Chairman's letters

18 January 2016

Guy Hands speech at the LSE Alternative Investments Conference: “Forging your path in an uncertain world”

It’s an honour to be here, speaking to a group that will include leaders of commerce and industry. And since there are many potential future leaders out there among you, I’d like to share some thoughts with you. These are based on my forty years as an entrepreneur concentrated mainly on the alternative investments area, as to what it takes to survive and succeed in a world that appears to be becoming less and less predictable.

But first, is the world really so different now from when I was in your shoes?

This year’s market start has been the worst for over 40 years; indeed, it’s probably the worst in living memory. However, back at the start of 1976, a time many now romanticise, but I remember well, the UK was facing an absolutely horrendous economic situation. We had just had a referendum on Europe where the UK had voted to stay in and the Tory party had nearly torn itself in two. We’d recently experienced an oil crisis, but at that time it was because prices were going up. One thing was the same, and that was that the Middle East was the centre of instability, with plane hijackings and a bitter civil war in Lebanon that resulted in more than 100,000 deaths.

In spite of these things, certain politicians now put forward the view that 1976 was actually not a bad time. They point out that today the world faces terrorism, human rights abuses on a massive scale in Syria and, indeed, across the world. Flooding is affecting many parts of the UK, political extremism and intolerance are growing in Europe, and the West is facing relative, if not absolute, economic decline.

However, those same politicians should remember that 40 years ago, we also faced a number of serious challenges. We were grappling with new and frightening forms of terrorism, albeit very different in nature and scale from those that confront us today. According to the CIA, 1976 saw more terrorist incidents than any year before, and more of those incidents took place in Europe than any other region of the world. There was also a huge heat wave and drought in the UK that year, with some parts of the country not seeing any rain for a month and a half. Water rationing was in place and people were queuing to get their water from standpipes in the road. Of course today we have a better understanding of the effect that humans have on our fragile ecosystem.

However, even I would admit it wasn’t all bad – Apple Computers was founded in a California garage in 1976. The UK won Eurovision that year, thanks to the group Brotherhood of Man and their song ‘Save Your Kisses for Me.’ And last but not least, at least for my wife and daughters, Benedict Cumberbatch was born.

As a 16-year-old 40 years ago, my number one objective was to escape what I saw as this bland, dark, socialist prison. It was of course often literally dark in the 1970s, as industrial action caused power cuts, and at times factories were forced to operate a three-day week. The top rate of income tax in 1976 was 83% and we had to be bailed out by the IMF.

I thought the UK would never change. I felt that we had lost the will to be successful. Our cultural beacon, the BBC, aired such programmes as The Benny Hill Show and Till Death Us Do Part, which attempted to parody the racism and sexism which were then an everyday feature of British society.

Like many young people at the time, I despaired. And like many young people today, I had little time for the Establishment. However, unlike some of my contemporaries who have become less hopeful as they’ve aged, I now have plenty of optimism – though I don’t think I’ll ever become part of the Establishment.

But in the late ‘70s, not surprisingly, my favourite music was punk. I didn’t have the looks or the body to dress like David Bowie. Instead, I pogoed to the Clash, the Sex Pistols and the Stranglers. I wore tight black drainpipe jeans and an Afghan coat, and danced in London music venues like the Marquee Club, after which I ate at Poon’s in Lisle Street, where a three-course meal with unlimited Chinese tea could be had for £1.10.

Then, in 1979, Margaret Thatcher was elected, and the UK changed. All of a sudden, enterprise and hard work weren’t dirty words. I started an art gallery business while at Oxford, took out a mortgage and bought my first home. Things looked good.

But the economic transition was painful. The 1982 recession resulted in more than 3 million people out of work. Some communities have never recovered.

It was also a very bad time to be selling art, and I needed a real job quickly if I was going to pay the gallery’s debts. I joined Goldman Sachs in one of its first five graduate intakes. This was pre-Big Bang, and I was the 72nd person to join their London office.

Since then, like everyone of my generation, I’ve seen times of great elation, and times of great despair. We’ve witnessed the AIDS epidemic, many market crashes and numerous terrorist attacks. But we’ve also seen the fall of the Berlin Wall, the end of apartheid in South Africa and the arrival of democracy in countries such as Spain, Portugal, Latvia, Argentina and South Korea. Here in Britain, while we still have a way to go, the revolting, endemic racism, sexism and homophobia of my youth is gone and that is a powerful reason to feel optimistic about this country’s future.

I’ve seen banks go bust on numerous occasions, from the Latin American debt crisis in the early 1980s, to the savings and loan crisis of the mid-1980s, to the bursting of the Japanese asset bubble, to the Asian and Russian financial crises of the 1990s, to the great credit crunch and financial crisis of 2008, and most recently with the European debt crisis in 2010.

I’ve seen businesses that looked like incredible successes go on to fail – businesses such as Enron, which traded the volatility in oil; Kodak, which invented the digital camera but opted to try and protect its traditional film business; and Global Crossing, which tried to bring high-speed internet to the whole world.

I’ve seen businesses which looked like failures become great successes. Apple, which looked like it was going nowhere after Steve Jobs left; IBM, which only reluctantly shifted focus from mainframe to the personal computer; and Burberry, which produced sporting clothes for people who looked like they belonged on the set of Downton Abbey.

Over 40 years I’ve had my own ups and downs. 2011 stands out. There was EMI of course, and at the end of 2011, Terra Firma marked its stake in Tank & Rast, German motorway service stations, to €37 million, when it looked like the business wouldn’t be sold for much. Last year we sold Tank & Rast for over €3.9 billion. Deutsche Annington was trading in the secondary market at a valuation of around €1 billion. Today, Deutsche Annington, German residential housing, renamed Vonovia, is worth more than €12 billion.

We’ve had investments which we thought were going to be worth a fortune and weren’t. Quadriga, an in-room hotel entertainment business – at the peak of the dot-com boom we thought it could be sold for £1.4 billion; in the end, we got £70 million as in-room entertainment systems were replaced by laptops. Or Threshers, UK liquor stores, which at one point was worth nearly £500 million, and ended up being sold for £110 million as Tesco entered the market selling alcohol cheaper than we could buy it.

Then there are the transactions which never took place. The oil and gas exploration business we nearly financed in 1999 at a valuation of $250 million. When oil was at its peak of $145/barrel it would have been worth over $40 billion, but today, with oil around $30, who knows? Somewhere between zero and $2 billion, depending on how much hope you have that oil prices will come back.

So, how have I survived 40 years of a constantly changing world? And how will you survive the next 40 years?

The key to surviving in business comes down to a few rules.

Firstly and most importantly, things are never as bad, or as good, as they seem. In 2011 after EMI had been seized by Citigroup and broken up, I thought there was a possibility that I could go bankrupt if the same thing was to happen with our other businesses. Now, with the recovery from the financial crisis, Terra Firma deals have proved to be incredibly successful, generating substantial returns for our investors and giving us a balance sheet of €1 billion. So you need to focus on the long term.

You also need to remember that people tend to believe that market trends will continue forever. So, while the trend is often your friend, and bucking the trend is always going to be painful, and often expensive, things will (almost) always turn around at some point.

The key is always to have sufficient time, and good, loyal partners. I’ve been lucky in most of the transactions I’ve done in that, for the most part, I’ve had partners who have supported me with patience and belief.

Business is not an intellectual process. All of you in this audience are intellectually very bright, but what will determine which of you will succeed is not your brightness. It is, in a lot of ways, the same as it is in sport. There are lots of skilful footballers, just as there are lots of bright businessmen. But the ones who succeed are those with dedication and a willingness to withstand pain until they can make a difference.

Successful long-distance runners are willing to run and train until they’re sick, until their feet bleed, until their muscles feel like they are being ripped apart and their lungs are gasping for air. Being an entrepreneur is not that different. However, you can be successful and avoid that level of pain by becoming an adviser. You can become a banker, an accountant, a lawyer, a consultant. Of course, those jobs require you to work very hard and have intelligence and skill, but they do not require the same level of personal commitment and tolerance of pain as being an entrepreneur.

But if you feel you want to be an entrepreneur, if you want to build something unique, then you are going to have to be willing to tolerate the brickbats, the derision, the laughter, the doubt, and yet, keep ploughing on. You won’t always be right, but when you are right, you’ll really make it.

The second lesson is: don’t put all your eggs in one basket. But if you want to be an entrepreneur, put enough eggs into one basket that it will make a difference, and that it will really matter to you whether it succeeds or fails.

If you don’t want to make that level of commitment, but you also don’t want to be an advisor, then you can still be a principal in the investment business and become an asset manager. You can work for one of the big asset management houses, such as Blackrock or State Street. In doing so, you need to focus on producing a balanced portfolio in order to create a successful business. You should focus on achieving beta because it’s unlikely that getting sufficient diversity in your portfolio to avoid pain will give you sufficient leeway to create alpha. The successes as well as the failures are unlikely to make a large impact on your portfolio.

So where are you on this spectrum? Are you an entrepreneur? Are you someone who would like to be an asset manager? Or are you an advisor? Each of these business areas gives you an avenue to be very successful. But they each call for different personalities.

I am at the entrepreneurial end of the spectrum. I’m willing to fight and give my all for what I believe to be right. But success or failure in pursuing what is right can be lonely. You won’t have a balanced life as an entrepreneur. And you will make enemies.

To be a successful entrepreneur you must be willing to make the sort of sacrifices that most people wouldn’t. I’ve spent a lot of my life working 80-plus-hour weeks. My family taught me to moderate that, up to a point, but I still struggle to switch off.

So what will determine which of you is going to be successful? Through Terra Firma, I’ve hired thousands of people and tested tens of thousands. I’ve seen many who have been successful, and many who haven’t. And at the end of the day, after 40 years, I’ve come to a very clear conclusion. The number one criteria of someone being successful is that they find the right role.

Once you’ve got a certain level of ability – and you’ve all got ample ability – you don’t need to be more intelligent, more skilful or more knowledgeable. From then on it all comes down to your character, your work ethic and finding the right role or opportunity for you. As an example, do you want to become a manager? Many of you think you do. And many of you will make terrible managers. You think that to be a manager, you have to be better than your team at doing things. You’re wrong. Completely wrong. All the best managers I’ve met focus on getting other people to do a really good job for them. Not necessarily on doing the best job themselves. The art of good management is getting other people to do a better job than they believe they can do.

Again, it’s like sport. The best captain is not necessarily the best player. They have to be good enough to command respect, but not so good that nobody else feels they can add value to the team. If everyone else on the team feels that they can’t add value, then they will get discouraged and the team will never succeed.

Now, I’m going to say something which is slightly different from what I said at the beginning. At the beginning, I talked about change. I talked about how over 40 years I’ve seen lots of different things and I’ve adapted to them. But the one thing that’s important not to change if you want to be successful is your focus. You’ve got to stay laser-focused on your goal.

I spent 40 years of my professional life focusing really hard on one main thing: how do I find the next business opportunity where I can change the business and make a difference. There are lots of other things I could have focused on. For example, I love photography, and I loved politics at university.

Let me be absolutely clear, I don’t think I would have made a great photographer – and I’m certain I would have made a terrible politician. I was very lucky to find the right role early, and having found it, I didn’t allow other passions or interests to distract me from it. My life has been defined by my work and my family. There hasn’t been room for much else.

You, on the other hand have been told that you can have it all. It’s the great myth of modern Western society. Rather than trying to have it all, I think we would all be happiest by making our contribution to society in an area that we love, are best at, and are motivated to pursue. Be it as an entrepreneur, an artist, a scientist, a carer, a soldier, a sportsman or many other activities that are needed in a balanced society. Or you can have other aims and ambitions for your life. Each is equally important and just as laudable and contributes to making a successful society. Each needs to be recognised and nurtured. But if you want to be happy, and if you want to excel, make a choice.

Back in 1976, most people chose not to follow an entrepreneurial route – they didn’t see the upside. Taxation was too high, and the government of the day was against business success.

On the other hand, when we went into the noughties, too many people had decided to try for commercial success at any cost for us to have a balanced society, with serious negative consequences. Now, we’re in 2016, and you are the next 40 years. You need to decide what you want to do.

For the sake of the global economy, I hope enough of you want to go out there and become entrepreneurs. And for the sake of a truly balanced society, I hope a lot of you go out there and do something completely different and contribute to the future in other ways. Whatever path you choose, I wish you luck.

Thank you for listening.

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