On Sept. 25, Kelly Cornelis of LaSalle Capital and Pat Dorsey of Dorsey Asset Management hosted “Rise of Private Markets.” The event was the third in this semester’s Robert K. Wilmouth Speaker Series, a number of lectures hosted by NDIGI designed to further students’ knowledge of the science and art of investing. The objective of the event was to demonstrate to the audience the differences between private and public equity.
Kelly Cornelis joined LaSalle in 2005 and is currently responsible for sourcing investment opportunities, overseeing due diligence, structuring and negotiating transactions, portfolio management and investor relations. Prior to joining LaSalle, she served as a Vice President at SB Partners, a lower middle market private equity firm. As a founding member of the Chicago Women in Private Equity, Cornelis is also a committee member of PE WIN (Private Equity Women's Investor Network) and served as a board member of MBBI (Midwest Business Brokers and Intermediaries). A Moline, Illinois native, Cornelis holds a BBA from the University of Notre Dame and an MBA from the Kellogg School of Management at Northwestern University.
Pat Dorsey is the founder of Dorsey Asset Management. Prior to starting Dorsey Asset, he was Director of Research for Sanibel Captiva Trust, an independent trust company serving high net worth clients. From 2000 to 2011, Dorsey served as Director of Equity Research for Morningstar, where he led the growth of Morningstar’s equity research group from 20 to 90 analysts. He was instrumental in the development of Morningstar’s economic moat ratings, as well as the methodology behind Morningstar’s framework for analyzing competitive advantage. Dorsey is the author of two books — The Five Rules for Successful Stock Investing and The Little Book that Builds Wealth. He holds a Master’s degree in Political Science from Northwestern University and a bachelor’s degree in government from Wesleyan University. He is a CFA charterholder.
The event was structured as a Q&A “Fireside Chat,” led by students Emily Feczko and Conor Hogan.
Q: Could you start by telling us about your background and education, and your day-to-day career responsibilities? Do you have any advice for students looking to enter a career in finance?
Cornelis: My path into finance began at Notre Dame. I started as an English major, believe it or not. One of the pivotal things I did was take a class called AIM (Applied Investment Management). It was a new entrepreneurial course, and we were managing a small portion of the endowment, I believe $100,000. But it was a great way to gain exposure to capital markets. It opened up a whole new world of opportunities I didn’t know about. After that class, I shifted majors andtook the traditional path in Finance and went into investment banking before entering private equity.
My day to day activities consist, of course, of a lot of numbers and analytics. But it’s also about relationships. We look to invest in family-owned businesses in the lower middle market. People skills are very important on a day-to-day basis.
I recommend that students read about private equity transactions. I also think there’s a lot of ways to end up in private equity, but having an interest in how businesses operate is great.
Dorsey: I never took an accounting or finance course. I took a very non-traditional path. My first job was a temp in Merrill Lynch as a receptionist. Later, I got a job working for an investment newsletter in Washington, DC. I didn’t like finance, my impression of the industry was that it makes money off of the investor. I decided to get my Masters’, and eventually went to work for Morningstar. Eventually, I decided to start my own firm, which was the only way to invest in the way I thought was rational.
The best advice I could offer to you now is that it’s not about ‘title.’ A small firm growing quickly may offer you a better opportunity than a large firm that’s stagnating. The wrong job at the right firm is vastly better than the right job at the wrong firm.
Q: Could you both please describe the differences in approach between public and private investing?
Cornelis: I focus on Private Equity. At LaSalle, we invest in companies which are privately held. These are illiquid securities, they are not traded on any market––which is part of the challenge of private equity. Our investors are relying on fund managers like us to manage the investments (portfolio companies) and make sure we can turn them into a liquid exit at some point down the road. From a return standpoint, we’re targeting over 25% IRR on our investments. It’s challenging; we have to be very hands-on to ensure we can get that return. There’s a lot of capital everywhere. It means you have to be disciplined. If you’re going to make an investment at a higher valuation, you better have a plan to grow the company and to generate that return.
Dorsey: Public equity is generally a more efficient market than private equity, because information is out there––the companies invested in are not privately-held. Now, there’s a great diversity of styles within public investing. But one of the largest differences is private equity firms are long-term investors. They’re in a fund for a long time. We [conversely] have 30 day liquidity. Because of this, we have to think very carefully about who’s giving us money and what their time horizon is.
Q: Would you say one is better than the other?
Dorsey: No. It’s chocolate and vanilla. They are just different.
Cornelis: People often assume private equity has better returns. It has to, though, because [otherwise] why would you lock your money up for so long? Because of the differences in terms of investment, and because you’re not investing up-front, it’s in many ways hard to compare to public equity.
Dorsey: It’s also hard to compare because there’s no benchmark index for private equity.
Cornelis: Right, the data is very hard to measure. At some levels, with certain private equity funds, there’s very little transparency.
Q: Kelly, could you elaborate on current conditions in the private market?
Cornelis: Private equity has grown quite a bit. There are astronomically more funds today than when I started. As for trends in the industry, specialization is very important now.
There’s also a lot more ‘capital chasing’ deals. While there’s hundreds and hundreds of small businesses out there, not all of them want to sell. So all private equity firms need that supply of companies, but the competition has increased drastically. We have to be very knowledgeable about our industries and networks.
Q: Pat, can you speak on the public side of this?
Dorsey: Well, we don’t face same supply and demand issues. There are many more public companies than private. But I don’t really think about the “market environment” very much. I think of the valuation of the businesses we’re looking at.
I would say if your planning to go into public equity, never worry about “the market.” Worrying about “the market’ gets you nowhere, because it’s an unanswerable question. “How can I learn more so I can more accurately forecast the financials of the businesses I do care about?” ––that’s the sort of question you can answer.
Q: Pat, how do you find a business with an economic moat?
Dorsey: So much of it starts with the customer, specifically around their behavior. A question I ask, for example, is “If price goes up 150%, will customers still buy the product?” Moats are highly structured. An Oracle database is a really tough thing to rip out of a business. It [the database] makes it difficult for a competitor to do the same thing as you.
Q: Kelly, one thing you touched on is how you spend a lot of time operationally with businesses. How do you evaluate them operationally?
Cornelis: Time.You get a lot of experience from doing this for a long time. We’ve also developed more structure over the years, like 100 day plans, and post-transaction plans.
We have people working for us who understand that side of the business. We bring them in to assist in that operational knowledge. They work with us on due diligence, on the front end, and on the efficiency standpoint. We rely a lot on these operating advisors.
We also look at the management team, and we ask if these people have the skills necessary to take this company to the next level. If not, we have to augment that team.
Q: What would you say is the biggest challenge to working with so many people?
Cornelis: One of the greatest challenges is that many of the CEOs we work with are the founders of the company, or are the family members of founders. It’s not always rational. It can be very emotional. You have to put yourself in their shoes and try to find ways to grow the business. I would say it is the most challenging aspect of the job.
Q: Pat, how do you quantify risks in the equities you look at, and what risks would make you stay away from a particular equity?
Dorsey: For us, risk is anything we can’t control. We hate leverage. We can’t control it. We don’t like commodity prices, because we can’t forecast them.
Risk can also come from deeper in the organization. We have to focus on alignment. If management is paid to misallocate capital, they will continue to do so. An unaligned management team is a massive risk for us.
Q: Kelly, how do you use leverage?
Cornelis: We really have to stay away from commodity risks and cyclical businesses. In private equity, we can’t ‘ride out the cycle’ and wait it out. We would lose the business. We try to be prudent with leverage, because we are growth investors. Most of the time people are offering us more leverage than we take. Where valuations are today, we do need to use some leverage to make our returns, but we’re absolutely looking to find a balance.
The event concluded with a Q&A from audience members.
For more information on LaSalle Capital, click here.
For more information on Dorsey Asset Management, click here.