Interview with Carl Ferenbach, Co-Founder of Berkshire Partners and Chairman of High Meadows Foundation
Carl Ferenbach is the Co-Founder of Berkshire Partners and the Chairman of High Meadows Institute. Berkshire Partners is a private equity firm with $16 billion worth of assets. High Meadows Foundation is a Boston-based think tank and policy institute.
BT (Scott Newman): During your tenure as managing director at Berkshire, private equity changed quite a bit. What has been the most profound change in the industry since you entered the business?
Carl Ferenbach: It went from being an entrepreneurial business to a large, global asset management business. It professionalized profoundly. It was able to come into being because a small number of institutions in the 1970’s and 1980’s—mainly life insurance companies—were a source of capital to smaller, non-investment-grade companies. We, and some others ahead of us, figured out that life insurance companies needed deal flow, and we could provide it. They understood how to do risk financing. That was the first sort of step. Then, other investors—like some of the state pension funds—were looking to diversify their investment portfolios. Supporting the funds of this new group of buyout firms became something that was interesting to them. And then others followed—university endowments for instance. The thing that really allowed the whole business to grow was the enormous growth in the availability of risk capital that was provided by these new classes of investors. What really changed was the institutionalization of capital and the professionalization that led to the creation of a new asset class. That was huge.
BT: What was once called leverage buyouts is now called private equity. Why did the name change, and how has been Berkshire able to adapt?
CF: LBO’s got a bad name in the late 1980s. It was simple. Many buyouts then were financed with eighty or ninety percent debt capital, with the sponsor group putting up ten percent of the money. If you couldn’t retire the debt by its terms, which happened when the overall economy turned down at the end of this decade, then you were in default to the lenders. And the defaults began to create problems for the banks. Because there was a problem, there was also a lot of negative publicity. It felt like an Op-Ed a week in the Wall Street Journal that was saying something negative about all this risk and all this irresponsible activity that these LBO’s had led to. At the end of the 1980’s, the famous bidding war over R.J. Reynolds with KKR and Forstmann Little got a huge amount of press that also generated a book, The Barbarians at the Gate. As we went into the 90’s, people were looking for a fresh start. And so, the name changed.
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?
CF: It became apparent as it became more competitive and prices went up that you really needed to be able to grow these businesses if they were going to be successful. And so, we increasingly focused on growth—whether it was in a stodgy old railroad or in the exciting new wireless business—but growth became a requirement to both retire debt and earn superior returns. As this occurred, we felt the need to articulate our own set of values for the development and operation of the Firm, and the Berkshire mantra was that the culture needed to be about collaboration at every level. We were never hierarchical. We didn’t have a chief executive officer, and we shared responsibilities. It still operates similarly–based on the values articulated then. And our investment process was analytical rigor. We just had to understand what was going on in these businesses, and what was going on in the markets and the surrounding environment. We also felt strongly that we always wanted to be viewed as fair, inclusive, participative. Our approach fell out of that sense of being collaborative. There are no stars. There’s no star system. We really just want to understand these businesses and what the people do, and we always want to be fair in all of our transactions, I think that has not changed.
BT: Turning to your philanthropic work, there were many charitable causes you could have chosen to support. Why did you choose to focus on the environment?
CF: We [Carl and Judy Ferenbach] had bought a farm in Vermont in 1987 or 1988 or somewhere in there. After we had been at it for ten years or so, my wife, who is a great design person and had been a landscape designer, was meddling with the land, and we began to ask ourselves:
‘what is really going on here?’ We didn’t understand anything about the environmental impact of our activities or any of the activities going on around us. This was during a period when everybody in the Northeast had been dealing with acid rain. Acid rain came from the emissions from the major coal-burning facilities through the Ohio Valley and the Midwest. So, it was emissions of sulphur dioxide and nitrous oxide that was causing the acid rain. The Environmental Defense Fund, bless them, [was then] a small organization but advocated for and managed to work through amendments to the clean air act in 1990 that instituted a cap and trade system that allowed the utilities to substantially reduce their emissions. We had been on the receiving end and trying to figure out what that meant and what was happening to our forest, and if there was anything happening to anything else.
Through others we developed a relationship with the Vermont Community Foundation. Working with them, in 2004 we organized and capitalized the High Meadows Fund to focus on environmental needs and issues in Vermont. Two years later we organized the High Meadows Foundation to manage and facilitate our philanthropic support. Its focus has been environmental science and policy and innovation in education. At the end of 2011, I stepped down from Berkshire to spend full-time on High Meadows and the organizations it supports.
BT: How did your work in private equity prepare you for and inspire your work at the Environmental Defense Fund and at High Meadows?
CF: You do what you know, and we knew what we had done in organizing Berkshire. High Meadows is small. There are now three of us, but the principles and the values are the same. We are following the same methodology basically—how do we figure this out and what do we do? And it is relationship driven. We [took seats] on boards, and stayed close to most, but certainly not to all, of our grantees. We have been interested in helping them with their self-evaluation, their growth, and their development. It is similar to having a bunch of portfolio companies.
BT: How relevant and necessary was an MBA for you? What would you say to those unsure about whether or not to pursue one?
CF: It was really relevant for me, but I was out of school six years before I felt free to go and do it. You saw a lot of everything in terms of peoples’ life decisions in the 70’s. At that time, we did have a lot of people who had been through the Vietnam War, and of course, we had people coming directly out of college, and we had everything in between. And that hasn’t changed that much in the last 45 years. The private equity firms hired heavily from MBA programs and ultimately urged, encouraged and financed people who worked in their non-MBA intern programs to get an MBA, and then return to the firm. We thought for the most part the right MBA was very relevant.
BT: What advice—whether about business or life or anything in between—would you give to our many undergraduate readers?
CF: That’s hard because after all, you’re all individuals, and in the end, you’ll all pursue your own interests and dreams. But do something. Do something that makes a contribution to a community even if it’s purely for profit, constantly evaluate it, and don’t be afraid to step back and do something else. You’ll have a long life, and there’s plenty of opportunity. You all have fantastic educations and lots of good brains and common sense. You’ll figure it out.