Jean Eric Salata: Find the Comeback in the Setback

0:00Mo Assomull:From Morgan Stanley, this is Hard Lessons, where iconic investors reveal the critical moments that have shaped who they are today. You'll hear about two out-of-consensus calls, one that was on the money and one that wasn't.

0:12Jean Eric Salata:The easy thing to have done at that time would have been to say, you know what, this is too difficult, this market doesn't work for us, we don't know how to operate here.

0:20Mo Assomull:Today on the show, Jean Salata, chair of EQT Group with$316 billion in assets under management.

0:27Jean Eric Salata:I've sort of always viewed myself and our business as a little bit of an underdog.

0:31Mo Assomull:Jean founded Bering Private Equity Asia in 1997 and led the management buyout that established BPEA as an independent firm. In 2022, BPEA merged with EQT to create one of the world's largest global private markets firms, which today spans the U.S., Europe, and Asia.

0:49Jean Eric Salata:People talk about the beginning of your firm and they look at where you've ended up and they say, wow, haven't they been so successful? But there were so many times when it could have easily gone the other way.

0:58Mo Assomull:He sat down with Mo Asamo, Global Co-Head of Investment Banking at Morgan Stanley. They met at the Campbell, inside Grand Central Terminal.

1:05Morgan Stanley:Thanks for joining us. Lots to get through today. Great to be here. Thanks for having me.

1:10Mo Assomull:Mo began by asking Jean about the arc of his career.

1:16Morgan Stanley:You started out building a small private equity business within a larger organization, Barings Bank, of course. You're obviously our chairman now of one of the largest publicly traded private equity firms. How has that shaped your career?

1:30Jean Eric Salata:Yeah, when we started off, actually, we had only$25 million of assets under management. But in the midst of that, just when we were getting going, the Barings Bank actually went under. And that was really one of my first sort of setbacks or shocks in my private equity career was being part of an organization that was going through a pretty tumultuous period. But in hindsight, and as you're living through it, you don't appreciate these things. But in hindsight, This sort of mini crisis or crisis opened up opportunities for us to eventually spin our business out, which is what ended up happening when Barings was acquired by ING.

2:02Jean Eric Salata:And then we negotiated with ING to spin the Asia business out. And that's sort of a recurring theme in my career that when there's been these big dislocations or some of these setbacks and crisis, there's always also been another door that's opened or that's created a new set of opportunities. provided you're able to survive the setbacks and navigate through the difficult periods that you're going through. The business grew, it developed, and we went from being a much more focused business around a few geographies to being a much more dispersed business around multiple geographies. And then we got to the stage where we were a fairly established large firm in Asia.

2:37Jean Eric Salata:And I started noticing some of the global firms changing the way they did business in our industry, moving from being just a single product, single fund focused partnership to being multi-product, larger institutionalized businesses, multi-strategies operating across geographies globally and also having just much more scale. And that's when we started to really institutionalize our business. We started to put in a lot more processes and changes to our leadership structure. So it wasn't so much centered around me as the founder and became much more of a distributed organization. And that really set us up for ultimately what we ended up doing was becoming part of a much larger global platform.

3:18Jean Eric Salata:And I was lucky enough to meet the folks at AQT who had a very strong business in Europe and the US, but really didn't have much of a presence in Asia. So it was a perfect strategic fit, but it was also importantly a really good cultural fit, which is ultimately why the combination succeeded. That's great.

3:34Morgan Stanley:So I'd love to understand some of your investment calls over the past couple of decades. Maybe you could start with one that was a particularly successful one before we get into the ones that are more challenging.

3:45Jean Eric Salata:The one that comes to mind is a for-profit education company called Nord Anglia Education. Nord Anglia Education is an operator of international schools around the world. Today, it's actually the largest in the world. But at the time, which was around 2007, 2008, it was an industry that actually was on the radar of investors in the United States, but was not on the radar at all in Asia. And I had a very close friend working at a firm in the United States that was helping diligence a lot of private for-profit education companies for private equity firms. And I was talking to him about it, and I was thinking, wow, for-profit education.

4:22Jean Eric Salata:And I remember even discussing with some of our investors at the time, and they felt like, are you sure you can even invest in the education sector in Asia? Is it even allowed? What are the regulations? How do you generate profit? I started learning more about this, and we started looking. And one of the things we always try to do at Bearing Private Equity back in the day and still at EQT is rather than wait for deals to come to us, is think about how we can find things that are not yet in the market, take private opportunities or companies that are privately owned by families. And so we did a sort of a top-down market mapping exercise of education assets in Asia.

4:58Jean Eric Salata:And to our surprise, there were actually three pretty sizable for-profit education schools in China at the time, but they were owned by a UK-listed company. Got it. This is before the days of sort of cross-border investing being that well-known or practiced in Asia. And so we decided to take a trip to London. We met the company. We said to them, we're an Asian private equity firm. They'd been approached by European private equity firms. We're an Asian private equity firm. We can actually help your business in our part of the world, which they found quite intriguing because they were having trouble penetrating the markets in Asia.

5:32Jean Eric Salata:And they felt that as a private company with our backing, they could do a lot more. And we took the time, it was a business of six schools, bought it for something like three or$400 million at the time in total enterprise value. And over the last sort of 15 years, we've owned it in subsequent funds and vehicles. And we've taken it now to over 90 schools around the world. And we just recently transacted on the asset at over a$14 billion enterprise value.

5:58Morgan Stanley:So a reasonable return, I think.

6:00Jean Eric Salata:Yeah, not a bad return. But looking at new sectors and how you can tackle deal constructs that are a little bit different, I think, is a way to generate some alpha in our industry.

6:11Morgan Stanley:What lessons did you take away from that initial investment as you thought about the success?

6:16Jean Eric Salata:I think number one, there was a very big consolidation opportunity in the industry. It was a very fragmented industry. Most of these schools are individually owned around the world. So there's an M &A kind of roll-up opportunity, which I think is a really good playbook for value creation that we've subsequently executed on in multiple different industries. Secondly, we gained a very strong appreciation for businesses that have these kind of recurring revenue type business models, tuition in this case. In this case, it's prepaid. You get paid in advance. So it's very favorable cash flow characteristics that enable you to utilize the cash in the business to make acquisitions or to invest in further growth.

6:55Jean Eric Salata:I think the other key takeaway from this business is that actually the business went through some very challenging periods. We had actually right after we bought the business was the GFC, the financial crisis in 2008, which nearly took the whole business down. So we had to get through that. Then we had a very tough and challenging period during COVID as well when people weren't going to school. But we invested in the technology platform. We developed a really good online offering at the time. So I think just this idea of whatever comes at you, figuring out the strategy to overcome it. If you have a good business, you have a good management team, how do you continue to build on that and overcome the business challenges, which are kind of a natural part of most companies and most businesses.

7:37Jean Eric Salata:And this is where I think the active ownership strategy of being a control investor, which I think Nord Anglia was probably one of the first buyouts that we'd done. And I think that was also a key lesson for us, was that the more you have control of a business, the more you can really drive value creation, the more that you can really be in control of your destiny on the investment.

7:55Morgan Stanley:That's great. I wanted to ask you about the impact of AI, maybe on Nord Anglia, but also on other businesses. How has that changed the way you think about investments? And again, maybe picking on just education as a sector, would it be the same lessons today versus back then?

8:13Jean Eric Salata:Yeah, I think in education specifically, AI is a tailwind. The way we're looking overall at AI is it's very sector specific and we're not going to be uniform. even within sectors, within subsectors in certain companies, there will be value creation as a result of AI and others, there will be value destruction as a result of AI. So what we're really focused on now is making sure we have the right leadership team, making sure everybody has an AI strategy and then we have the right leadership team to execute on that strategy with a sense of urgency. Because if you don't move quickly here to take advantage of whatever AI offers to your particular company or your industry, than other either incumbents or even worse, AI native players would be coming in to really disrupt your business.

9:00Morgan Stanley:Makes sense. Can we talk about an investment that didn't work out as well as you thought? What was the original thesis and why it didn't play out the way you thought it might?

9:10Jean Eric Salata:Yeah. As I think back to the early stages of our business, when we were just getting started, we had a very strong China business that was growing and doing well. And we decided that the next phase for us was to start investing in India. And India was a relatively new private equity market at the time. You're talking about more than 20 years ago when we were looking at this in the early 2000s. And so we started investing in really a broad range of companies there. There were opportunities, but I would say that we were not very systematic about it. And what ended up happening is that we made a lot of minority investments in a lot of different companies, in a lot of different industries, which mostly ended up not working out.

9:55Jean Eric Salata:And it was a real setback for us.

9:57Morgan Stanley:Was there a moment during that early journey in India where you said, it's not working, we have to pivot? Was there a mindset shift or something that made you change?

10:08Jean Eric Salata:Well, it started building as we started losing money on investments, which none of us like to do. And viscerally, when you lose money, for me personally at least, it just bugs me. And of course, I had to go and tell our investors the bad news when we were losing investments. Probably the low point was when we had one of the portfolio company's founders try to come after us legally using the Indian legal system. It was really a way to try to strong arm us in the kind of weak position that we held in the investment. And investors were asking, why are you bothering going into other markets that you don't really understand?

10:48Jean Eric Salata:And so the easy thing to have done at that time would have been to say, you know what, this is too difficult. This market doesn't work for us. We don't know how to operate here. Nearly got to that conclusion. But that's when we sat down and said, let's stop here and evaluate and figure out what's going wrong and how we fix it. First, we said, you know, do we have the right people? Do we have the wrong team? We actually came to the conclusion we have the right people. But what we were doing wrong, we had the wrong strategies. And what we changed subsequently was, number one, we stopped making minority investments because we felt like it was very important to have control.

11:20Jean Eric Salata:We had issues with governance. We had issues with management quality in the businesses and not being able to do anything about it. We had issues with not getting liquidity in our investments, being stuck as a minority investor. So we shifted from minority investments to control investments. The second thing we did is that instead of being opportunistic and investing across whatever deals we found in the market, we decided, let's analyze this top down. Let's look at the market. Let's try to understand where the biggest growth is going to happen and where the best private equity type opportunities are going to exist and where the most controlled deals are going to exist.

11:53Jean Eric Salata:And we came to the conclusion that IT services, the technology sector was the big sector for us to be focused on. And we basically exclusively focused on that one sector for, I would say, almost 10 years. We also started really doubling down on professional management, avoiding founders or promoters, as they're called in India, and really working with kind of professional CEOs that we would bring in who were very aligned with us and driving value creation together. And it did actually take us, I'd say, another two or three, maybe even four years before we made another investment, having to reorient it ourselves and started to completely generate a whole new pipeline of opportunities based on this new outlook, this new strategy that we wanted to execute on.

12:33Jean Eric Salata:and sort of building our conviction. That strategy worked. And we went from having the worst performance in our portfolio in India to having the best performance in our portfolio in India in our subsequent funds. So the takeaway for me from that was, it nearly put us out of business, moving into a market where we didn't have our strategy right yet. But having refined it, we were able to then deliver great results, which ultimately ended up strengthening our business. And if I look back at what enabled us to do that, I think it really kind of boiled down to, first of all, just being very honest and open with ourselves that we weren't doing a good job and being able to have a transparent discussion around that.

13:13Jean Eric Salata:And then secondly, I think it's this idea of kind of learning agility, of like constantly trying to improve the way you do things and figuring out what you can do to make your business stronger rather than taking every setback as a sort of a negative experience, see how you can figure out what you can do better next time. Right.

13:33Morgan Stanley:I guess part of the lesson for me, at least, is something's hard. Rather than walk away from it, pause, reflect, think about what needs to change, and then go back in if you have the conviction to see it through. Yeah.

13:47Jean Eric Salata:And this is where your team members really come in. I mean, none of us can do this on our own. It's a tough situation to be in. And, you know, a lot of these periods are coinciding with setbacks overall in the industry or fundraising being challenging or wondering whether you're going to raise another fund ever again or your team getting demoralized. So people see the beginning of your... They talk about the beginning of your firm and they look at where you've ended up and they say, wow, haven't they been so successful? But what not everyone really appreciates is that along the way, there were so many times when it could have easily gone the other way where you nearly were thinking about giving up.

14:24Morgan Stanley:How was it retaining the right people, making sure that those that were with you early stayed with you through it, especially the ones that were the strong performers and that they weren't swayed by, I'd like to do something different.