Founded in 2016, Ceteris Paribus is A student-led economics and finance publication at Davidson College.

Interview with Steve Pagliuca

by Sean Wright

 

Steve Pagliuca, alongside College President Carol Quillen, at last night's Nisbet Lecture. (Photography by Bill Giduz) 

Steve Pagliuca, alongside College President Carol Quillen, at last night's Nisbet Lecture. (Photography by Bill Giduz) 

Last night, Davidson College was lucky enough to host Steve Pagliuca as the 2017 Nisbet Speaker. Pagliuca is the co-chairman of Bain Capital, a global private investment firm that provides firms of all sizes with capital and expertise. Additionally, Pagliuca is the co-owner and managing partner of the NBA’s Boston Celtics, and serves as an alternate member of the NBA Board of Governors. His sports-related ventures hardly stop at basketball. Pagliuca also served as co-chair of the Boston 2024 Olympics Finance Committee, and now serves on the Committee for Los Angeles 2024 Olympics. As you’ll read below, he also found time to coach a variety of youth sports for his four children.

 

Pagliuca hasn’t let his vast array of engagements slow down his philanthropic motives, either. He serves as the president of the Shamrock Foundation, the charitable arm of the Boston Celtics organization, and is also the chairman of the Massachusetts Society for the Prevention of Cruelty to Children. Last year, he and his wife donated a research lab, the Pagliuca Life Lab, to Harvard University. A recipient of the American Dream Award from Habitat for Humanity, Pagliuca has also won the Bright Star Award from Bill Clinton, in recognition of his contributions to the Boston community. Pagliuca has also taken his talents to the political arena: in 2009, he was a Democratic candidate for a U.S. Senate seat. Ceteris Paribus caught up with Pagliuca before his lecture to get the inside scoop on his extensive career.  

 

Ceteris Paribus: So how did your career get started?

Steve Pagliuca: My grandfather was a shoemaker in a factory before he emigrated from Italy in 1922. We grew up as a very middle-class family in Boston and New Jersey, and my mother was a schoolteacher and my father was a salesman so I was always interested in becoming an economics professor. I started out really enjoying economics, and majored in accounting and economics at Duke. My grandfather and father always thought there was another depression coming. The only people that were employed during the depression in their lifetimes [Great Depression] were accountants and lawyers, so they wanted me to be an accountant. I didn’t really want to be an accountant, but I studied accounting and economics. Then, I learned that you had to work 3 years to get a CPA, so that was made it even worse. But I got very lucky in that I asked all the firms that I interviewed with if I could start off in Europe, and they were agreeable, so I worked in Europe for 3 years as an accountant. I was planning to go to graduate school to be an economics professor but couldn’t afford it, so I got a summer job with a company that was called Bain & Company at the time, which was a consulting firm. So that summer kind of transformed me, and they really encouraged me to defer getting my doctorate economics degree and to just get an MBA and come work for them. They were a growing company, and they were pioneering state-of-the-art techniques for building businesses, and trying to grow businesses, especially involving global business strategy. I had a good summer and they offered me a job, saying “Why don’t you defer [getting your doctorate]?” So I deferred, and I deferred again, and now I’ve been in the business for 30 years.

 

CP: Did your accounting background provide you with a solid foundation for your other endeavors, like private equity and venture capital?

SP: Yeah, the accounting background was very helpful. I also studied business strategy at HBS [Harvard Business School] with professors like Michael Porter, who came out with a revolutionary book on industry and competitive analysis. That, combined with a solid understanding of the numbers of accounting and the balance sheets of companies; you put those two together and that is a really good base for being an investor.

 

CP: How would you describe your experience working in the Netherlands straight out of Duke? Was it a culture shock of sorts?

SP: It was definitely a culture shock; it was only my second time leaving the United States and my first time going to Europe. I was very much stooped in American culture. You don’t realize when you grow up in America…we’re very proud of America and we think everything we do is the the right way, but there are people who do things in different ways, and you really come to learn that when you move to a foreign country. The Dutch think about things in a different way, so it was a great educational experience. One difference in particular was television programming. At first, I was really disconcerted when I watched a TV show and they would air the whole show and then play the commercials after, between the shows. At first I thought it was really strange; but I got to like it after a while, seeing the whole show and then the commercials were like halftime. They do many, many things differently, and it makes you realize that there are a lot of ways to solve problems and to accomplish goals. It was a great cultural experience to learn their perspective. Another major difference was that the Dutch, as a society, put a huge emphasis on family time. Stores would only be open between 9-5. So culturally, you didn’t have the convenience of American stores, many of which are open 24/7. You had to be much more organized because the stores were only open certain times, but that gave the people who worked at the stores much more time at home. They were early in thinking about balancing work with family and society.

 

CP: With all of your commitments and work that you’re involved in, is it difficult to balance work and family life?

SP: It is very difficult, and you really have to work at it. I have four kids, and I think I’ve coached over 120 different soccer, baseball, or basketball teams. I coached them directly and tried to get home every weekend. My wife also did a great job. I mean looking back, probably everyone says this, you’d like to have more work-family balance, but I think in terms of the business that I’m in I’ve just tried to make family a priority.

 

CP: What kind of work were you doing initially at Bain, and what has that evolved into now?

SP: Well initially Bain & Company was a consulting firm that was pioneering techniques to help businesses grow and gain market share. They helped to develop business theory like the growth-share matrix, which I believe initially started at Boston Consulting Group, which talked about the rate of growth of a company versus what their market share was. Really, it was about creating more sophisticated tools, kind of like the statistics used in Moneyball but for business. So Bain & Company, McKinsey, and BCG were strategic companies that kind of pioneered this way of thinking. Bain had the idea in the early 1980s of possibly starting some venture capital activity, that would use those same theories that we were using to advise businesses to directly invest in growing businesses of our own. That began in 1984, when some folks from Bain & Company, including Mitt Romney, went over and started a venture capital arm. The differentiation between this venture and VC firms at the time was that we were using these consulting skills, and developing a whole staff of consulting-type people, to go in and analyze how these businesses could grow and succeed. At the time, it was a bit of a revolutionary concept; investors didn’t want to put their money behind us because we didn’t have Wall Street or New York financial experience. It was unclear to them whether or not consultants could actually make investment decisions. People were very skeptical; it took us between 18 months and 2 years to build even a very small fund. But that fund was raised, and some initial investments were companies like the startup of Staples, which has now grown into a multibillion dollar global corporation from one store. Successful investments like these helped to grow Bain Capital into the firm that it is today; we started with a fund of about $36 million, and now we have a fund complex of over $75 billion.

 

CP: What are the fundamental differences in the decision-making process for venture capital investments versus that of private equity, for example?

SP: Well there are a lot of similarities; in both of them you always want to back great management teams. On the buyout [private equity] side, we normally find existing companies with opportunities to grow, or to merge with other companies. Additionally, with private equity, there’s definitely a better understanding of the markets, and the products, and the competition. On the venture capital side, a lot of them are disruptive technologies or companies. For example, the big issue with Staples was, would people change their behavior and go to a store the size of a football field for their office supplies? Or would they continue to go to small stationary shops that provided high levels of customer service? Our analysis said that the large store concept would in fact take a lot of market share from the smaller stores. The large stores could offer a lot more products, better pricing of those products, and would save the consumer time by having all of these office supplies in one convenient place. It turns out that the analysis was right. The venture failure rate is higher because ventures, by definition, are riskier. In many cases they’re just starting up, and they’re competing against big companies and doing things in new and different ways. The private equity failure rate, on the other hand, is relatively low because they’re already stable companies. On both sides [venture capital and PE], we try to build models of these companies from scratch, and then compare these models. How much market share can the company take? What are the opportunities for new products? What are the opportunities for globalization? These are the questions that we ask, and we try to add that value to the companies and find opportunities for growth.

 

The key to it really is, how do you transform the company from what it’s doing now, to get it on a faster market share and growth rate. It’s a misnomer that the key to private equity is cost reduction. If you look at the history of the field, earlier companies were not always run very well, but nowadays they’re pretty well-run. The multiples are at all-time highs. So it’s a misnomer to say that you could make money by coming in and just reducing costs; you have to strategically look at the company and say, how do you grow it? So if you take costs out and you start to shrink, maybe the earnings go up temporarily, but in the long run they’ll stay flat because you haven’t invested in growth. We look at all of our businesses, both in terms of venture and buyouts, and want to see a clear growth path for the future. If the public stock market buys a company from us, or another company buys it, they don’t want to pay a high price for companies that are shrinking.

 

CP: How did you initially make the decision to become a co-owner of the Celtics? Was it a business decision, personal decision, or a bit of both?

SP: It was mainly a personal decision. I’ve always loved basketball. I played in high school, and played at Duke for two years. I was probably the worst player on the worst Duke team they ever had. All three of my sons have played college basketball; one actually plays at Duke right now. The opportunity came up through a friend of mine, who himself had the opportunity to buy the team, and asked me to partner with him. I did it as a kind of labor of love, because Boston hadn’t had a championship if 15 or 16 years. They love championships in Boston, and they’re used to that, so we felt like we could bring back a championship to the city. We treated it more like an asset of the city than a business investment. A byproduct of the team’s success has been financial success as well, but that wasn’t the primary driver of it.

 

CP: You were part of a group that assembled the Big Three (Kevin Garnett, Paul Pierce, Ray Allen) on the Celtics. Looking back on that, as one of the first teams to acquire multiple All-Stars to create a sort of “superteam,” what are your thoughts on where this phenomenon has gone today, with NBA title-winning teams like the Golden State Warriors still finding enough salary room to bring on an additional MVP contender (Kevin Durant)?

SP: It’s probably progressed too far since those days. I think the Durant thing was an anomaly, because that normally couldn’t happen. That was a perfect storm in that the league revenues happened to bump up that year, which increased the salary cap for every team, and that gave the Warriors a unique opportunity to get a guy like Durant to come to a team that was already very, very good. What tends to happen is that after you get those increases, there’s not enough space to add a third or fourth All-Star, and there’s a large tax system that tries to maintain competitive balance. I don’t know if we’ll see something like the Durant situation again, as now all the teams are getting nearer to the cap. In most cases, they won’t be able to bring in multiple top free agents at once anymore. But [the acquisition of the Big Three] was exciting to be a part of, and our management strategy had a lot of optionality to it. Our strategy was to draft and grow great players, but if those players turned out to be really, really good, you can often trade those players for older players who have experience. Garnett is an example. He was in the last part of his career and wanted to win, and we had Paul Pierce and we had traded for Ray Allen, and he felt like him being a third piece to that team could get them a championship. It turns out that we were very successful and did just that, and almost got a second one.

 

CP: Which, if any, skills that you’ve acquired from basketball have translated into the business sector?

SP: There’s a huge amount of overlap between the two. You learn a lot when you’re on a sports team. First off, you learn it’s not all about you it’s about the whole team, and I think successful businesses like Bain Capital have an incredible team culture where we get lots of people involved. Business and sports are both meritocracies. You’re accountable, your statistics are out there, and you need to perform well for your team. But you also need to make the players around you better. People like Steph Curry are very good themselves, but what makes them so invaluable is their ability to make the other players around them better. It’s the same in business. It’s a team effort, it’s a very complicated global world, where no one person can solve all the problems. You’ve got to work together as a team, and that’s what we try to do at Bain Capital.

 

CP: In the past you’ve specialized in information technologies investments; what are your thoughts on Snap Inc.’s recent initial public offering, and the market for tech companies that could be considering an IPO (Uber, Spotify, AirBnb)?

SP: If you step back and look at IPO markets, what IPO markets serve as are a source of capital to take the company to the next stage. So when they’re ready to be a bigger company, the IPOs help monetize the initial founders’ stakes, and gives the company a platform to grow. I think that Snapchat has a lot of growth potential because it went public at a very large multiple. People pay large multiples for large growth potential, just as you saw in companies like Amazon or Alibaba. Public markets are generally for founders to get liquidity, and for companies to raise money to continue to build and grow after they get out of the venture capital stage.

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