John K. Castle is the recipient of the 2015 Peter Hilton Founder’s Award
What inspired you to start in private equity?
Well, the truth is that I have been very involved with private equity from almost the moment I arrived at Donaldson, Lufkin, and Jenrette which was in 1965, actually 50 years ago, July 1st. The first project I was involved with was a private equity investment, done in a different way. It was a bunch of Chicago business men that had effectively gone in and taken over ITE Circuit Breaker Company, which was a Philadelphia-based circuit breaker company, and they bought stock in it and had taken control of it. It was after the price-fixing scandal that had taken place in the early 1960s, when General Electric, Westinghouse, and a bunch of fellas/bad boys were all subject to an anti-trust suit. As a result, ITE Circuit Breaker stock had become very depressed and they effectively took control, and I was very involved with them in the process of taking over the company. I was obviously the junior man of the team, some-what rationalizing the business and ultimately helping finance the business, raise debt and so-forth with the company. By 1969, I had become head of all private equity at Donaldson, Lufkin, and Jenrette and formed maybe the very first private equity limited partnership that brought in institutional investors and created the Sprout Fund in 1969, and it had a large number of organizations investing in the fund such as the Aetna Life Casualty company, Connecticut General, Allstate Insurance, some pension funds such as the General Electric pension fund. These guys were considered to be big players at the time, and they put in a million dollars, two million dollars, which for 1969 was a lot of money. By 1969 I was running all of DLJ’s private equity activities and overtime they gave me more activities: investment banking, DLJ natural resources, DLJ real estate that happened in about the mid-70s. Then by 1979, they made me president of Donaldson, Lufkin, and Jenrette and I ran the whole place. But the truth is, my roots were very much in the private equity business. In my life time I’ve raised 14 private equity funds, 5 of which were at Donaldson, 5 of which are here at Castle Harlan, 3 through Australian Affiliates -CHAMP, and now we’ve also formed a Branford fund, so 14 funds over a long period of time. So when I left Donaldson, it was my intention to go into the private equity business, in a format that was a private company smaller than where I was at, with personal freedom as well as economic freedom, I could take vacations and what not, not that I take very many, I was sort of my own man.
What would be your advice for professionals who are getting into private equity?
Well, private equity is considerably more competitive activity today than it was 50 years ago as there are many more people focused on it and so forth. I think the thing you want to do if you get involved in private equity is that you have to enjoy working with companies. If you’re in the marketable securities/public securities market, most of the time if you do the research and conclude it’s a good company, you buy the stock and then you ride it until you decide it’s no longer an attractive investment. In the private equity business, you are very involved with the management of the company; you are very involved with the direction of the company, and therefore you have to focus a lot of time working with management and so forth. It is one of the reasons, as president of DLJ I had institutional equities, retail equities, all kinds of fixed incomes from municipal governments to corporates—all of those reported to me. I had money management with Alliance Capital reporting to me, which is now 4 or 500 billion of assets under management. All of those things reported to me, but I never enjoyed as much working in the context of public securities, where you sort of placed your bets and then watched somebody else roll the dice, as I did working in the private equity area, where you could say “well, look I am not comfortable with where management is going here, we’re going to have to go a different way.”
Is there any role model or mentor that you had throughout the years that really stands out as saying, “they’ve really shaped me into the investor I have become?”
I think a couple people come to mind; one would be, of course, George Doriot who was a professor at the Harvard Business School, founder of American Research and Development. Doriot had a lot of personal values. His feelings about businesses and how they should be run and for him making huge sums of money was not that important. It was more about creating important enterprises/important businesses. Digital Equipment was an example of a company of his that was extraordinarily successful and very important in the mid-size computer market. But Doriot was involved in so many kinds of businesses and his value system— your responsibility is not only to make money, but to also take care of the community, take care of your employees, and most importantly your customers—I thought was very noble.
Another mentor that has always been very important to me has been Dan Lufkin, one of the founders of DLJ. He always exhibited the qualities of commitment and loyalty to people, always had great respect for certain individuals and his investment decisions are heavily based on what he thinks of the individual. It’s not about checking boxes, it’s about if this is a good guy or if this is a resourceful person, is this a smart person?
So those would be 2 people, Doriot and Lufkin that have been very important to me in terms of my career.
So broadly, you have completed a lot of transactions over the years and made some very successful investments. As you look across the broad spectrum of investments that you have made, maybe on the smaller side/large size/mid-size, which one really stands out as being the most successful to you, both from the perspective of return or personal satisfaction?
So return: there has been a variety of investments that have been extremely successful. I was very involved over the years; I owned a fair number of off-shore oil service activities. And those, which happen to be in Branford, are probably worth 100 times more today than what I originally bought them for, so that’s a very big return on money. There’s a chain of retail stores in America today called the Children’s Place. I along with two Harvard classmates helped fund and build the first 150 Children’s Places, we sold them to federated department stores. We made 50 times on that particular investment, it took us about 15 years, but we still made 50 times on our money. Within Castle Harlan, a very wonderful investment was Delaware Management, which was the seventh largest independent money manager in the United States at the time, we bought it. We ended up selling it to Lincoln National and made about 7.6 times on our money at a very high return on our investment obviously. Those are all examples of very high returns and wonderful investments.
Perhaps one that was particularly gratifying from another point of view, was a company called Envirotech, which I helped build starting in 1996. We built it into the largest water pollution control company in the world. It was actually very significant in other forms of pollution control, and we managed to make five times our money in the process, but it was very gratifying. The fact that the Hudson River is as clean as it is today and many other rivers in the world is because of our efforts at Envirotech, which were not always well received by municipalities and states, but we did clean it up.
How important do you see giving back as part of your activities, is this something that LP’s are even concerned with?
I think there are a certain group of LP’s that find this to be important. In terms of myself, I was trained at the Harvard Business School in a different era: when the professors said you have to worry about your customers, your employees, the union-if you’re at war with the union all the time, you’re probably not going to have a very successful company, you got to be worried about your community because having peace with your community is important to your success, and finally you got to take care of your shareholders-you need to have a great chief executive who is able to balance all of those elements in terms of resulting in a good outcome for everyone. And that has probably been a central focus in terms of my personal time. Most of the last 40 years, I have given a third of my time to not for profit institutions, and I have probably given a third of my income to charitable things over the last 40 years. It’s not always the same but I give away millions every year, for better or for worse, whatever I feel like is the right way to do things.
A lot of times, just in life, you think about the one that got away. When you look at an investment/your history of investing have you ever passed on an investment or for whatever reason an investment didn’t work out?
I never look back. You know, if you miss one bus there will be several more.
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