IVCA Feature: Part One Highlights of the 2015 IVCA/NVCA Luncheon, “A Conversation with Bon French,” Moderated by John A. Canning, Jr.

May 26, 2015

The 2015 IVCA/NVCA Luncheon took place on May 19th, 2015, in the Burnham Room of the Chicago Club, and the large gathering was part of the annual the coming together of the Illinois Venture Capital Association (IVCA) and National Venture Capital Association (NVCA), The Small Business Investor Alliance (SBIA) and the Private Equity and Growth Capital Council (PEGCC) for the annual overview of Venture Capital and Private Equity issues.
The luncheon was sponsored by legal firm Ropes & Gray, LLP and accounting/advisory firm Baker Tilly.
The second part of the program for the luncheon was a special meeting of two leaders in the industry. “A Conversation with Bon French” (Adams Street Partners) was moderated by John Canning of Madison Dearborn Partners. The two longtime colleagues spoke of the changes and challenges of their industry over the years. Both men were founding members of the IVCA.
T. Bondurant “Bon” French is the Partner and Chief Executive Office of Adams Street Partners. As part of the firm’s leadership succession plans, Bon will transition to Executive Chairman in July 2015 and will continue as a member of the Board of Directors, Executive Committee and Portfolio Construction Committees.
John A. Canning, Jr. is the Managing Director and Chairman of Madison Dearborn Partners.
John Canning: What is your background, and how did you end up in Chicago?
Bon French: I grew up in Peoria, but have a family farm in downstate Illinois, which we still have and still help to run. I learned the value and humbling experience of hard work there, as we grew corn and soybeans. I went to Northwestern as an undergrad, and graduated from the Kellogg School with an MBA in 1976. I went to Connecticut to work for the investment department of Cigna Insurance Company. I was recruited back to Chicago with First Chicago, and joined the Venture group in the Trust Department.  The Trust Department’s venture activities were begun in 1972. Separately, the Bank had its own venture activities, which began in 1961.  Stan Golder ran that First Chicago Venture group very successfully throughout the 1970s.  Stan founded Golder, Thoma & Cressey in 1980, and John Canning took over the management of First Chicago’s Venture Capital group. The bank had two Venture groups at that point, one for the bank and one for outside clients.
Canning: What was your first job in the Trust Department’s Venture group?
French: I actually thought I was late to the venture industry, but you told me to just do it, and I did. In 1983, Intel, Microsoft and Apple had been launched by venture, so the boom had begun. At that time, I got a hold of a chart that was put together by the Western Association of Venture Capitalists in San Francisco in 1983, which had the then 25 year history of Venture Capital in Silicon Valley, and that began in the 1950s – specifically what firms begat what companies. Today, people talk about my being early in the industry, but it sure didn’t feel like it then.
One of the reasons I moved into it was because for six years I’d been involved in fixed income management, private placements and publicly traded bonds. In the late 1970s, there was a lot of volatility in the bond markets. I joked with people, but I was actually serious, that I was joining the venture business to get into something less risky than being in the fixed income bond business at the time.
Since the bond market is driven by top down factors, and individual stocks were driven by changes in the public markets, I thought pension funds and people would index those giant asset classes lowering their costs and fees, and gradually shift modest amounts of money to more active alternative strategies like real estate, hedge funds and venture capital, and that there would be big growth in that area. In working with the venture capital industry, it would be bottom-up as the main driver of the return.
Canning: So in 1983, Venture Economics was posting no comparative returns, with no history of what venture had done. Who were the investors and what were they thinking?
French: There were no conferences regarding venture until the late 1980s, except for the NVCA, which was founded in 1973. There were no pension consultants, and there were no written valuation guidelines or industry benchmarks. There was no ILPA.  The mainstream press never covered the venture industry. The LPs were mainly insurance companies, some endowments, and some early corporate adopters in their pension funds like General Motors, General Electric and AT&T. There were no public pension fund investors at the time. An investment in venture capital was prohibited by public pension funds in 40 of the 50 states when I started. When people complain about how hard it is to market a fund today, at least now the states allow it.
We did an enormous amount of off-site work with staffs and consultants. Since our group at First Chicago started in 1972, at that point in 1983 we had 11 years of data, and we could actually put it into a framework that was clearer to understand, which was expected returns and standard deviations. Gradually, the laws changed state-by-state for public pension funds to invest in the industry. Another thing to mention is that there were no data rooms, there were no computers, no cell phones, no email, no internet or any social media. It was all face-to-face work. We had to travel and meet people, and it was good training, because this is a people industry.
Canning: You were part of Brinson Partners, what was that about and what did you do there?
French: First off, Gary Brinson came to First Chicago as the chief investment officer of the Trust Department in 1979, and really transformed the way the bank managed stocks, bonds and investments. Fast forward to 1989, Gary had made a very successful group in all asset classes. The venture class within the group was about 10 percent of the total. We did a buyout from the bank in 1989, with 125 people, and $12 billion in assets. That became Brinson Partners.
Brinson was an independent firm for only six years, but in hindsight it felt longer. It was acquired by the Swiss Bank Corporation in 1995. They didn’t have a similar venture group in their realm, so there was nothing for us to do in merging cultures. Three years later, Swiss Bank merged with the old Union Bank of Switzerland (UBS) to form the new UBS. They didn’t have a counterpart either.  
Adams Street Partners was spun out of UBS in the fall of 2000.  It was a new company where we left all the economics and all the existing business the same between us as employees and UBS, but we had a better share in the economics of the new business. UBS owned 24.9%, but we were an independent firm after that. Subsequently, in 2008, we brought in that 24.9% from UBS.
Canning: Can you tell us the size of Adams Street Partners when you spun off, as compared to the size that it is now?
French: In the fall of 2000, we were 55 people, and we’re 135 today. We’ve gone from $5 billion to $27 billion in assets today. We had two offices when we began, Chicago and London, we have six offices today. We have clients and investments everywhere now, in 32 countries, every continent except Antarctica. That has been most gratifying, to honestly see how many other countries have seen the success of U.S. tax and entrepreneurial policy, and are adopting those policies, and how beneficial it was not only for pension fund and endowment returns, but job creation and growth.
Canning: You mentioned you invest in funds, you buy secondary funds and you make direct investments in portfolio companies. What is the decision process at Adams Street Partners?
French: It’s a top-down AND bottom-up process, with four investment teams: secondaries, buyout co-investments and venture growth direct investments. There are two or three person deal teams and they meet with the senior partners on each of those teams, so it’s very decentralized. There is not one central and large investment committee, because you can’t operate a global enterprise and have everyone come to one place. We want to empower people, and give people responsibility. It’s a partnership, literally and figuratively. Those decisions are made on a weekly basis by the teams.
And then there is the top-down process. What do we want our overall commitments to be, in venture versus buy-outs? How do we compare U.S. opportunities with non-U.S. opportunities? What do we want the mix to be between large funds and smaller ones? We have a portfolio construction committee of four people – myself included – who make decisions on all of those top down factors including currency exposures. Although bottom-up is how most people in the industry think of the asset class, I’ve come to realize how important top-down is as well, even in thinking about the right sizes for funds, and how you handle risk. The top-down matters hugely.
Canning: Where do you find the people that you hire, how do you hire them and most importantly, how do you retain them?
French: In the early days, we had to beg, borrow and steal people, and train them ourselves, because there wasn’t any precedent for what we were doing 30 years ago. But these days you can recruit a lot of people with tremendous experience working with other firms, and it’s becoming an asset management business in large part. As far as retention, we are very inclusive, and offer equity even down to our executive assistant level. It’s a better way to run a firm. We have one bonus pool and one profit center that are also broadly held, which is very important to us. Compensation is one way to retain employees, the other is that all viewpoints, input and constructive criticism are solicited, to encourage an entrepreneurial spirit. People really like that. 
Canning: Partnerships are a fragile type of organizations. When you’re investing in partnerships, what are you looking for?
French: The most difficult thing to get your head around, or assess, is whether the people in that partnership have trust and respect for each other. They don’t have to come from the same schools or backgrounds, and we’d like them to have some diversity, but we’re looking for the good give-and-take regarding transactions and deals. That’s the most important thing. You can’t break it down by Venture or Buyout or big or little, the give-and-take with transactions and deals cuts through everything.
Somebody in the group also has to be a good investor, with a good investment track record. Other characteristics include deal flow edge, some international experience and things like the number of portfolio companies per partner.
Canning: What are some situations where partnerships lose backing even though everything looks okay on paper?
French: The most obvious one is that they grow too fast, so you have to have judgment as to whether that’s okay or it has the potential to break the bank. When an organization gets bigger, it often puts them into another strata of competition for deals, or working with a company that isn’t in their sweet spot, or might cause them to hire more people or take in more partners – which changes their dynamics – or open more offices in more countries, and all these things can lead to poor returns.
Canning: What about timing in the marketplace. Is there a time and a cycle, for example, for investments in secondaries or partnerships?
French: We don’t think about market timing, we try even to discourage that thinking with our clients, in this general sense. We obviously follow the public and private markets, and understand, for example, that Silicon Valley, is booming. But we are committing to long-term funds, and they are going to commit money not only today, but over four, five or even six years as an investment period. That is going to average up or down, no matter what you want to do. A lot of times trustees or clients just don’t internalize this well.
Because there are cycles and there is a herd mentality among institutional investors in private equity – just like any other asset class – with people piling in when the returns are good and slowing down when they aren’t, if you go with dollar cost averaging you’re automatically going to be a contrarian, meaning you’re not going to put more money out during the boom times, and you’re going to keep investing in funds during the more scary times.
Canning: I remember you were active in buying secondaries when the world was coming to an end during the Great Recession (2008) downturn, you did quite well, didn’t you?
French: We bought 750 million dollars worth of secondaries during the last quarter of 2008, and the first quarter of ’09. At that time, they were 50 cents on the dollar. The truth was, half of those discounts were the mark-to-market. We had to figure that out – and the market fell 40 percent in 2008, so that was hard to do, but the returns subsequently were spectacular.
Maybe it’s my personality, but I’ve never been overly excited during a giant victory or depressed during a downturn. It’s lucky that I was born with a very even keel, and I guess that helps in the investment business. I talked to the team at the end of 2008, and I told them that in 50 years, no one ever is going to know that there was a financial crisis in 2008.  Who has heard of the Panic of 1873 or 1893 or 1907?  These were terrible financial crises, but no one remembers today.
Canning: I took a different view. I was glad that the windows in our offices didn’t open. [laughs] There has been a lot of talk about diversity in the business of late, given that women and minorities are slow to make inroads. What is your diversity make up?
French: We have many women at all levels, and in all our investment teams. Forty-six percent of our employee base is women. We have 20 women, out of 55 total, who are partners. In terms of minorities, we are at 17 percent in the United States. Another element of diversity is nationality, and even though we have small numbers in terms of employees at 135 total, they come from 24 different countries. This diversity is really great because we speak many languages and dialects, and that helps our relationships with GP’s, clients, and portfolio companies around the world. I think the diversity of insights is critical, because different technical expertise is necessary – we need experts in hardware, software, biotech or whatever the focus is.
Canning: Earlier today the topic of wage inequality came up. What are you thoughts on this hot button issue?
French: It all starts with education. And because of this, it’s possible that the inequality will become worse, not better. We’ve gone from the agrarian society of two hundred years ago, to a manufacturing society, to – within the last 25 years – the information age. All of that requires a lot more education. The people at the top of that education stack, will lead in the information age, and receive the rewards and support the ecosystem. It’s so important that we get children early in pre-school, all the way to high school, to buy into what is necessary to be educated in this new era, otherwise you will not solve the wage inequality problem.
Canning: You are in the midst of a transition period, with your retirement coming in 2017. How are you handling the transition?
French: I got a lot of advice from people, and I’ve had several dinners over the years with your firm and other firms that handled it very well, and people I look up to as role models, that informed us. We’ve eventually decided to have a management partner going forward, as opposed to a CEO, so that was a title change. We wanted a strong leadership model also, so that is important. We named a managing partner, Jeff Diehl, who will begin on July 1st, and I will transition from CEO to Executive Chairman for the next three years, to help transition the other roles.
Canning: Who are some of the role models throughout your career, and why?
French: I start with my parents and grandparents. In the last 35 years, I am inspired by the industry and civic leaders I work with, in addition to my academic and philanthropic colleagues. These are great leaders in a lot of different sectors, but they have tremendous people skills and relationship skills, and it’s interesting how they think about strategy. What is taught at Kellogg and Booth are applicable across all these sectors, and of vital importance to the success of their organizations. I am still learning from all of them.
Canning: Speaking to you as an investor, has SEC regulations and oversight over potential investor companies a good or bad thing?
French: Probably a good thing. The SEC going over key documents and analyzing disclosures is a good thing. On the other hand, the annual cost is significant and real, in the practice of regulatory compliance. That favors large funds over smaller funds.  Congress and legislators think they’re looking out for the little guy, but it’s the big guys that can absorb oversight much easier.
Canning: What are your predictions for Venture and Private Equity in the next 15 years?
French: It’s hard to forecast. When we look back 15 years ago, so much of our technology and internet media in use today did not exist. So it would be extremely humbling to forecast the next 15 years. I suppose we’ll look back to wonder how we ever survived with what we have now, just like they looked back in 1900 at the telephone, telegraph and other innovations in the 15 years prior to the turn of the century.
I don’t see a fundamental difference in terms of where the Private Equity industry is going, other than probably a lot more retail investors and high net worth investors will be participating in private equity, either through defined contribution plans with target date offerings – that don’t really exist today – or directly through funds, and particularly in larger buy-out funds, in which they can buy public shares. However, unless it’s through a professionally managed portfolio, this asset class is not well suited to retail investors. In the portfolios we’ve put together, no client has ever lost money with Adams Street Partners in our 43 year history, no matter how poor their starting point.
Click here for Part Two of the 2015 IVCA/NVCA Luncheon, a panel discussion of “Federal Issues Affecting Venture and Private Equity.”