07 Aug 2019
A Life Less Ordinary: Peter Cluff
Peter Cluff went from a wall full of rejection letters to the thick of the action as private equity funding swept the world’s financial markets. Having got in on the ground floor at Morgan Grenfell, he struck out on his own with Europa Capital.
Cluff tells us about writing the rules for the private equity industry, surviving the financial crisis and leaving the cautious behind:
At university we had a rejection wall. Every time you got a letter of rejection for a job application, it went up on the wall. I had more letters than anybody else. I’d applied to all these institutions in the City, who all told me where to go, if they replied at all. I decided another qualification was needed so I joined a chartered accountancy firm.
I was seconded to its private equity division, which was then a very fledgling industry. I liked the idea of helping entrepreneurs build and realise their plans and find ways to entice private equity firms to invest in them. On qualifying as a chartered accountant I told recruitment agencies: “I’m not interested in going anywhere unless you can find me something in this brave new world of private equity.”
If you don’t try, you never know if you can do it... If you have the tenacity to hang on, you might get lucky.
I got a job with Morgan Grenfell Private Equity, which was just being set up. I walked in on my very first day, and on my desk there was a phone and a draft partnership document to go out and raise the first fund – and nothing else. It felt like we were on the cutting edge.
We’d had the Big Bang, and London was becoming a massive financial centre. These investment banks, emerging markets and private hedge funds came along, and you felt you were at the forefront. The regulator was always playing catch-up, trying to understand these new asset classes. It was a fun time.
Banks saw dynamic managers coming in to shake up a business that had often been quite staid. They loved it as we were helping them find innovative ways of lending, allowing them to generate higher margins than on their traditional business, whilst helping entrepreneurs realise their dreams.
We were writing the rules for the industry. I was devising partnership agreements with our lawyers, helping to form what would become the infamous carried-interest clauses that the industry has been using ever since.
It’s incredible how quickly the business grew, but even in the 1990s, private equity was overheating and firms were bidding against each other. I became worried about the size of funds and the competition that was forcing up prices. But if you were at the top of the tree, firms were able to earn very nice money. The potential treasures outweighed any caution around growth, and the cautious were left behind. It seemed time to move on to new frontiers.
I knew I should be doing something more worthwhile with the skills I had acquired. In the States, private equity real estate companies were emerging working on the same model, but dealing in bricks and mortar rather than buying and selling companies. I saw the opportunity to do what we’d done in the last 10 years, in this new frontier, so I embarked on Europa Capital with John Beckwith, a very successful property investor, and his team. We had early-mover advantage and raised a very successful first fund; then with two other members of the team I took the opportunity to buy John out, thereby jettisoning the lifeboats and setting out on our own. Finally I had my own private equity firm.
Investors don’t like change – if a fund manager changes it increases the risk. So despite telling us it would make no difference, not many of our investors were willing to step up to the mark and back us as a newly independent firm. It got to the stage where we were writing personal cheques to pay the staff because there was no money left in the pot.
We were floundering quite badly. I said: “It’ll take all the money we have to wind the business up in an orderly fashion. We need to call it a day.” I got home and told my wife we’d have to downsize, take the kids out of private school and start anew; it was a difficult conversation to have. The next day I got in, and lying on the fax machine was a big wedge of documents. It was a commitment from the University of Michigan endowment fund to our new fund. It was astonishing; we had met them some months previously but had no active dialogue since. So we decided to keep the lights on and keep going. That’s when the miracle happened – within six months we went from €65m to €450m as the investors poured in.
“We were in Canary Wharf the day Lehman’s went down. We said: ‘We’ve just got to hold on here.’”
If you don’t try, you never know if you can do it. That’s the message I give in my occasional lectures in a series called ‘Inspiring Entrepreneurs’. If you have the tenacity to hang on, you might get lucky. That was the amazing thing about Michigan – it came out of left field. The investment manager there said: “I saw the chemistry between the three co-founders, the rapport. You laughed, and you looked like you enjoy what you’re doing. I thought: ‘Yeah, I’ll back these guys.’” I think a lot of people who backed us liked the camaraderie we showed and the belief we had in our abilities. Investors take confidence in the fact that as owner-managers we have everything to lose if we do not invest their money wisely.
In those days, it was an advantage to be independent rather than captive. A certain style of investor appreciates that, because it means the profits would stay with us, which makes us more motivated. When the crash came, the reverse happened. Investors would only go with funds that had a big backer, knowing they would be safe in a storm.
We were in Canary Wharf, having an off-site strategy session with the full team, the day Lehman’s went down. We saw people carrying their belongings out in cardboard boxes and got the sense that the world was changing. In the evening, we took our team out for a drink and saw all these bankers drowning their sorrows. We said: “We’ve just got to hold on here.” We realised that this was a pivotal point and although we had just raised some €1 billion from investors we didn’t make any investments for a year, and in that year, property prices fell 40%, so our timing was perfect. When people came back into funds, a lot of them looked at how their managers had handled the crash.
The key to appropriate behaviour is transparency. We rang our investors when we realised the crash was hitting and told them we needed to write down some of the existing portfolio, so they didn’t read it in the papers first. Property is illiquid and private equity property especially so, so it was a question of battening down the hatches and riding out the storm. Unlike many other firms we had not over-leveraged the portfolio and we managed to keep the banks onside, helping them to manage their investments.
Don’t use money just because it’s burning a hole in your pocket. When we weren’t investing, investors were getting shirty: “We give you this money, you’re charging us a management fee and you’re doing nothing!” It was only once the market corrected downwards and we piled in that investors realised we’d saved them a huge amount and created the potential to enhance our returns as the markets recovered.
When Europa linked up with The Rockefeller Group, we retained 25% of the business. More importantly we retained control over all the investment management decisions and fund creation. Following the financial crisis investors saw the wisdom of having a big brother behind us, and also appreciated the way in which we had secured the management succession of the business by retaining shares which could be made available for our senior employees.
We’d set it up from nothing, nearly lost it, survived the crisis, and ensured the legacy.
Lysanne Currie writes about business and luxury travel for magazines including Robb Report, Luxury Plus, Glass Magazine and Meet The Leader.