Investing Billions - E102: Interview w/Kellogg School of Business Dean

Episode Date: October 10, 2024

Francesca Cornelli, Dean at Northwestern University - Kellogg School of Management sits down with David Weisburd to discuss how private equity firms handle CEO turnover, why private equity firms benefit from enlightened disagreement and diverse opinions, and the importance of mentorship in private equity. The 10X Capital Podcast is part of the Turpentine podcast network. Learn more: turpentine.co – X / Twitter: @dweisburd (David Weisburd) @KelloggSchool (Northwestern University - Kellogg School of Management) -- LinkedIn: Northwestern University - Kellogg School of Management: https://www.linkedin.com/school/kellogg-school-of-management/  Francesca Cornelli: https://www.linkedin.com/in/francesca-cornelli/  David Weisburd: https://www.linkedin.com/in/dweisburd/  – Links: Northwestern University - Kellogg School of Management: https://www.kellogg.northwestern.edu/  – Questions or topics you want us to discuss on The 10X Capital Podcast? Email us at [e-mail] -- TIMESTAMPS: (0:00) Episode Preview (1:13) Path to becoming dean of Kellogg School of Business and defining its culture (4:20) Practical tips for enlightened disagreement and commonality in negotiations (5:47) Impact at London Business School and research in private equity (7:18) Insights on private equity from academic research (11:24) CEO turnover in private equity and case studies (14:36) Industry-academia collaboration and future of business education (17:35) Closing remark

You've studied private equity your entire career. If you had to choose one, what's more important, IQ or EQ? EQ. I always tell the students, if you think in finance or private equity, you don't need communication or ability to do relationship, think again. You can have the best strategy, but if you can't raise the capital to implement that strategy, you're nothing. And so the ability to inspire people, the ability to have a vision, the ability to get people, your team behind you. I think that is really where the alpha comes. In the oftentimes cutthroat business world, isn't being cooperative, can't that be as much of a disadvantage as an advantage?

So I think it's exactly the opposite because you see, you think there's a lot of people you have to compete against, right? So isn't it good to have a group of friends who excel in different areas and can support you? It's exactly because it's cutthroat. Don't you want to have people who have your back? Francesca, I've been excited to chat since our friend Ron Diamond made the connection. Welcome to the 10X Capital Podcast. Thank you for inviting me. I'm very excited to be here. How did you become the dean of the Kellogg School of Business, one of the top business schools in the world?

Well, I like to say it's actually by pure accident. I was in London as an academic, but also being interested in the value of business education, thinking of doing new things in my areas. And a headhunter called me and said, would you be interested in interviewing for the Dean of Kellogg? I'm like, I didn't really think about things like that. But then he also added, you will never get it because we are looking for someone who's already a Dean with experience, just come for the experience. So I thought, why not? And I knew, of course, of Kellogg very well, but more as an academic, I knew my colleagues in finance, my colleagues in other areas I worked on, and I knew it was a top business school. But

coming over, I discovered more and more about the culture of Kellogg. And I really loved it. What defines the Kellogg culture? So the Kellogg culture is one of innovation. I like actually to use the word creativity, because a lot of people think of creativity to be more like outside of the box and empathy. I should mention that it's also rigor, because sometimes because we stress creativity and empathy, people say, well, what about the analytical rigor? Of course, analytical rigor. Of course, that is at the basis of all because people need to be prepared and know. We have courses which is like leading with empathy, but it's not enough to have a course. It's the entire culture. We always talk about the fact that our students help each other in preparing for the

interview, even when they're interviewing for the same job. And oftentimes cutthroat business world isn't being cooperative. Can't that be as much of a disadvantage as an advantage? So I think it's exactly the opposite. Because you see, you think there's a lot of people you have to compete against, right? So isn't it good to have a group of friends who excel in different areas and can support you, right? It's exactly because it's cutthroat. Don't you want to have people who have your back and who are in different areas? Business problems are so complex. Nobody, doesn't matter how clever you are, nobody has the ability to know everything, to solve everything. So I think, yes, the world is

cutthroat, but it's also complex. You need people with you, you know it will work with them. And also I feel, you know, sometimes it's the cutthroat because the other side thinks you'll be cutthroat. Sometimes you just need to extend a hand. You need to show empathy. And who knows, you will join an alliance. We recently created the Center for Enlightened Disagreement, which is exactly to talk about how you build bridges in a polarized world. It doesn't mean people have to agree. It doesn't mean you can't be passionate about your point of view, that you are right and the other is wrong. But instead of undermining each other, can we have a dialogue and can we both move forward with our conviction?

What's a practical tip that someone could implement today in order to become able to be and enlightenly disagree with someone? The first thing you need to build a connection because that will help to create empathy. So try to reach out, try to first have a communication at the human level. It can be a brief, a brief part, but look at that and never assume that the other side is evil. Never assume that the other part doesn't have the same values. They've been doing experiments in which, for example, they would ask people to answer questions and then they would show them, actually, you have way more overlapping. And the people said we never would have imagined, right? So it's really trying to think at the human level, we have way more common values that

people think these days. Commonality is a form of information that's useful. When I advise people in negotiation, I say, always try to get more information. There's never only one factor to consider in a discussion or negotiation. On my podcast is regardless of how little time I have, if I have 30 minutes, it's always important to spend the first five, 10 minutes building rapport, even if it ends up having a smaller, shorter interview, because that interview is just going to be that much better. It's something in the human nature that leads us to want to perform for people that we have a connection with. You were the

director of private equity at London Business School prior to Kellogg. What did that position entail? My role as a dean here is clearly a continuation to what I thought about it there. There was really to build a bridge between private equity, the business world, and faculties. I strongly believe is to put people in the same room and talk. Because maybe to write that paper, sometimes talking to people in the business world, they say, oh, the academics don't research the right question. And my answer is always, well, did you go and try to talk to them? And that's what I'm trying to create here. We created this concept of Kellogg's Circle, which is really we have an impact on people outside, but we want to listen to their feedback. You know, I always tell the alumni, you're my ears and eyes out in the world that tell me what you used to teach me doesn't work. Here is what's happening.

What an interesting problem. Let me think't work. Here is what's happening. What an interesting problem. Let me think about it. And that institute is really where I start thinking about it. The other part that I learned every time private equity is covered, let's say in the media, either everybody's evil or everybody is a savior of companies. And I always said, I have never seen an industry where everybody's evil or everybody's a saint. And there's much more to discuss and to say what works, what doesn't. Let's not have a prejudgment. And that's what I take to every area we look. What are the main takeaways in the cutting edge research that's coming out on private equity and best practices? LPs are now very sophisticated in measuring returns, right? Benchmarking returns of

private equity fund. Let's not forget that that came out of very technical research of some amazing faculty who did and continued. So I just want to mention because sometimes people forget, right? And maybe then in the real world, they evolved on it. But that was to me a huge impact on private equity. These days, there's more also focus on, you know, what makes a fund

be more successful versus not successful? How do I identify also a fund which does deals where there's an actual operational change? What is the source of values? The studies have to be quite narrow and like a specific industry, because the only way to really see are you creating value or not is to benchmark to a case where the private equity was not involved, right? The old question of the chicken and egg, right? Did a company improve because the private equity invested in it or did the private equity

invest because they saw the company and they were the first to actually see that the company was going to grow? And both cases might be true, right? But it takes a lot of methodology to actually see that. If I can shamelessly talk for one moment about some of the research, I have that one paper, I'm still working on it in the little time I have, is I've been looking at how whether turnover of partners in a GP is good or bad. Because the typical thing is LPs tend to see turnover as something which is actually not good news and react negatively. And actually what we show is there's a lot of reverse causality, exactly like people leave actually because the deals are not doing well.

You just discover it much later when you exit the deal. In the meantime, the person is gone. But actually turnover, especially in times of recession or in times of when the industries are going fundamental change is a predictor of success in the future fund. Not the same fund. That fund is probably invested, whatever it is. But there's way more of prediction in the turnover.

What's the intuitive explanation for that? There's two things. One is that there's too much lack of transparencies, correctly, so it's not a criticism, but it's very difficult for an LP to really identify whether the partner is really performing or not. They think they know, but there's such a delay sometimes and so many other confusing factors in the success of a deal that is difficult for them. But the second part, you need new people who bring a new point of view. And it's almost like the enlightened disagreeing is more for acrimonious. But you need someone who disagrees.

There's so much of like, because otherwise the same team will have the same experience of the same deals, right? And their knowledge, right, the information, as you mentioned, comes from the same deal histories. So all of a sudden, they'll all agree because, of course, they have the same information set. You need someone who has a different history of deals or a different point of view. Congratulations, 10x Capital podcast listeners. We have officially cracked the top 10 rankings in the United States for investing. Please help this podcast continue climbing up in the rankings by clicking the follow button above. This helps

our podcast rank higher, which brings more revenue to the show and helps us bring in the very highest quality guests and to produce the very highest quality content. Thank you for your support. Have you seen any case studies or examples of an Elon Musk type firing of 90% of ex-employees? I have another paper, which is about CEOs. And it shows that actually, contrary to what people outside of the private equity believes, private equity are less likely to change CEOs than a normal, like a public company board. They might do at the beginning, but it might be, you know, because also that CEO, but once they hired a CEO or the previous CEO has decided to stay, has been announced staying, you can see that they are, the turnover of a CEO is lower in private equity and is less sensitive to actual financial information. The way I see it is because, and it shows sometimes that's the good of the private equity, right?

The private equity have the knowledge. They don't need to react to the financial numbers to say, oh, we have to fire this CEO. The financial numbers are no good. They're going through a transformation. So it's more about is this CEO really the right one or not? And there is literature in public boards that shows that sometimes the boards just react to industry shocks in the decision to terminate a CEO. I had a really interesting conversation on this podcast with Justin Pollock of Pinebridge. Pinebridge is $168 billion as a manager. And

what he said is that private equity returns are essentially undifferentiated from levered public returns with one very important caveat. And that caveat is when you have a correction, what happens in the public market, if you were to lever your returns, you get called. So you lose all your returns. It can be disastrous. In private equity, it's not marked to market. So not only is it not marked on a daily basis, and secondly, and perhaps most However, that financial engineering was a source of true competitive and sustainable competitive advantage. What do you think about that? There's so much noise in what is happening. I mean, there's no doubt that this is part of what is happening, right? It's definitely true. I would say if it were only that, I would actually be even more skeptical because then I'm not sure to what extent is a source of advantage. Maybe you should correct for that in measuring the returns. For example, there is research that shows that if you do it correctly and look really at capital calls or capital distributions,

actually the cyclicality of private equity is much higher than it would look because a lot of people just look at the beginning or the end of the fund. It's very hard to keep track of all the capital calls and distribution. So I feel if that was only – I wouldn't call it as an advantage. I would call it as something that I, as an LP who wants to invest, would like to disentangle and keep in mind. Because really, in the reality, I am exposed to all these things. When we last chatted, we were talking about the relationship between industry and academia. How should private equity practitioners partner with business schools like

Northwestern in order to collaborate? What are some use cases? So there's two things, right? Also, because until now we talked about research, but there's also the teaching, right? If I can talk for one moment about the teaching, I would say, I think it's fundamental. And that's what we are trying to do with Kellogg to get actual practitioners in private equity to come mentor the students, work with them and even giving us idea about things to teach. Like we have an entire course, for example, in which each week is a different alum successful in private equity who comes and teaches something like fundraising, which happens to be very important, but nobody teaches it. Or how do you do due diligence? Or how do you really decide your focus? Really hands-on things and have a discussion. I feel that is extremely important because ultimately, the way we see private equity is it's not, yes, there's a lot of finance, but the finance is more

to get your job. And then, you know, after three, four years, the more not, yes, there's a lot of finance, but the finance is more to get your job. And then, you know, after three, four years, the more you become senior, there's so much more than finance. And that's how we approach. So we have various courses beyond the finance, but we also want the people who have done it to come and discuss with the students. So first of all, I do think that's extremely important, especially in an area with private equity, where there's not enough transparencies on the operation of the firm. What I find is having alumni coming back and teach and help with the students means you also have a faculty who talk regularly with the alumni, have a conversation, the faculty become better and they have a great

idea for research and they know more about what's going on. I think there's a lot to learn, right? You've studied private equity your entire career. If you had to choose one, what's more important, IQ or EQ? EQ, because the IQ, there's a lot of people and you can hire a lot of people to give you the IQ. You can't be very, very low IQ. Yes. Hopefully, I don't think. But you can outsource a lot. You can use other people and think the EQ is the vision, the ability to do relationships, the ability to convince someone. I mean, I always tell the students, if you think in finance or private equity, you don't need communication or ability to do relationship. Think again, right?

You can have the best strategy. But if you can't raise the capital to implement that strategy, you're nothing. And so the ability to inspire people, the ability to have a vision, the ability to get people, your team behind you, right? I think that is really where the alpha comes. I think it's EQ for private equity, IQ for hedge funds. Okay. What would you like our audience to know about you, about Northwestern? I would like people to know that we are very ambitious.

So our plan for the next 10 years is to reinvent the business education. I believe you need business school more than ever, because in all the changes, in all the uncertainty, in all the disruption that is happening, you need leadership, you need EQ, but you also need the ability to innovate and change. Thank you, Francesca. Thank you. Thank you so much. button. On the YouTube version of this podcast, you can see the graphs, visuals, and key takeaways that accompany every episode.