How one big investor is "playing offense again"December 8, 2009: 3:21 PM ET
I interviewed Carlyle Group's Sandra Horbach, who heads the private equity giant's consumer and retail group, at the Women's Alternative Investment Summit in New York last week. I shared a few highlights, and since the session drew terrific audience feedback, it's worth giving you more of Horbach's smart talk about managing through the recession, investing into the recovery, and navigating a career in private equity, where few women dare to tread.--Patricia Sellers
If you had to hand over your job to someone else tomorrow, what would you tell them?
Horbach: Be really good to your people. Develop a vision. Inspire confidence because at the end of the day, they must follow you. Listen well, and give them the resources and developmental tools they need. One of the things we do not do well in private equity is develop junior talent.
What's the lesson of the last couple of years?
Horbach: Bubble bursts, for sure. There is too much of a good thing. There was too much leverage and not enough checks and balances.
Did you make investment decisions you shouldn't have?
Horbach: We bought a company called Oriental Trading that had 30 years of predictable growth. It's a direct marketer, and it had years of success and dividends and free cash flow. It looked like the most predictable business you could buy. But there was a dramatic shift in the industry. The U.S. Postal Service, which is essentially bankrupt because of the Internet, raised the price for catalogs 20% in one year. When you mail 350 million catalogs, that's a very big nut to swallow. We had to take a lot of costs out of the business. We're not going to have stellar returns. But in general, Carlyle stayed away from the mega-deals in the '07 time frame. Knock on wood, we have a very solid portfolio.
You bought Dunkin' Brands for $2.5 billion in 2006 from a liquor company, Pernod Ricard (PDRDY), where it had been orphaned. How is Dunkin's strategy now shifting?
Horbach: We went on an aggressive expansion plan. Since we bought the company, we've given the cash flows back to the business. We've doubled EBITDA. We've added almost 2,500 new stores in the U.S. alone. For every Dunkin' Donuts store we open, we create 25 jobs.
Horbach: We hold our own. We're No. 1 in coffee. We're also investing internationally. Most people would be surprised to know that Baskin-Robbins has 4000 stores outside the U.S. Dunkin' Donuts has several thousands. We just opened our first 20 stores in China.
There's a belief that the consumer is never going back to the level of spending of the past. So, how do you deal with that?
Horbach: The consumer sector accounts for two-thirds to 70% of our economy. You can't ignore it. We're shifting to areas where consumers have to spend. Retailers that are value-oriented can still be very attractive. You look for great brands that are under-penetrated. We own a brand called Philosophy, a personal-care business, and we're growing our top line double digits as we expand distribution and grow awareness--in a very tough economy. You have to pick your spots.
Philosophy is the last company you bought. That was in 2007. Why have you not acquired anything since then?
Horbach: We looked at a lot of things, But credit dried up completely. You couldn't even find a banker. They wouldn't return your phone calls. And we weren't sure where the bottom was. No one was. Now we're seeing multi-billion deals with high levels of leverage, at attractive rates. We're back in business. We're excited about playing offense again.
Do you feel confident that we've hit bottom?
Horbach: I believe that we've hit bottom.
What have you learned from Lou Gerstner, the former CEO of IBM (IBM), who is on the Carlyle investment committee?
Horbach: I talk to Lou a lot. His office is right next to mine. Very early on, Lou and several other members of our senior team were very aggressive about how bad it was going to get. "You have to take action now! You have to start cutting now! You have to evaluate your CEOs!" He said, "There are good-time CEOs and bad-time CEOs." Good-time CEOs look good when the market is going up and everyone is acquiring things. But they don't look so good when markets do down. We probably turned over 40% of our CEOs.
What is Lou saying now?
Horbach: Six months ago, Lou said, 'Okay, now we have to start playing offense." So, we are. The management teams that start to play offense will be so much better positioned when things start to pick up.
So you're not looking for good-time CEOs yet, but rather, hybrid CEOs?
Horbach: Well, none of us expect a robust revenue environment. We're calling it "the revenue-less recovery." We're thinking that there's going to be a lot of M&A activity. Everyone is looking for share and global opportunities.
How might the private-equity industry attract more women?
Horbach: In order to be successful at anything, you have to love what you do. I think a lot of women have gone into private equity because it's the right thing to do, or they think, "I'm going to make a lot of money." Hedge funds, same sort of thing. Women have to step back and know what skills they need.
So, what are those skills?
Horbach: You have to be able to work in a very male-oriented environment and not take it personally. Women have to be adaptable--actually, that's a strength women bring. But you need to be tough. You need to speak your mind. And you have to be realistic about how hard it is. Women often think that when they're doing a great job, people will notice. Women don't self-promote as much as men do. You have to network. And if you're doing great work, make sure that your bosses notice.