By Tom Cordes
I had the pleasure to interview Dr. Alexander Dibelius, managing partner of CVC Capital Partners. Dr. Dibelius holds a Ph.D. in medicine and practiced as a heart surgeon for several years. After that, he transitioned to McKinsey where he quickly rose to the rank of partner. Beginning 1993 he joined Goldman Sachs from which he retired as chairman of global investment banking and CEO of German and Eastern European operations in 2015. Since 2015, he oversees CVC’s private equity operations in German-speaking countries (DACH Region) and is a member of CVC’s investment committee and board. Dr. Dibelius is known as one of the most successful German dealmakers, the man behind famous transactions such as the Daimler Chrysler merger, Schaeffler’s acquisition of Continental, the takeover of Mannesmann by Vodafone and many successful private equity deals (Wincor Nixdorf, Kion, Cognis, Kabel Deutschland, Messer, Xella, GSW, Breitling and Tipico among others).
Firstly, I would like to thank you for taking the time for this interview. Could you begin by explaining your academic and professional background which led you to head CVC’s operations in the DACH region? What led you to leave medicine and pursue a career in the financial industry?
At a certain time after having worked for some years in hospitals in Germany and South Africa, I felt that I wanted to do something different for at least one year, as I felt that my career wouldn’t progress fast enough in the near future, which is a normal pattern for medical doctors working in German University Hospitals as they are governed by Anachronistic hierarchical principles. As I brought this up with my tutoring professor from the Studienstiftung (German Scholarship), he pointed me to management consulting, which I had never heard of before. After doing some research, I found McKinsey to be the top institution in this field. Hence, I applied and got, very much to my surprise an invitation to an interview. To my even greater surprise, I was eventually hired. So, after doing my last appendectomy during a Wednesday night-shift, I was immediately dispatched to Sandoz, known today as Novartis, as a McKinsey consultant to work on my first client project: the restructuring of their headquarters in Basel. At the time, I had no idea what I was doing. I had no idea about FTEs, cash flows, revenues, or costs. However, as a medical student and doctor, I was used to learning fast and working hard, which I transferred to my new life as a consultant. This allowed me to keep up with my Ivy League MBA peers that McKinsey generally hired at this time. Not without making some embarrassing rookie mistakes, though. After one year of experiencing this vastly different world, my former boss from the hospital called and wanted me to return, which I declined, as I was enjoying the new dynamic environment of management consulting very much.
Can you tell more about your transition from co-chief of the global investment banking division and CEO of the German operations at Goldman Sachs into the Private Equity industry? What are some of the differences in your day-to-day work, and what were/are the most interesting parts of these two positions?
The difference actually wasn’t as pronounced as you might imagine, because, during my time at Goldman Sachs, I was already involved in many private equity deals through the merchant bank division. On top of that, I was advising and financing clients from the private equity industry as a Goldman Sachs banker, so I had a pretty good understanding of the sector. So, it did not feel too dissimilar when I joined CVC. One major difference, however, had to do with the size of the organization. Having advanced career-wise within Goldman Sachs, it was logical and unavoidable to become more and more part of the governance structures and processes of this large organization. This includes, for example, sitting on different executive committees and boards with an increasing share of managerial responsibilities typical for a large listed organization. This, in addition to multiple and often changing regulatory requirements in particular after the Great Financial Crisis, kept me increasingly away from the client work and actually doing deals, which had always been what I enjoyed most. By joining CVC as a managing partner, I to a certain extent, returned to the heydays of my career in the financial industry. CVC is a comparatively smaller private partnership, that is very much focused on doing deals. And thanks to its size, it is much more efficiently governed.
How does the corporate culture vary from Goldman Sachs to CVC? How do you judge the recent efforts of the financial industry regarding diversity and improvement of public image?
That is a relatively short question with a lot to uncover. Let me answer in three parts.
First, regarding corporate culture at CVC and Goldman Sachs: in general, both are highly professional organizations. They both hire very well educated and experienced people. And by the way, many of the CVC professionals have a background either in investment banking, management consulting, accounting or law. Many of my colleagues at CVC in Germany had worked with me already at Goldman Sachs. So, from that perspective, the professional high-performance culture is very similar. On the other hand, CVC is very much focused on doing buyouts in specific regions, whereas Goldman Sachs is obviously a much more diversified global business, being active not only in investment banking but for example also in the securities trading business and asset management. There is a difference between an organization like CVC that has a few hundred employees and Goldman, which has tens of thousands. On top of that, CVC is owned by its partners and managing partners. That makes a difference as a partnership is much more the “master of its destiny” compared to being exposed to the swings and sentiment of capital markets. In a funny way, CVC feels like Goldman Sachs; I joined the latter in the early ’90s when it was still a private partnership itself.
Second: diversity. This is obviously a key topic at CVC, to be responsive and socially responsible. But it goes way beyond diversity and public image. These days we summarize it under the acronym: Environment, Social and Governance. Diversity and equal employment opportunities are a big part of that and go beyond gender diversity. However, it is very difficult to comply with an ideal ratio that reflects the composition of society with regards to gender, age or sexual orientation. Although we are working hard and have made some good progress, we are aware that more is needed. The biggest problem we are encountering when trying to fix this is that we cannot find enough talent with a diverse background. This is a problem not specific to CVC, but to the financial industry at large and for private equity in particular. Nevertheless, we are not giving up and implementing focused programs to improve our diversity scores further. This is not a matter of public image but rooted in our belief that a diverse organization performs at a higher level, compared to a less diverse “monoculture”.
Third: public image. I believe as an industry, we have made a big step forward in recent years. 10-15 years ago, we were exposed to the locust discussion, particularly in Germany. Private equity was being attacked as destroying companies like locusts destroy vegetation. Nowadays, people understand that private equity fulfills a very specific role: creating liquidity in the markets for corporate control. The industry has been able to demonstrate – with very few exceptions – that it leaves healthier companies behind after exiting by focusing on economic value creation during private equity ownership.
Recent macroeconomic developments such as trade issues, protectionist movements and low-interest rates, especially in Europe, lead many people to believe that there is a recession around the corner. What is your view on the situation, and (how) does CVC adjust its strategy to the economic situation?
There are positives and negatives about the current macroeconomic situation. We are living in an ultra-low interest rate environment. That itself drives money into higher-yielding asset classes such as private equity which means that currently, there is no shortage of money inflow into private equity. This is a trend the PE industry can take advantage of as long as it is able to deploy these funds in a value-enhancing way. On the other hand, we are now experiencing, partially driven by the same low-interest rates, a significant asset price inflation and long uninterrupted growth in the equity markets. Valuations of companies are at record levels. Hence it is very important for our industry to be prepared for the next cyclical downturn. We at CVC for example, before buying a new company, pay increasing attention to the performance in the crisis-ridden years 2007-2010, as this shows us what happens to a company when a downturn occurs. Having said this, halting investment now in an attempt to time the markets in fear of such a downturn will not be, and has never been, successful. No one knows exactly when the markets turn, so investors would incur significant opportunity costs if they stay on the sidelines for a protracted period of time. Of course, we are slowly recognizing that the probability of a downturn is increasing, and indeed, there are a few companies that we would be very reluctant to buy now as we believe that they are the first being hit by the cycle. Additionally, everybody should currently be more concerned about aggressive leverage levels.
What are your thoughts on the German industrial slowdown especially? What actions should politicians take in this situation?
Well, there are basically three ways in which the German industry is currently impacted. One is a “cyclical downturn” that is expected, and we see that GDP growth has reduced significantly, which posed the question throughout the last quarter if Germany is technically already in a recession. With 0.1% growth, Germany barely managed to stay out of it. But the slowing down of growth definitely has a negative impact on German business.
The second issue is the impact of technological disruption in many sectors, in which German companies used to be front runners. Take for example the automotive industry that is moving with increasing intensity towards electrification and in the more distant future to autonomous driving; or take the retail industry that has moved and is further moving from offline to online marketing and distribution; or take the energy industry that is moving from fossil and nuclear to renewables. All these changes create not only new potential but also uncertainty and transformation. This is a burden that the German industry has to shoulder.
The third issue the German economy has to face is based on the tremendous development and growth it has gone through in the past. To a certain extent, not only the German economy but also the German society as a whole is victim to its own success. Even if it may not always feel like that for everybody, we have to realize that we cannot take economic well-being or every social benefit that is derived from it for granted. The same is true for the high employment levels. These are, to a large extent, the result of the painful but necessary reforms of chancellor Schröder’s agenda 2010, which rescued Germany from its status as the sick man of Europe. The reforms mobilized German society and combined market economy principles with a focus on social responsibility for those who need help. I sense however, that the awareness that further social benefits have to be earned first by a growing and striving market economy, is slowly dwindling, and the sweet poison of socialism under the heading of a misunderstood concept of fairness and justice is taking its toll in our zeitgeist. Despite an already extraordinarily high state quota, politicians have, for example, started to eye larger social benefits that will inevitably lead to higher taxes and will entail more centrally managed and planned wealth redistribution. This happens without really knowing if and when the economy can afford it – and at a time when we are confronted with the above-mentioned challenges, that every government will be unable to manage without the help of markets. Yes, the principles of the social market economy are not always the path of least resistance, but they are the root of Germany’s success story of 70 years since World War II and have helped to facilitate and then manage the reunification of East and West. Unfortunately, though, instead of ensuring economic health going forward, the focus seems to be more on winning the next election by saying what people supposedly want to hear and applaud.
So, all these three factors put the German economic development somewhat at risk and could even create a perfect economic storm which would bring Germany back to where it stood at the outset in the beginning years of the millennium – before the Agenda 2010. Having said that, even this scenario would provide some chances as well.
At the moment, there are record levels of dry powder in the PE industry. In your opinion, what is the reason for this? Is this a problem for CVC as well? If yes, how do you plan to address this issue?
The dry powder situation is definitely driven by the low interest rate environment and the huge inflow to the alternatives’ asset class. Everyone is looking for yield, and the private equity industry has proven to provide relatively resilient returns. If you look at the industry as a whole over the last 20 years, it has always yielded a significant premium compared to bonds and public equities. That will continue as long as the players don’t start a race to the bottom while fighting for deals. CVC for example, since its founding in the ’80s, has distributed more than 2-times money or more than 20% IRR to its investors. Private equity is the only asset class that has been able to demonstrate that managed returns outperform non-managed returns. In public equity for example, there is no real statistically significant difference between buying managed funds or just investing in indexes. Nevertheless, growing fund sizes will affect two changes: equity tickets per deal will rise and allow deals to become larger and larger, the rumored buy-out of Walgreens demonstrates this. Second, the more competitive fight for deals will, looking at the PE industry as a whole, result in somewhat lower returns. Needless to say, that the individual players in the market will try to avoid this.
With a market characterized by high prices and intense competition, investors have to be smarter about where and how to dig. How do you generate new investment ideas?
Everybody has their own secret sauce. I for example, try to stay out of hot auctions, where the price is the only factor that matters. I jokingly say that one should avoid investing according to the “greater fool principle”. Because in these auctions, everybody can win, just by paying the most. In the end however, it is not unlikely that the greatest fool has paid the most, which will lead to him making very low or no returns. For that reason, CVC tries to unlock exclusive partnership transactions with the seller or industrial partners. This provides us with a special angle. We try to avoid the brutal mechanisms of an auction by offering a unique solution, differentiated by more than just the highest valuation. beyond that, our approach allows us to develop better relationships with industry insiders, leading to a better understanding of a business. Almost all deals that CVC has done in the German-speaking region over the past 5 years, were partnership transactions with families, founders or investment partners.
These extremely high valuations are especially present in the tech sector. Regardless, there has been a rapid increase of PE deals in this industry. Do you see this trend continuing, and what are some other industries where you believe we will see an increase of PE deals in the near future?
Tech is indeed growing a lot. This is mainly due to certain growth characteristics in tech companies that attract specific funds that focus on value enhancement predominantly through top-line growth. At CVC for example, we have a dedicated growth fund as well, that focuses mainly on tech-enabled growth companies.
What kind of investor are you? How would you describe your relationship with the management of the portfolio companies and with the other shareholders?
We are investors who would rather buy a good company at a fair price, than a bad company at a good price. We are focused to grow the value of the company through specific value creation programs, linked to the operational performance of a company rather than through balance sheet restructuring. The main goal for our portfolio companies is to go from good to great. We rarely, if ever, buy unprofitable companies that need a complete turnaround. This restructuring sector can offer high returns, but its principles are not necessarily part of the CVC DNA.
We see the management of our portfolio companies as investing partners and co-shareholders, that are as interested as we are in growing the value of the company in close collaboration. So, our interests are fully aligned with theirs in creating better companies.
Can you tell us about a particularly difficult or stressful deal you worked on?
Every deal is stressful. Perhaps the most interesting one that I can tell you about was from my time at Goldman Sachs, when we bought Cognis from Henkel in a partnership with Permira. The deal was supposed to be signed in the same week as the attacks of 9/11. It was very difficult to stick to what was agreed, but not yet signed contractual arrangements. We did not yet know about the full impact of 9/11 on the market, but we were scared. Nevertheless, we honored our word and signed the deal at basically unchanged conditions. Luckily, it turned out to be a successful deal, but it took a somewhat longer holding period to make up for the economic decline in the aftermath of 9/11. The lesson we learned was that one has to always be prepared for the unexpected but more importantly that in the long run, it pays off to keep your word.
What advice would you give to students like us who want to pursue a career in the Investment Banking or Private Equity industry?
Number one: never give up. Number two: try to work hard, but not too hard, instead always work smart. Number three: you should always be aware that with all the experience and exposure you get during your studies and first summer jobs, you to a certain extent “brand” yourself for the future. Hence you should never take any assignment lightly. Try to deliver top results in all your tasks. Try to get into the best institutions or companies you can and try to impress with outstanding performance. A fast and successful start will result in an easier career path for you later.
It was a pleasure speaking with you, thank you for your time.
Editor: Eric Peghini
Author: Tom Cordes