Clearlake Capital Group, headquartered in Santa Monica, CA, and managing more than $85 billion in assets, has completed several high-profile investments and exits and is well known for its growth. Recent investments include the $5.2 billion acquisition of NASDAQ-listed software company Cornerstone OnDemand, the acquisition of software company Precisely for $3.5 billion, the £2.5 billion acquisition of the English Premier League’s Chelsea Football Club, and several others. Proudly, the team’s results for institutional investors, including pensions, foundations, and endowments, have contributed to investors’ ability to pay benefits to retirees and support community enhancing programming, among other initiatives.
In this one-on-one exclusive interview, José E. Feliciano, Co-Founder and Managing Partner of Clearlake, shares the story of the firm’s origins, reflecting on some early challenges, including being rejected by potential investors. He also delves into Clearlake’s distinctive investment strategy and what he learned from good and not-so-good investments. The renowned investor, philanthropist and leader also shares his vision for Clearlake’s continued evolution and how the firm plans to remain at the forefront of alternative investments in the years ahead.
NAIC: Walk me through the origins of Clearlake. How did the founders come together?
FELICIANO: I went to Princeton as an undergrad and went into investment banking. After investment banking, I went to Stanford Business School and graduated from Stanford in 1999, at the peak of the internet bubble. Instead of going as I intended to join a private equity firm, I took a detour, and I did a detour in the dot-com world and that dot-com ultimately failed. Here I am in 2001, yet another ex-banker failed dot-com entrepreneur. I joined a small firm in L.A. that was dedicated to what people today will call special situations. It was more credit-focused, with more turnarounds and some direct lending. It was a little bit unusual at the time.
We did two transactions with the folks at TPG. That was the introduction between my co-founder, Behdad Eghbali, and myself.
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We felt that there was an opportunity for a new firm to capture or combine a few things that would make for a better investment vehicle or firm. We wanted to be sector specialists because we felt that the world was moving to a place where you really needed to understand your sectors in a much more in-depth manner than traditional generalist private equity firms. We felt that most of the great investors out there had a few commonalities, but one of them was that they were less constrained by the limitations imposed by others.
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NAIC: You are speaking of being opportunistic?
FELICIANO: Take an investor like Warren Buffett. He will buy the company outright, buy 10% of the stock in another company, save AIG in a funky debt plus warrants structure, and inject some preferred equity into Goldman Sachs in the middle. Being opportunistic in nature but also having that ability to invest across economic and credit cycles and doing that with the best structure possible is certainly one of the reasons why Warren Buffett has been uniquely successful in the investing world. In our own way, we want to recreate that and the idea of investing across economic and credit cycles and doing that by using different entry points.
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One of the hallmarks of Clearlake is not only that sector expertise but also the ability to do anything and everything from pure play, traditional healthy buyouts to more complicated deals like carve-outs and turnarounds and funky structure equity deals, all the way to distress where we’re buying the debt at significant discounts and looking to go through restructuring to gain ownership of that business. That, in turn, has allowed us to be more opportunistic and oftentimes create or buy these businesses at better valuations than the generalist traditional private equity investors have been able to do. That’s been part of our success.
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NAIC: The Great Recession hit not long after you launched. Were there ever moments of doubt where you thought maybe starting Clearlake was not the right move?
FELICIANO: Of course, there were many, many challenges, and the early days were actually difficult. It made raising capital very difficult, but we didn’t compromise. We went out in 2008 to raise our first institutional fund, and we started fundraising before the crisis really hit. We started that early summer of 2008. It was clear that the world had changed by the fall of 2008. It was incredibly challenging. Early in the life cycle of a firm, you’re literally flying the plane as you’re building it. You have to basically go from calling, spending an hour on hold with, I don’t know, Verizon to get Wi-Fi, and then basically try to call some investors, some pension plan to get money and then try to source an investment from a banker that are like, “Who are you again? Yeah, I paid attention to you when you were at this firm, but how much capital do you have? Why am I talking to you?” It was a rough transition.
We also had some very well-meaning people who sat me down and said, ‘José, we’re passing, and not only that, I’m going to do you a favor. I’m going to sit down with you and tell you why this doesn’t work.’ We got that feedback directly.
NAIC: Do you ever interact with those skeptics now?
FELICIANO: What I have found in that regard is that, with success or perceived success and wealth, anything that I say now sounds more eloquent, wiser, and smarter than it did before. People tend to put more weight on not only what I say, but they’re willing to listen. The other thing that’s super interesting is that the human brain is remarkable in terms of rewriting history. You will be amazed at how many people passed [on investing with Clearlake] in the early days, and now the story is, ‘Well, I was always a believer in you guys, but you raised the fund too quickly. Or I remember that this committee member didn’t want to do it, so they vetoed it.’
You have to understand that being an asset allocator is a tough job. If you are an XYZ pension plan and you’re getting bombarded by people, it is very difficult to find out or to predict who’s going to be a success and who’s not. The stories sound the same. Everybody on paper tells a good story, and the track records may look the same. Then, you are being asked to do a really tough job. After meeting somebody a few times, you have to commit to somebody for 10 or 12 years. That’s a tough ask. I never lose sight of that.
NAIC: I want to talk about investments now. It may be like asking you to choose your favorite child, but Clearlake has had some impressive transactions: Ashley Stewart, Sage Automotive, and Chelsea F.C., to name a few. Which one are you most proud of, and why?
FELICIANO: Oh boy. That is a very difficult question, so I’ll be like every good politician and might avoid answering the question directly. But the interesting thing about that is that you have to compartmentalize as a great investor or trader. Having a bad day today should not influence your decisions tomorrow. Yes, you should learn. But you should figure out why that decision today was not a good decision, and you should take that. You should incorporate that into your pattern recognition, into your process, into your blueprint of how to invest. But you should not let that emotion affect you tomorrow. That question is so difficult for me because there are investments I’m so proud of. You mentioned Sage. We made ten times our money. Fantastic outcome.
But I also tell people that often, you learn the most from your bad investments. With Sage, we did a ton of things right, but in some respects, I didn’t learn the most from that one. We may have learned the most from Irongate Energy Services, a business that was in the oil and fuel services space. We bought it because the business model was very similar to what we had seen in general industrials, and the entry multiple was really low. But we missed a few things, and we certainly missed the cyclicality of that industry, the unique characteristics of the buyers and sellers that created unique challenges that we were not necessarily prepared to overcome. Going back to our industry expertise, we didn’t have at that point that deep expertise in that industry that that industry requires, and we lost money in some of those deals.
NAIC: Let’s talk about the evolution of your firm. You’ve been in business for almost 20 years. What does Clearlake look like if we’re speaking in another 20 years?
FELICIANO: Number one, I truly hope that the two things still stick out. Whatever we’re investing in at that point, whatever strategies we have, we want to be known as one of the best investors out there with a great track record. Number two, I would like to think that Clearlake is still a great place to work from a cultural perspective. I often tell people that if you want to be a great investor, you have to check all of those boxes. If you want to be a superstar, there are great places to work, and you’ll be great at private equity, but at Clearlake, we want to win or lose as a team. We’re hypercompetitive against the world, but we’re collaborative internally .
We are always learning. We are an old dog that will learn new tricks, but we have to stay true to our roots and what makes us unique and what has led us here. I think that’s fundamental. That’s where you have to have real passion and real belief. That’s where, by the way, some people fail. I always tell people, ‘If you’re in this business because you think it’s sexy and you’re going to make a lot of money, you’re in the wrong business because there’s a lot of elements of this business that are not sexy.’