Robert Davis ’97 Describes His Formula for Success in Private Equity

Robert Davis '97, managing director of the private equity group at Aetna, has invested over a billion dollars during his career. He’s pored over balance sheets and analysts’ reports. He’s advocated for deals based on hard numbers and with no shortage of due diligence. But when it comes to whether an investment proves successful, Davis has found that more often than not, it’s not the numbers that are the determining factor. "It all goes back to people, never forgot that," he told Yale SOM students in a talk on September 16. "And it all comes down to management in the end."

Davis, who spoke to a full room as a guest of the Private Equity Club, touched on a career that began on Wall Street and included time at a telecom start-up before he made the jump to Aetna. He credited Yale SOM for helping to propel his career, noting that he not only learned about private equity from a course taught by David Cromwell, an adjunct professor of entrepreneurship and former CEO of J.P. Morgan’s private equity unit, but was recommended to his current partners by Cromwell. His talk covered the basics of private equity as an asset class, touched on common mistakes investors make, and addressed the last couple of years of market instability. He also discussed his work for Aetna, which focuses on the leveraged buyout market. Davis has been involved in about 40 direct deals and has been on the boards of a dozen companies, helping to direct a portfolio with assets greater than $1 billion. "If you looked at Aetna, you wouldn’t know that it had a unit that does these things," he said.

When Davis joined Aetna in 1997, being part of a private equity fund with a billion dollars would have put him in elite company. Back then, he said, there were probably no more than a dozen funds with that kind of money to invest. But then private equity boomed to the point that just a few years later, “there was something wrong with you if you didn’t have a billion dollars," he said. "But then the whole thing blew up and it’s not coming back anytime soon."

The Aetna private equity unit emerged from the 2008 financial crisis more or less unscathed, but the experience left a deep impression on Davis. He and his partners felt that there was too much leverage available even before the crisis began to develop, so they refused to do any leveraged deals nearly two years before the crash.

Deals often run into problems, he said, simply through the errors of those who put them together. He attributed many of these mistakes to "the toxic young man syndrome," where bankers in their 20s or 30s will do just about anything to push through a deal, whether right or not, as a way to earn their bona fides, and he warned students against dealing with people who seem over-enamored with their own abilities. "The thing that worries me most in people is hubris," he said. "They lose their inherent paranoia to watch all flanks at all times. When you come across someone in business with hubris, walk away, or at least let them implode to your advantage."

Davis drove this idea home with some of his final advice for students. He recommended two things worth remembering going forward as investors. The first was to stick with what you know, a point that he illustrated with a couple of stories about how both he and others made less-than-profitable decisions on investments outside their areas of expertise. "And don’t buy the hype," he said. "It’s unbelievable how smart people buy the hype. It’s like there’s societal hypnosis going on."