The co-founder of SCP Partners, which invests in Israel-based technology companies, has combined his interests in economics and physics through creating private equity firms.
Winston J. Churchill says he created his own career. The son of an insurance salesman, Mr. Churchill — no relation to the famous U.K. statesman — first studied physics, earning a Bachelor of Science degree at Fordham University. But after also earning degrees in economics from Oxford University and Yale Law School, his first real job was practicing law.
He left law more than 25 years ago to work for one of his clients, Bradford Associates, which managed private equity funds on behalf of Bessemer Securities Corp. and Bessemer Trust Co. He finally combined his interests in economics and physics when he struck out on his own and formed private equity firm Churchill Investment Partners Inc. in 1989. A year later, he formed venture capital firm, CIP Capital LP. His science background came in handy in researching technology-based companies to finance or buy.
Mr. Churchill founded his most recent venture capital firm, SCP Partners, in 1996 with Ehud Barak, a former prime minister of Israel, and James W. Brown. SCP is raising its third fund; all invest mainly in technology companies in Israel.
In June, the Greater Philadelphia Venture Group, recently renamed the Mid-Atlantic Capital Alliance, a trade organization to promote the region as a private equity market, awarded Mr. Churchill the Blair Thompson Lifetime Venture Award for promoting the region's venture capital base by establishing a network of partnerships in Israel and bringing early stage technologies back to the United States to be developed and sold.
Why did you switch from leveraged buyout to the venture capital business? Working at Bessemer was a great experience. At the time, you could do middle-market leveraged buyouts domestically and they had great deal flow. In the middle 1980s, most of the "Steady Eddy" companies had been identified and opportunities involving such companies were becoming less numerous; by the late 1980s, such companies were selling at high multiples of EBITDA (earnings before interest expense, taxes, depreciation and amortization) making it a good time to sell them.
By the early 1990s, we had substantially liquidated that portfolio. Our sister firm, Bessemer Ventures, was then doing technology investments. So taking the cue from them, I went back to my technology roots and in 1991 formed the first of our venture funds, CIP Capital. Venture funds had a broader scope in those days. We did venture capital investments in technology as well as the occasional leveraged buyout when we could find an attractive one.
When did you begin investing in Israel? In the early 1990s we looked at Israel as a source of great technology. There was a large amount of brain power in a place the size of New Jersey. It was obvious to me, but perhaps less so to everyone else, that Israel provided better opportunities for venture investors than did Silicon Valley. Israel has very sophisticated financial markets for a country of its size. Defense and security technologies in Israel were developed with support from their government, but in many cases can be converted readily into non-military products such as medical devices.
Is the midmarket a tougher place to be these days? Domestically, the answer would be yes. We think it's still interesting and we are looking at financial services, technology and defense and security companies. We have a new fund we are currently fundraising that is smaller than the general fund. Our target is $150 million: 65% to be invested in Israel and 35% to be invested in the U.S. The general fund is 80% to 90% domestic, and that includes things that began in Israel but are ready for the Nasdaq. Much of the research and development is in Israel … but all the business development is here. We are more flexible. It helps to diversify the risk. It helps the returns. There is less risk and sometimes less reward in some midmarket leveraged buyouts. … But a lot of the company building is where you can drop off the tracks.
Are midmarket funds getting squeezed? Would we be forming a straight-up midmarket fund now? No. Leveraged buyout — where one firm is selling to another — is keeping the market up and investors' sweet spots for the moment are the big end (of the market).
However, in the lower end of the market, you can change the management … There are inefficiencies and so things can be improved and technology can be a change agent. The only way to change things (to increase a portfolio company's profitability) is driven by technology … At the lower end you can have a substantial change agent for a modest amount of capital. At the higher end, you have public-to-private arbitrage. There are not many inefficiencies.
Why did a physics major go to law school? I received my B.S. in physics. I had some friends who were going to law school and I made a $50 bet that I could beat them in the law boards. I read economics and I began drifting to the application of technology for the benefit of society. If you can understand economics, you have a better understanding of the world.
Has all your training coalesced? Absolutely. I had to invent the job.
How important are the management teams of your portfolio companies? It's the single most important thing. It's not just the executive management team, but the entire team, maybe between five and 10 people. It's important to have trust between the investors and the management team. It's important for owners to speak with one voice and to have unanimity on any investing and policy decision. We co-invest frequently with our brethren. Some are better at being partners than others. There are firms we are tremendously comfortable with, that we know everyone will use horse sense rather than an Excel spreadsheet. An Excel spreadsheet will always look right, but it does not mean it contains any useful content.
Funds of funds are said to be having a tough time getting into venture capital funds. I know why ... People who run funds of funds add to the burden of running the venture capital firm because they are doing their job. It's a whole additional constituency. It may not be senior people. There may be junior people making all sorts of information requests. We have funds of funds (as investors). I think its all part of the business. It's an important class of venture capital investor.
Do you have any new strategies on the drawing board? Here's something I've been thinking about, but it's not fully baked. Hedge funds are backing in side pockets (of the private equity business). There are longer maturities in some hedge funds. The function of our firm is to do technology investing and you need some time. We used to say we need a 10-year fund. Now we need a five-year fund; I think within five years you know if the horse is going to win or not; or you should. A lot of the business of hedge funds is zero-sum investing, so it is not appropriate for large pension funds … because it is someone's retirement. We're thinking of shorter maturity funds.
Isn't that the opposite of the current trend of private equity firms holding portfolio companies longer? The biggest risk in the whole private equity business is manager risk. The real big names have too much money with too long a maturity. For investors, shorter maturity with proven managers should be offered. I think we should be able to live with shorter maturities ... Those are my thoughts. I'll see if anything sticks.
You once mentioned a connection between managers' golf handicaps and the venture capital business? (There's) a website of the U.S. Golf Association that gives you access to other people's golf handicaps. Between the bubble years of 2001 and 2004, private equity guys' handicaps went down. The bubble burst and people were drowning their sorrows playing golf. Now handicaps are up and they're all paying more attention (to their businesses).
Are you a golfer? My handicap has remained high and steady.