Investor – M H Carnegie & Co
‘… You’ve got to be passionate about whatever you’re doing, and you’ve got to be prepared to do stuff that other people won’t do.’
Mark Carnegie’s track record in the corporate advisory arena is legendary – he has been involved in a range of Australian and international deals valued at billions of dollars. With diverse international experience as an entrepreneur and investor, he co-founded Carnegie Wylie which was acquired by New York’s Lazard. Now he is using his powers for good in the areas of social policy and philanthropy.
Interview
BRETT KELLY: Mark, I’d like to start at the beginning. Where did you grow up?
MARK CARNEGIE: I grew up in Melbourne. Then, when I was six, we moved to Connecticut, just outside New York, in America. Dad was working for McKinsey there. We came back when I was eight years old and we stayed in Melbourne.I studied at the University of Melbourne and then overseas. I worked on Wall Street and went back to London for a while and came back to Sydney when I was twenty-eight.
BK: Twenty-eight. And what were you doing then?
MC: I was consulting for a west coast private equity firm, Hellman and Friedman.I was trying to help them make an investment in Fairfax.
BK: Was that your first small deal in Australia?
MC: It was my first deal back in Australia. There were plenty of people involved.
BK: So is that when there was a Packer bid on and–
MC: That’s right. Packer, Black and Hellman and Friedman were one group.
BK: Where did your interest in finance and business come from?
MC: You know, I wanted to be Jacques Cousteau. I wanted to be a marine biologist. I could see that I was never going to be a particularly high-quality research scientist so I went and did a law degree in England where I would never have got in had I not been able to row as well. Then I worked summer jobs in finance while I was there. It was the fashionable thing to do. And I went and worked in Wall Street for Jim Wolfensohn who was a high profile Australian investment banker.
BK: Would you describe business or finance as a particular passion or something you just fell into?
MC: I have always enjoyed venture capital. Business is a constant war between the people who have to defend the hand – the big businesses – and the attacker hand. Some guy’s got an idea about how he is going to change the world to make a bigger business. I have always naturally gravitated towards people who are applying the attacker hand.
BK: Where does that natural inclination come from? Is it quintessentially Australian to back the underdog?
MC: I don’t know. I mean, they’re two good questions in the area of accounting and finance. I never took a formal finance or accounting degree, but it was one of those things, I found most stuff at university and academically really a struggle.By contrast, I could just understand accounting. It was relatively straightforward how it worked and was put together. So that helped – and when you have a predisposition to something, it is easier because you work harder at it.
BK: One of the things I keep hearing is that, over time, people find something that they are naturally talented at or passionate about and they put more effort into it because they feel more competent.
MC: It’s the Gladwell 10 000 hours point.
BK: The guy that puts in more effort normally wins the war.
MC: Exactly.
BK: Did you have any plans for your career path?
MC: It’s an interesting question. Eisenhower said, ‘In preparing for battle, I have always found that plans are useless, but planning is indispensable.’
BK: Then no grand plan for your life? Just to do a great job at what you’re doing?
MC: I would say, you need a broad view. You need to be doing the opposite of what the investment banks and big financial services businesses are doing. You need to fulfill an unmet need; you need to do it in a different way, stuff like that.So you’ve got a broad understanding of it, which is being where other people aren’t, but after that, I tend not to try and get too committed. Then I’ve taken it in stages. I wanted to be successful and I wanted to make Carnegie Wylie successful.
BK: So let’s talk about that. you essentially started an advisory business?
MC: No, we were trying to be an investment business. The deal is, the basis on which X will give you money is so unattractive that Wyles and I thought, we will do it better. We will make more money, a lot more money, from being advisors than we would from being investors.
BK: OK. So you’re in the market. At the beginning it was dominated by full-service investment banks where you had to be everything to everyone and do the whole transaction, but you came out as an independent advisory group.
MC: That’s right. That was the key thing. There was a huge sector of growth in private equity and we wanted to capture that wave. I had done it with Hellman and Friedman for a long time. By contrast, at that stage, the all-singing, all-dancing investment bank looked like it was going to sweep all before it. Then what happened was the dot-com boom, alternative assets, venture capital was on the nose and people didn’t want to give us money. By contrast, in advisory circles, everybody said, ‘God, you need an independent advisor.’ So because the model changed from hiring a big investment bank to hiring a big investment bank plus an independent advisor, you had this big industry shift.
BK: So the big investment banks started to compete with their clients. How early did you see that, what was the difference that you saw?
MC: Our whole thing was that we were prepared to actually fight for our client.Most people just really don’t like conflict.
BK: So would you characterise yourself as aggressive or direct?
MC: I think other people have characterised me that way.
BK: I noticed in the article on Banjo, the advertising group that you and John Singleton invested in, that John comes across in the media as somebody who has always been prepared to take a different angle and to go hard for what he believes in. I have never met him, but that was a critical piece.
MC: Absolutely. I mean you’ve got to be passionate about whatever you’re doing. You’ve got to be prepared to do stuff that other people won’t do. One of my favourite lines of all time is Jimmy Goldsmith’s great line that if you see a bandwagon rolling, it’s too late to get on. But that’s what people want to do.When they say, this is the year to become a management consultant, it’s the best time not to be.
BK: So you’ve got Banjo and One Big Switch. What would you not want to be doing in the world right now?
MC: I wouldn’t like to be a mainstream retailer at the moment.
BK: So online?
MC: I think we’ve got the highest service costs in retail. We’ve got the highest occupancy costs and the internet is free distribution. I don’t think that sounds like a good game.
BK: So where would you want to be?
MC: I think, in the end, even though we look like we’re on the cyclical downturn for China, I think the emerging markets are going to increasingly have a larger and larger share of Australian GDP. So what you need to do is find something that’s derivative on the secular growth of the emerging markets.
BK: OK, so where do you think those places are right now? What excites you?
MC: I’m not so much a person who will fund and invest in secular themes on the bull side. By contrast, what I’m interested in and trying to do is find places where, as a result of this capital drought and the European banks disappearing, there are things being sold really, really cheap. It’s the same reason as getting into venture.Venture had an appalling performance, post the dot-com bubble, so I said, ‘Let’s get into venture.’
BK: yes. So with that venture fund, where do you–
MC: Well, we’ve got prostate cancer diagnostics. We’ve got One Big Switch. We’ve got a water treatment business – it’s just what deals were looking good.
BK: In a sense, buying assets below replacement cost–
MC: No. I mean the venture things are far more, you know. Could you have a big market? Do you have a sustainable, competitive advantage? How long's your path to revenues? How long is your path to profitability? The other stuff which we’re doing at the moment – pubs, marinas, those things – that’s all about replacement cost and buying cheap.
BK: Can I ask you how old are you now?
MC: Fifty.
BK: OK, so what’s the plan from here? you know, the broad strategic direction.
MC: So the way it works at the moment is I try and do three things: I want to be commercially successful, I want to do a whole lot of philanthropic stuff and I want to speak out on issues of public policy.
‘I try and do three things: I want to be commercially successful, I want to do a whole lot of philanthropy stuff, and I want to speak out on issues of public policy.’
BK: Tell me about the public policy issues–
MC: The one that I’m on the record about is the argument that rich people should pay more tax.
BK: In what sense?
MC: If you look where the tax burden lies in Australia, the people who are doing well out of Australia’s economic prosperity should pay a greater share of the tax burden.
BK: Through a super profits type of tax?
MC: No. My argument is basically that there should be no negative gearing. Rollback the Henry land tax.
BK: Estate tax?
MC: Yes.
BK: So you would be a fan of estate taxes rolling back capital gains tax (CGT) versus income differential?
MC: Well, no. This CGT thing is … what Henry says is that we want to reduce the tax on interest income.
BK: yes.
MC: Increase the CGT and basically we’ll still make a concession for interest on savings, but equalise between interest income and dividend income and those sorts of things.
BK: And capital gains?
MC: It would mean that capital gains tax goes up, but not the same as income.
BK: OK. What about incentives to invest? Do you believe in having a tax system that is designed with incentives to invest in particular things or do you think governments should stay out of it?
MC: No. I believe clustering rarely works. I think it’s regional. I think huge amounts of economic development are regional competitions. I think with that, without Australia finding areas to compete against Singapore, Hong Kong and stuff like that, we’re going to be largely irrelevant. I think Singapore’s industry policy is really, really effective.
BK: So, after we’ve equalised some of those other areas there should be–
MC: Two different things, right? Think about individuals. At the moment, a demographic tsunami is going to hit us. As older people retire, what they call the dependency ratio goes up. We have huge amounts of good fortune at the moment. I’m saying the rich people who are really fortunate at the moment should pay more tax and put that into a savings account or a sovereign wealth fund so that when things are tougher in twenty years’ time, as they inevitably will be, we’ve got–
BK: So the continuation of Costello’s first intergenerational report goes on– it’s probably a decade old now.
MC: But they’ve done two or three subsequently.
BK: That’s right, they have been continually updated but it’s interesting, you heard about Henry, but there’s not really been much focus on that intergenerational report–
MC: I think the Business Council did a really good job before the Tax Summit when they said that the numbers are far worse because they have misjudged how much damage comes as a result of the state governments. The expense line looks like this and the revenue line looks like that.
Also, it’s this thing that the voters are old and the workers are young.The voters are going to say they’d like higher and higher real expenditure on healthcare. How is it going to get funded? The answer is to fund it while you are working. That’s my argument.
BK: And that’s why tax rates can only go–
MC: Fifty percent is an absolutely top rate for income tax, top rate. I think it’s all to do with these messed-up incentives and other stuff.
BK: So you are in favour of a progressive tax system?
MC: Yes. I thought about all that flat tax stuff but I just don’t think it works.I’m hugely supportive of Bruce Bonyhady and what he has done with the National Disability Insurance. And divorce. I believe divorce is a disease, so we are funding a whole lot of stuff to say divorce is a disease, the mental health cost is huge. It’s a hidden cost to society and we need to be having a more focused look at it.
BK: A harder look?
MC: At how to deal with it.
BK: So you would call divorce a disease?
MC: We are saying, mental health is so many things, it is not like schizophrenia, no. Here is a middle class thing that happens to a third of middle class families that has huge, huge costs, right? Nobody investigates that. How do we do that?
BK: OK, so how are you doing that?
MC: Through the Menzies School of Health Research in Darwin. We’re using them.
BK: you’re funding some research they are doing?
MC: We’ve got to see what we come up with.
BK: What is your interest in disability?
MC: I have an interest in early intervention and the National Disability Insurance Scheme (NDIS). My youngest child was deaf. We had a whole lot of stuff that we had to do to help her. That was fine because Tanya and I had the resources to do it, but there are a whole lot of people who go through the same thing and don’t.
Bruce Bonyhady has come up with a National Disability Insurance Scheme.They got the first round of funding this year. That’s doing well and I’m really, really supportive of what he is trying to do. In contrast, there are people who say the full effect, which would add six billion dollars a year to the budget is too much.My argument is, that’s failed accounting. This is an investment, not an expense.Down the track, early intervention saves money and improves lives.
BK: So for the child with a hearing issue, early intervention changes everything.It takes them from being dependent at eighteen to being a contributor.
MC: Exactly.
BK: Interesting. So why venture capital? I’ve read a bit about how they raised a lot of funds for the internet boom. Those funds essentially killed the venture industry in Australia. How big is the fund that you have?
MC: It’s small. Twenty million from us and twenty million from the government, so forty million, but the thing that’s clear is you don’t need huge amounts of money in the new world–
BK: What is an effective or average size of an investment for you guys?
MC: I don’t know. Accel, which is the most successful venture firm in the world at the moment, is willing to do things as small as a hundred thousand bucks if they have to because everyone is realising that it’s a smaller and smaller number of investments in the portfolio that make all the money. The history was always a third of your investments were going to be responsible for your entire outcome.Now, it’s like 3%. That’s a tiny percentage doing this stratospheric …
BK: It’s a lot more small investments.
MC: And the big ones can pay out at a hundred times of what you invest.
BK: So, how big is your team in that business?
MC: About half a dozen do both the normal investment plus the private equity, because it all sits together.
BK: What’s your criteria in the venture space? When you look at a business to invest in, what are you looking for? Where do you start?
MC: The quality of the guy, right? And then, is the market big enough? Can you put the risk upfront? Therefore, you know whether you’ve got something really good. How is it going to be sustainable? That is, how are you going to create a competitive advantage?
BK: Any view towards the exit or do you guys prefer to buy and hold?
MC: Basically, we buy things to sell, so we’re not like Warren Buffett, but you can find ways out if you’ve got a sustainable business model, there will always be someone who wants to buy it off you.
BK: That’s very Buffett – if it’s a great business he likes to keep it. Tell me, what are you looking at when you look at that person you’re going to invest in?
MC: It’s really, really diverse. There’s the way they think about the world. Are they trustworthy? Are they willing to learn from their mistakes or take counsel, take a difference of view–
BK: What distressed assets are you looking at? What do you like about pubs?
MC: No-one is ever going to have a drink on the internet. I like that. My kids buy their shoes, their clothes on the internet, but they ain’t drinking on the internet.
BK: When you look at them, how do you price them?
MC: Well, I halve what they were before–
BK: Any sense of a model of earnings or is it a real estate play as well?
MC: You can borrow at five and you can buy them at twelve. Before, you could buy at five and borrow at twelve. I like the former, not the latter.
BK: I read that the plan with that portfolio is to group them together and then list it?
MC: List it or sell it, I just don’t know. Returns at the moment are just so good for what we do. We’ve got a happy operator, we make a whole lot of money. I mean, how good is that?
BK: Hold them forever if–
MC: We’ll wait and see.
BK: Marinas?
MC: They’re basically the same as the pubs, which is 60% off some of them.
‘I’ve got no interest in doing big deals. There are just too many people doing it. I’m interested in doing small deals …’
BK: OK. What else are you looking at?
MC: I’ll look at anything. I just wait for the phone to ring. I was looking at a pain management business recently. My whole thing at the moment is because of the way the intermediations work, there are a whole lot of people who expect to get paid $500 000 a year as investment bankers. They need to do big deals. I’ve got no interest in doing big deals. There are just too many people doing it. I’m interested in doing small deals because–
BK: There’s no-one there.
MC: Exactly. I always go where the money ain’t! It’s not contrary, it’s just what I’ve always said about capital. It’s a commodity, right? Being in my business, you are the high-cost provider of a commodity. That’s a shit business, right? You don’t want to be the high-cost provider.
BK: So you’re running here, basically, one man at his desk and, you know, six men at a desk.
MC: It’s twenty men at a desk but the whole thing is you need to manufacture something out of a commodity. So you need to manufacture a solution. For a guy’s problem, if all you are is a low bid on a capital availability–
BK: Bad business to be in.
MC: Whereas if somebody’s got a problem and you can find some way to fix it, fantastic.
BK: How important is your knowledge versus your ability to deal with people versus the people that you know?
MC: I think they’re all together. It’s one of those things, everyone knows everyone in this town. If you know them and know their strengths and weaknesses and how they can fit together to provide a solution–
BK: That helps. So when you look forward, or look at where you’ve been, what are the things that you’ve got really wrong or that you’ve learned a lot from?
MC: Mate, you’d be here for hours.
BK: So the biggest thing you’ve learned? Biggest mistake?
MC: I’ve always said you can only lose your money once. So I have never regarded my failed investments as a huge problem. Provided you’ve got a diversified portfolio, you only lose your money once. So your mistakes are selling your winners too early and doubling down on your–
BK: Not selling your losers earlier?
MC: Yes. Peter Lynch describes that as watering your weeds and cutting your flowers. Ultimately, that’s where the problem is. There’s a thing called confirmation bias in bad investments and you’ve just got to be ruthless about the fact that routinely you stuff up.
BK: How important do you think self-discipline is? A willingness to be objective?
MC: You are buggered as an investor, a genuine investor, over time if you are not able to be objective. You are gone.
BK: Do you have any advice to young people seeking to build a career?
MC: It’s great, that John Paul Getty line, isn’t it? ‘Work hard. Work hard. Rise early.Strike oil.’
BK: It’s a good one. But is it also about finding something you really love?
MC: Absolutely.
BK: you can’t just keep going to the point of being very, very successful if you don’t have the passion to just keep going.
MC: But I think it’s about drive. The other description I have for the young kids is, you need some grit in the oyster if you’re going to try and make a pearl.
BK: Tell me, how old are your kids?
MC: Eighteen, sixteen and fourteen.
BK: What do you say to your kids?
MC: I just say, you know, work it out. I don’t care whether you’re feeding refugees at Darfur or working at Lone Pine Capital. Just make sure you’re working. Make sure you’re engaged and make sure you do what you love.
‘Just make sure you’re working. Make sure you’re engaged and make sure you do what you love.’
BK: you talk about the divorce disease. For business owners with really intense careers and businesses they’re building, how do you keep a marriage and family on track? I don’t think there’s a silver bullet–
MC: Well, I’m divorced so that’s the reason why I’m big on the divorce thing –I know the cost of it. It’s a really, really big challenge. It really is. It’s stressful.Building a business is stressful. It takes a lot of work. I did a ton of business in Asia.It’s just really hard.
BK: So what is it? Is it because you’re not there, you’re not engaged? you’re more engaged in business and you don’t spend enough time with your kids when you’re there.
MC: I’m sure you’ve heard it a hundred times from all sorts of people. You’ve got choices and you don’t spend enough time with the kids when they’re young. You know, I tried to overcome that subsequently.
BK: So when you look back, what would you change if you could change anything?
MC: Let me think about that, I’m trying to work it out. I mean, I wouldn’t have travelled as much as I did to Asia. I would have tried to find a different way to do that.
BK: Is there a motto, a quote or a thought that best summarises your approach to life?
MC: I used to have one about persistence, but the one I have now is the Puggy Pearson quote – there are only three things you need to know about poker.The 60/40 end of a proposition, money management and know yourself. It was used by some of the big investors and there’s never been a better quote about investing. So, that’s my quote.