The Big Shift from Corporate Development to Private Equity

Transitioning from Corporate Development to Private Equity

There's a few things you realize in corporate development. There are finite lifespans, and one of the reasons for that is that it typically is oriented around a particular corporate strategy. You're in many ways at the whims of the C-suite. 

And so, if there is an executive team that comes in, typically they have a mandate and that may or may not involve M&A or otherwise, joint ventures or other strategic partnerships. And for whatever reason, it seems like four to five years is kind of the timeframe that you get to develop that prune entities or subsidiaries that are not core to the future strategy. And then at that point, you kind of move on.

As an example, my former boss at TIAA CREF, an incredible guy, had been an M&A practitioner in different roles for different types of organizations for over 20 years. He is actually still at TIAA CREF, but after we completed a lot of the M&A that we had done, he actually moved into a product role as the strategy shifted.

I love doing M&A. I love doing deals. And so when I look at the future, I saw the opportunity in moving to private equity to be, in many ways, a corporate development professional for a number of different entities. 

You know, 777 today probably owns 60 odd portfolio companies. I've sat on the board of about five or six of them and in addition support a number of others through corporate development-type activities and in some cases, operational activities. 

And that's what makes the transition so exciting. You still get to do your corporate development work, but you really get to do it across a number of different entities. And typically, there are multiple mandates involved. 

There's not typically one central corporate mandate. There's typically more of an opportunistic bent and frankly, the ability to move a bit more nimbly and more quickly. 

The joke around corporate development, especially for larger corporations and both of the ones that I work for Fortune 500, is it's like steering a battleship. Getting it to turn, getting it to shift a strategy is a monumental task. And so, it can take, in many cases, that four or five year period just to sort of reorient the business, reorient the board, towards a different approach. And it's especially true for the two companies I worked for, who were 100 and 160 years old or something at the time I left. 

It’s just different. Whereas at the place I work now, in many cases, probably about half of the companies that we own were internally developed. And so that means they were developed in the past four or five years, so it's a very different kind of framework and approach. 

I think there are positives and negatives to both, but for somebody who wants to just keep doing M&A, which was the goal that I had, the private equity role can be particularly rewarding because definitionally, there's always companies that need to be harvested or potentially opportunistic acquisitions to be made. 

And I might say that in some respects, it has to do as much with the size of the company and the stage of development of the company that you work for. I suspect for the mega cap private equity firms, there probably is something more programmatic that may resemble the large corporate environment. But obviously, the firm I work for is on the smaller side, probably having about nine billion of assets or so across the platform. And so there is definitely a much nimbler environment that you're working in.

Corporate Development role vs Private Equity role

I would say that a huge contrast, and this goes into what you as the corporate development professional or private equity professional actually does on a day to day basis. When you're in corporate, especially a larger corporate environment, you typically have a lot of resources available to you.

You've got shared services, and especially in those environments, the shared services professionals want to work on M&A. They might spend their whole day on HR or IT, but M&A is fun. M&A is sexy for them. 

I remember when we developed a really good cadre of professionals internally at both of the previous organizations I worked at. And you'd say, “Hey, we've got another deal coming up.” They were always excited to work on it, because even though they're doing it off the side of their desk, even though it wasn't necessarily part of their day job, that was really exciting for them, because it changed up the typical day-to-day for them.

And so, the difference is that in private equity, especially a firm where you have disparate businesses that may not necessarily have linkages to each other, your shared services don't tend to be as robust. So, your efforts, your attention are required a lot more as a corporate development professional to help out operationally.

Let’s say, someone needs help with a particular HR issue and employee matter. You are typically the person who is connecting the handful of HR professionals you might have at a corporation who have the subject matter expertise with perhaps the one HR professional because these are small companies. These are growing companies. They don't have an HR department. They have one person. 

And so you as the, let's call it the intermediary, you are making those connections. You're spending a lot more time handholding to connect resources at your portfolio companies with whatever resources you might have internally. 

And in some cases, you may not have that resource internally and therefore, you're not going to have the resource internally, you might have to go externally, and that's also something that's particularly important. You might go to an external advisor or something like that.

It’s like a lot of program development, essentially scaling across multiple companies.

That's absolutely true, especially because we tend to be sort of an earlier stage investor or someone who's developing companies from scratch. So as a result, there's always more development that has to happen. You're not going to be building out just because the businesses can't support the cost. 

You're not going to be building out full HR departments, full IT departments, full accounting teams. You're going to be leveraging some shared services, but often there is still a lot more coordination that's required. So it's probably a matter of scale more than anything else. 

If I had to guess, the mega cap private equity firms probably have some level of shared services provision that's equivalent to what you might see at a fortune 500. But certainly, it's not going to be the case for most of the mid-cap and smaller-cap ones.

Seeking employment opportunities

First of all, the technical skill set is just so similar. You might have different return hurdles in corporate versus in private equity. You might have different investment time horizons. 

You frankly might have different criteria as to why you're buying a company, why you're investing in a particular company. But at the end of the day, that's just different formulas in Excel. The core skill set really is the same and the ability to speak intelligently about transactions is a skill that's relevant across. And so, if you have the technicals down, you have a tremendous opportunity to make that transition.

Sometimes there is sort of a bias against professionals coming from the corporate world often because you are using external advisors on the banking side. So, we at TIAA CREF, Guardian, you acquire a large business, you sell a business, you're using investment bankers. And so the bias as well, it's the investment bankers who are during the work. 

Well, that's not often the case, especially when you are the one who is presenting to your board or to your key constituencies. And so, demonstrating that you have kind of that core skill set, which frankly you learn in your days as a baby investment banker, fundamentally that carries you through a lot of this transition. 

The other thing that frankly is important when you are a corporate development professional is Rolodex development. Your relationships when you're in corporate are very critical for bringing those over to private equity, because the key in private equity is making sure that you are in the flow. You know everything else that's going on in the marketplace in your particular industry. 

I was fortunate at both Guardian and TIAA. These are large companies. Wall Street wants to cover them. Wall Street sees a lot of free opportunities covering those places. And so, I developed relationships with people from the bulge bracket investment banks all the way down to the real boutiques and have carried those relationships with me. And that's fortunate because it's enabled me to see all the relevant industry deal flow throughout my transition from corporate to private equity. My joke is I've gotten a lot of investment bankers paid really well over the years.

And so, it's nice when they can return the favor. Often, especially if it's sort of a smaller, perhaps lesser well-known investment firm, you may not be covered by the street, but if you're bringing those existing relationships, then you have a tremendous leg up.

And in fact, we recently announced a transaction at 777, where the banker who was on that transaction was someone who I had been in talks with about different opportunities. Frankly, going back to my TIAA CREF days and had never worked on a deal with them.

And so, just that continued discussion, continued discussion, and they were sell-side on a recent opportunity, knew that we were interested because when I first joined 777, I let them know what our mandate was, and sure enough, we were on their buyer list and ended up winning the auction. And so, it's maintaining that Rolodex and cultivating that almost as if you are still a banker is pretty critical. 

I remember in another case, when I was an investment banker, someone who I was across the table from and had always had a good relationship with on a particular transaction, we knew each other from 2009. He ended up being our advisor at Guardian in 2021. And so, it's a really long sales cycle, but it's important because bankers know that. And so maintaining those relationships in order to stay in the market, in-the-know, is pretty critical.

The efficient frontier concept

When we were speaking a little while ago, I was talking about the efficient frontier in the context of M&A in corporate versus in private equity, and how there is this dichotomy. And I sort of can go into that because your traditional concept of efficient frontier really relates to optimizing your investment portfolio return for a particular level of risk.

So I was using the term with us to describe optimizing your M&A returns relative to the intangibles that are very difficult to measure with the XIRR formula in Excel. You talk about why M&A fails, and I think you hear statistics. Two thirds of all M&A deals actually fail but we don't tend to speak of economic losses in the first instance. 

When we talk about M&A deals, we talk about a business perhaps underperforming, but if you think about it, really that's not why it failed. It failed because of culture. It failed because of what I'd call the soft factors. It's about: 

• How did the integration go? 
• What was integrated? 
• What was housed locally? 
• What kind of treatment or incentives did the management team get? 
• What kind of oversight and governance was the target subject to? 
• Was it an overbearing corporate parent versus one that was hands off?

Those issues tend not to be in focus as much for financial buyers of businesses in the way that they are for strategic buyers. So that as a corporate development professional, interestingly enough, you are looking much more sort of that efficient frontier, optimizing return for the amount of intangibles because you have typically a lower return hurdle when you are looking at deals in the corporate side than you do in the private equity side. And so, you can sacrifice a few points of IRR in order to “get the deal right.” 

I'll give you an example. Typically, when you're doing a deal, you're buying people. The management team, the employees are very important, and how they're treated is very important. How they feel in an environment is very important. And so, when you're in the middle of negotiating the transaction, you're often typically negotiating employment agreements for at least the key professionals.

Even if you are able to complete the transaction, you have to think about how those employees feel right when you are negotiating really, really aggressively with them on their employment agreements. Is that approach necessarily going to be conducive to a long-term beneficial relationship?

Even if you do get the deal done, but if you've really put the screws to this particular management team and given them employment agreements that they may feel like are onerous or unfair or off market, but they agreed to it because they felt they had to. As opposed to holding their hand, bringing them along, making them feel like they're going to be valued members of this new organization you're acquiring. 

That's just one example of you might have been able to extract more IRR because you are, let's say paying them less or giving them less in the way of future code of equity optionality. But at what cost? At what cost to the overall? Those sort of soft factors.

So yes, you can get away with that probably as a financial buyer if your hold period, for example, is three to five years. You can't get away with that as much in corporate, and I just might make the distinction, because while I do work for a private equity firm, because we are structured as a holding company.

And so we have partners capital at play and limited partners capital that we have to return after a certain period of time. We do have a little more flexibility in how we can approach it. And to go back to that recent acquisition that I was discussing that we just announced, that's a deal where we looked at that company and said this is going to be the centerpiece of our strategy going forward full stop. 

As many private investment firms are looking at now, it transitioned a bit of an insurance funding model or using the insurance balance sheet to help fund other activities in a capital efficient way. And we see that business as a critical strategic component for us, not as something we're going to flip in a few years.

I've seen that from both sides, both obviously in corporate and private equity, but also even within this private equity environment, where it's not a flip. And it was really important for us to make sure that the management team in this case felt valued because we want them around for a while.

They've grown the business to a place where we wanted to buy it. Well, in that case, why wouldn't you treat the management team with respect? It’s probably important to think about that because even within the private equity realm, you can certainly see things as more strategic than financial. And maybe I'm seeing that more than most because of the way that insurance is transforming the alternative asset management world today, but it's probably a different M&A Science topic.

Are you happier in private equity than in corporate development?

I don't know that happier would be the right term. I think I'm always happy when I'm working on deals, so that's what I would say. I think you can be unhappy in both environments if there isn't a whole lot to do. And I think that that's part of it. 

That can certainly happen in corporate. I might say something a little controversial here. If you look at corporate, one challenge that can arise is that you may at times feel like politics is far more involved in this in the decision making process. 

Then, let's say meritocracy. And that can be true for transactions. It can be true for HR matters, but especially Fortune 500 America, you tend to see a little bit more of that. And as a result, that can probably stifle or slow your deal activity.

So you've got programmatic M&A organizations out there, one in particular in and around my space that would get very high marks. And I've been across the table from them and they're great as United Healthcare. They're programmatic about their approach.

I don't know that they have a lot of downtime. They have basically what looks like a mini investment bank within their business because they have such a large corporate development team. So I've held them in very high regard. 

But there are corporates out there who probably will let M&A or corporate development or other types of activities life follow, which if you look at a lot of the reports from the consulting firms out there, is really something that you should never do. 

You should always be thinking about how you can transform your business. When that happens, it's obviously just not good for business. It's also not good for the employees who are there wanting to do deals because that's why we're here. That's our raise on debt. And so when you're working on transactions in this type of role and with this type of background, that's when you're happiest. That's probably the best way I can answer that question.

Typically private equity environments give you the opportunity for more upside. And I would say that's true both of private equity itself and private equity backed entities. So if you end up going and working for a business that is run and managed by his own private equity firm that has an exit opportunity, where you're really earning your keep is in that carry, but it's not always carry whether it's phantom equity, profits, interest, things like that.

Typically, you have greater upside for that in Private Equity than you do in corporate development. I suspect that that's not true, frankly, for some of these tech companies that have seen their share prices appreciate and we're just giving out shares in lieu of cash compensation over the last decade or so.

You've made people fabulously wealthy just as employees of those companies, but obviously in my sector and financial services sector where you tend to have companies that are more mature and they tend to be more oriented towards sort of like base bonus, maybe some sort of profits interest to try to match a little bit where people are coming from, which is typically the investment banking world. You tend to just have a bit more of a capped upside in the corporate world than you do in private equity.

Whereas in private equity, if let's say, you can attach to a deal. You did a deal. You work it through that 3 to 5 to 7 year hold period and you participate in its exit. If you've gotten “points” on that deal, that's where the real upside takes place because the capital appreciation has happened.

It's purely a capital appreciation game. But from a cash compensation perspective, you tend to find things are largely equivalent, especially at the more senior levels. Your delta in the upside tends to be more around that carry profits interest type of thing that is again more commonly distributed in private equity.

How to negotiate employment offers

I would say that in general, you take a lot more ownership of your portfolio companies, the thing that you're responsible for in private equity, because it's typically a leaner environment. And so you have just a lot more direct access and influence to success or failure. 

Ultimately there's a management team and there's macroeconomic factors that can be at play, but you have a lot more direct access to those returns. So typically, what you seek to negotiate is some level of, let's call it a piece of the upside. So some level of performance. 

To keep it really simple, you end up with an employment agreement for every transaction that you work on. There is typically a baseline valuation that the entity that you're working for has to essentially catch up to. So there's kind of your hurdle, there's your minimum hurdle, and then above that, you would typically be entitled to a percentage which would have to be negotiated obviously with your employer of the Upside return associated with that.

So, to be really simplistic, if they buy an asset for 10 and sell it for 20. And those are your only elements of cost basis, which is never the case, but for simplicity, perhaps you would be entitled to, let’s say, 50 cents of that incremental upside or a dollar of that incremental upside.

It really is going to depend on the size of the firm. I am familiar with people at private equity firms who were sort of three or four man bands. And they bought something at 10, sold it at 20, and after their LPs got paid, everybody got a few dollars.

That's a really big windfall. That's the kind of thing where you're making your outsized return. But it typically is something that you'd want to negotiate in your employment agreement. What kind of percentage return do you get as a proportion of the overall pot?

Some firms will be more specific about it and some will essentially be vague. Certainly in the case of my friends who work at hedge funds or alternative credit managers, oftentimes those things are left fairly vague and they just get a big chunk at the end of the year. 

Sometimes, however, it will be specifically based on the performance of your portfolio or particular investments that you're overseeing. There are some people who like to keep it vague at a senior level to preserve optionality around how much they have to pay you. But obviously, the more specificity you have, the more you really know how much earning opportunity you do have. And so, you can gear your work towards that. 

Other things to negotiate in employment agreements

Private jet access is typically not something I've seen in employment agreements, but it's possible. Maybe, maybe at a bit higher level than I'm at. 

With respect to negotiating your employment agreement in private equity, what's really important is to understand. And this is something new, frankly, because for the last decade or so up till the last year, inflation wasn't really a thing, and so you typically had base salaries.

That didn't move all that much. And they might be different by location. They might be different wherever. But at the end of the day, they didn't really move. And so, from 2011 or 2012, 2013, if your base salary isn't moving up while you're in the same role, you're probably not really noticing it that much. You're probably not really noticing a raise. Now that inflation is as relevant as it is, and probably will be somewhat stubbornly relevant for a little while longer. 

One thing that's really important to think about nowadays is the cost of living increases. The cost of living increases are something that we had forgotten about. So that's maybe the first thing with respect to base salary. 

Bonuses, cash bonuses are typically going to be less. They're going to be less oriented towards perhaps a specific deal. And again, more generic. And I say generic, meaning that, you're going to have a target, you'd negotiate your target cash bonus, and you would expect that unless the sky falls. Or unless you do something and you help the firm hit a home run, and maybe you don't necessarily have an attachment point to that home run.

You'd expect to be somewhere around your target, and this hues pretty closely, frankly, to how corporate is. I mean, I remember we were at both TI Craft and Guardian. You basically had target bonuses, not dissimilar to what I'm talking about, annually.

And I think 80% of the firm got paid essentially within a few points of target on either side. And so you had a bell curve, basically. You want in many respects, your target to reflect something that you feel really comfortable about that you get a little ups on it.

You're really happy in a particular year, but you want to negotiate a target that you can live with, not with the expectation that you're always going to be paid above target. And then finally, where your upside comes in is around that carry that we discussed. That's definitely important. 

I always say as well, and this may be sort of the risk averse person in me and maybe the guy who has seen a lot, especially starting my career in the great financial crisis, a lot of this is you probably want to pre negotiate your severance.

You really want to make sure that you understand what happens if, for example, the business changes its tack. If the battleship actually does turn and turns in a direction where your role is no longer necessary. You want to make sure you understand what that is. 

And people, pre-negotiating a severance is a little like signing a prenup. You don't really want to have that conversation because you're forecasting something bad happening in the future. But it's an important insurance policy, because if something bad does happen, that's the wrong time to be negotiating that. You want to get what you want to have that negotiated at the outset.

So I would argue that having a severance provision, and I've seen severance provisions and contracts and have seen them actually acted upon. And if you do right by the employee, and let's say you're more generous than the provision, everybody's as happy as they can be in that situation. That's probably where you want to be.

In terms of how they structure it, it's a combination of months of salary and years of service. So typically, the longer tenured you've been, the more recognition you will get in your severance package for that.

I would say it's typically a 10 year amount of compensation basis. In some cases, you might just look for a lump sum. That's not too common, though. I can't say that I've really seen that people like to keep it consistent for every employee. You don't want to look like you're playing favorites.

And so typically, doing some months of salary, obviously, if there is a severance event mid bonus year, you also want to make sure that whatever bonus had been accrued, which, by the way, accounting is certainly accruing. So it's not like they can say, “Oh, well, no, you're not entitled to any of that.” Everybody knew that accounting was accruing for a portion of the bonus. You want to make sure that you obviously get that beforehand.

How to land a PE role

How do you land one of these roles? It depends on where you are in the career hierarchy. But the higher up you get, I tend to find that it's more about the network. And it's not like you know a lot of guys that you know at JPMorgan or Goldman or something like that. And you're going to get a job there. It's more because those guys are so in the flow of everything going on in the market. They know who's changing strategy. They know what direction companies are taking.

They will know if that company is going to be staffing up their corporate development department because they're going to grow. You should talk to so and so over there. Or they will have that pulse of the market. So that would be one place I would say is pretty important. 

It goes back to the Rolodex thing. It's pretty important to continue to maintain those relationships because those people will have an idea of who's hiring, etc. And then, of course, you have recruiters. 

With respect to the 777 role, that actually came about through a recruiter, as I mentioned earlier. There are certain recruiters that you probably want to get to know in your space as you develop your relationship over the years, as your resume evolves.

There's a handful of people who will tend to cover the space just like bankers, just like lawyers. There's actually recruiters who tend to be industry specialists. Making sure that you're on their radar at all times is pretty important because ultimately, and perhaps it's a bit surprising because you always hear about network, network, network.

I am always shocked at the number of roles and the types of roles that recruiters are used for. We are not just talking about C-suite. We're talking about up and down the chain. And so, recruiters are perhaps equally as important as making an impression with them, because they're seeing opportunities every day. That's their job. 

Making an impression with them early on, even if you're not, for example, ready to move. Let's say you like what you're doing now, but just making sure you develop a dialogue with them. Again, no differently than you would with bankers or lawyers, is actually pretty important.

Industry conferences are another thing I might mention. As you go along in your career, you will probably end up specializing in something. I fell into financial services. When I was growing up, I certainly did not think I really wanted to be a financial services investment banker. But once you end up getting into a particular industry, you tend to stick with it in some way, shape, or form. Whatever industry that is, you want to make sure that you're going to the conferences, you're doing the networking. 

You know, insurance is a very small group of people. It feels like it's a huge industry and yet it's sort of the same basis. Every time you go to a conference. That's not a bad thing. You want to make sure that you're constantly making those connections and hearing what is on the radar, because out of that come opportunities.

Advice to those considering transitioning between Corp Dev and Private Equity

In many respects, aside from doing the things that we've just discussed, getting the best and most comprehensive deal experience in your current corporate development role, frankly, there's no substitute for that. 

There's no substitute for having great opportunities to speak about. There's no substitute for having those kinds of engagements because if you can speak intelligently and articulately about deals that you've worked on, the role you played, how you influence the transaction, even if you're junior, there's a lot to say. If the only thing you did on a transaction was run the model that can take up an hour of an interview.

There is no reason why, even at a more junior level you can't leverage that experience into something else. And so I would say there's just no substitute for doing that. There's no substitute for actually doing the work today. And continuing to build the experience and to make that experience a part of your repertoire.

Every deal is different. In every deal, you're going to learn something new. There is no such thing as a rinse, lather, and repeat on deals. There's a lot of similarities, but no two deals are the same.

How to transition to a PE role from a VC and M&A role

That's a good question. If you're in VC today, what's interesting is there's a lot of corporate VC roles out there. A lot of corporations, especially over the last decade or so, have developed corporate VC capabilities. And so, if somebody is in VC today and wants to transition to PE, probably the best thing to do is go to PE directly because what a lot of corporates are going to do is look at your background. They're going to say, you're great for our corporate VC team, not our corporate M&A team.

I would probably just go directly to PE because some of the skills are going to be similar, especially if we're talking about more like growth equity type roles. If you're talking about the earlier stage type companies, the skills are good and the work that you do on a day to day basis is going to be pretty similar.

So I wouldn't worry about making a step, especially because from a corporate lens, they might view you more as a VC Professional, who's someone going to be pigeonholed into VC. 

At the last firm I worked at, we had a very specific delineation between who worked in the VC, the corporate VC area, and who worked in the corporate M&A area. And they didn't really cross pollinate so try to do your best to grow directly, but focus the search on those smaller, earlier stage growth equity type firms, not the mega caps.