Vestar Capital Partners CEO Brings Practitioner's Insights to Corporate Finance Class

When he arrived at Yale SOM more than 30 years ago, Dan O'Connell '80 said, he barely knew anything about investment banking and had no plans to go into it. But classmates urged him to consider banking, and a summer internship led to a full-time job, which became a career in finance. O'Connell is now CEO of Vestar Capital Partners, a private equity firm focusing in the consumer healthcare, financial services, and industrial/service sectors.

As O'Connell explained to students in Professor James Choi's Corporate Finance course on April 11, the connections he made at Yale have helped him throughout his career. After he and six other colleagues from his time at First Boston (including Jim Kelley '83) started Vestar in 1988, their first deal was brought to them by a Yale finance professor. "The friends and relationships you make here will be an important ingredient in your life down the road," he said.

O'Connell got into private equity when it was still in its infancy. He has seen it grow and go through numerous cycles, and Vestar has evolved its approach along the way. Vestar, which started with seven founders and little capital, now boasts more than 50 employees, has completed more than 70 investments, and manages over $7 billion in committed capital. Back in the early years, O'Connell said, most private equity firms were generalists, searching for companies that could be bought and quickly improved for a profit. And, he told the class, those profits were often enormous. "It wasn't incredible to see 50-100% annual returns," he said. "The market was inefficient and there weren't a lot of players. Obviously, that's no longer the case."

Huge returns attracted more capital and more firms. The cases of firms sweeping in to buy a company well below its instrinsic value and quickly selling it or taking it public became rarer. The game changed from finding undervalued gems to making acquisitions more efficient and profitable through active management before selling them. "The days of being able to get the deal done by being driven and a good schmoozer have gone by the board," he said. "It's now about how well you know an industry and how you can help the management team bring a strategic and operating edge to the equation."

With greater competition, profit margins have declined. Nonetheless, through active, focused management, O'Connell believes, private equity outperforms the public markets by a healthy margin. And since the financial crisis, some of the riskier practices, such as over-leveraging companies, have declined. "Firms have focused on fixing their portfolios and strengthening their capital structures," he said. "There's still an occasional bargain out there, but they're fewer and far between. The overall wealth creation opportunity isn't what it used to be. But I can't think of anywhere else you get such an engaged, personal touch in what you do."

Choi, an associate professor of finance, said that it's very helpful for students to get to hear from top practitioners such as O'Connell. "He's had a front-row view of the private equity industry over the last few decades, and he provided a great portrait of where the industry has been, where it's going, and his firm's thinking behind one of their recent home-run deals," he said. "Yale SOM is lucky to have many distinguished alumni who give generously of their time by returning to share their wisdom with current students."