IVCA Feature: Highlights of the 2017 IVCA Spring Luncheon, Part Two – David Golder, Son of PE Pioneer Stanley Golder, Talks to Pioneer Partner Bryan Cressey

IVCA Feature: Highlights of the 2017 IVCA Spring Luncheon, Part Two – David Golder, Son of PE Pioneer Stanley Golder, Talks to Pioneer Partner Bryan Cressey

May 24, 2017

The mahogany halls of the Chicago Club, in the traditional Burnham Room, was the setting for the annual Spring Illinois Venture Capital Association (IVCA) Luncheon, a centerpiece for the year which took place on May 16th, 2017. The event was sponsored by accounting/advisory firm Baker Tilly (their 10th year) and the legal firm Ropes & Gray (their 8th year). The luncheon program featured a panel discussion on “Will Carried Interest Get Carried Away?: How the Trump Administration Could Affect Venture Capital and Private Equity.” (click on link at the end of the article for that overview). And this was followed by a talk entitled “The Son of ‘G’ Interviews the ‘C’” – which was a celebratory back-and-forth between David Golder, the son of Private Equity pioneer Stanley Golder, and one of Golder’s pioneer partners, Bryan Cressey.
 
Stanley C. Golder is considered by some to be the “Father of Private Equity” in Illinois, having begun the program at First Chicago Corp. in the 1970s. In 1980, he co-founded the PE firm Golder, Thoma and Co. with Carl Thoma. In 1984, they recruited Bryan Cressey from First Chicago to create Golder Thoma Cressey, and with the promotion of now Governor Bruce Rauner to partner, became GTCR around the same time. Golder passed away in 2000, but GTCR still still lives on.
 
David Golder is Stanley’s son, Managing Partner of Golder Investment Management LLC, and VP and Treasurer of the Golder Family Foundation. Bryan Cressey went on to co-found Thoma Cressey in 1998, and in 2008 co-founded a third firm, Cressey and Company. He is acknowledged as a nationwide expert on the healthcare industry and the surrounding issues associated with it.
 
David Golder and Bryan Cressey, related by business, family and history, got together for a compelling give and take at the 2017 IVCA Spring Luncheon.
 
THE SON OF ‘G’ INTERVIEWS THE ‘C’: David Golder Interviews Private Equity Pioneer Bryan Cressey
 
The Beginning
 
David Golder began the interview by pointing out the ties that his family has with Bryan Cressey, and by bringing up the “tombstone” of the first fund raised by Golder Thoma Cressey.
 
Bryan Cressey remarked, “That $60 million dollar fund in the 1980s tied for the largest fund ever raised, in financial history. And I’d add, looking around this room, that back in those times you could have fit the entire Private Equity and Venture Capital industry of the United States in this space, and not fill it up. The world has changed markedly, and the industry has become a great success. It has been a fast growing part of the American scene, the business scene and the drive towards innovation. The reason is it’s so effective, in both building companies and corporate governance, is because it’s superior to the way things used to be done.”
 
Golder was then interested in the days before independent funds, specifically Cressey’s work at First Chicago.
 
Cressey explained, “I joined First Chicago Venture Group in 1976, which David’s father ran very well. There wasn’t much money, but we could do any type of deal including venture, a leveraged buyout, and growth equity, in any industry that we thought might return our capital, and succeed.
 
Those pioneers, here and on the West and East coasts, were great people. David’s father Stan – when I came to First Chicago – ran that business based on his own values. He was serious about excellence, he loved his family, and that reflected in building the team. Work and home life blended together for your father to create a very rich life, which I always admired.”
 
“One more thing you have to know about First Chicago,” he continued. “Our holdings were one tenth of one percent of the overall company’s assets, and we were producing 10 percent of the company’s total income, off of that one tenth of one percent. Your Dad established and led a great business.”
 
Making the Move
 
Golder brought up making the move, from First Chicago to raising their own first fund. Cressey had a simple explanation...
 
“It was an interesting conversation. It was 1980, and it came down to ‘do you want to work for a salary and bonus, or do you want to get upside and Carried Interest?’ It also was about freeing ourselves from the shackles of the bank, and their PR, etc. That was a short conversation, and we did go out and raise our first fund. It was very successful, within an atmosphere of cardboard boxes and rotary phones in our first office. But it was a powerful movement – private capital that actually cared about companies and their growth.”
 
Identification, Succession and Different Names
 
David Golder spoke of the number of companies that came from the beginnings... “There has been a lot of names attached to these funds. There was Golder Thoma, Golder Thoma Cressey and Golder Thoma Cressey Rauner, You and Carl Thoma split off and did Thoma Cressey, and now the current Cressey and Company. Each move had its own succession planning attached to it. Can you tell us how each change took place, and how you learned to take the next step?”
 
Cressey followed up. “There were a couple things going on there. One is strategically, during the 1980s and early ‘90s, it became evident that to continue to be very successful in this business, we needed to specialize more and ultimately become really good at something, because both the capital and competition was growing rapidly.
 
So in the transition from Golder Thoma Cressey Rauner to Thoma Cressey, the younger guys wanted to build really big funds. Carl and I were far enough along to know that we didn’t quite know what we were doing, but we loved working with younger companies where we could make a difference. So we felt we wanted to continue doing that, learn more, and make more of an impact.
 
The next transition was more about specialization. Orlando [Bravo] and Carl had done a great job on the West Coast building a wonderful software practice, and in Chicago we had built a wonderful healthcare practice. But we couldn’t help each other on investing, decisions or operations. It made sense to have two specialized firms, and that’s a trend in the industry, we’re going to see more specialization.”
 
Trends of the Industry
 
Golder inquired about these trends, in regard to specialization, geography, and the impact of registration. “What do you think had the most impact today, in terms of the trends and changes that you are aware of?”
 
“I think trends – and I’ll skip regulations, because it is a waste of money and time – but the key trends that are affecting the industry is the number of competitors, and the amount of money chasing transactions.” Cressey stated. “But what does that mean? I think it means when you’re going forward successfully, and produce better-than-average returns, you’ve got to be the best at something.
 
And if you’re the best at something – whatever it is, because the American economy is pretty big – you can do pretty darn well. So we’ve gotten narrower over the years, from doing almost anything in the 1970s that we felt would make money up to today, where we specialize in healthcare and healthcare software services. By going narrower, you can go way deeper. You can gain ultimate knowledge, and in that way you can really help companies. The next 15 years will be about firms investing their resources in growing revenue and help grow their earnings faster. That takes special knowledge and a special network within the niche that the firm is good at. And that’s going to grow within the necessity and opportunity, and that will be the trend in the next 15 years – just more value creation from the firms.”
 
VC & PE Firms as ‘CEO’
 
Cressey added, “I think our industry, whether it’s Venture or Private Equity, are taking over more of the CEO functions, and leading them, from the investor level. If you think about choosing the management team that reports to the CEO, or evaluating them, that work is done by Private Equity and Venture firms. That’s a necessity, because the firms have much more experience than any single CEO, in seeing how companies develop and how executives are important to that development.
 
Secondly it’s about strategy. When we come into our investments with a strategy – how we’re going to help build this company and create value, and where it ought to go, then we bring in the outside expertise to help us understand it better. We also help to determine how to finance this growth, and network the company into the markets. A whole bunch of what was formerly a CEO role, is now joined in by the investment firm. That’s a very important trend that I think will continue. So there is opportunity, and it will be interesting to see how it develops.
 
In Accordance with Those Trends, How Are Firms Hiring Personnel?
 
Cressey explained “It has changed, both in how firms are composed, plus how and where we recruit. In my experience – and I won’t call it being older, I’m in the halftime of my career right now – when you think about people and what I just talked about, I’ve learned how little I know. The good news it that frees you to hire people that know things. In our firms, we bring in great CEO level operators and thinkers, and all the specialization talents... HR, Management, Financial, Sales & Marketing and Recruiting.
 
Because when you think about each business function, and you ask yourself, ‘Am I pretty good at this?’ The truth is no. So in accordance with that answer, hire someone who is good at the function, and get a well-oiled team together. We’ve added more folks in those function categories in the last several years than young investors. And if I get great people in place, they’re going to make me look smart. That’s my objective, to look smarter than I am.”
 
The Evolution in Relationships with Limited Partners
 
Golder was next curious about Cressey’s history with LPs, “In the forty year span of your experience, how has the relationships with LPs changed?
 
Cressey was quick with this answer, “It has changed remarkably. Going back to the first fund, the sales process was to simply get somebody to see you, and then explain what Venture Capital was. You would explain all the great reasons – which by the way has proved out, and then some – and back then, once you got the money, the LP was fine with waiting it out.
 
Fast forward to today. LPs are very strategic... many of them specialize in industry, stage and size of investment. They have big matrices that they’re working from, and many times they’re approaching us. The bad news is they know now what PE and VC are, so we don’t get to give the same old pitch. Today, the challenge is to distinguish ourselves from the competition. We have to explain how our returns came about... was it luck, timing or a cycle? And we have to explain that in the future we will continue to succeed. That gets into strategy and people, and goes very deep. Unfortunately, a lot of LPs get hung up on details today, when in fact it’s about finding the winning team which has succeeded before, noting their strategy, and then backing them.”
 
LP Expectations... is There a New Normal?
 
“I think yes, and I think that LPs assume returns are going down over a long period of time because there is more supply,” Cressey answered. “as an industry, there is no doubt about that. But if you’re an investor in this industry, LPs should be looking for firms that are trying to improve, with signs that their returns are improving, and that they are constantly understanding the trends. That comes from strategy, people and innovation. Firms have to be doing things differently than they did ten, even five years ago. That is what works, and those are basics.
 
I observe that the industry has a long way to go. It became quite large from nothing. More people have a stake in the success of a fund, and everyone is competitive and hard working. That model is far superior in general than what I’ve seen in family owned and public owned companies. And so, PE & VC is going to continue to grow, in the percentage of the economy. If I were starting out, I’d start in this industry. It has opportunity for creativity, growth, and it’s satisfying to work with a company over a long period of time and help them succeed. You also become like family, and that’s also rewarding.”
 
Healthcare
 
David Golder pointed out that Cressey’s first investment in healthcare was in 1979. “With that history, what drew you to your specialization in healthcare, and what does that industry bring that lends itself to Private Equity?”
 
Cressey reminisced, “What drew me to healthcare began with a hospital investment. We were in the right place with the wrong CEO, and once we adjusted it was very successful. Along the way I looked at healthcare services in the early 1980s, and it didn’t take a genius to see – because I saw it – that it would continue to grow substantially. Technology allowed better treatment and the aging population was growing, and all that pointed toward sustained expansion.
 
Also what I recognized is that it was a very inefficient industry. Thank goodness a Diagnosis Related Group [DRG] fixed prices for fixed activities in 1984, which made it a bit more rational, but it was pretty clear that the industry as a whole was not well run, and the management wasn’t there. I saw a lot of opportunity, and made a wise decision in the 1980s to specialize in healthcare services, and it turned out that these services are the major part of the industry. It just proved you really have to specialize and know those different niches.
 
The good news about investing in healthcare is once you gain expertise, you can see what the payers want to see happen, and that’s what gradually is going to happen, but it takes years for implementation. It doesn’t take a sprinter to know that once you get to selling companies, it will be connected to what payers want, and makes you look like you were ahead of the curve. The additional good news about opportunities is that healthcare is constantly changing, and it constantly is growing and evolving with technology, so the opportunities keep growing as well.”
 
What is Going on in Transition between the ACA and the AHCA?
 
David Golder questioned, “What has been the impact of the Affordable Care Act, and what do you see going forward in the healthcare space?”
 
Cressey further applied his expertise. “The ACA didn’t create a lot of change for the providers of healthcare, and IT side of providers. Mostly it was about payer, insurance and how you get your insurance through the exchanges. It didn’t change our investment world at all. Going forward, with the repeal-and-replace talk, it turned out to be a very complex equation. I think the Republicans looked at the ACA, and thought they could improve it, but it’s hard to find real cost savings, and involves taking many people off medical rolls. Personally I don’t like that idea, especially for low income people.
 
I don’t see something coming together that is going to get passed... and if it does, it will be quite limited. It will be marginal changes, so the banner can be held up and victory declared, but it won’t be substantial change. As usual, I believe the marketplace is making the changes. The payers and providers are going toward measuring quality for payment, and IT is helping in chronic care management. There is a lot of opportunities to save money in healthcare, that a lot of young companies in America are going to invent, create and develop.”
 
The Prediction
 
Cressey added, “The market will change healthcare in the U.S. And my personal prediction is that by 2035, our much maligned healthcare system in the United States will become recognized as the best in the world. And the reason that will happen is that the American entrepreneur, with VC and PE activity, will take a narrow function and improve it using technology, and saving a lot of money. So I think in 18 years, we’re going to see the best healthcare system in quality, delivery and information.”
 
The Importance of Philanthropy
 
Golder pointed out that something his father Stanley and Bryan Cressey have in common, and that is their commitment to philanthropy. “Why is that important in your life?”
 
“it’s very important,” Cressey said, “because I recognize my great luck in being born in America, having great parents and great opportunities, and that very few us are that fortunate. And I want to help those who are not as fortunate, so I’ve been involved for many years with Junior Achievement, and Chicago has the best JA in the country, and has taught a half million students here. They go on, statistically, to graduate high school and college, and strive to start their own businesses.
 
In philanthropy, you do meet a lot of people and share a lot of good ideas. It improved my network, which is a tremendous side benefit. And recently, because of some addiction issues in my family, I decided to start an addiction treatment center for the poor and homeless on Chicago’s west side. I jumped off the diving board last year, found a place, renovated it and started recruiting people to work there. The dream is not just to treat the poor and homeless, but to also develop – I believe – the best addiction treatment in the U.S. The reason it will be the best is that addiction treatment in this country is mired in the 1940s, and I could see that problem. We’re using European techniques, and even improving those methods. We’re doing a lot more than traditional care, and it seems to be working... we’re having good outcomes.
 
I’ve found that applying my business experience has helped in innovating this project, but I’ve also found that doing philanthropy translates back to my business. It is beneficial to do both. Each entity informs the other.”
 
Stanley C. Golder
 
David Golder simply asked, “You had a special relationship with my father. Talk about that relationship, and what are the things you learned from him?”
 
“I’d love to,” Cressey replied. “Stan Golder was my first mentor, and I was very fortunate to work with him, because as I mentioned he built a firm through values. In the early 1980s, there was a deal that Stan was looking at, and brought it back to us. We were skeptical with feedback, but Stan stood tall with his integrity. ‘Guys,’ he said, ‘I shook hands on the deal.’ And immediately everyone around the table said, ‘Then we’re in.’
 
And that’s the type of firm that Stan built, and that integrity we learned has served us well over the years. Sometimes you pay for that integrity, but that is what tells people that you actually have that integrity.”
 
Stanley C. Golder in Practice
 
“Stan could cut through complexities, and identify the one or two necessities for a deal, whether it was people or the market. I always marveled at this, and always his first question about a deal would cut right to the heart of the matter. I remember him sitting at the end of the table, getting to that core, and wanting to learn that talent myself. He created value, progress, and didn’t waste a lot of time, and everyone loved working for him. Those was his high standards... his fairness and his ability to inspire us to do the best we could for our investors.
 
One investor from Boston once told me as I was starting out, ‘Bryan, if you get into this business, call me because I want to know who you work with, because this is an apprenticeship-type industry.’ When I called him back, and told him I was joining Stan Golder in Chicago, he said, ‘Get on the next plane, that is a fortunate opportunity.’ 
 
AUDIENCE QUESTIONS
 
“What is your perspective on investing globally?”
 
“I think investing globally is a great opportunity for those who are global,” Cressey replied. “In other words, we just felt there was so much opportunity in the United States, and while we understood the global initiatives, we had great opportunity investing here. But of course if there is global investment using the same techniques, there is a ton of additional opportunity. It’s in a younger stage, and is very competitive, and will continue to weed itself out, much like what happened here.”
 
“You mentioned you were in the halftime of your career. What advice, if you could back in time, would you give yourself in 1976, as you were starting out?”
 
“Two things. You should reset your brain and understand how little you know, because you learn through mistakes and experiences. That includes listening, and seeking wisdom and advice, from the people who’ve been around for a long time, because you can figure out a lot from them.
 
Secondly, I would double down on innovation. Don’t copy what everyone else is doing. You have to look for your own ideas, niches, wrinkles and ways that you can be the very best at something, because even if you are young, you can become the best at that, whether it’s investing style, industry expertise or recognizing innovation, you can become very good at a very young age. I’m still working on those two things, by the way.”

View pictures from the event here.
 
For PART ONE of the 2017 Spring Luncheon, “Will Carried Interest Get Carried Away?: How the Trump Administration Could Affect Venture Capital and Private Equity, click here.