“Only those who risk going too far can possibly find out how far one can go.”
—T. S. Eliot
Our approach to investing and global development projects has always been similar. Deal junkie, value seeker—call it what you will. I have always seen myself as a value investor. We’re fascinated by situations with potential to turn possibility into reality, preferring to focus on a few companies that I like and to work with management on strategies to help grow the business. We are perfectly willing to stay in these companies for years if they do well for their shareholders, their markets are growing, and they are on the ball. We’ve stayed in some companies more than twenty years, believe it or not. That’s rare for an equity investment group (most private-equity funds have a time limit for returning funds to investors), but it’s my idea on how to make a good return—or a good impact.
To stay involved that long requires a focus on relationships. If people like doing business with you, and you are committed to long-term relationships, more often than not you will be much more successful. So we at Blum Capital have tended to be friendly investors. We have never believed in squeezing the last dollar out of a deal. Being greedy is bad business because it’s bad for relationships. We have never bought into a business with the idea of dismantling it and selling off the components for a profit. And we have never been interested in a buyout predicated on laying off large numbers of workers and shipping jobs overseas. My principle has always been Don’t go in looking for a fight. Make love, not war.
When we invest, we work with companies to make their operations better, and I think we have developed a reputation at Blum Capital for helping build companies in ways that have benefited all the key constituents: employees, customers, owners, and the community. BusinessWeek summed up our investing style well in a 1996 article by Linda Himelstein, “Reaping the Rewards of Friendly Persuasion”:
After doing exhaustive due diligence, [RCBA] takes stakes—on average 5 percent—in midsize companies that tend to be rather obscure, often troubled, and undervalued. The firm has a knack for identifying weaknesses. Then, over a period of months or years it will coax management to adopt its usually elaborate recipe for change.1
From the start we were collaborators, often working with other investment groups who wanted to help companies be great by solving some of their more complex problems. We knew the global development community would benefit from a similar mind-set focused on results, not simply on concocting grand ideas and competing for attention or recognition.
Shankar Sastry, director of the Blum Center for Developing Economies at Berkeley, summed up typical frustrations well: “Development is lots of pilots—and no planes!” Foundations, think tanks, and NGOs are rife with ego-driven empire builders. The results, no matter how well intentioned, too often are needless, overlapping efforts and expenses—and a lack of accountability, efficiency, and results. All this generates organizations and initiatives that just come and go, like fireflies that flicker alluringly before vanishing into the night. Big, real-world problems today in global poverty are moving targets; they never stop evolving. There is no point at which you are “finished” and can walk away. Early exits sometimes can be more disastrous than not doing anything at all.
My philosophy of long-term investing and value-building is very similar to what we have done at the American Himalayan Foundation in identifying and backing local champions, often for twenty years or more, and at the Blum Center for Developing Economies. As we will see in chapters 12 and 13, the Blum Center is turning out thousands of innovative students collectively on all ten campuses of the University of California—the largest public institution of higher education in the United States—plus Hebrew University in Jerusalem and Central European University in Budapest. Many of these students are making important contributions to development projects in different parts of the world. In any scenario, I try never to abandon the long-term strategy for building a business or organization that can effectively serve its customers or clients. That is the big opportunity.
About the time I set up my firm in 1975, the CEO of a small engineering services company known as URS called me with a problem. I owned some stock and had some clients in it, too. He was very concerned that two blocks of his company’s stock might soon be bought by an investor planning a hostile takeover. URS stock had been issued as payment for some small-company acquisitions he had recently completed. “Why don’t you buy that stock?” he said. “You’ll be the largest shareholder in the company. You can come in as vice chairman.”
I was intrigued but would need to raise between $3 million and $5 million to buy the stock. I had not yet raised any money from investors for my first fund at Richard C. Blum and Associates. Over the years our firm’s investor base would grow to where about 90 percent of our capital came from large state pension funds; insurance companies; sovereign wealth funds; and institutions in Europe, the Middle East, and Asia. Two of our bigger investors over the years were California’s large pension funds, CalPERS and CalSTRS. But back then my clients were all individuals.
I knew whom to call to raise the money for URS.
Gene Friend was the first person I pitched. He was the father of one of my buddies, Bob Friend, when I was growing up in the Ingleside neighborhood of San Francisco. I had worked in Gene’s clothing store on Market Street during the Christmas holidays, and he still remembered the time I sold more blue suede shoes than anybody else. (Remember, this was the 1950s.) Gene was a good guy but a tough, tough sale. He had me sit on a stool in his kitchen while he walked around asking the toughest questions. I felt as though I were on the witness stand in some courtroom. But in the end I raised the first $50,000 for my firm.
Through more conversations with other people in my network over a couple of months, I raised the funds to buy the URS shares. It was the first official transaction for Richard C. Blum and Associates, and it had to go right; otherwise, going back to raise more funds would have been hard. It was a bumpy ride, as URS went through a couple of up and down cycles, but when we sold our position in 2005, it was worth $300 million.
Over the years, companies came to us because they needed a partner. Maybe they didn’t have a major shareholder, were concerned about a takeover, or needed to get financing to grow a product line or make an acquisition. What drove our decisions? I listened to the thesis, met the people involved, and read all the summary memos. I looked at the numbers enough to know whether we were crazy or not in our valuations, but I was never a number cruncher. I was much more into the people and culture within each business.
We were drawn especially to businesses we thought had a really solid core but might have lost their way. Maybe they had branched into related businesses where they didn’t have the capacity to compete and had refused to retreat. If there was a problem that management wasn’t addressing properly, however, throwing more money at it wasn’t going to fix it. We would seek out the opportunity to fix the problem, encouraging management to refocus on what we saw as the company’s core strengths.
The considerable returns on this work have been the source of most of the funds I’ve dedicated to help support people committed to fighting poverty and income inequality in myriad ways.
When you take aim at solving complex problems, you need to be clear in your own mind that your long-term commitment will be imperative for making an impact. When you actually realize the impact, you will be rewarded beyond what you might have imagined at the beginning. We saw this in the stories in Part 1, showing how thousands of people have benefited from the planning, persistence, and values of our foundation and our many partners, and of course from their own long-term commitment and hard work to make the most of new resources we helped gather and provide. For me, the parallel in value here—between investing for the long term in businesses with great potential and investing for the long term in people with great potential—is just obvious.
When I was at Berkeley, many undergrad students took a philosophy class with a professor named Stephen Pepper because it was supposed to be an easy A. It was held in a big lecture hall, and if people went, they often spent the class dozing. But I was intrigued.
Professor Pepper was an expert in the tradition of pragmatism. In his most influential book, World Hypothesis, published in 1942, Pepper argued that you need to apply both common sense and rigorous analysis when considering any problem, because there is no such thing as pure, objective fact. Anytime you accept something as pure, objective fact, he believed, you inevitably open yourself up to false conclusions.2
I wanted to understand Pepper’s lectures better, so I started dropping by to talk with him during office hours. I never had to wait; nobody ever went to see him. But to me it was a real privilege to spend half an hour with this man. He talked about how to frame your perspective about the world—basically, how to think. He wanted you to step outside the world you knew and question it from all angles, to dig into the details.
His ideas struck a chord. They certainly served me well when I was coming up as an analyst at Sutro—and far beyond that time. I imagine this was at least partly because my faculty advisor at Berkeley, a truly brilliant man named Choh-Ming Li, had driven home a related idea in his lectures on international economics: “When you say something, understand the implicit assumptions of what you are saying.” I’ve quoted Professor Li on this point at one time or another to most every partner and colleague I’ve worked with.
If you want to be a problem solver and add real value, you always need to address and test your assumptions. The better you understand those assumptions, the better your decisions and solutions will be.
In 1989, Blum Capital made the biggest investment we had ever made: $100 million as part of a $3.65 billion leveraged buyout (LBO) of Northwest Airlines. Gary Wilson, onetime chief financial officer of Marriott Corporation and the Walt Disney Company and a close friend with whom I have invested and served on boards for thirty years, proposed the deal, and we took the company private.
Airlines had been struggling, since Jimmy Carter deregulated the industry in 1978, with high legacy costs; new, low-fare competitors; and frequent fare wars. Northwest was reeling from poor labor relations and bad customer service in the wake of the largest merger in airlines history, with Republic Airlines. Yet Northwest had the best position of any US airline on routes to Japan and elsewhere in Asia, plus several hometown corporations based in Minneapolis–St. Paul. With the LBO, Northwest management would buy a controlling share of the company using outside capital—from us. We saw a route to success through leveraging the company’s strengths, making the cost structure more competitive with low-cost rivals, and adding routes and passengers through acquisitions. Over time, we would get expenses under control, achieve more pricing power, rise as one of a few industry consolidators, and become respectably profitable. That was the plan, anyway.
“We both were fascinated by the airlines business. We had this connecting-the-world philosophy,” Gary later recalled. More than that, though, we saw opportunities for major innovations in the industry to capitalize on trends we could see just over the horizon.
To begin with, Dutch airline KLM signed up for nearly 20 percent of the private ownership. The Northwest–KLM equity partnership led to the first international airline strategic alliance, approved by international transportation authorities in 1993. “It was a great leap forward,” KLM executives said later, noting that most major airlines adopted the strategy to form international route connections through alliances with other airlines over the following decade.3 Northwest and KLM also were the first airlines to create a single brand to reflect this alliance; we provided benefits for frequent flyers along the international routes involving any combination of airlines that were members of our alliance. Another innovation: We called it SkyTeam, and it still exists today.
We took Northwest public with an IPO in 1994, only our second year of profitability after the 1989 buyout. The US economy was recovering from the 1991 recession, and passenger volume for Northwest was rising after two bad years following the Gulf War. We had weathered some hard times and narrowly escaped bankruptcy in 1992. But the IPO was profitable for the LBO investors. I kept a large share of my firm’s holdings as well as my seat on Northwest’s board of directors. A year later, the value of our investor group’s stake in Northwest had tripled to $300 million, capping three years of outsized performance that helped our firm attract more funds from large institutions, mainly public and private pension funds. Those prosperous years helped fund more innovation at Northwest. For instance, we were the first large US airline to offer passengers Internet check-in.
Good times never last forever, though. A ten-day Northwest pilots’ strike in 1999 cost us $1 billion from operations before the Clinton administration ordered the pilots back to work. A collapse in air travel after the 9/11 attacks in 2001 sent Northwest further into a downdraft. We were forced to lay off thousands of employees and to accelerate plans to take aging aircraft out of service.
We didn’t like the way the airline was being run and concluded the pay issues with the pilots’ union were intractable. If your airline is not the lowest-cost producer and you lose customers to lower-fare competitors, you eventually go bankrupt. We could see the writing on the wall and, by 2004, had sold much of our firm’s holdings. Northwest filed for a Chapter 11 bankruptcy reorganization in 2005 and, in 2008, agreed to merge with Delta. The last plane flying the bright red tail that had marked Northwest aircraft since World War II was repainted with Delta colors in 2009.
We could have sold our firm’s shares in the years after the IPO for a huge gain. We did make a return in the end, netting out in the high single digits, but the fact is, we would have done better if we had simply bought US treasuries with that $100 million back in 1989, when they were yielding more than 9 percent.
At a farewell dinner when I was leaving the board in 2004, I surveyed our ups and downs in my parting remarks and concluded wryly that my fifteen years with Northwest had been “long on theater and short on returns.” In the end, the Northwest investment didn’t cause our firm any damage, but it did require a lot of my time and effort. John Dasburg, Northwest’s CEO from 1990 to 2001, summed up the lesson from Blum Capital’s prolonged connection with the company: “No matter how difficult it became, Dick stayed with it.” I believed then, and believe still, that to build a great company or organization, you have to keep the long view, even in bad times.
In all that I do—with the American Himalayan Foundation, the Blum Center for Developing Economies, the Brookings Blum Roundtable, and our private-equity work—I believe emphatically in the power of innovation. As I had told Sutro’s more traditionalist partners when I left, our world of course would continue to change. To keep pace and improve lives, we as a society as well as global citizens have to innovate in everything we do, whether it’s how we partner, how we develop strategies, how we teach, how we give, or how we invest.
Technological innovation in particular is a huge area of interest for me. It’s why we formed the Blum Center on two pillars: innovation (in partnership with the College of Engineering) and the Global Poverty and Practice minor. Later, we added Big Ideas, a campuswide competition that provides seed funding for undergraduates with world-changing ideas.
I am confident we will see quantum leaps within the next fifteen years in the ways advancing technologies help millions of people who otherwise would continue to struggle in poverty. Renewable energy may provide some of the most far-reaching benefits. First, global climate change affects poor, underdeveloped communities (through drought and severe weather) dramatically more than developed communities. Second, improved access to energy at affordable rates leads to better living standards, attracts more investment, generates growth in local economies, and more.
For former US Energy Secretary Steven Chu—a Nobel laureate, former UC Berkeley professor of physics and of molecular and cellular biology, and distinguished member of the Blum Center’s board of trustees—climate change is the biggest long-term obstacle to a sharp reduction in extreme poverty.4 “We’re heading into an era where, if we don’t change what we’re doing, we’re going to be fundamentally in really deep trouble,” he has said. “We have to transition to better solutions.”5
Many national security and migration challenges are tied to climate change. Severe drought, crop losses, and high food prices resulting from rising temperatures contributed to political upheaval sparking the rise of terrorists in northeast Nigeria and civil war in Syria. Rising oceans linked to melting ice caps are submerging low-lying coastal communities. These may be only the beginnings of our global predicament.6
Steven favors many steps to accelerate renewable energy supplies, including policies to put utilities or other third parties in the forefront of owning, installing, and maintaining rooftop solar systems. “If distribution companies and regulators got behind this, then all of a sudden they’re making money by deploying solar-energy systems, instead of fighting it or dragging their feet. It’s now in the profit/win column. You have to allow people to make money; that’s what motivates them.”7
We know that the costs of producing solar energy and wind power are declining faster than most anyone anticipated. This is hopeful news for the entire world, especially for developing economies across Africa and in India, where vast swathes of the population have no access to reliable sources of electricity. And more than 80 percent of the world’s one billion people struggling with extreme poverty live either in sub-Saharan Africa or India.8
Over time, I and others believe, hydropower will be a larger source of global renewable energy than solar and wind systems. Several governments in Africa and Latin America have approved massive hydropower projects over the past several decades that require construction of colossal dams on major rivers. The projects created vast new supplies of reliable energy. However, these benefits often were accompanied by cost overruns, corruption, significant ecological damage, and the dislocation of millions of people.
Run-of-the-river projects have become a preferred alternative since the turn of the century, a compelling engineering breakthrough often with financial backing by the World Bank. These smaller systems harness the force of a river as it flows downhill, capturing the water to turn turbines inside a small power generation plant. They are vastly cheaper and much faster to construct than large hydroelectric dams. This innovation has enormous potential to make reliable, low-impact energy available to hundreds of millions of people.
Since my first treks with P. K. in Nepal in the late 1960s, I had often thought of the vast potential all across the Himalaya for generating hydroelectric power. Here was an abundant natural resource, concentrated among eight of the world’s fourteen tallest mountain peaks. If rivers originating from snow packs on these peaks could be tapped, the hydropower could bolster the wealth of Nepal and several neighboring countries.
So in 2015, we invited Dr. Rajiv Shah, USAID’s administrator for the prior six years, and a team of proven professionals to join us in forming a private-equity firm, Latitude Capital Partners, with the purpose of raising funds for several clean energy projects, either hydro or solar. This is our newest effort to combat global poverty, extending the work of the American Himalayan Foundation and the Blum Center in important ways. More than $2.5 trillion in investment will be required to build new power-generating capacity in Africa and India by 2035. That’s for 700 gigawatts of generating capacity—the equivalent of 350 Hoover Dams! And although our work at Latitude Capital is just beginning, we expect our results to provide sorely needed resources for poor people in both southern Asia and Africa—resources they can use to improve their lives.
Life-changing innovation requires long-term commitment. Big advances do not happen overnight as if delivered by lightning bolts from the sky. They take years of research and planning. They require huge capital investments. But when the result is environmental, political, and social stability and an improved standard of living for millions of people, it obviously is worth the effort.
I was more confident than ever in the early 1990s about our firm’s investing fundamentals. The big trends of economic growth in Asia and expansion of international businesses were creating opportunities with tremendous potential. You only had to know where to look, stay focused, and take action.
There weren’t many in private-equity firms who thought CB Commercial, a forerunner and the foundation for what is now CBRE Group, was one of those opportunities. “The real estate industry before then was scattered to the four winds,” according to Mickey Kantor, US Trade Representative and Commerce Secretary during the Clinton administration, a CBRE board member for many years, and a colleague of mine in Democratic Party politics since the early 1970s. “But Dick saw a time coming in commercial real estate when globalization would hit and there would be opportunities if you could find the right kind of acquisitions.”
Over my twenty-plus years on the board—I joined in 1993 and served as chairman from 2003 to 2015—I can count at least a dozen acquisitions that were essential in creating the global CBRE Group platform. Two UK transactions in 1998 positioned us as the first vendor able to professionally manage real estate services for companies in major cities around the world. Those acquisitions put CBRE on a trajectory toward becoming a global organization. Acquiring and integrating companies has become a core competency: In 2013 alone, CBRE made eleven acquisitions, all funded from cash flow with no added debt. This is a formula for rapid, profitable growth.
The CBRE Group is now the world’s largest commercial real estate services and investment firm, entering 2016 with more than seventy thousand employees, annual revenues approaching $13 billion, and approximately 450 offices worldwide. It was the only corporate real estate services firm in the Fortune 500—ranked number 363 in 2014. It also was Blum Capital’s largest single holding, with a market value exceeding $500 million.
CBRE is a case study in how strategic focus and corporate values are mutually reinforcing. Commitment to values is why the company has topped its industry sector on the Fortune magazine World’s Most Admired Companies list for four consecutive years. We continually emphasized ethical standards and behavior—doing the right thing. All too often, acquisitions create bad blood and poor outcomes, especially when executed internationally. It’s essential to establish a high bar for all employees, including the management team, no matter where they’re based.
From the start, the culture we wanted and supported was to do good while doing well. We wanted senior management and the board to always keep in mind that in effect we were taking care of the families of tens of thousands of people who worked for us. When the economy softened in early 2009 and our revenues declined, we put salaried employees ahead of managers and executives as we cut expenses.
According to Brett White, a close colleague at CBRE for more than twenty years, “We didn’t provide salary or bonus increases for senior management in a tough market, but we always did for lower employees regardless of the market.”
When revenues were falling and no one knew where the bottom would be, Brett, then the CEO, told me he was going to eliminate all executive bonuses across the company—after having just committed $11 million to give employees making less than $150,000 a year a 3 percent merit increase. My answer was, “Of course.”
You can’t succeed in mergers and acquisitions without dealing with personal issues. They are inevitable. After one big merger when I was chairman, I had to work out a peace treaty between the leader of the company we acquired and the head of a CBRE business unit. They disagreed over multiple issues: titles, the formula for splitting commissions, and so on. Both leaders stayed, however, and made important contributions to CBRE’s success. That wouldn’t have happened if we hadn’t been listening to our people and treating them with respect.
I have learned over the years that strategy and finance are secondary to people and values. You can do well personally with the former, and obviously many do, but creating an organization with lasting value also requires listening closely and doing the right thing for people.
The CEO who originally brought me in to URS in 1975 made a few acquisitions that some of us on the board weren’t all that thrilled about, and for good reason. They failed, and URS nearly went bankrupt in the late 1980s. We brought in new management, the new CEO was successful, and URS grew impressively.
But this CEO miscalculated in 2005 when he agreed to partner with Lockheed Martin and the University of Texas to compete against the University of California for the contract to manage Los Alamos National Laboratory in New Mexico, the famed research institution for national security sciences.
The University of California (UC) had managed Los Alamos since its inception in the 1940s. I thought it was highly inappropriate for a major San Francisco engineering firm to join another state’s university system in competing against the University of California. I had been on the URS board for nearly
thirty years by then, and a member of the governing Regents of the University of California for three. In my view and that of professionals who knew the nuclear science field well, the advanced science capabilities of UC were far superior to what URS, Lockheed Martin, and the University of Texas could offer. And indeed, UC would go on to easily win the contract.
But the competition created the perception of a conflict for me, and a nasty public controversy ensued. I requested a letter from URS confirming that in fact I had no conflict related to the URS–Lockheed Martin bid. Three days after I received that letter, I sold all my URS stock and resigned from the board. I had been a URS vice chairman all those years, but I refused to go against the University of California.
If I invest in a company and don’t think management is doing the right thing for shareholders, I’ll let them know. I can get tough then. I don’t go looking for fights, but I am not afraid of them.