel, but we'll find a new mean.

Ludovic Phalippou:
Yeah. So we have questions asking about whether you invest in Nigeria, there is a question by Subhadra from Chennai on how private equity performed in emerging markets versus developed markets. Does your firm have experience with that? Do you invest also in emerging markets, especially like Africa or Asia?

Vindi Banga:
No, our firm is principally focused... our global dollar fund is focused on investments which are centered either in the US or in Europe. Now bear in mind, that those are global companies so they may have operations all over the world including Asia and Africa.

Vindi Banga:
But we don't invest directly through CD&R in either of those geographies. We do have a partnership with a fund in India called Kedaara, which invests in Indian companies. And that has also done extremely well. It's just raising its third fund. We've been a partner of theirs for about eight years, and I think that too has weathered the COVID crisis extremely well.

Ludovic Phalippou:
Okay. And there is [Ario 00:27:41], he's asking: given how crazy the valuations are on the stock markets, why aren't you just basically selling everything in an IPO and running away?

Vindi Banga:
Well, the point is this, our job is not to sell and run away; our job is to actually create sustainable value creation. And I think when we take on an investment, that takes time. We have a certain thesis and we need time to develop and deploy that thesis, whether it be in terms of growth or in terms of cost reduction or whatever.

Vindi Banga:
So now, is it a good time to exit certain investments? Yes, of course. And I'm sure everybody, and we will also try and take advantage of the public markets to do so. But I think one has to be very clear that you have created enough value inside the company to access the public markets. Public markets are intelligent investors.

Ludovic Phalippou:
Yeah. Thank you. We are about half way. So let me take this opportunity to welcome those who have just joined us to today's Leadership In Extraordinary Times. I seem to have difficulty saying that word. Today's topic is private equity and the contribution to the economy and especially during the COVID crisis.

Ludovic Phalippou:
And I'm Ludovic Phalippou, Professor of Financial Economics at Oxford University, Saïd Business School. And my guest today is Vindi Banga from the Private Equity Firm, Clayton Dubilier & Rice. So I will have to move to the heavy part at one point. We keep on talking about the good part but we'll get there.

Ludovic Phalippou:
I have some questions on ESG and the like, so that will come I think at the end pretty naturally. So how about I take one more question from [Vitia 00:29:37] in Singapore about your thoughts on the competition and interaction between SPACs and private equity firms?

Vindi Banga:
Well, look, we've all watched the raising of so many SPACs. I think we have to wait though and watch to see how successful they are. SPACs basically are trying to offer an easier route into the public markets for businesses. I think we have to wait and watch. It's very early to judge what the real potential of the SPACs will be. A lot of capital has been raised. Right now, very little has been deployed.

Ludovic Phalippou:
So there is a question from Germany by Alexander, who's related I think to what we just talked about. So let's do that one and then we'll move onto the more controversial aspect. So he says, "In times of crisis, you need extreme speed of action," and then he says, "Isn't it your experience that in founders startup companies, you would go faster than if you have an established PE firm finance company with respect to the speed and agility?"

Vindi Banga:
I think the two cases are very different. Yes, of course, founders and startup can be very quick but they also benefit from being supported by the appropriate venture capital firms, because the venture capital firms have the benefit of many, many startups, of having seen many founders, of seeing many situations.

Vindi Banga:
So those firms benefit from those types of partnerships or support from venture capital funds. And yes, they are agile. Of course, they have to be. In fact, most founders and startups, as you all know, pivot through maybe two or three times before they discover a successful direction.

Ludovic Phalippou:
So moving on now to the second aspect of what we wanted to do today, as you may have noticed, private equity firms do not have a particularly splendid public image. And what we've described so far is extraordinary, right? Everybody should love private equity and embrace private equity as a form of ownership.

Ludovic Phalippou:
And yet, that's not quite what we see in the media. In fact, there was a recent Channel 4 program talking about the private equity sector in the UK that was pretty bleak and very negative. And that's quite typical; you open the newspaper, it's usually to turn a negative story. It looks like no one is denying... or maybe some people don't realize enough what you just said. So that is possible that there may not be enough communication about that.

Ludovic Phalippou:
But I think most people agree with everything you've said so far. I think the point of tension is on the leverage aspect. In everything you just described, you describe about helping companies to grow et cetera, and that doesn't generate any controversy. I think the controversy comes from the fact that somehow there is leverage that is added to a lot of debt, that is added to portfolio companies, and if things are going well and you do increase the value of companies, leverage means you will earn a lot more money which I guess people can live with and they are fine with that.

Ludovic Phalippou:
But the flip side of this would be if things don't go well, given the high level of debt, you don't have that much margin for error, and then any error would then just destroy a company and on textbook, in principle, that shouldn't be a big deal. If it's purely financial distress, then the private equity person should just lose the control of the company, someone else is picking it up and if the company is economically viable, they just carry on.

Ludovic Phalippou:
But in practice, we see it's not we see it's not what's happening and the companies may be forced to shut down. There is tons of examples, like Toys "R" Us et cetera, where it looks like the company was maybe viable economically but it is the leverage put on by private equity firms that killed it. And then that means lots of people that already don't earn much money whose situation is financially fragile, that then become in tremendous distress and are kind of a collateral victim of private equity.

Ludovic Phalippou:
And I think this is where the controversy comes from, is that people don't deny anything of what we've just said in the first half, but they have an issue with: why is it you take this leverage bet on this and at the cost of the society picking up the pieces if it doesn't go well and you picking up the reward if it is going well?

Vindi Banga:
Look, I think every company, whether public or private uses leverage. It's a question of judgment as to what is the level of leverage that an individual asset can support. And that's a judgment that public companies make and private companies make.

Vindi Banga:
Every businessman makes that judgment, even a founder. So I think the first point is to be very thoughtful about the amount of leverage you place on an investment and that depends a little bit on the business, the market, the volatility in that industry, the competitive dynamics and the opportunity for growth. So all of those need to be taken into account.

Vindi Banga:
Now, coming to the question of what happens when companies run into difficulty? Look, business does run into difficulty, for sure. Walking away from a company, in my book, it's not an option. It's certainly not an option for CD&R. Why? Well, first of all, you lose your investment.

Vindi Banga:
But that's one issue. The bigger issue is your reputation. And that's what Ludo is talking about. Our reputation is the currency with which we are able to source new deals and that's particularly because more than two thirds of our deals are in partnership with the buyer or the seller. And therefore, actually, where we have business challenges-

Ludovic Phalippou:
What do you mean it's in partnership with the seller? How does that work?

Vindi Banga:
... So let's say there is a company that wants to divest an asset. They could either divest that asset to us in one go. Typically, those tend to be non-core assets, right? And when they're non-core assets, they've often been starved of capital, starved of operating talent, starved of growth and initiatives. So if a company sells a non-core asset like that, let's say it realizes a value of 100.

Vindi Banga:
On the other hand, if they decide to keep a share of that and partner with us and they hand over the operational responsibility to us and exit in a second stage, then typically, they would make two or three times their money. That's been our experience.

Ludovic Phalippou:
Why do you give them that? Because you're doing all the work and you're just giving them this. Is it because then you can buy it for a lower price? And I have never heard of that, actually, and I would also expect you to be the only one to do it. I don't think it's that common.

Vindi Banga:
Well, actually, our history is very much in this. In fact, one of the first deals we did like this, way back, I'm now probably talking 30 years ago, 35 years ago was when we bought Lexmark out of IBM. And at the time, the typewriters and the mainframe computers used to be sold by the same sales force and that didn't make sense.

Vindi Banga:
So we actually stepped in and helped IBM carve out the typewriter division. And we had to stand up the whole division with a separate sales force et cetera. And IBM kept a stake in Lexmark. That's one example of a partnership deal. And in our history, we've probably got, as I said, more than two thirds. Ludo, you asked why do we do it. Why do we do it? Actually, there's a very good reason.

Vindi Banga:
When you do a partnership deal, you firstly are hopefully able to invest at a more attractive price because it's not being sold in an auction, and the seller is thinking much more about, "Hey, I might be able to get 10% more today in an auction, but I might be able to get two or three times my money if I keep 40%, transfer the ownership to this private equity firm which will be focused on that asset, help it grow, help it revive and then we exit together."

Ludovic Phalippou:
Yeah.

Vindi Banga:
So that's one reason. The second reason is that when you're in carve-outs, there's a lot of activity in the carve-out. You have to create a new sales force, you might have to change supply chain arrangements et cetera. And when you do that, if you're in partnership, you can do it in a more coordinated way, otherwise, the risk of transition could be quite high.

Ludovic Phalippou:
Yeah. I have never heard of that approach, actually. Would you say you... And it's making sense that you can then get a lower price and you have all that option. I think, especially, nowadays where everything goes through an auction, it is probably a very good idea. But you seem to be the only firm to do that, right?

Vindi Banga:
Well, I wouldn't say we're the only firm but what I would say is that the vast majority of our transactions come that way. And I believe it's really important and that plays back to what we were saying earlier.

Vindi Banga:
That is why it is so important that we are very thoughtful about our reputation. Our objective, when we invest, is to create sustainable value, and we must ensure that we do that with our partners in particular.

Ludovic Phalippou:
Still on this topic though, Lewis from London was asking, and I thought about asking that earlier actually: how does the interaction between the operating partners and the management team works in a sense, it feels like a bit duplicating, right? So there is a management team, they are supposed to manage and then you have your own operating partners. How then does that work?

Vindi Banga:
Well, Lewis, that's a really good question and I often get asked that. It's actually quite straightforward. Look, our job is not to manage the company. There's a management to do that. Our job is to support the management but first of all, to make sure we have the best management and then support them to really get on with the job.

Vindi Banga:
And we can help them because we have seen many situations like this before, we have looked at different industries, we have looked at different geographies. So we can actually help them see what they may or may not be able to see on their own.

Vindi Banga:
Think about an analogy of a coach and a captain in a sport field. That's it. The coach doesn't play the game. He's not on the field but he's very much there to think strategy, to be a brainstorming partner with the team and to help them become a better team. That's our job.

Ludovic Phalippou:
I see. I like that analogy. If we go back to leverage, what-

Vindi Banga:
Can I just say one other thing?

Ludovic Phalippou:
... Yeah.

Vindi Banga:
Before we leave that topic. We have, today, I would say probably about 40 operating partners or operating advisors in the firm. And most of them... in fact, all of them. Not most. All of them have had very successful careers in whatever they did earlier.

Vindi Banga:
They're at a stage where they actively choose this role to be a coach. They actually don't wish to be a CEO anymore. They've been there, done that, got the T-shirt. And now it's about helping and supporting people, energizing them, helping them achieve.

Ludovic Phalippou:
The main source of controversy about operating partners about the cost and who bears it, right? So there is always this question on should the portfolio company pay for the operating partners, in which case it is effectively the LPs paying for this on top of the management fees they pay to the funds, or should it be the firm paying the operating partners? Any [crosstalk 00:41:44] it does create a conflict of interest, right?

Vindi Banga:
In our firm, the operating partners are part of the firm, CD&R, just like the financial partners.

Ludovic Phalippou:
So you are paying their salary entirely?

Vindi Banga:
Well, we don't draw a salary. We are partners of the firm, that's it. If the firm is successful, you'll be successful. But therefore, we are very much part of the firm.

Ludovic Phalippou:
Okay. So the portfolio companies do not pick up the tabs?

Vindi Banga:
No.

Ludovic Phalippou:
Okay. So then you close that conflict of interest. But do you agree that it's not the case at all of the other firms?

Vindi Banga:
I actually don't know how the other firms particularly work, but I know that's the model in our firm which is that we don't create a burden on the portfolio companies.

Ludovic Phalippou:
Okay. Going back to the leverage, so the controversies that we've seen, especially during the COVID crisis, that these companies that were on private equity have a lot of leverage. A lot of them were retailers that everybody knew et cetera, so they were brands people know and sometimes loved.

Ludovic Phalippou:
And then comes the COVID, and then they are running out of money pretty quickly. And then they turn to the government and say, "Can you help us out?" And then there was this controversy which is if you hadn't put so much debt on them to begin with, you wouldn't need so much bailout from the government. So is it again a case of a famous sentence, "Capitalism for the rich, communism for the poor"? Once you're in trouble, then it's the taxpayer who has to bail you out. Any thoughts on that?

Vindi Banga:
Well, I think that the governments all over the world have been very thoughtful about how to help business through this crisis. And I'm glad that they have actually not followed any criteria on what is the source of ownership. Rather, they have focused on the sustainability of business.

Vindi Banga:
And when you see, for example, many of them have tried to protect employment through either the furlough scheme that was used in the UK or other such employment support schemes all over the world. And those schemes comes with certain formulas, certain norms and I believe every firm, whether it's owned by private equity or by venture capital or by public markets, should actually access that but play by the norms of that scheme and that's what's good.

Ludovic Phalippou:
Yeah. So you say it's good to have this social backup for any businesses but on the upside, when companies are doing well then they hopefully pay taxes so that they can contribute to this social safety net, right?

Vindi Banga:
More than that. I think what happens is companies that do well, and this might be taking us into the area of ESG, but companies that do well, do well for a whole set of reasons. First of all, their customers are happy and their customers are doing well. Their employees have to be happy and satisfied and engaged and are therefore doing well.

Vindi Banga:
So companies that do well, when you create sustainable value, your whole ecosystem does well. Of course, you pay taxes, but your whole ecosystem does well. And when that happens, that's good for society, it's good for everybody.

Ludovic Phalippou:
Okay. So again, do you think it makes a difference in theory when you have too much debt and you cannot pay that debt, in principle, the equity holder is just losing its stake and then we move onto the debt holder and then employment should be unaffected, so there is no need to help the equity holder in case of a downturn?

Ludovic Phalippou:
It happened here in the argument of the [inaudible 00:45:25] was the debt holder is not capable of running a company. But then if it is the case, then it looks like private equity can basically never lose because if there is a downturn, they say, "Look, you need to save employees so bail me out because nobody else can run this company." And if things are going well, then they win. So again-

Vindi Banga:
I think typically, the equity holder has a responsibility of actually finding a pathway through crisis. And that's what I was saying earlier, when crisis happened, the responsibility is to double down and find a solution.

Vindi Banga:
Now in finding a solution, it is possible that you might want to involve other stakeholders beyond yourself. It could be the debt holders, it could be yourself by putting in more equity. It could be a constellation of these actions that you create and you try to lead a solution out of that crisis. That, I believe, is responsible management.

Ludovic Phalippou:
... Okay. We're getting some questions on taxes. So [Anulica 00:46:30] from London is saying: what happens if companies are not paying taxes? So private equity has not been the only one to be creative to lower the tax bill, others have been as well. But private equity certainly, it's pretty creative when it comes to lowering the tax bill of companies.

Ludovic Phalippou:
And [Harry 00:46:51] is also asking whether you could comment on the potential tax change treatment of carried interest and then maybe also the Biden changes and all the countries trying to make company pay taxes. So right now, it looks like a lot of companies have been avoiding the tax.

Vindi Banga:
Look, I think that again, it doesn't matter whether you're in private ownership or public market ownership, you have to pay the taxes according to the law of the land. Every country has its tax laws, then there are international tax laws and you have to operate under that regime. And that's just fair. It doesn't matter what kind of ownership you have.

Vindi Banga:
Now, having said that, what do I think about what will happen? I honestly don't know. I don't know what will happen to the taxation of carried interest or not. My view is whatever the taxes are, they have to be paid. Today we pay all kinds of taxes. And you have to do business under that environment.

Ludovic Phalippou:
But it's not quite that but we are pretty much in a world, where if you're wealthy enough, you basically decide whether you want to pay taxes or not. If you're a big company, you basically decide whether you want to pay taxes or not because you can have an aggressive tax avoidance strategy like a Starbucks and companies like that, and effectively not paying any taxes.

Ludovic Phalippou:
It's almost a choice of companies to decide whether they're going to pay taxes or not. We see big, large companies that says, "I decide not to pay taxes by using the laws and I'm within the laws and then it turns out I don't pay taxes." And we see some big companies saying, "I could avoid taxes but because I don't want that, vis-à-vis my stakeholders and my responsibility, vis-à-vis society, I decided to go ahead and pay taxes at the higher rate than I could."

Vindi Banga:
Well, look, I think this again takes us back into the area of ESG. And I think if you are interested in being a sustainable business, you have to follow not just the letter of the law, but the spirit of the law. And I think that's what responsible companies do.

Ludovic Phalippou:
Do you see taxes being discussed much in ESG? To me, so far, ESG often discusses the fraction of women you have in a company, what do you do vis-à-vis maybe the environment and the carbon footprint at best. That's pretty much it. That's most of the topics. I rarely see much discussion in ESG of companies saying, "We've decided to pay more taxes than we could have had because we think it's our responsibility to pay taxes." I've never seen that statement but maybe I missed it.

Vindi Banga:
I think that in the area of G under Governance, certainly, appropriate taxation responsibility is an important aspect of companies. And they must have a policy as to how they actually operate in different tax regimes. You are right in pointing out that international companies, in particular, have to think very carefully about what is a responsible tax activity.

Ludovic Phalippou:
Because you don't have your shareholders, right? So if you decide to pay on all taxes, your shareholders are getting less. So Anulica was asking again in her question saying... Well, she was stating in her question, I think rightfully, that PE backed portfolio companies seem to engage significantly more in non-conforming tax planning and have lower marginal tax rates than other private firms.

Vindi Banga:
I don't know. As I said, I can't speak for the industry. I can just talk about our firm. And I would tell you that we are of course very thoughtful, but we're extremely responsible about how we approach the subject of taxation for all our companies.

Ludovic Phalippou:
Okay. And so if there is a change on carried interest tax, you don't think it will lead some private equity professionals to move houses to other places and things like that? It's a-

Vindi Banga:
Look, you can't change your business model or your life just because of taxes. How do you do that? You can't do that. But I think, at a different level, and again, this is taking us into the space of ESG, I think that one has to realize that as a company, you don't only have a shareholder; you have multiple stakeholders.

Vindi Banga:
The best companies in history have been companies that have always actually taken care of all their stakeholders, their customers, their employees, their supply chain, their extended supply chain, the regulators. Everybody.

Vindi Banga:
Those are the companies that actually command the highest multiples in any industry they operate in. Now, there is a reason for that and that is why ESG is good for business. ESG is not something that you have to do. ESG is something that you must do. And you must do it because it's good for business, your employees want it, your consumers want it, your customers want it, your governments want it. So this is non-negotiable in my view.

Ludovic Phalippou:
... Yeah. I'm skeptical about the win-win doctrine but that will be for another podcast. I'm happy people are more responsible. I'm not quite sure it's as simple as saying if I am responsible, then I will do well. But I think people need to go beyond that and be much more proactive in their responsibility.

Ludovic Phalippou:
So right now there is some emergencies in India and elsewhere. We see the landscape in the UK on retail is absolutely terrifying. The tax issue is a big deal. We don't collect as much taxes as we used to on businesses. So there is quite a number of things that are red-hot on that space. Talking of which the [crosstalk 00:53:02]. Yeah, go ahead.

Vindi Banga:
You can stay with that. I agree with you and that's the point I meant, actually. I mean that every business person, it doesn't matter which business you're in, which country you're in. You must make sure that your business engages with the society around it in a very responsible way and helps when there's a problem.

Vindi Banga:
Similarly, you as an individual, if you're fortunate today to have more than many others, then it's up to us to actually see how we can help and we can help in kind, we can help in money, we can help personally. I think it's really important for business to be engaged with society and certainly, again, if I come back to all the firms that I've been associated with, if I think back to my corporate career, Unilever was deeply involved with society.

Vindi Banga:
It was the first employer to employ women in the UK. The first. And that was because the women were fundamentally more productive on the shop floor, and therein lies the kernel of, let's say, the responsibility doctrine in Unilever.

Vindi Banga:
In CD&R, we have the same philosophy. As a firm, we do what we can, as a private equity firm and through our portfolio companies we try to be as responsible as we can.

Ludovic Phalippou:
[crosstalk 00:54:23] climate and justice social and racial. Is there anything that you have observed over the last 12 months when these issues have been coming even more center place than they used to be? Any concrete actions that were taken at your firm or around you on these issues?

Vindi Banga:
We've been focused on these topics many years earlier. We have not adopted ESG today. We've been actually on this journey for a very long period of time. To your specific points, as a firm, we of course, are very focused on inclusion, diversity. We are trying to get in people from different backgrounds and try to actually assimilate them in the firm.

Vindi Banga:
But we can do much more through our portfolio companies. Today, our portfolio companies employ 225,000 people and have much greater impact. So we're actually focused on how our portfolio companies can have a very responsible ESG focus. What do we do? So when we actually diligence the firms that we're going to invest in, we look at them through the ESG lens. And as soon as we've invested, within the first hundred days, we put together a very relevant ESG program for that company.

Vindi Banga:
As you might imagine, every company could have different focuses. Two items are always common: I would say carbon and diversity. These are common to all companies. But on other aspects, different companies choose other areas that might be relevant, and then we actually help them through the period of their investment with us to improve on the ESG plan.

Vindi Banga:
We think that ESG initiatives are just like growth or cost, it adds value. And I come back to what I said earlier, at the end of our ownership period, if we can increase the ESG embedded value in the company that we have invested in, I think we will command a better multiple on our-

Ludovic Phalippou:
[crosstalk 00:56:37] Laid Bare. Don't forget to subscribe. Congratulations on your acquisition of one more piece of knowledge. Don't forget to rate it if you liked it. Ciao ciao. (Silence).