General Atlantic’s Gabriel Caillaux on what it takes to be successful in private markets
For Gabriel Caillaux, there is one obvious thing that people in finance often overlook. ‘The market for private equity has matured really quickly,’ says the co-president, managing director and head of EMEA at General Atlantic. ‘It isn’t the wild west it was 40 years ago.’ For a long time, he explains, if you found a great company and had capital, you had a good chance of winning the deal. ‘Today, great entrepreneurs can meet 20 investors and can choose the investor they want.’ So, the most relevant question nowadays is: Why would they pick us?
One way to answer this is to ask a second question: Why have entrepreneurs picked us in the past? General Atlantic has done the legwork here through surveying most of the founders of the 191 companies in its portfolio. ‘Cynically, one might think it’s because we paid the highest price,’ says Gabriel. ‘But, actually, the first two reasons were the brand and what it represents, and secondly, the people. And those are essentially the same, because you recruit according to your brand and your brand is built by your people. ’
General Atlantic has nurtured that brand over the course of the past four decades. Founded in 1980, it was one of the early pioneers of growth investing, originally born out of a family office, something Gabriel believes has influenced the way it operates. (‘We have always felt highly responsible for the capital being invested,’ he says, ‘partly because originally, it was family money.’) It has grown steadily ever since and today, General Atlantic employs over 400 people across 15 global locations and has more than USD84bn of assets under management, as at 31 December 2021.
As Gabriel sees it, General Atlantic is built around two core principles: that ‘technology will change and disrupt every aspect of the economy’; and that ‘innovation and entrepreneurship aren’t the luxury of a few countries but are global phenomena.’ Its portfolio is, therefore, diverse geographically and focused on disruptive technology. Every investment also falls under one of six investment themes: climate, consumer, financial services, health-care, life sciences and technology.
In truth, however, Gabriel puts much of the company’s success down to its uncompromising approach to partnership. ‘The overwhelming majority of our deals are minority deals,’ he says, ‘which means that we partner with entrepreneurs in the spirit of adding value to the business. We don’t believe in control for the sake of control. We believe in trying to help entrepreneurs build great businesses.’ While this might not be the approach of everyone investing in the private-asset markets, much of what Gabriel has to say about partnership is instructive for anyone looking to engage meaningfully in this world.
The first lesson is that you cannot compromise on due diligence. Often, an investor will be partnering with a founder for a number of years, so you can’t rush into that relationship. At General Atlantic, for instance, Gabriel says that it’s rare for the firm to do a deal with an entrepreneur that the team hasn’t known for many years already. There is no shortcut to this. He estimates that his teams meet thousands of entrepreneurs globally each year. ‘Most of the time, there’s no deal to be done,’ he says. ‘But we keep building the relation-ship, which means that, eventually, when a deal starts taking shape, we’ve been monitoring the progress of the entrepreneur for a few years.’ This mitigates partner risk.
Once that deal takes shape, another aspect of diligence comes into play: honesty and transparency. ‘One of the commitments we make to our entrepreneurs is that we’ll show you exactly what we find, good and bad,’ says Gabriel. ‘If we find great things, we’ll show you the great things. The flipside is that if we find issues, we need to gain alignment.’ This word ‘alignment’ is one Gabriel returns to time and again. Honesty and transparency are the bedrock of alignment at the outset of any deal, and that alignment is in turn the foundation of a successful long-term partnership.
Inevitably, the toughest conversations revolve around human cap-ital. ‘It’s an incredibly important test to see how an entrepreneur reacts,’ says Gabriel. ‘Because if they can’t upgrade their own team, which in a start-up has typically been cobbled together and often includes friends, if they can’t realise the weaknesses of their own team, they’re never going to realise their own weaknesses.’ It’s hard to be successful in the growth-equity world, it seems, if you have a tendency to shirk challenging conversations.
All of this is in service of long-term growth, and this is another lesson from Gabriel: always maintain a long-term view. ‘When you’re investing in growth, it’s foolish not to take a long-term approach,’ he says. There’s a simple reason for this. ‘You have to invest in a business to get growth, it doesn’t happen by miracle.’ At General Atlantic, revenue growth drives approximately 80% of the value creation in its portfolio. This also points to one of the common pitfalls that investors fall into when investing in growth. ‘The one thing you cannot get wrong is the long-term growth rate,’ says Gabriel. This comes down to having the skill set to assess addressable market and the competitive dynamics in that market. ‘I don’t outsource that,’ says Gabriel.
This isn’t always a failsafe preventative, however. As Gabriel acknowledges, even the best investors will make mistakes. The important thing is that ‘you need to be extremely disciplined at acknowledging when you got it wrong and addressing those investments that you didn’t call right.’ Otherwise, you’re heading down a dangerous ‘rabbit hole’. By contrast, if you get an investment right, lean into the success. ‘When you’ve got a winner on your hands, you want to deepen that partnership and support the continued growth,’ says Gabriel. Last year, General Atlantic invested around USD2.0bn into its existing portfolio companies. ‘This was doubling down on our winners.
’The last area that Gabriel feels deserves attention is, of course, the exit. When you’ve courted for so long and had a successful partnership over many years, how do you bring that relationship to a close? For a growth-equity investor like General Atlantic, an exit might come in the form of an IPO, but it might equally be a sale to a buyout firm. Again, for Gabriel, the key is that word ‘alignment’, which doesn’t just refer to having a shared vision for where you want to drive the business; it’s also about alignment in exit.
As Gabriel’s insights demonstrate, investing in the private markets is a complex undertaking. Great entrepreneurs can now have their pick of investors, but by the same token, as we have seen, great investors need to be just as picky. And, of course, forging a deal is merely the start of the journey; the real tests come after that. ‘Whatever way you design this at the beginning of your journey with an entrepreneur, it will get challenged,’ says Gabriel. ‘There will be a Covid crisis or a recession. It’s never anything you can predict, but you’re going to have to deal with it.’ Like any long-term relationship, then, you need to know that you can rely on your partner, and you need to be prepared to weather a few storms together.