David Warnock, Co-Founder of Camden Partners, speaks with GrowthCap CEO, RJ Lumba. David shares his insights about being active in growth equity investing for over two decades and bringing that experience to schools in his community.
RJ: David, thank you for joining us.
David: Good morning RJ, thanks for taking the time to speak with me.
RJ: Perhaps we could kick off with your background starting with your time at T. Rowe Price. It seems you were at the forefront when growth equity was first coming about. Could you share with us what the investment space was like at the time? We’d love to understand the emergence of the asset class and how you became interested and involved in growth equity as well as how the field has changed between now and then.
David: Sure. Well, I started my career at T. Rowe Price as an investment analyst in their small company mutual fund, the New Horizons Fund, which at the time was, and may in fact still be, the largest small cap fund in the country. It certainly is one of the oldest. I had the good fortune to work there until 1995, when I founded Camden Partners. To answer part of your question about how things have changed since then, what’s been a radical change is that in the 80’s and early 90’s companies could go public at a much earlier stage. There were a whole host of small company brokerage firms that many younger folks today have never heard of such as Alex Brown, Hambrecht & Quist, Montgomery Securities, and Robertson Stephens all doing IPOs and secondaries that were of $10 to $30 million dollars in size for companies that today wouldn’t have a shot of going public.
As a result, the public market options were much more available for smaller, growing companies and a lot of the increase in the private financing of growth companies has come as a result of these options disappearing at the end of the tech bubble, at the end of the 1990’s. When you look at companies today that are going public, they’re more mature and have a much larger revenue base than 15 years ago. Additionally, the appetite for public company investors has really moved almost entirely from individual investors who are investing on their own account to institutional investors. These are two of the really big trends that come to mind which have had a profound impact on availability of capital for small companies.
RJ: When you were first embarking on the growth equity space, how did you come about establishing your investment criteria? And how has your thinking evolved over time?
David: Some things have changed but the core hasn’t really changed at all. And that really goes back to things that I learned early on. It’s all about the management and finding CEOs that have the propensity to surround themselves with really good people. That’s the real differentiator of success for businesses in my experience. I think that that hasn’t changed one bit in the 30 years I’ve been a professional investor.
There are a lot of changes that have taken place in the financing markets that are more a function of the times that we live in. For example, one of the things that we see right now as a big trend is the confluence of transaction processing, IT outsourcing and healthcare spending. Back in the 90’s and the early 2000’s, we did a lot more investing in medical device companies. Today we see a lot of the opportunity is in the confluence of IT and healthcare so our healthcare portfolio looks a lot more like an IT portfolio than it ever has in the past.
In the education space, where we’ve done a ton of investing over the years, we have moved almost exclusively towards vehicles that have some sort of online delivery platform. On the other hand, the whole post-secondary education space which I started investing in back in the 90’s got way overheated and you’re now seeing a tremendous consolidation in the number of site-based post-secondary education institutions; that space has become a trickier place to invest.
Those would be two pretty big trends that we have seen in our portfolio over a longer period of time, but again I would just harken back to the fact that there’s a seemingly endless supply of innovation and interesting ideas. When you combine innovation and interesting ideas with a management team and a CEO that surrounds himself or herself with great people, that’s what we’re looking for. The specifics in terms of the areas of focus may have changed and will continue to do so, but the core principles of what we do haven’t significantly changed.
RJ: One area that I’m personally interested in is what successful fund managers such as yourself do outside of the business. I was able to learn a bit about the work you do in the Baltimore community and would love to hear more.
David: Sure. Well, probably the easiest to explain is Green Street Academy, which is a charter school that I co-founded and for which I am a co-operator. I did so because I really felt that we could change the course of urban education by focusing on a couple of things. One of those things is focusing on sustainability and green jobs to give kids real skills that they can use when they graduate from high school. A good example of this would be our close relationship with a local utility company, Baltimore Gas and Electric, where our kids have the option to graduate with a certification that will allow them to get a job as a lineman immediately after they graduate from high school. We’re also one of the few middle school / high schools in the country that is a Microsoft-authorized training academy. Our kids, and in some ways equally important, the parents of our kids, can get certifications that give them a leg up in the job market.
For example, how did we get the Microsoft certification initiative launched? Well, I happen to be the chairman of New Horizons Worldwide, which is the largest Microsoft, Cisco and VMware training company in the world through a network of franchisees. I was in a unique position to talk to Microsoft and get them excited about Green Street. Also, one of the things that I wanted to do with Green Street was to be able to take some of the portfolio companies and the experiences that I had investing in our portfolio and really bring it to bear for the benefit of our kids. We own the Calvert Home School, for example, and we’re going to be implementing a number of blended learning options for our kids at Green Street Academy. While it seems like Green Street might be a step afield from some of the investing that I’ve done, it actually is very much integrated because Green Street can be a great skunkworks for our portfolio companies. At the same time I really feel like we’ve created a school that has a value system and a culture that has captured kids’ imaginations in teaching them science and math.
Another example is our 125 foot long greenhouse and tilapia farm in the school. By the way you should view the Green Street Academy video which provides a great overview.
RJ: Yes, I saw the video, it is fantastic.
David: You can see those kids are learning entrepreneurship at the same time they’re learning science and math with those fish farms. You see those kids on that video saying, “This is our business.” Well, it is their business and they are learning entrepreneurship and business skills because we sell those fish to local retailers, which is amazingly exciting. At a community meeting the other day, one of our kids spoke to a group of people about Green Street Academy. He said he was out in the greenhouse with his math class learning the Pythagorean Theorem by looking at the angles inside the greenhouse. I thought, “Okay, that’s about as good as it gets.” It’s all about inspiring kids, and I’ve learned a ton about that at Green Street, which again I bring to the benefit of my portfolio companies as well. It’s been a dream and we’re just getting started.
RJ: That’s wonderful. Do you see a way to replicate this in other cities?
David: Yes. There’s no rocket science going on there. In terms of creating a CSA for the families of our students, any school could be doing that. Every public high school should have blended learning opportunities for its scholars to be able to take Mandarin or advanced math online, and we are basically going to create a model where kids can do that through our friends at Calvert, and through our friends at New Horizons. There’s just no question that we will share all of that knowledge with anybody who wants to learn.
RJ: David, this has been very insightful. I know our readers will appreciate your thoughts on the growth equity space, and absolutely love learning about the things you do at Green Street. Thanks very much and again, appreciate you taking the time.
David: Absolutely, and please include a link to the video because the more people who watch it the better. More people in the private equity world could wake up and say, “You know what, I can start a charter school.” And it’s all about finding great people. We have a fantastic principal and a great executive director. It’s no different running a charter school, just like it’s no different being the chairman of the Center for Urban Families or investing in one of our portfolio companies. It’s all about having a great CEO that surrounds himself or herself with talent and being the consigliere to that person to help them take their game to the next level, that’s exactly what I do every single day.
RJ: We speak with quite a few education companies that have the ability to attract high caliber people. I think in general the investor space is enamored with the new education models that are coming about, so I think viewing that video and learning more about what you’re doing at Green Street is going to be very well received by our audience.
David: Excellent. If you get to Baltimore, come see the school in person.
RJ: Will do. Thanks David.