If you think venture capitalism is just about numbers, think again. Put a group of venture capitalists in the room and feel the energy jump. Besides being brainy, they tend to be hyperactive and plenty social. Theirs is a game of calculated risk, where you need to analyze people as well as business plans and pro formas. So I was thinking as I attended my second annual meeting of the Canadian Venture Capital & Private Equity Association at a Halifax waterfront hotel in June.

The first one was at the same hotel in 2001, and stockbroker and musician Denis Ryan hosted the evening’s entertainment. He insulted the audience with the caustic wit and general good humour that only an Irishman can muster, and there was an energetic performance by the talented Natalie MacMaster in which a stage lamp fell over and narrowly missed her head. The international audience soaked it all up.

This year, in keeping with the times, the organization has added “Private Equity” to its name. (Where the venture capital side has stalled a bit in recent years, the buyout side is thriving, with $918 billion (U.S.) in deals done globally last year.) The keynote was a major coup—rather like nailing God, or at least one of the Apostles, as the lunch speaker. Henry Kravis is a co-founder of the modern private equity movement. In the 1980s, his firm, KKR, took over corporate behemoth RJR Nabisco in a hostile bid, inspiring the book and movie Barbarians at the Gate.

Even they had a hard time getting started. When Kravis and his two partners founded the firm in 1976, they used their own money and barely scraped by for the first two years before attracting private investors, proposing to pay them 20% of the profits and thus creating the industry standard. Today KKR has six offices around the globe and has churned out $418 billion (U.S.) in leveraged buyouts.

The VC/PE industry is a poker game with real money, one where the value of the chips—real corporations—can be increased by good management. Guys like Kravis use money from banks and pension funds to acquire control of public companies they think are undervalued. Then they do whatever it takes to improve performance: fire and hire, inject cash, alter strategy. If the plan works, they can sell their interest back to the market at a large profit. This process generally takes a while, but it can happen in months.

Like all top PE artists, Kravis is a global thinker, and he keeps an eye on the sleepy giant to the north.

Using Canadian banks and pension funds, KKR bought such Canadian companies as the Yellow Pages and Shoppers Drug Mart and made a fourfold return on their investment when they were sold.

From his lofty mountaintop, Kravis outlined the history of his industry. In the 1970s, it was all about high leverage and financial engineering; the 1980s saw the global growth of equity markets, and today it’s about value creation by improving operational performance—in other words, sanity. He calls this the industry’s Golden Era for two reasons: “the enormous amount of capital available and the receptivity of companies to going private so they can make long-term investments in the face of the vaguaries of the public markets.” Money is a commodity today, he said. “You need to add real value by creating a relationship with the CEO and the company.”

Later, at a panel discussions back on Earth, we learned about the VC industry. U.S. funds have had 10-year returns of 20%. In Canada, however, returns are below 2%, with Canadian money going into VC half of what it was three years ago.
Meanwhile, it’s the entrepreneurs and managers who do the heavy lifting to create real value. They made up one panel, and local entrepreneur John Risley stole the show. He was impatient with the numbers guys and with the investment industry generally. Risley, who founded three companies, is leery of the detailed business plans with their five-year projections presented by most start-ups. “It’s bullshit, most of it,” he said.

Risley comes to the issue from both sides, as an investor and an entrepreneur. His main point was that one cannot predict the future in any detail. One has to decide if the people one may be investing in have capacity and are trustworthy. “The two ingredients in business are people and timing, and you can only tell about timing in retrospect,” he said. “In my businesses, timing has been a huge component.” That leaves people. Do due diligence on the people, he said, not just the plan and the financial projections. “Ask, will they be able to make money with my money?”

Later there was scotch tasting, and lobster and wine was consumed by people in kilts. Matt Minglewood played the blues. There was a Scottish tune or two. The energy went up another notch. Groups starting drifting downtown. The prospect of money keeps you young.