BILL WALTON PROFILE: AN ALTERNATIVE MIND
Shapiro, Ronald M. Dare to Prepare (p. 277). Crown. Kindle Edition.
Bill Walton has that Clint Eastwood look in his eye.
You have probably seen Eastwood in movies and may have heard him talk in interviews about his work as a politician, director, or actor. His public persona and his film characters blur together more than almost anyone in Hollywood.
Walton has that same measured tone, glance, and gait, methodically formulating and assessing his sentences before speaking. The habit of weighing his alternatives seems to be in his DNA.
Whether you are a deal maker or decision maker at any level of any enterprise, the way Bill aggregates and measures his alternatives is both practical and instructive.
Allied Capital, Bill’s company, provides debt and equity financing to over 140 private, middle-market companies that generate aggregate revenues of over $13 billion and employ more than ninety thousand people. It offers investors the opportunity to participate in the U.S. private equity industry through an investment in publicly traded stock. Bill’s preoccupation with alternatives significantly contributed to his company’s delivery of a ten-year average annual return to shareholders of 18 percent through the end of 2006.
“A key to preparation is your temperament,” Bill said. “Our business is basically about the allocation of capital. You have to know your alternatives and be prepared to adapt as things occur. And a key to our business is having the ability to say no. We reject 99 out of 100 investment opportunities.”
Bill began his career by analyzing his professional alternatives.
“Even in my mid-twenties I was still experimenting and exploring—theater, bartending, driving a truck—I sought things outside the box of a middle-class upbringing in Indianapolis,” Bill said. “It is valuable to not try to progress through life in a linear fashion. Those experiences made me better at what I do today.”
Then, once he settled on a career in the investment field, Bill studied his alternatives again within the trade.
“At Continental Bank, my first job was in multinational lending where we serviced companies like IBM and GE,” he said. “I was talking to assistant treasurers about derivatives instead of dealing with people and products. I asked to go to the bank’s Midwest division because I wanted to work with entrepreneurs, with people who were making things and building organizations. My alternative—more esoteric finance—provided good training and background, but I preferred a more tangible line of work. I decided when I was thirty that I wanted to run something and build businesses and took a series of jobs that I thought would prepare me for that.”
Bill has looked to role models and books throughout his career for alternative ways to think, lead, and do deals. Biographies especially give him precedents for how different approaches to life, leadership, and business can yield different outcomes.
In an obsolete software planner called Sidekick, Bill keeps a category called “the well-furnished mind.” It is his book list, and topics of the books range from economics and fiction to philosophy and history. He reads for two hours every day and always travels with a book in his briefcase. For Bill, honing his imagination and instincts are important for forecasting outcomes.
“The intellectual exploration that comes through reading is a big part of preparation,” he explained. “I believe I am better able to analyze and implement a business decision because I have studied how Reagan led by focusing on a few big principles or how Lincoln did the same thing during the Civil War.”
Allied offers financing at all levels of a company’s capital structure, from senior or subordinate debt to equity. Allied tries to distinguish itself as an alternative to the multitude of private equity firms by emphasizing long-term partnerships with its portfolio companies.
During any given year, Bill and his team come across thousands of opportunities for investment. These alternatives are informed by numerous ways to structure the deals—for example, various combinations of debt and equity, decisions about minority versus control positions, whether or not to ask for board representation—which can lead to different relationships between Allied and these companies. Bill and his team have to think through myriad risk/return alternatives to determine the correct strategy for each investment.
They narrow the list down in part by looking for businesses that seem to offer the potential for long-term growth. “Does the company generate free cash flow, high return on capital, and has it been doing so consistently for years?” Bill said as he lists Allied’s criteria for determining if a business is a viable investment alternative. “And if so, why? You often find a good business at the wrong price, or a good business at a decent price but with poor management,” Bill explained. “You need to be able to check the business against your criteria, and walking away is always an alternative. Then you can stay in touch and the deal may come back years later.”
Two other critical factors in Allied’s forecasting of outcomes are the leadership of a business and how a company could relate to others in Allied’s portfolio.
One company in the portfolio as of 2006, Advantage Sales and Marketing, is the result of a merger of sixteen consumer packaged goods brokers nationwide. “Talk about herding cats,” Bill said. “There were sixteen companies headed by sixteen very different, yet successful entrepreneurs. For our deal team it was essential to assess the best leader and the right leadership group overall. You go into meetings and especially look for how leaders treat others; who doesn’t talk when others are talking; whether a CEO is talking all about himself or herself or is focused on a vision for the company. People reveal themselves pretty readily in the first thirty to sixty minutes. We’re looking for ethical, smart and industry-savvy leaders.”
Portfolio fit means evaluating how Allied can leverage the skill sets, products, and location of a potential investment. “We ask ourselves,” said Walton, “‘What we can bring to the table to help a particular business grow and what might it bring to other companies already in our portfolio?’ Our core competencies are with business and consumer services and consumer products companies.”
Bill continued, “We are laying bricks one on top of the other to some degree. The idea is to invest or lend to companies that interrelate. One company might provide financing or merger and acquisition advice; two companies might help each other with supply chain consulting or even import assistance. For example, one of our companies with offices in Shanghai helps source product from China for several other portfolio companies.”
Bill also recognizes that potential companies for his portfolio also have alternatives to Allied that they consider.
“You analyze their alternatives as part of any deal,” he said. “We know our competitors, and we try to make clear to potential partners that we think we have distinctive competitive advantage as a highly transparent company with permanent capital and a long list of partners to share their experience.”
Allied’s final factor in evaluating alternatives is to analyze how an investment contributes to an unabashedly optimistic vision of capitalism. While not the primary factor in making investment decisions, the contribution of a company to economic improvement for employees, consumers, and communities factors distinctly into the decision.
“It is a proof of our analysis that most of the companies in Allied’s portfolio are providing interesting goods and services that contribute to the social good in and of itself,” Bill said. “Our companies are led by people of integrity and when we wind up making money, it is based on real production and creation. We’ve created a lot of jobs, helped a lot of local economies, and created a lot of wealth. Preparation for an investment has to factor this sort of thing in.”
We all are regularly faced with investment decisions—of our time, energy, and capital. Bill’s story reminds us that assembling and evaluating alternative outcomes and pulling back to study the larger landscape help make the investment productive in the long term.
Shapiro, Ronald M.. Dare to Prepare (pp. 102-107). Crown. Kindle Edition.