An Interview with Kevin Callaghan: On Relationships, Diversity, and Slowing Down

Below is an interview with Kevin Callaghan, Managing Director of Berkshire Partners (a private equity firm), conducted by Scott Newman (Princeton ‘21). Mr. Callaghan received his BSE from Princeton University and his MBA from Stanford Graduate School of Business. Prior to working at Berkshire Partners, Mr. Callaghan worked at Lehman Brothers. Enjoy his considerations about life and business; more specifically, on the value of relationships, diversity, and slowing down.

BT(Scott Newman): What drew you to Princeton? Specifically, what elements of the University were most attractive to you? 

Kevin Callaghan: When I was applying to college, I was the first person in my family of six siblings and in my extended family to go away to a true college experience. My father had gone to the University of Pittsburgh on the GI Bill, entering as a 24-year-old as a freshman. My mother had grown up in Ireland on a farm and not gone to college. I honestly didn’t know what I was doing. I threw out a bunch of applications to different places, and Princeton was among them. My high school was relatively young and had never sent anybody to Princeton, but as I grew up in Northern Virginia, it wasn’t an unknown place. And so, the first time I visited Princeton was when I got in—pretty different from most applicants today. I had a number of choices, but I kept coming back to [the thought that] “I really think I’m going to get a great education here. I really think this is an outstanding place.” 

BT: You have mentioned that if you could do it over again, you would’ve majored in art history. Why is that?

KC: Well, I say that a little bit whimsically because I don’t know what being an art history major really would entail, but what I’ve come to enjoy—I’m currently the chair of the board of the Museum of Fine Arts here in Boston—is just that I appreciate that art is an expression of a culture at a point in time, and that it is really sensitive to the times. And that has been true throughout history. It’s a very interesting reflection of the psyche and of the tension at a moment in time. In some ways, it’s an exploration into world history and into the human condition, and I just appreciate exploring those aspects more and more every day. I find it interesting, and I find it fun, and I spend a certain amount of my free time learning about that as an avocation.

BT: What is the relationship between art and private equity?

KC: Within the world of business, I think there is room for a lot of creativity and innovation and connecting with people in a way that art can powerfully do. It’s not just about the numbers. I heard one person say…that even though he was an economics and business major in undergrad, he wishes he had been a psychology major because you [need to] truly understand the motivations of [the] various people involved in our business. It’s not all about the numbers. It’s not all about the financing package. It’s not all about the data. These decisions we make are people judgments in large part.

BT: You entered the world of private equity fairly early on in your career. What drew you to finance and particularly to PE?

KC: I found the world of investing to be very interesting. Of all the companies that are out there, you had a chance to figure out which ones are most attractive that you might want to invest in and help guide over a period in time…If you chose well, it could be very rewarding psychologically, monetarily, and otherwise. That felt like an activity that was way more interesting than doing a transaction as an agent, if you will.

BT: During your tenure at Berkshire, private equity changed quite a bit. What has been the most profound change in the industry since you entered the business?

KC: When we started this, there was a notion across business that this activity was a fad or a bit of a moment in time. It wasn’t clear that this was a sustainable enterprise as an industry. I think the biggest thing that has changed is that it’s pretty clear that this is an institutionalized industry that has a real place in the capital markets. The notion of companies being private—versus public—and accomplishing ownership transitions which can permit founders to exit over time or management teams to exit over time and for investors to get access to companies that are not, for whatever reason, public, and [that are] oftentimes better-performing companies than the ones that are public, [has proved to be a sustainable enterprise.]

It is a cyclical industry. We’re in the fourth private equity boom that Berkshire Partners has seen. There are times when it is challenging to get financing to accomplish transactions. Usually after a boom comes some kind of a bust—big or small. But our industry has weathered that. And at this point, many of the firms that are in the industry are institutions themselves. That’s the biggest change I think:  the institutionalization of the industry as a fixture on the business landscape.

BT: What has been the changing role of leverage over the years and how does Berkshire view an investment now versus how it used to view one?  

KC: It hasn’t changed much for us, but we have refined our focus and what we want to invest in. In our first ten or fifteen years, I think we looked—and I’m going to overstate this a bit—at nearly any company as a possible investment if you could buy it at the right price. In the last 15 years, we’ve said it’s not about the price. And I’m overstating this a bit to draw a distinction, [but] it’s really about the quality of the business. Is it a business that we want to be in for a very long time? Is it a winner in its industry?

Leverage is a way to enhance your equity return. If overdone—and I say overdone meaning too much debt/too much leverage—it sacrifices the ability for the business to invest in itself. It puts too much pressure and tension and on the day-to-day operations and becomes a distraction… From our standpoint at Berkshire, we look at leverage as a way to enhance equity returns, but fundamentally equity returns are driven by earnings growth and enhanced market position.

BT: How is Berkshire dealing with the onslaught of money in private equity? With increased amounts of capital coming into PE, what has Berkshire done differently than other firms? Why would a company go with Berkshire rather than another firm?

KC: The capital coming in is reflective of this fourth boom of private equity that I referenced. When times are good, and returns are good, investors want to put more into asset classes which are performing well, and our industry is performing well. We try and look through that cycle because we know there will be some kind of correction coming out of [it]. We don’t look at it and say “let’s try to attract the most capital that we can to Berkshire.” [We say] let’s raise the amount of money that permits us to be good investors and to deliver great returns to Princeton, to Yale, and to other places.

On the question of how Berkshire differentiates itself, there are a number of people in our industry who have been around for a long time, who have good track records and industry knowledge. I think what we try and do is convince people that we can be a great partner for them. In part because of our structure, we come together as a team in the collaborative way that we do business…We all have to, internally here, get along and make decisions in a way that reaches consensus. Our experience here will make us great directors at your company. We’re not used to having our own way. Let’s get facts on the table. Let’s get to consensus decisions, and let’s build something for the long-term. The other thing is that we’ve had very little turnover over the years here, so people wishing to do business with us can have confidence that our team will remain largely the same.

BT: In a 2017 discussion with Mr. Grousbeck, you spoke about your love of investing and commented that “I would do it for far less or even nothing, and I would probably enjoy it.” How were you able to find your niche and what advice would you give to undergraduates as they go about finding theirs?

KC: I think I’m lucky in that I found what I really wanted to do. I think I could be happy in other pursuits as well. So, I don’t think this is the only thing that I was meant to do or that I could be really engaged in. I think there is a little of making sure early on that you have enough exposure to experiences and to people, to situations, and to different types of industries or segments, so that you can make an informed judgment of where your passions might lie.

For many people, there’s no “one thing.” I’m guessing that Bill Gates could also probably have been successful in other things. He probably would have been a great investor. He might have been a terrific doctor. I don’t know that there’s just one thing for people, but I do think that having exposure to a wide range of activities can help folks figure out what one of those things might be that is your passion and that you can be really good at.  

BT: In your opinion, to what extent does one’s major matter? You majored in Engineering and Management Systems (now ORFE). How did that inform and prepare you for your career in finance?

KC: I think it was probably helpful for me to get hired that I had taken a finance class, an accounting class, that I clearly navigated an engineering curriculum, and that I had quantitative aptitude. So I checked the box. Does it help you get hired to have some of that background? Yes. Can you demonstrate that in other ways if it’s important to an employer? Yes. If you’ve got great aptitude on quantitative measures like your SAT’s or ACT’s, if you’ve taken a couple classes like a statistics class or a computer science class, you can probably signal the same thing. I think that Princeton’s caliber of education permits people to major—I believe—and I’m not that close to it, but I believe almost in anything, and if you do reasonably well in it, you’ve met the bar. And if there are some courses that show that you have specific knowledge that’s related to the industry, then that’s terrific. But they’re not hiring [you for] what you took in college necessarily. They’re hiring you as a person who has the ability to learn new things and to work in a group and to be curious and creative. It’s not all about what you took. It’s who you are, and who you will become.

BT: Is there anything else that you would like to cover? Are there any questions that you wish I had asked you but did not?

KC: The business world overall is dealing with diversity and goals of diversity, and we were very fortunate early on to appreciate one aspect of diversity—gender diversity—as an important part of our culture…We’re diverse, and I think that the science of group decision making suggests that the more diverse the group, the better the decisions it arrives at, because the group is thinking of the outlier points of view as it makes that decision. We did it this way before the science was clear about this, but we knew what kind of culture we wanted to have. And as it turns out, it’s been a differentiator for us also. It’s a question of who do you want around your table, and I think we just make good partners. We believe that [diversity] is not [just] correlated with our success. We think it is causative. And we have more room to grow in this area as well.

BT: What advice—whether about business or life or anything in between—would you give to our many undergraduate readers? 

KC: In a world of so much quick change and complete inter-connectedness, I think there is a lot of merit in slowing down a bit and taking the really long view, being patient, and connecting in a real human way with people, with nature, and with the world around us. None of those things are very profound. It’s just hard to do it.