Consensus-shy Violy starts afresh

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By:
Felix Salmon
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Schadenfreude greeted the demise earlier this year of Violy Byorum & Partners. Founder Violy McCausland's uncompromising style had irked those inside and outside the firm. Now she's trying again, this time on her own.

Violy McCauseland: still believes in private jets
VIOLY McCAUSLAND DOESN'T have a private jet these days. It's not that she doesn't believe in such things, mind: she's adamant that "I believe completely in private airplanes, totally". It's just that she's rather busy rebuilding her company from the ground up at the moment, and the thing that private jets are best at - getting her out and about, meeting potential clients and generating mandates - is not at the top of her list of priorities right now. She's also too busy to use the jet for private leisure. Besides, she can always borrow her friend James Wolfensohn's just about any time she needs it.

Violy - one of that select group of people, like Prince or Madonna, who are universally referred to by their first name - knows a great deal about boutiques, and about the differences between them and large Wall Street shops. She now heads Violy & Company, the phoenix rising from the ashes of her previous shop, Violy, Byorum & Partners (VB&P).

Before that, she was the Latin America rainmaker for Wolfensohn's boutique, and earlier on spent 14 years in the Latin American M&A department at JP Morgan.

The break-up earlier this year of VB&P occasioned much Schadenfreude-laced gossip within the small world of Latin American banking - a world where everybody knows somebody whose toes Violy has stepped on. Looking back on those days now, Violy is under no illusions about how many enemies she has. They could probably fill a stadium, she says.

Still, it wasn't her enemies who did her in. She was herself responsible. "What went wrong at VB&P was V," says a former high-ranking employee. She was out of control, most observers agree. Even Violy admits that she couldn't reach any kind of consensus or compromise with her partners.

"I think consensus leads to mediocrity," she says. "I'd rather understand why you're right and I'm wrong than have to go to the middle. Either you're right or I'm right. But in a partnership, the need for consensus kept growing and growing."

Million-dollar woman

What Violy's partners wanted above all was for her to break the habits of a lifetime and cut down on spending in the face of a huge reduction in Latin American M&A activity. But Violy is something of a force of nature, and this particular leopard finds it surpassingly difficult to change her spots.

Violy has always been splashy: her offices are vibrant and colourful, filled to bursting with her beloved Latin American art.

She first hit the headlines in May 1994 when a front-page Wall Street Journal article delved into her exploits at JP Morgan. Morgan was a stuffy commercial bank at the time, only just beginning to build an investment-banking franchise, and it was clear that Violy's Wild West approach to doing business was not a good match for it.

Violy pushed the envelope in many ways: her expense account was one of the largest, if not the largest, at JP Morgan. She was once described as "the only person I've ever seen spend a million dollars in one day", and a champagne-and-caviar party she threw for Mexican cement company Cemex at the New York Public Library is one of the two touchstones of Violy mythology.

"I work hard, and I like things that are high quality," she says. The two are connected, in her mind. Because she accounted for over half of Wolfensohn's profits in the two years she was there, she could easily justify spending some fraction of those profits on expenses.

And Violy was never hypocritical when it came to spending: she's not the type of banker who flies first class on business and economy when on vacation. Her art-filled Central Park West apartment is legendary, especially for the dinner parties she throws there, and she is chauffered around New York in a car that doubles as a mobile office. She calls the Four Seasons restaurant her "home away from home". And for all the millions that she makes, there are persistent rumours that her out-of-control spending is testing her financial resources.

Violy left JP Morgan under two clouds. One was that she had personally borrowed money from a JP Morgan client - said to be the CFO of a leading Mexican corporate - in order to make the down payment on a Park Avenue apartment. The other was that she had pushed JP Morgan to invest in Spanish bank Banesto shortly before it was seized by the Spanish government; JP Morgan vice-chairman and Violy mentor Roberto Mendoza was dumped from the board of directors and sued by the new management.

Both incidents are indicative of Violy's appetite for taking risks. Her vision for her new company is for an A-Team kind of shop: "If you have a complicated transaction you think is virtually impossible to do, we want to be the first name that comes to mind," she says. Of course, her critics will say that she only achieves the impossible by embracing the ethically questionable; that she will say or do anything to close a deal. It's an attitude to business that has seen her defending more than one court case.

But Violy didn't make her name by being timid. Rather, her reputation rests on a combination of closing deals and maintaining strong relationships with the owners and CEOs of companies.

Violy may have cut her teeth at JP Morgan, and still preaches the Morgan Way, epitomized by the philosophy of the empty tombstone: sometimes the best deals are those you don't do. But she was never going to see out her career there.

What Violy doesn't like about big banks is their turf wars. "You see rivalries between different groups which have to come together to deliver the product," she says. Especially when you have as divisive a personality as Violy has, there's a good chance your colleagues will be working against you, rather than with you.

After JP Morgan, Violy immediately joined Wolfensohn, at the eponymous M&A boutique he had founded in 1981. There, she says, she learnt the art of dealing only with owners and CEOs.

Boutique building, round one

Wolfensohn taught Violy that "CEO is the loneliest job in the world", she says: if the man at the top of the company has any problems, he can't really go to the board with them, and he certainly can't share them with his employees. That's where people like Violy and Wolfensohn would step in, and help to solve concrete problems while also building very strong personal relationships.

Within a couple of years, Violy decided to set up on her own. The idea was that she would build relationships like Wolfensohn, while executing deals like JP Morgan.

Violy, Byorum & Partners was founded in 1996 largely thanks to James Robinson III, the former chairman and CEO of American Express who became non-executive chairman of the new boutique. He was introduced to Violy through Wolfensohn, and in turn introduced her to Stormy Byorum, a high-powered Citibank executive with an impressive roster of clients and a stint as CFO of Citibank's Latin American Banking Group on her résumé.

Violy and Byorum put up most of the $8 million of start-up capital. They also enlisted Lehman Brothers LBO specialist Julie Katzman. Other equity investors included Robinson and the fourth founding partner, Javier Macaya, who had moved with Violy first from JP Morgan to Wolfensohn and then to VB&P.

VB&P made its name and reputation with one of its very first deals. If you only hear one story about Violy, it's likely to be this one: Violy advised Gustavo Cisneros, who owned the Cisneros Group Pepsi bottling operations in Venezuela, to switch his operations to Coca-Cola literally overnight.

It was an incredibly audacious move, and paid off handsomely both for Violy and for Cisneros, who later sold his bottling operations to Panamco for $1.1 billion. His adviser on that transaction, naturally, was VB&P.

The deal was vintage Violy, and fitted perfectly into her rubric. It was an almost impossible thing to pull off, it had to be done in complete secrecy in a few hours, and yet at the same time it was the culmination of three years' relationship-building between Violy and Cisneros.

VB&P was riding high, expanding very quickly, and often standing out as the only boutique in the upper reaches of the Latin America M&A league tables.

The first few years of operation for VB&P coincided with the peak of the investment boom in Latin America, as foreign direct investment in the region soared and credit spreads narrowed to all-time lows. A lot of people were making a lot of money, VB&P included, and soon the company had expanded all over the region. Argentina, Mexico and Colombia each had an office; Brazil had two. Former Colombian finance minister Rudolf Hommes was brought in as a partner, and the number of employees reached triple digits - greater than the number of people devoted to Latin America at JP Morgan in New York.

At the time, the atmosphere was heady. In retrospect, however, Violy has a slightly different take. "I found that the larger boutique model had a huge amount of administration," she says. "If you have 100 professionals, you need 50 administrators, so suddenly you're 150."

The breakneck expansion also meant that VB&P violated one of the first rules of boutiques: hire only the very best. Though nobody questioned Violy's intelligence and drive, eyebrows were raised about some of her employees. "Violy hired a lot of people on the basis of their last names," says one observer who saw a lot of sons and nephews of important clients getting jobs at VB&P. Although that was great for building relationships, it also meant that VB&P had less of the leanness and efficiency of many other M&A boutiques.

When Violy did hire good people, they often left after a couple of years, vowing never to return. "Violy's done horrible stuff to employees once they start having good relations with her clients," says one observer; another describes the atmosphere at VB&P as something out of Lord of the Flies. There was never any doubt who was boss at VB&P, and Violy seemed intent on ensuring that there were no fiefs there but her own.

At the same time, however, everybody who knows her describes Violy as being incredibly generous on a personal level: as ever, spending money is something she's very good at. She has something of a maternal relationship with her employees - she even refers to them sometimes as "my kids". That means she won't think twice before going to bat on their behalf. Violy is also a significant philanthropist, donating time and money to many organizations, especially those connected to the arts.

But even as she personally charmed the owners of some of Latin America's largest companies, her cavalier way with people lower down the ranks in those companies was storing up problems for the future. If Violy blamed a CEO's underling for one of her own mistakes, that underling was likely to remember the episode if and when he rose up the ranks and had a say in who to mandate in the future.

One banker who met occasionally with Violy during her growth period remembers questioning her breakneck expansion. It was Violy's name on the door, and her personal connections, that were driving most of the company's business, but that business was being spread out over more and more people, consuming more and more overhead expenses. "I always asked why she grew the place so big," he recalls. "She's very talented, and I think she could do better if it was just her and a few people."

Expanding to sell

Eventually, Violy came round to his way of thinking. But at the time, she took the opposite view and, by the end of the decade, she was looking to expand even further. VB&P had already dipped its toes into the capital markets, advising its clients on international bond issues as well as both public and private equity placements. Now it was looking to get some investment mandates as well, raising funds and advising investors on venture-capital and private-equity investments in the region.

Growing VB&P was part of the company's strategy. The idea was to take a leaf out of Wolfensohn's book - or, for that matter, any number of other boutique M&A shops, like Wasserstein Perella, Phoenix or Beacon, all of which got bought for huge sums by multinational investment banks desperate for their expertise.

In order to find the capital to expand the bank, VB&P turned to two investment houses - Fenway Partners in New York and CDP Capital in Montreal. (CDP Capital is the fund-management arm of the Caisse de dépôt et placement du Québec, a public-sector pension fund that is the largest investor in Canada.)

Fenway could provide important relationships with big-ticket investors who could invest in VB&P's new funds, while CDP Capital pledged somewhere in the region of $50 million for two new funds that it would run jointly with VB&P.

Both bought equity stakes in VB&P, implying a rough valuation of about $100 million. Fenway invested $20 million in mid-2000, while CDP Capital put in $10 million at the end of the year.

No sophisticated investor buys a 20% stake in a company for $20 million without wanting some control, however, and, according to people with knowledge of the situation, Fenway had concerns about Violy's big-spending ways. To put those worries to rest, Violy turned to her former boss at JP Morgan, Scott Levine. He was brought in to professionalize the organization, and bring costs under control even as VB&P was expanding into new markets. A highly respected lawyer with a wealth of experience in international finance, Levine was a safe pair of hands with which to guide VB&P.

Levine had his work cut out. Violy is a formidable personality, hard to say no to. And one of her first acts after receiving the $30 million equity investment was to take $5 million of that sum and distribute it to the company's existing shareholders, most of whom had bought in at a valuation of $8 million. Stormy Byorum, for instance, owned 26% of the company, and received a cheque for $1.3 million - a sum that represented the larger part of her original $2 million investment. The lion's share of the payout went to Byorum, Violy and Julie Katzman; Javier Macaya had already left the company at that point, and sold most of his shares back at their original valuation.

In retrospect, Fenway and CDP Capital were buying in at the very top of the market. Julie Katzman left VB&P in the summer of 2001, having failed to raise any venture-capital funds. Cori Capital, the joint venture set up by CDP Capital and VB&P, never raised any money either.

Within a year, both Fenway and CDP Capital had drastically written down their investments in VB&P. And by mid-2002, there were signs that the company was in serious difficulties. According to a lawsuit filed in New York, Javier Macaya phoned Levine on May 14, and was told that he would not receive his third and final payment for the shares he had tendered when he left the company - a relatively small $312,000 that was due the following day. If Macaya got his money, said Levine, VB&P couldn't make the rent on its Fifth Avenue office space.

Macaya had returned shares representing 7.5% of the company, so the $312,000 represented, in a sense, repayment to Macaya for 2.5% of VB&P. Such a stake had been worth some $2.5 million to CDP Capital just 18 months earlier.

Evidently, even after accounting for the $5 million that had been distributed to shareholders, VB&P had managed to run through $25 million in fresh capital in less than two years. As for the idea that this would enable VB&P's expansion into fund management, all that there was to show for it was one stake in a Mexican publishing house and a contract as adviser to the $230 million Trust Company of the West Latin American Partners Fund.

At the end of the year, Levine left VB&P. The company was shrinking, and the COO position seemed a bit too grand for its new smaller scale, especially considering Levine's failure to keep Violy under control.

Levine had come to embody many observers' hopes that VB&P could continue as a going concern. "Without Scott, that firm was unmanageable," says one associate of Violy.

It was not long after Levine's departure that Violy and Byorum had a huge fight. They agreed that they could no longer work together, and entered into a process of splitting the company along product lines: Violy would take M&A, while Byorum would take private equity and try to breathe new life into Cori Capital.

Violy brought in two old friends to advise her on the restructuring and the buy-out of Byorum. One was Susan Segal, the Chase Manhattan Latin America venture-capital queen who left the renamed JP Morgan Capital Partners after the dot-com bubble burst. The other was Rodman Drake, an extremely well connected former McKinsey consultant who now runs CIP Management, a fund investing in mining companies.

She used the two as "outside judges of talent", she says, and embarked upon a soup-to-nuts questioning of absolutely every aspect of the company, from business lines to individual employees. The procedure was something she learnt from Cemex, which sent in a post-merger integration team every time it bought a new company. In the wake of Mexico's tequila crisis in 1995, Cemex sent exactly the same team to work on itself, saving over $100 million in the process.

Take no passengers

By the time Drake and Segal were finished with the company, it had eliminated roughly 20% of its bankers, roughly 60% of everybody else, and was down to 30 employees. Violy's own secretaries were slashed from six to three: she needs that many, she says, because she works 20-hour days. In a boutique, she says, "you can't carry people: every single one of my people has to be partner potential. By going small I wanted to have the cream of the cream of the cream."

Violy's new paradigm is taken, she says, from the pages of the Wolfensohn playbook. Rather than try to leverage her M&A expertise and her contacts by building out new arms of her boutique, she has decided to enter into what she calls the affiliate model.

"The one thing Wolfensohn had that Morgan didn't have was that you had to be connected to knowledge outside the company," says Violy. She has put together a large board of advisers and an equally large list of affiliates, all of whom are very good at what they do, and any of whom can be called upon - for a share of the fees, of course - should their expertise be needed on any given deal.

Violy has also decided to stay with the change in direction that VB&P started towards the end of its existence. The shop was always considered to be a Latin America boutique, but with Latin American mandates drying up the partners decided that their skill set was applicable to more than just the one geographical region. In fact, what they were really good at was dealing with the kind of companies that are the rule in Latin America and the exception elsewhere: those owned and run by families or individuals.

VB&P called this its "entrepreneurial strategy" - rebranding itself as a company that doesn't so much understand Latin America as one that understands the unique requirements of owners, as opposed to CEOs and public shareholders.

One of the biggest successes of this strategy came towards the very end of VB&P's existence, when Stormy Byorum landed a plum mandate from her old friend Calvin Klein. VB&P advised the fashion magnate on the sale of his company to Phillips-Van Heusen for $400 million in cash and as much as $300 million in stock, warrants, and other incentives.

Today, says Violy, one-third of her projects are outside Latin America, but they're all with company owners. "We work to put in place strategies that are dramatic, that revolutionize the company," she says. "We always ask clients to make bold decisions. If you're not the owner, it's tough to take those steps."

And, as an owner herself who's just restructured her own firm, she really knows now what she's talking about.

In fact, Violy is perfectly open about the difficulties that face boutiques in general and Violy & Company specifically. One problem: in any halfway successful boutique, there will always be more than enough work to go around. That raises a crucial question, she says: "Where do you take time from an active project to nurture a new relationship?" After all, every boutique needs a flow of new mandates, yet virtually none can spare the staff time to go out and get them. "I've seen boutiques die because they latched on to one or two or three clients," says Violy.

Violy knows that her clients give her mandates because they want her to do the work. That's why she can charge premium rates: no-one thinks, if they give a mandate to Citigroup, that they'll have Sandy Weill working on their project. At the same time, however, Violy has both to build and to maintain her existing relationships, and also keep Violy & Company operating smoothly. It's a hard workload to balance.

The plan at the moment is to concentrate on existing mandates and her own shop for the next year or so. She already has more projects than she would like: there are 20 or so going at the moment, while her ideal would be more like 15. Once the immediate workload eases off a little, Violy will have a bit more time to build relationships.

At that point, she'll probably need her private jet back.