April 7, 2016
Interviewed by: David Snow
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Advent’s Secret Sauce for Global Success

An interview with the head of Advent International, one of the largest private equity firms in the world, with a global footprint that extends from the developed markets of US and Western Europe to the emerging markets of China, India and Latin America. Mussafer discusses the firm’s evolving investment strategy in Latin America, the way the firm vets deals, and the incentive structure across the firm.

An interview with the head of Advent International, one of the largest private equity firms in the world, with a global footprint that extends from the developed markets of US and Western Europe to the emerging markets of China, India and Latin America. Mussafer discusses the firm’s evolving investment strategy in Latin America, the way the firm vets deals, and the incentive structure across the firm.

Advent’s Secret Sauce for Global Success
With David Mussafer of Advent International

David Snow, Privcap: Today we’re joined by David Mussafer of Advent International. David, welcome to Privcap; thank you for being here.

Your firm invests all over the world, so I’m fascinated to hear what you’re seeing in the various regions and the various sectors that you focus on. Let’s talk first a bit about the pace of deal making that Advent was involved in in 2015. It wasn’t at historic highs, in fact, it was relatively quiet for your firm. Why was that?

David Mussafer, Advent International: David, the markets always have their ups and downs. And so in any cycle – and for us, this last year kind of marked a little bit of the high water mark that we had seen in some of the pricing for deals. So last year I think most of private equity had certainly seen that it’s a great time to exit. The markets were really robust on the public side, the private side. The debt markets were really fluid, and so it was a great time to exit. And all of that just meant that it’s going to be really favorable for the seller. We actually took advantage of that on the other side. So while it was one of our slower investment years, it was actually our second best year for realizations, divestments. We actually had six IPOs last year across our portfolio.

Snow: Advent International has a real flexibility in the way that it invests. You can write a $100 million check. You can do a deal that’s $2 billion, $3 billion. How do you sort out what opportunities you’re going to go after and what criteria needs to be met for like a smaller deal versus a larger deal?

Mussafer: So you want to know our secret sauce.

Snow: Yes, yes. As much as possible.

Mussafer: I mean part of the secret is that there isn’t a secret. So what we’ve tried to do with our business model is create a really flexible approach that gives us the widest hunting ground possible to find the best deals. So one of the things that we’ve done with our approach is to try to challenge our deal makers in each of our sectors so we’re sector-focused; that’s a fundamental underpinning to start with. Everything we do is really driven by a thesis in some broad fashion, and then more specifically, inside a sector. And so within that challenge, let’s take healthcare, for example.

Our investment professionals in Europe or North America are really challenged to find that one great deal a year that they think is the best place for them to invest. And we give them the flexibility to say it could be $100 million equity investment, or a billion-plus equity investment. The difference is we’re not going to give a break to that big deal. What we’re really looking for is more than half of our portfolio to have break-out potential, which is an opportunity to outperform our base-case scenario. And outperform pretty significantly.

And so by taking the focus and making it pretty broad, but then challenging to say we’re not going to expect, we’re not going to give a break to this big deal if we put a lot of money to work. But we’re also not going to burden this small deal by saying, oh. If we’re going to invest only $50 million or $100 million, we’ve got to make five to ten times our money. We think if you look along the entire curve, there’s a lot of efficiency. It’s not bunched up at any one spot. The mid market is really efficient. The larger market is efficient. And so then the real focus is what can you do with that company, and why are you going to make that investment?

Snow: So if you’re always looking for a company that has the break-out potential as you described it, are you necessarily mostly looking at younger companies that have not reached a certain level of maturity? Or are in industries that are not at a certain level of maturity and therefore, would cap their growth?

Mussafer: Well growth companies clearly provide one element to outperform, right? You can grow much faster than the industry and then exceed your projections. But there are other ways to outperform your base case. So you can do a transformative acquisition. You can help reposition the company in a way to improve its strategic position inside a market and therefore, raise the ultimate exit multiple for that business. So we’re trying to think about what’s that fundamental underwriting case that’s going to get us comfortable with this business. But then what can we do to, if we get it right, win and win big?

Snow: Let’s talk about Advent a bit more and the culture that’s been built there. How are people incentivized? How is a partnership structured such that everyone is rowing in the same direction?

Mussafer: You really want to know all our secrets, okay.

Snow: I’m going to keep digging. I’m going to keep digging.

Mussafer: Like a lot of shops, I think you have to have the incentives that encourage the type of behavior you’re trying to foster. We have the benefit of having this old fashion partnership. So in today’s world, we have a partnership model that’s very broad. And we have an incentive structure that we think fosters and encourages collaboration on a global basis and has the right balance. You don’t want to have too much of an issue where deal makers are so focused just on their own deals. But then you don’t want to have the free rider issue at the other end of the spectrum. So having the right balance that gives people the incentives to collaborate, work together to really share information, is the key. And that’s, in essence, what we think we’ve put together. It’s a fairly complicated compensation system, but the benefit is we’ve been using that same system for probably 25 years. So it’s well known, understood and appreciated within our organization.

Snow: Talk about how you deploy operating partners, or just the operating function within Advent. How you help these companies transform themselves. Do you use external resources? Do you have full0time employees who do nothing but value-added work?

Mussafer: That’s something that we focused in on a few years ago – probably about ten years ago – as we were trying to continue to evolve our model. And today we’ve got one of the biggest operating partner networks of any of our peer group. We’ve got almost 70 professionals worldwide, and these range from really focused, functional experts – maybe CIOs or a lien-manufacturing expert – to a seasoned CEO that’s acting as a senior advisor to us.

In addition to our senior advisors or what we call operating partners, we do have our own in-house portfolio support group. And those are the pros that are dedicated to working on the direct implementation plans for our companies. We have about 15 of those professionals dedicated, 100% in-house within our shop, in addition to these operating partners.

Snow: Advent is one of the largest private equity firms in the world that only does private equity. Many other large firms have gotten into other asset classes, and even into advisory work. How has Advent resisted the attractions of, let’s say, raising a big real estate fund or a hedge fund or a public equity fund?

Mussafer: Well I’m not sure I’d give us so much credit for resisting. In fact, if you really go back to our earliest days and our roots, it’s always been a pretty entrepreneurial shop. So when Peter Brook, the founder of Advent spun it out – these pieces – out of TA, back in the early 80s, we actually had a pretty broad approach. We had an early stage biotech fund. We had a VC IT fund. We had a clean tech fund. And so one of the key decisions in the development for us was really about 15 years ago, where we made the decision to just focus on doing one thing. So in a lot of ways, I don’t think it was any grand plan or strategic vision. But rather just simply saying, “What do we think we have to do to be successful?” And about 15 years ago, that was the right answer, which was focusing. And it was really powerful for the investment pros within our shop to be really connected and say that everybody all over the world is doing the same thing. Over time, we’ve really built a broader and broader organization. And it’s not to say maybe at some point it will be the right thing for us to broaden. But that was a really powerful move for us as an organization and how we got to this point today.

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