‘Complexity is Our Friend’: James Brocklebank on Advent's Private Equity Strategy

0:05James Brocklebank:This is just one more challenging time in a line of challenging times. But complexity is our friend, and we lean in in times like this. And the best deals tend to be made in non-benign conditions, if you like.

0:23Where are the biggest opportunities for private equity investors now? I'm Alison Mass, Chairman of Investment Banking and Goldman Sachs' Global Banking and Markets Group, and your host for this episode of Goldman Sachs Exchange's Great Investors. Today, I'm sitting down with James Brocklebank, who is the co-chair of ADVENT, a global private equity investor where he also co-heads the European business. Well, welcome to Great Investors, James. Really thrilled to have you here.

0:52James Brocklebank:Thank you so much for having me. It's a real privilege. Thank you. So you've been at ADVENT now for 30 years? Just under 30 years. Which is spectacular. Thank you. And thanks to a paper job listing in the FT, the Financial Times, I heard. And I heard that you still have that listing in your office. I do. I have it on my wall. It was given to me for my 25th anniversary at Advent. They found it, the actual piece of paper. It's framed on the wall. And it does mean a lot to me because it's a reminder of how random life can be and how nonlinear one's career can be. and it was interesting because when I was at Bearings in the first year or so, I did like an internship sort of stash, if you like, like an apprenticeship in their private equity business, which was called Baring Capital Investors.

1:37James Brocklebank:It was on Park Lane in London. I really enjoyed it. So I had an inkling that the private equity was interesting and would appeal. And then I saw this ad and I didn't know anything at all about Advent, but I liked what it said. And it said that this was an international firm, very sector-focused, operational value creation, and they were looking for people to help them with deal sourcing. And I thought, this looks interesting. And so I rang them, or I applied, and I ended up getting the job. And that is how it all started. I'm not sure I've ever met a senior leader in the private equity industry who found his or her job from a paper listing in the FT or any newspaper.

2:18So that's absolutely That's really fascinating. So you joined Advent in 1997 at a time when private equity was still relatively small. What did private equity look like in Europe at that time? And how different was the industry from what we see today?

2:32James Brocklebank:Well, for starters, it was a lot smaller, right? So I remember in late 1997 going to a dinner, an industry dinner, and you had really the whole UK industry in the room. And it could fit in a single room. It was a ballroom in London. So it was a very small industry. It was at a time of transition of the industry, but moving a little bit from venture capital to private equity. So very early days, the acceptance of private equity as a form of ownership was just getting going. It was less sophisticated. There was smaller deals. For example, it's quite funny, but to think that the deal sizes that we were dealing with there at that time, really it was about the same as what we might pay in fees today on a transaction, right?

3:16James Brocklebank:So it's a completely different kind of space. But it was early days, but good fun. And just in that transition period. So now Advent manages about$100 billion and has equal presence both in the U.S. and in Europe, which is really unique among your peers. So how is the firm structured to serve both regions effectively? Yeah. So we started in Europe in 1989. Advent was founded by Peter Brook in 84 here in North America. But interestingly, we were in on the ground in Europe from 89, which is a lot earlier than most other firms. So we developed offices in London, in later in Luxembourg, but in Milan, in Madrid, Paris and Frankfurt.

3:59James Brocklebank:And we've always had this strong focus on boots on the ground, local presence, people who understand the nuances of what's happening in their regions. And that's always been a key part of how we've addressed the European opportunity. Because if you're a founder in Spain or you're looking at a carve-out in Germany, it's partly about trust and it's about who you deal with. And having people who've got those really long established networks in the local countries is really important. And Peter Brooks saw that was how Advent came together in a sense. And we've maintained that spirit ever since. And we were early movers in the European presence.

4:38So Europe is a special place to do business. Can you talk a little bit about the structural differences that make European buyouts fundamentally different from the U.S. market? Yes.

4:49James Brocklebank:I think, look, when we compare the two, we see a little bit more transformational deal flow in Europe. So Advent invested along two main archetypes, transformational buyouts and acceleration buyouts. And we see more of the transformation archetype in Europe. There are a lot of very high-quality companies in Europe, but there is a complexity about Europe, which means that there's often big companies are trimming their portfolios. And that throws up opportunities for us and other private equity firms to take on these kind of carve-out type deals. So if you think about us recently with ThyssenKrupp Elevator coming out of ThyssenKrupp or Zentiva coming out of Sanofi, or we recently bought a portfolio of consumer brands from Reckitt Benckiza, which is now called Vestacy.

5:37James Brocklebank:We bought Ineo, which is the gas engines business of GE. There's a consistent flow of these transformational deals. And that's a little bit more the case in Europe than in North America, where you see more of the growth and acceleration buyout archetype. So that is one key difference, I think. And then also on the financing side, you have such a deep capital market here in the United States. You can sort of price any deal in a way. It's just a matter of the price. In Europe, the market is more relationship driven. It's more binary. So the credits get done or they don't get done. But it's also perhaps a little cheaper because it's somewhat overbanked.

6:17Yeah, that's consistent with what we hear, but also why you are as successful as you are because you have those relationships locally.

6:24James Brocklebank:Yeah. So I'm sure you're getting a lot of questions about the macro environment now. So how does the current Middle East conflict change the economics, in your view, of private equity deals, particularly in Europe, where growth is already weaker? Yeah. So the direct portfolio impact of the conflict in the Middle East, I wouldn't say has been significant on our portfolio or other private equity portfolios in Europe. However, energy price volatility definitely feeds into higher prices, higher input costs, and that could feed through into consumer impacts. And so it's really the second and third order impacts that we are anticipating here.

7:08James Brocklebank:At the moment, the impact is manageable. But, yeah, it depends. It really depends on kind of what happens next. So as we talked about earlier, Europe often looks structurally different. than the United States in terms of fragmentation and regulation. Does that complexity make investing harder, or does it create more opportunities for private equity investors, in particular, ADVENT? Yes and yes. Look, Europe is a patchwork of 44 nations, of which 27 are obviously part of the EU. Very complex, fragmented landscape. Each country, different political regulatory setups. You've got all the different languages.

7:46James Brocklebank:We love that complexity. Complexity is your friend when it comes to operational value creation and trying to drive alpha. And so we really like that Europe has that kind of inefficiency in the way it's set up. There are a lot of really high quality businesses like the ones I mentioned. And quite often you have a situation where companies have to trim their perimeter. You have also a lot of very strong public companies which operate across Europe and often internationally which become available. And so we think that the European landscape is highly attractive. But what it means is that you need this local kind of presence.

8:22James Brocklebank:I think it's really important because there is an information asymmetry for those who might take a more remote approach to investing in Europe. And I think if you've got people on the ground, teams on the ground who really understand the local labor unions and the ways of doing businesses, it really is a huge advantage. And if you combine that with global sector expertise, that I think is a very powerful combination. And that, in a sense, is what Advent is set up to do. And I think that is a huge benefit of how we can deal with that complexity in the European market. Yeah, I think I'll go off-piste and say that if you talk to our merger team in Europe and they're in boardrooms in all of these countries, that is your reputation.

9:02So one of the defining challenges in the private equity industry today is the slowdown in exits. given the macro, whether through IPOs or strategic sales. So how is ADMENT thinking about monetizing your portfolio investments in this environment?

9:19James Brocklebank:Yeah. Well, you're absolutely right. In the good old days, investors could expect 20 % of starting NAV back every year. Today, they're getting between 8 % and 12 % of starting NAV each year. And really, for the model to work properly, it needs to be at least 15%. So there has been a really significant change in the pace of realizations in our industry. And that is really the key question, I think, that LPs face at the moment. So for us, this is a key topic. And in a sense, the exit question is really a question of what you do at the beginning when you buy a company. And so what we try and do is to be very clear and specific about who is going to buy the company at exit and what you need to do to the company to make it attractive to those specific buyers.

10:07James Brocklebank:So it's not an abstract discussion about who's going to buy it. It's a very specific discussion about who might buy it and what you need to do to the company to make it attractive to them. And what we're trying to do is create very strategic businesses, businesses that we believe will be attractive to consolidators. And we try and avoid situations which might have a single threaded exit. So just pure IPO. We'd much rather have the optionality of being able to sell to multiple different parties. So that is how we are trying to address this challenge. But it is very clearly something that the industry is wrestling with at the moment and something that we all need to get better at.

10:45So you mentioned that in the current environment, you think harder about monetizations on the way in.

10:50James Brocklebank:Yeah. And who's going to ultimately buy them? I'm curious, in your investment committees, has any of the analysis changed? Is there a new case that goes into investment committee memos now, given the macro environment with software and everything going on? Yeah, there is even more focus, I think, on the exitability question. The other key topics we focus on is AI, which I'm sure we'll come to in a second. But I mean, that's the other key focus that we have. But no, without question, we're thinking about also the timing of exit, because the other thing that investors are very focused on is obviously IRR.

11:26James Brocklebank:and how quickly you can get money back. Because some of these transformations take a long time, and that's the trade-off a little bit. And you need a lot of people and a lot of resource to undertake them. And that's something that we have 300 people on the deal team for that reason. Right. So, of course, we cannot have a conversation about investing today without talking about artificial intelligence, which is transforming industries at a very rapid pace. How are you thinking about AI both as an investment theme and as a tool to improve your portfolio companies? Well, starting with AI within ADVENT, because I think you have to walk the walk internally.

12:02James Brocklebank:And I think we were very early on in hiring a chief data science officer and a chief digital officer before AI was a thing. And so we've been thinking about this for some time. We were very early having our own large language model trained on ADVENT data. It was called ADVENT GPT. But that was the first generation tool. Now we have a sort of intelligence engine which is agnostic to the LLMs and uses all of them. The implication of AI in all businesses is going to be truly profound, and we see that. And so we want to make sure that we have the tools internally to really be able to take advantage of it.

12:38James Brocklebank:So it's a data question fundamentally as well. You have to organize your data properly in order to be able to have the benefit of AI. It's also a cultural question because you need to break down silos and all ways of doing things and get the people on board with doing things in a different way. And in a sense, we're almost moving to a landscape where we're working for the AI rather than the AI working for us, in a sense. So that's on the advent side. On the portfolio side, we have dedicated people who help our portfolio companies with AI transformation. And genuinely, it is about AI transformation because too often you have little AI projects bolted on.

13:15James Brocklebank:And really what you need is the data to be organized properly, the cultural and human factors dealt with. And then AI then more transformative on top. And so that's a big focus for us. You talked about how Admin is using AI. How has it impacted your investment committee processes? Well, the other thing that we've done, which is fascinating, we've created something called the IC robot. And this is an AI that has been trained on all of our investment committee papers over the last 13 years. So it's ingested everything, all the deals that we've shown the committee. And interestingly, it has the perspective on what happened to the deals that we did, but also the deals that we didn't do.

13:52James Brocklebank:And then what it's doing now is that when we bring any new deal to the committee, it looks at it and it can look at the assumptions that are in that particular case. And it can basically say, oh, I see a margin assumption here. That has not been achieved before in this particular type of company before. And so it's just a prompt. It's not a voting member or anything like that, but it's extremely powerful in terms of prompting discussion on particular topics. I'm curious with your junior professionals, as you onboard junior professionals, how important is their knowledge of use of AI in hiring them?

14:29And how do you teach people the business if they're using your large language model to do their analysis? Yeah, great question.

14:37James Brocklebank:So two things I'd say. First of all, a lot of the innovation comes from the junior people. They are coming with very sophisticated knowledge of this already. It is an apprenticeship business, you're quite right, and therefore they need to understand the basics. They can't just outsource all of the model creation. You need to understand how the models work before you just outsource them, because clearly now you can just have them made through skills and through agents in the AI. But so far, we've not had a problem with that. We are definitely looking for people who are more native with AI when we hire them.

15:08James Brocklebank:So rather than have a deal team and then a team of data scientists, we want the deal team to be already experienced in data analytics so that they're natural with it rather than a separate group. And that, I think, is the vision that we've held for some time. And that's been a factor in our recruitment over the last few years. So let's talk about ADVENT's own evolution. Private equity firms are under increasing pressure to branch out beyond LBOs to better compete with so-called one-stop shops. but Advent remains focused on pure private equity. So tell us about the strategy and where do you look for unique opportunities?

15:47James Brocklebank:Yeah. So we have made the definitive choice to stay absolutely focused on private equity. And that way, all of our time, attention, and effort can go into what makes the bicycle go faster. And we love that purity and clarity of purpose. And we also think it's actually becoming increasingly attractive to the LP community because so many firms have grown so much and have diversified so much that the private equity is actually quite a small part of what they do. And there's nothing wrong with that business model. It's just a different thing. They are solving for something else. And so we want to be the best place for people who love deals.

16:23James Brocklebank:So rather than financiers, we want people who love doing deals and who really, really love the kind of deal environment. And that's, we want Advent to be the best possible home for those people. So you're known also for specializing in payments and financial services and in fact led the acquisition of the payment processing company WorldPay from the Royal Bank of Scotland in the early 2010s, which I think we worked with you on. Yeah, you did. What did you learn about sector verticals from that deal and how did it change the way you think about operational complexity? Yeah. So the payments subsector is just one of many subsectors that we focus on.

16:59James Brocklebank:You know, within Advent, we have our five main sectors, but we really focus on these very deep sub-verticals of which payments is one, chemicals is another, pharmaceuticals, aerospace and defense being others. And in payments specifically, we've invested about$11.6 billion since 2008 in 19 different payment companies, much more if you include the M &A that those payment companies have done. So really deep experience. And what we learn is that by being so deep in the sub-vertical, you become almost quasi-strategic. You really understand what good looks like. So, for example, in a payment company, by the time you've done your third churn management project or your third pricing project, you're pretty good at it, right?

17:36James Brocklebank:And so you keep repeating that knowledge. You also can recycle people. So you can recycle some of your best talent. And so this all speaks to how you can drive operational value creation and transformation. And this is really core core to the ADVENT model, which is continuous improvement and this deep sector knowledge then across the globe. So taking learnings initially the early payment companies done in the United States, moving into Europe, and then more broadly across the world. It's an incredibly powerful model and it's something that we keep repeating over time. So you've reaffirmed your involvement in the defense sector in recent years.

18:17Tell us about how you're thinking about that sector.

18:20James Brocklebank:So we were an early mover in the defense space. I think we saw it before it became a sort of fashionable thing. And we were attracted by long-term contracted cash flows, very defensive business, great technology. But equally, many of these defense assets were part of struggling or under-invested conglomerates. So one of the early deals that we did was Cobham in the UK. And it was a public company that had multiple profit warnings. but there were within it really strong individual businesses. There was no strategic buyer for the whole thing, but we identified that there would be really strong strategic interest in the individual parts.

18:55James Brocklebank:So we acquired that company through a P2P, which is a public-to-private, provided the investment it needed, put specific boards in place for each of the different companies with the relevant people, and liberated that company, in a sense, and all the different underlying entities. Since then, we've pivoted a little bit more to next-generation defense businesses. We've recently invested in a business called Shield AI and a business called Sironic, where we are supporting innovation into next-generation defense technology, which we're very excited about as well. So in early 2024, Admin announced its plans to invest$5 to$10 billion in India over five years.

19:35The firm also recently opened offices in Tokyo and in Sydney. So what is driving the focus on the Asia-Pacific region? And what opportunities are present that didn't exist a decade ago that have made you focus today?

19:48James Brocklebank:So Asia-Pacific broadly is going to account for 50 % of global GDP growth over the next period, right? So it's super important. Equally, its share of global trade has gone up from about 7 % to 35 % in the last 25 years. So you want to be there. That's our view. You want to be part of that growth. taking the advent model to Asia. So we started in India, then we opened an office in China. And as you say, we recently opened an office in Australia and also in Japan. And what you're seeing is a growing acceptance of private equity as an ownership model. You're seeing a growing maturity in the capital markets.

20:25James Brocklebank:You're seeing a greater acceptances of control buyouts, which is what we do. It's also why we're less focused on Southeast Asia, because there's less control buyouts in that region. So we focus more on the sort of buyout markets. So Asia has developed and is now becoming a really quite exciting opportunity. India is a story around financial penetration, emerging middle class, strong growth. China you have in our focus is on domestic champions of very strong strategic businesses, which we think have strong strategic bids in due course, even if exit is more challenging at the moment. Japan is a fascinating opportunity because of regulatory and governance changes, which is requiring these complicated and complex public companies to simplify.

21:04James Brocklebank:So we see a huge opportunity for carve-outs and P2Ps in Japan. And we think our brand of steep sector level knowledge and this operational value creation will really work well. That said, we recognize it's a very competitive market and it's very popular at the moment. And then Australia is a mature market with very strong institutional support where we see great opportunity for patient capital to drive value creation. So in all four markets, we think there is very exciting opportunities, but overall, Asia Pacific is clearly a key focus for us going forward. So I've heard that the culture at Advent is similar to Goldman Sachs' culture.