Q&A: Ripplewood's Tim Collins

Q: You describe Ripplewood’s approach to investing as counterintuitive. How did it develop?

A: I started it with three great operating guys. Our theory was that, at the time, private equity was mostly investment bankers who were good at raising money, good at buying and selling, but didn’t have much strategic insight. We decided to spend time and effort understanding industries and companies before investing and have plans for significant operational improvement. Early on, we bought a little refrigerator company that sold to restaurants because we realized that restaurant chains were becoming the critical part of the industry and they needed scale and help. We spent 18 months studying the industry and it worked out well. It was the same with car dealerships and non-branded food. We also established Gogo, a wi-fi provider for airplanes, after Boeing had failed with its own system.

Q: What got you interested in Japan?

A: When I started the fund, coincidentally, Mitsubishi was looking to invest more in the US. They became a significant investor with us and were very supportive. At the time Japan was struggling and we were fascinated by the potential to be helpful. Companies had great products, good manufacturing processes, and strong brands, they just weren’t very profitable. We thought it made a lot of sense to look at Japan, but everyone said we were crazy. They said it was closed, the government won’t let you in, the Keidanren won’t let you in, the unions won’t let you in, you won’t be able to survive.

Q: And why banks specifically?

A: There was concern about the financial system, so we hired McKinsey, and together we rolled up our sleeves and went through the balance sheet of every big bank and reconstructed it using proxies for what loans would have been rated by the rating agencies. We soon realized how troubled the banks were – even the government’s understanding underrated the magnitude of the problem. We started looking at investments with a great deal of caution and during that time I found Masamoto Yashiro, who is one of the best managers I have ever met, strategically brilliant. Then LTCB [Long-Term Credit Bank of Japan, later renamed Shinsei Bank] went bust and we decided to bid on it. We knew it was a long shot, but after a long process we were successful. Some business leaders and politicians pushed hard for a Japanese buyer, but the government realized we understood the problem, we knew what we were doing, and we were sympathetic to operating in a way that wouldn’t make things worse. Even after we won, people said it was a gamble. However, we had Yashiro-san.

Q: You subsequently invested in banks in Egypt and Latvia. Are there common themes in your approaches to these deals?

A: I was on the board of Citibank for a short time, after the government bailed it out. I remember having a conversation with Vikram Pandit, who was then the CEO, and he was complaining about the regulators and government. I said, ‘Vikram, you don’t own this bank and neither do the shareholders, we rent it from the regulators.’ Obligations come with any business, but especially with banks, you have an obligation to the regulator first and everything else is secondary. Before we make an investment, we go to the government and explain how we would manage the bank and how we think this would help the financial system in general – as opposed to saying here is what you have to do to generate our required returns.

Q: Is there always a Yashiro-style local manager in your deals?

A: In most of our deals. We just made an investment in a bank in Saudi Arabia and it has a great CEO, so we didn’t need to bring anyone else in. But in Egypt we had Bob Willumstad, who used to run retail banking at Citi. We also brought in Lucio Noto, who used to run Mobil Oil, and then Paul Volcker helped us – as he did with LTCB. At Gogo, we had a guy from Sprint who understood the mechanics. We do use McKinsey a lot as well, but not for basic strategy, that is our domain.

Q: What are your investment criteria?

A: From the beginning, I didn’t want to do anything where we couldn’t make the business better for all stakeholders. If all you needed to do was cut overhead, raise prices, and then sell through an IPO or to another buyer, that wasn’t for us. Later, when we restarted the business in a non-private equity format – where we commit a lot of our own capital and bring in specific investors for projects – we made three rules. We don’t do any investing with people we don’t enjoy being with. We don’t do anything that isn’t interesting and important. And we don’t do anything where we can’t make a certain quantum of money.

Q: Can you give an example of something you didn’t want to touch?

A: We were offered a bank in Ukraine at almost zero. I went there a lot, met with the then president – who was recently defeated by a comedian (which I think is great) – met the anti-corruption people, and spoke to a bunch of businessmen. We decided there was no way we could operate in that culture; it was too corrupt. But the more likely scenario is someone calls us and says there’s a company that’s cheap, badly managed, and all you need do is go in, cut costs and you’ll make a fortune. As I said, we don’t do that.

Q: How did you get comfortable with Egypt, given the instability of recent years?

A: The Arab Spring happened nine months after we left (not a coincidence). When we invested there was a new cabinet full of very sophisticated guys. One of them had run Unilever’s business in the Middle East and the finance minister was a highly regarded nephew of Boutros Boutros-Ghali. There was a big push for reform, and we wanted to be part of that. In almost all cases, the financial system is an important part of economic reform. Then the politics started to change, we got nervous, and because this investment was in a private equity fund, we exited. I was there a lot when Mubarak was kicked out and the Muslim Brotherhood were elected – I was trying to be helpful because I knew a lot about the situation – but we didn’t own anything. Once the Muslim Brotherhood were removed, we invested again.

Q: When – and why – did you abandon the traditional private equity model?

A: We made the change six-and-a-half years ago. I brought in a partner who had similar views about the private equity model and the nature of the rewards. Under the typical model, I would have needed to spend a year raising money, a year finding investments, own a business for two or three years and then sell it. I thought I was good at adding value to enterprises, but if you sell after three years, you don’t have much time for that process. When I sold the bank in Egypt, even though it was the right thing to do, it was heart-breaking. Over the entire PE period, we had a 54% gross IRR; there were only a few bad investments and a lot of good investments. It’s funny that everyone sees Shinsei as being so successful, but it was below the average at something like 44%. In our new model, we would rather have a 15% IRR over 15 years than 50% over three-and-a-half years.

Q: Several global PE firms have introduced longer hold vehicles. Will more follow?

A: It allows us to focus, to say no to lots of things, and to curate the investors. The private equity world is in such a race for size and that means you miss out on half the benefit, which is being able to focus. At the peak, I had 15 or 16 companies in the portfolio. I spent time with the ones that were not doing well and not with the ones that were doing well. That’s less fun.

Q: You aren’t subject to some of the traditional pressures facing PE managers. How does this impact your risk appetite?

A: I would describe our risk appetite as zero. I went to Ukraine half a dozen times, met everybody there, and met everybody outside who knows about Ukraine, before we decided we couldn’t invest there. I’ve been to Egypt 60 times, to Latvia 50 times. We de-risk by making sure we understand the dynamic in the company, the country and the region. We are not going to hold everything forever. If things get bad politically or we don’t trust the government or the competitive dynamic changes or someone walks in the door and offers a crazy amount of money, we would exit but we never plan to exit at the time of our investment. We have already exited one investment in Egypt because we didn’t like the strategy. But we don’t go in with an exit as our objective, which is unique. I have a long-term appetite.

Q: How much time do you devote to assessing potential investments?

A: We have a team of people, most of them are now in London, and we are very slow to make investments. My partner and I have an agreement that we both agree on every investment. We spent six months looking at Latvia before deciding to invest, which is on the short side. We were looking at Saudi Arabia for more than 10 years.

Q: Was it difficult to justify investing in Saudi Arabia following the outcry over the Jamal Khashoggi assassination?

A: The situation was difficult to deal with, but we weighed the decision, and in the end, it was simple: Saudi Arabia is the most important country in the region and the region is important to the stability of the world in every dimension – economic, geostrategic and security. I have been going there long enough that I could see the social and economic reforms – they are powerful and it’s important they succeed. We concluded that making a positive impact on the people of Saudi Arabia was worth taking whatever controversy comes along with being there at a time when there’s a lot of criticism. What happened is terrible, but the reforms are proceeding, and they are very important.

Q: Going back to Japan, what did you learn from your time there?

A: I learned humility because of the great leaders I met and because it was a heck of a lot harder than I had expected. I also learned a lot about analyzing the political structure. Spending time in Japan reinforced my original instincts on our values. We enjoyed the Japanese stakeholder perspective – one not antithetical to making money – where one prioritizes your broader responsibilities alongside your profits.

Q: What was the biggest challenge you faced during the investment period?

A: The right-wing politics. Every time something happened, Yashiro and I would get criticized – me as the vulture and him as the I don’t know what. That was painful. We knew beyond a shadow of a doubt that what we were doing would help mitigate a massive financial problem and from the prime minister down, when they really understood our point of view, they were supportive. But they were under immense political pressure. It was a legitimate political debate – whether to open the economy to foreigners and the risks involved in doing that. One side said: “They are not like us, they won’t behave like us, we don’t like the way they run their economy, they are rapacious and don’t care about people, let’s not allow these barbarians in.” We hope our approach softened those views.

Q: By the end, were you still perceived as a vulture?

A: Oh yes. It is unfortunate that after we exited and Yashiro retired, the bank had some problems and never achieved its full potential. But we did get some good press. There was an article in the Japanese media, three years after we invested, with the headline, “Tim Collins no longer smells like butter.” It was the highest compliment we were paid. The article argued that we had become a part of the business community and demonstrated that our values were in sync with Japanese values. I love that phrase.

Q: Is traditional private equity not a good fit for Japan?

A: Japan has its own transitions to wrestle with and I’m not sure Anglo-American private equity values are all that helpful. I’m not sure either way. We were lucky because we were the right group at the right time, with an idiosyncratic approach. Japan is not going to go the same path as the US and the UK, or even parts of Europe. I would love to invest there again – Japanese values suit my own – but right now I don’t have the bandwidth what with all the stuff we are doing in Europe and the Middle East.

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• Topics
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• Ripplewood Holdings