Ted Seides - Investment Industry Paradigms - [Invest Like the Best, EP.390]

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Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest Like the Best.
This show is an open ended exploration of markets, ideas, stories, and strategies that will help you better invest both your time and your money.
Invest Like the Best is part of the Colossus family of podcasts, and you can access all our podcasts, including edited transcripts, show notes, and other resources to keep learning at joincolosis.com.
Patrick O'Shaughnessy is the CEO of Positive Sum.
All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of positive some.
This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.
Clients of Positive Sum may maintain positions in the securities discussed in this podcast.
To learn more, visit psum.vc.
My guest today is Ted Sidies.
Ted is the host of the Capital Allocators Podcast and an investment industry expert.
It had been seven years since Ted and I last talked on the record, and he was one of my very first guests on Best Like the Best.
Now that Ted has a full time focus on all things capital allocators.
And has stepped away from traditional investing roles, he shares with us the wisdom he has gained from being a neutral third party in the conversations with countless industry experts.
We discussed the evolution of the LP and GP relationship, the scale of institutional investing.
And the nuance of asset allocation and much more.
Ted also has a new book out called Private Equity Deals that recounts many of the individual case studies that he has explored on the show.
Please enjoy my conversation with Ted Sides.
So it's been seven years since we did this on the record, which is insane because originally my plan was to make seven episodes of this thing. And now here we are both, seven years later, having made
I don't know, a thousand between us or something like this.
How has your view of the investing industry changed the most?
as a result of being this neutral third party
That gets to talk to everybody.
The first is
The institutional investing world is just a lot bigger than I realized.
That was the big joke when I started How many of these can you do? And is anyone actually gonna be out there listening?
And
The last thing I did was to do it for personal branding or anything. I thought I knew everybody in the world.
So that's a big thing. And then with that comes
Different people, different ideas, everyone trying to figure out incrementally how can they be better.
than what they had learned before.
So I don't know that there are like these big revolutionary changes now people think about investing is sort of on the allocator side.
But there's
incredible brain power in thinking about how do you improve things on the margin. And it feels like each person on that side that I have on the show, there's two or three nuggets. You're like, Oh wow, I hadn't thought of that before.
So I think that's the biggest thing. Broadbrush
I got lucky. I started in the business working for Swenton.
There's
Almost nothing that he's said.
that's been proven incorrect in his thesis about how he went about investing. And so
I don't know that there are like significant
changes in how I've thought about investing or learned from it, but there's just so many things in the implementation of it.
from like a high level down that have come through.
Is there anything from the Swenson model that feels now antiquated to you or needs to change?
Yeah, there's one.
I think it's incremental more than antiquated, which is
The asset allocation model
is inexact when it comes to measuring
the assets that you're trying to have. So think of risk and return of a mean variance optimization of US equities or private equity.
And now if
And availability of data.
You could have a multi manager portfolio of a hundred managers.
with much more granular information about what you actually own underneath.
You see this in the model called the total portfolio approach, which some of the big sovereign wealth funds, Canadian pension funds, New Zealand Super uses.
And it's not that the risk structure's that different. So maybe you're a seventy thirty investor, eighty twenty, or whatever it is.
But in the past, if you were eighty twenty, that might mean you have
This much in US equities and this much in international equities and this much in hedge funds and this much in fixed income.
Well what's the hedge funds?
There's some cash risk in there.
And there's some beta, but how big is that beta? And what is venture capital compared to US equities?
What the total portfolio approach does is it starts with a simple like eighty twenty.
And then says
Every investment you make, you're gonna fund.
That risk.
So if it's venture capital, maybe it's twice the equity markets and you have five percent in venture capital, that counts for ten points of the equity risk.
And because you know what's happening underneath with data, you can just be a lot more precise about calibrating risk.
That's the piece that's antiquated in the asset allocation structure, but it's not different.
It's just
the way you communicate it and the way you implement can be a little bit more fine-tuned than, say, when David wrote his book twenty four years ago.
There are some really innovative LPs in terms of how they run.
Their portfolios.
Are there any innovative approaches that you've seen become categories?
I think of Wash U as a great example as a partner of ours.
who has this very specific, well honed approach that's very much them.
And I think others they feel like a modern day Swenson or something, like others are looking to them as an example.
But I wouldn't say that we've met like a ton of LPs that can do what they do.
Do you see any categories emerge that are like alternatives to the Swenson model of running the portfolio?
Not much.
The wash use of the world and there are a few other comps, like if I were throwing out Brown or Rice under Allison as she's just resigned.
The commonality of some of those is that the CIO came from a direct investing background.
And so they are not looking at
this pool of assets as we're investing in a group of managers.
They're looking at it as we're investing in a bunch of assets.
that happen to be supported by managers. And so you see in Wash U's case lots and lots of co invests.
And their first lens is trying to analyze the deal.
Or the investment.
And then they look at the manager that's doing it. So that's not that different. It is a different skill set. It moves the manager of managers approach closer to being in the markets.
But ultimately
Scott and Adam and the team are a small group of people sitting in St. Louis, investing everywhere around the world.
they're not gonna have an edge in all of these different categories. So they still do use partners.
That's kind of almost like how's the bottom up implementation a little bit different?
And then the top down gets to
The other question about the EL model, which is
What do these asset classes actually mean?
So you see some places like Australian Future Fund and New Zealand Super the best examples where their quote unquote asset categories
Are things like market structure.
What's that?
Or
Domestic economy.
And so you saw some of that in the risk parity, is it like growth paradigm, inflation, deflation?
But the way people think about, okay, you have a bunch of cash.
And you have to invest it.
Well one approach is these assets.
Another approach is factors, then then people can define these factors in different ways. But
For the most part, none of that I think is revolutionary, but it's definitely evolutionary.
Does anything feel like fundamentally broken about the system?
You've become my like go to guy for the linkage between LPs and GPs. This very important relationship.
that has all these different kinds of LPs, all these different kinds of GPs. Does the system feel healthy to you overall?
It's pretty healthy.
There are two things.
That I think have always been broken.
One is
The when you're blending
Say private assets with commitments.
With public assets that mark all the time.
You always have a situation where you're committing nominal dollars
on the first bucket.
And you have a flowing pool of capital on the other.
I experienced that for the first time when we were running Protege, where we were seating managers with twenty five million dollars or fifty million dollars.
But our fund was a billion or two billion.
And the billion or two billion could move around, but the fifty million didn't.
Same thing in private equity. You make a commitment
for fifty million dollars to a fund
But then the markets crash.
Or the markets sore.
And it changes as a percentage of the denominator.
I don't know if you say it's broken, but it's always suboptimal.
So that's one.
The other
It's kinda what you said, which is bridging the gap of understanding between L Ps and GPs.
Most LPs and GPs don't quite understand each other.
They do if they've been in the business for a long time and they have great relationships with who's ever on the other side.
One of the things I learned coming out of Yale that's so different is except for in very rare occasions of
The
Top one percent of one percent of a manager in any category.
benchmark and venture or something that you could clearly identify can do whatever they want.
One of the things that happens is LPs want their managers to outperform for a long time.
And they forget.
That to outperform for a long time.
You have to be in business for a long time.
Sounds simple.
So what does that mean? What are the levers that go into having a successful business? Where it's things like
Customer diversification.
And different products. So all the things if you whooped at a business that said that's more sustainable over time. That's kind of the antithesis of the David Swenson of do one. Have the best performance.
So
That has led to this
Sometimes these subtle misunderstandings between LPs and GPs. That's a lot of what I'm trying to do now is when I see that knowledge gap.
try to either write something or bring people together to talk about it to Bridget.
What would you tell GPs listening about
the choice between multi product firms and not.
I wrote a piece about this earlier this year.
It's less what I would tell the GP because it's obvious for the GP and more what you would tell the LP. So what you would tell is
They need to understand.
The growth is healthy for an organization.
That idea of one model, one fund
Just focus on performance.
Is amazing.
When it works.
And in any other circumstance, including a wobble along the way.
It's treacherous for the business.
And if the business doesn't succeed, even if that manager was great, they can't have long term outperformance if they're not around for the long term.
So at every node in a decision tree, so you start with one product, one fund, you have success.
You have an opportunity to
Grow your assets.
Or
Move into a tangent
Area of expertise that would make sense, but it's a little bit diversifying.
Now there's a prudent way to do that and an imprudent way to do that.
That has to do with scaling and the pace of scaling and how your organization keeps up.
But the concept that you should never really grow
comes from Swanson.
And I think a lot of people that adopt that.
As is as he said it.
don't really appreciate the tensions that go into running a business.
What do GPs most misunderstand about LPs?
I think what GPs most misunderstand
Is that
The decisions that get made
By LPs.
When an LP says
Well
We're not gonna invest in your fund.
Ninety percent of the time, it has nothing to do with the GP.
that there's a whole portfolio that an L P is managing and a team
And a board.
And a decision process.
And that
The GP doesn't see what happens.
inside the LP's organization. So the best example of that is when there's a new CIO that comes in.
The easiest way to think about it is if it's like a new family office with a pile of cash.
There's gonna be a period of time when they're furiously gonna be putting money to work.
And then
They're gonna do that.
And they'll probably make some mistakes.
couple years later they're gonna have to make some changes and they're gonna optimize that
And then at some point in time they're gonna have the portfolio that they like.
And they might still make some changes, but it all slows down.
So that path might take six or seven years.
But when you're talking to them, if you're talking to them in year one
And they like you, they're giving you money. If you're talking to them in year seven and they like you.
But they don't love you, you have no shot.
So there's a whole thing that happens in the life cycle of an L P
That is tied to who's sitting in the seat.
More than
Is your product the right one for them?
What about the literal way that
GPs position themselves.
with LPs. What common mistakes do you see
Where the GP knows their business inside and out and then sometimes gets frustrated that the LP's not understanding what they do.
Anything that you've seen the very best or the great people at doing this well.
Share in common.
I'd start with saying you and I both know this from having spent time in the GP seat.
Which by definition
Your LPs are the smartest ones in the universe, and the ones who don't mess with you are just idiots. So there is like a confirmation bias mindset that GPs have.
So
I think that the best GPs
Have you got to be a little bit more.
two aspects of what they do. The first is they deeply understand what they do.
And they can describe it.
And that it's sufficiently personal.
Th there's differentiation because of that.
Sometimes there's differentiation'cause of the strategy, but for the most part
most organizations, they're doing a variation of the exact same theme and they're competing with everybody else.
But the more authentic it is to the principles.
And sometimes that comes out in small ways.
The more that
Say the L P side can say
That's differentiating.
The only other thing I say is that
GPs really don't understand most of the time the breadth of opportunities available to LPs.
So that you may think you're great.
But they're looking at you're great compared to whom.
And compared to what other asset classes or investment opportunities are available, that it's great. Patrick positive sum's awesome, but
We just found this venture fund in Africa and the risk reward is way better than what you're doing. You wouldn't even think about that.
And so that role of the CIO on the LP side is so broad.
And they see so much.
that any individual GP can lose sight of
the perspective that an L P is bringing and how they're trying to assimilate what you're doing into
their investment process.
If I were
Force you to
create a taxonomy of LPs where like
College endowments could be one, or
Large state pensions could be another.
What would be the major buckets that you would draw?
And maybe for each, just say a word about what defines them. What are they each like.
So there's a couple of ways of ascribing that.
And I'll define it in two ways and I'll just dive into one of them. So one of them you could think of as time to adoption.
So how innovative are those people?
And another lens.
Is
What's their governance structure like?
Which also relates to the size of the pool.
So if I tie those two together.
Think about something new.
Brand new.
So
Thirty years ago it was hedge funds and twenty years ago it was private equity and venture capital.
Maybe in recent years it's blockchain though. That's
Private credit.
Maybe for different reasons, but something that's brand new. Private credit's not really new. It's credit in a private buck.
What you see is that the early adopters are entrepreneurs.
And so it's someone who
Has built a business
That was on the forefront.
And they've been successful and they maybe they have a family office and they find something.
And then if that
Thing they found was successful.
They might be on a nonprofit board.
And when they see that it's successful and feels a little comfortable, they might bring it to a foundation or an endowment because they're on the investment committee.
So what you're seeing is that the endowments and foundations have tended to be early adopters of something new?
And then once that gets the institutional stamp of approval
then you see it flow through and you could think of this as going up on the x axis time and on the y axis asset size.
So now you have corporate pension funds.
And public pension funds.
When it's really late, you get retail.
democratization of private equity now
Okay, it's like thirty years later and we're trying to see how to
The one thing that subverts that is that some of the newer pools that are huge. So think sovereign wealth funds.
have been super innovative from very early on.
And that's where you get to the governance piece. So the governance piece is the ability to do something new and different.
is inextricably tied to
the willingness of whoever is responsible ultimately to let something like that happen.
So endowments and foundations you generally have sophisticated investment professionals on the investment committee.
In a public pension.
You might have firemen and policemen.
And therefore there's a consultant in the way and the consultant doesn't want to mess up. So they want to see what's
Okay and has worked.
That's why you have something different in the sovereign wealth funds because the governance structure is incredible. You have senior people, well paid
in government who have tasked other people
to say go manage money for future generations of
our citizen population and do it the best way you can.
So that's one way of thinking about it.
The last piece of that is
Where are you in adoption? So if you're an endowment foundation today.
You're fully baked in your investments in venture capital and private equity.
And so
If they're gonna invest in a new manager, it's gotta replace somebody in their portfolio.
They're not going from 10% to thirty percent. They're already at thirty percent.
Whereas a public pension fund might be at two trying to get governance approval to go to four.
And the two to four.
If your two hundred billions is a lot of money.
So that's where you see
When people talk about private equity today.
And what happened in the last couple of years and now there's isn't capital flowing. Well, a lot of that is'cause
There's a fair number of the investors who have their assets already exposed to the asset class.
And they're just one in, one out.
Then the question is, where is new demand coming from?
So it sounds like the
smartest thing any GP could do would just be a w do a way better job
of categorizing LPs in these meta criteria not as individual entities.
Obviously you want to work with the best teams that you're most compatible with.
Run a pre-screen on like find the ones that have
They're moving from point A to point B, not at the mature
Sala.
That's not what people do. No, if you're GP trying to raise money
There's a couple different lenses. One is in your space.
Where's capital coming from?
Is it coming from private wealth?
Well
You better figure out how to distribute it in that channel.
Is it coming from sovereign wealth? Well, if you're small.
They're probably not investing in.
Then you have this function of time and like is there a new leader?
'Cause when you have a new leader, sometimes they're making changes.
But it's hard. Make no mistake about it. There's no silver bullet that said all you have to do is tell this story to this person in this way and you're gonna be as large as you want to be. What about the cut at it where it's
The question is, what are the pros and cons of these different pools of capital? So like pros and cons of sovereign wealth, pros and cons of retail private wealth, pros and cons of endowments foundations.
I think that the pros and cons
Don't necessarily cut across the asset types, though you could generalize a little bit.
It starts and ends with who owns the capital.
And who the decision maker is. So
The closer you are to an end owner with a long time horizon
the more likely you can have a long relationship with them. So sovereign wealth funds kind of the greatest example of that.
And the endowment foundation world, in theory
These are really, really long life.
David Swinson's a yellow and down it's perpetual assets, so
That's a long time. Perpetual's a long time.
But in practice
It tends to only be as long as the people in the seat.
And maybe the average tenure of a CIO is six or seven years.
So it's not as long as a sovereign wealth fund.
Then there's a
Question of sophistication as well.
So one of the things that's tricky is the endowment foundation world, I think rightfully has a reputation for having very sophisticated investors.
relative to say the public pension world.
It's not consistent. Some of the most sophisticated investors in the US are sitting in public pensions.
But a lot of that is because of the governance structure.
And the public pension fund who's got a report to a bunch of firemen and policemen
They may know what the right thing to do is.
They just might not be able to get it done.
If you think about the
old outliers like I'll never forget that Wall Street Journal
front page of the business section of the guy Nevada.
Who just put everything in the S P five hundred and does nothing all day.
And I remember reading that
This is a long time ago now, and thinking, Oh my God, it's gonna happen, like it's gonna turn over.
And me and my friend Jeremy were looking the other day at the
annual statement from that same pool of capital.
And now they have this huge private equity position. Like they went back on it.
Which I just thought was so interesting and so funny.
And that's underperformed the S P five hundred over like a very long period of time for them specifically.
Are there any
other approaches like that, why don't you think that happens more often that a big pull of capital is just like
You know what?
Maybe the Norwegians are an interesting example where they basically just own the market.
Why don't we see that more where people just opt out of the game?
The most important word in your question was people.
If you're cynical, you would say it's just incentives. This is someone's job.
There are very few people who have said your job is to do nothing for the next thirty years. That's your job. Hope it works.
What you do see
is in the huge pool. So Norway
The Japanese pension fund, like trillion dollars.
They know they have to own the market.
And the question for them becomes
Okay, is that good enough?
Or
If you have to own the market, are the things you can do to make the market return better.
Nikolai
Just running
Norway or Norway's bank, the Norwegian Sovereign World Fund has done two things that are fascinating. One is
He said, Well
I'm just gonna let people know what this is.
And so you had this pool of capital that's been one of the biggest in the world forever.
But no one's ever known what it was. And he has this incredible podcast called In Good Company because
They own shares of everything.
And he's done a really good job of promoting the people on the team.
The other thing they've done is a little bit within the S G w end, but in a very thoughtful way, say, Okay
If we own the market.
What do we think are drivers that make the whole market better over time? So if you really think that sustainable investments matter.
Just drive that into the market more.
Because you have to own the market over time. But generally speaking, these are people
And Charlie Ellis has always said this well when people talk about passive investing. He's like, Who wants to be passive?
Do you want to go sleep with someone who's passive?
There's a degree to which it's just not
what people are wired to do. They want to compete and win.
Yeah.
Yeah, it's a fascinating tension for sure. If you were at a dinner and you got a bunch of bottles of wine into like
A lot of the best LPs.
What do you think would be their most
understandable gripes about
GPs.
Well, the first thing I'd say is the gripe you hear the most
It's not about GPs. It's about their own governance.
So their own ability to implement decisions.
So if you're sitting at a university endowment.
Which had been the plum job for twenty years.
And you go through protests last year.
It's not so much the plum job anymore.
People think very differently about that.
As it comes to GPs.
It's probably this question of greed.
The whole G P community has gotten wealthier beyond
What anyone envisioned.
I've seen it.
over the last twenty or thirty years.
And
It takes a rare GP.
Two
be truly in it for
Investing.
And sometimes you see it.
But it's very, very rare where it's kind of obvious what would happen if you said
You really would be happy getting paid.
If you'd pay somebody to do this and people say like Warren Buffett's tap dance to work type thing.
Mm.
As you grew, wouldn't you lower your fees? Yeah.
Almost nobody does that. There are a few who have.
And you could look at that and say
Mm.
Why are they doing it that way? That's stupid for them. And they're Yeah, but that's one way to boost your returns. Like if you really want to be better.
You can guarantee
twenty basis for the entire year. Every year all you have to do is learn your management.
Yeah, it's funny to think about that.
It makes me wonder about this question of scale because
It does seem like
there's this tension between the ideal
G P to an L P is this focused
Keep the main thing the main thing, one fund.
Don't over scale with success.
But almost all the world's assets are with massively scaled multiproduct firms. So there's like stated and revealed preference here.
The reality is most of the money's at Blackstone and KKR and places like this.
Coaches through this question of, okay, I'm doing well. I have the ability to scale. Scale obviously comes with natural advantages and disadvantages as a money manager.
How would you coach people to think about the trade offs?
Well you laid it out perfectly.
one way to think about it, particularly for a manager, the manager in public markets or private markets.
When you evaluate businesses or industries.
Over time.
They all gravitate to having
A certain form.
And that is they get concentrated in winners.
And then everybody else you can get stuck in the middle and if you're small and you find a niche, you'll have a place in the ecosystem.
Asset management and particularly alternatives has gone through that significantly in the last ten years.
So whether you're looking at
Venture capital or probably more relevant private equity and public markets.
you see a concentration in assets with the people become winners and they deploy more and more resources at it.
There's consolidation, there are purchases.
And a lot of that
gets tied to distribution.
So
If you were a five billion dollar
Hedgephone manager.
Well
Ten years from now.
Is that gonna work? Or is five hundred
Five billion today gonna look like what five hundred million would be today.
And you're gonna feel squeezed.
Just as one example. So when people think strategically about
How do I continue to play this game at the highest level I can?
You see more and more activity gravitate towards
You've seen it with the
The Citadels and Millenniums and hedge funds and
You've seen it in the public company private capital shops.
And so how do you play if you're in that ecosystem? Well
If you're not one of those guys.
You better have your own niche because as long as you can add value doing what you're doing, you're gonna have a place in that ecosystem.
You just can't compete.
Go try to
compete against Blackstone and private equity.
Buy
Being
faster or more knowledgeable with data, or having better industry knowledge or better operating executives. You can't do that when you're smaller.
But there are ways you see a lot more, say, in private equity like industry specialization, because
If you take the very top people and just hone in on one sector, you can end up with a Vista or you can end up with a Toma Brama.
What trends are you most interested in right now?
You mentioned Millennium and Citadel, which makes me think about this question, where they have sucked so much of the talent that
in two decades prior, probably would have started their own firms. And now they're like, why bother? I can get more money, more freedom, easier, lower friction,
More flexibility like all these features of just going to Citadel or something.
And that's obviously been a seismic change in the way that like public active investing works.
You could talk about that one or any other trends like that that you have your eye on.
Well, that one's one I've watched for a long time'cause I was in the hedge fund space for a long time and it felt like it was inevitable.
It's easier to talk about it asset class by asset class. So in the hedge fund space
the big question everyone is watching is those businesses are predicated on
A small return levered.
And the thesis, I think the core thesis is that a citadel or a millennium
has really done a great job at risk management.
What they are selling is
The efficient use of
leverage to amplify a very small alpha.
Leverage is
The killer.
We all know that.
in every cycle when something goes back. So there's this big existential question of
Is there some scenario
Whereas these platforms have gotten bigger and bigger and they have bigger moves on single stocks independent of fundamentals.
Can something bad happen there?
And so I think most of the people I know that
Don't invest in those platforms.
That's the big question in the hedge fund world. And then the other piece is what happens to fundamental investing? That is all the shorter end
quarter to quarter insane amounts of information of that CEO was giving a presentation and his left eyebrow winked higher than his right, and when that happens it means the stock's going up
One point tomorrow.
A little bit of an exaggerated example, but not that much.
it's really incredible how deep these firms get into understanding a small subset of companies at that individual PM level.
But then the question is fundamental. When you have that much stock volatility
What's happened to fundamental active management?
You get the concentration in the mag seven.
is the index that everybody points to, the S P five hundred.
Representative I guess it's representative of the economy that's being driven by seven companies.
But is that what you want to own?
when you're thinking about long term returns.
In the public markets there's a couple of things. In the private markets
And particularly it emphasized private equity.
The big question is has always been there's just too much money there.
And Mario Giannini says in the book.
For twenty years people have been saying, Oh, there's too much money and just keeps growing and it still has been working.
But you've had every tailwind you could imagine for a long time.
And most of those have either flatlined
Or maybe reversed a little bit.
And what you're left is
Can people who own these businesses make them better operationally?'Cause you're not gonna have a tailwind from rates.
You're probably not gonna have a tailwind from multiple expansion.
There's that and then in a short term cyclical period of time
What happens with
This bottleneck.
In exit.
So you had
pre twenty twenty one private equity firms coming back larger and faster and getting funded.
And now if you think about owning a bunch of businesses in a private equity strategy
There's only a couple of ways to exit, right? You have the IPO market. Well, companies don't want to be public.
There's plenty of money in the private markets to keep funding them.
There's no reason to think the IPO window is gonna open wide.
You have strategics.
And this has been the greatest
economy and bull market that no one's believed in all along.
So strategics don't want to swallow big acquisitions'cause they're just nervous about the future.
And then you're left with sponsor to sponsor transactions.
And there you have an issue with price.
Because there has to be a price reset when rates go up.
And if you own the business and you bought it and you had some plan and it's a little short of that plan, you don't really want to sell it at a discount.
If you look at like why aren't businesses
being transacted at the same pace they were. I think that's a lot of it.
There's a question of is this just hope and optimism or is it a rational strategy?
If you had to spend a whole month
As a shadow.
inside of a single LP.
Where you're just trying to maximize like enjoyment and learning and
A good experience for a month.
Who's someone that comes to mind that you would want to do that with?
Well, I wish I had a year. I could do a month and twelve. Let me throw four or five just for fun.
I've always thought the best summer job in the world would be Bridgewater.
Because I'd want to get my face ripped off.
And in that process learn more about myself than I could in ten years of therapy.
That's the only reason why. A place like a Citadel or Millennium, if you were sitting high up enough in the organization.
To be able to
Si
The people who are looking at the risk sheets.
That would be fascinating. And the way that they work with PMs to understand how are you adding value.
And then I think when you get to
The private markets.
There are senior seats at places like KKR or in Andreessen.
Where
The flow of what comes in.
Would be fascinating.
From to strategic deals to everything under the sun, or like Aries in the credit market, same thing where they've been active, very active on investing, but then also active on thinking strategically and really brilliantly about their business.
Yeah, it's fun to think about.
The seat in which he would learn.
the most. And those God's IV ones seem like
Really good examples.
Maybe we could talk a little bit more specifically about private equity.
It seems to been an area that you
have really double and triple clicked on. I'm curious why that versus
Something else?
Give us kind of a high overview of
your interest in the space and then we could talk about some of the underlying dynamics.
I got exposed to private equity a long time ago, my early years at Yale, but I spent most of my professional career in the public market.
So you have private markets sitting alongside.
And it's the same thing. Just owning businesses.
In the last five, ten years.
Private equity has exploded.
And
is so much larger.
Then
Venture capital.
Venture capital.
you have these ridiculous power law outcomes, which you don't have in when I say private equity, I'm thinking corporate buyouts. But the size, you're talking about six, seven trillion dollars
Some people say it's ten. I don't know what the number is, but it's very, very big.
And it's growing. And yet at the same time
People don't know about it.
It's a little opaque.
And it was a little bit of the thought.
Seven years ago when I started
podcast, which is okay, I sat in the seat between GPs and LPs.
And I kinda understand the LP community, but
Most people don't.
Private equity's a little bit the same way.
It's huge and yet
The public
Perception is so negative.
And I think that's just flat out wrong.
If you look at an industry that big
you are absolutely gonna have bad actors.
You're gonna have really bad outcomes and you're gonna have people go in and slash jobs and
strip out dividends and bankrupt companies. All that stuff is true.
But there's also ten thousand businesses. It's the economy.
That's what's in the news'cause it's sensational.
Most of it isn't sensational. Most of it has just been really, really good.
And so in the podcast format, I was kind of like, huh, and these conversations, by the way, happen all the time between GPs and LPs.
in offices around the world every single day.
But they're not in the public.
And so from the seed I had, I was like, Well why don't I just
do a something that'll be a little different and walk through deals.
business breakdowns, you're like breaking down a company. And there's a little bit of that if you're going through a deal.
But you also have a perspective on the firm.
Who are they and why'd they like the deal? And then you also have the deal dynamic, which sometimes isn't that interesting. Sometimes it's super interesting.
And then you have a game plan because they have control. So what are they going to do with the business than what they actually do with the business. And there's just so many different levers that makes a great case study.
So I thought
I don't know.
That might be fun.
And so I started doing it that way. And
Did the podcast and then after a while I realized.
Boy, these couple of deals.
Encompass everything.
There's one deal that was traded from private equity firm to private equity from private equity firm. They all won along the way, then KKR buys it and becomes their best deal in almost their history.
Wait, what's that about?
And then you have sports, of course. Everyone's interested in sports. And then you have distress deals and you've got turnarounds.
Carvouts, all these different things.
And I had done like one or two of each.
And I was like, wow, if you took a slice of this
and put it together, it would at least give people
a sense of what actually happens in private equity as told
By the people doing it, not by me.
Just helping them walk through it.
Seems like one of the highest levels of taxonomy here is like market price deals, auction deals.
And
I guess we'll call them distressed or like non market deals.
Why that is the highest level of separating the two.
I put that in the book because there's no particular reason for that. Feels right though.
There are deals that
Particularly when you get to larger size. If you're Blackstone or your KKR
Not a lot of situations.
where you have the quote unquote proprietary deal.
Everyone's running around trying to find something proprietary. But if you think about it, if you're a company and you're of some scale.
Yeah, you're gonna talk to you.
So there are a bunch of deals that happen that are just whatever the market price is, that's what it is.
Then you have this whole other subset.
There's something wrong.
Period.
And
private equity firms will generally take one or the other of those approaches. So it's a very simple taxonomy, but
Both of those are included in this large subset of deals.
What do you think the competitive frontiers are now between these firms?
What are the reasons that
Whatever. KKR beats Blackstone or
T A Bates, whomever. Like what is
causing winners and losers and you could hesitate and say it's just price, like you're willing to pay a higher price and you win a deal.
And so you accept lower return and you might then say the edge is like lower cost of capital or something, but like what do you think it is that determines who wins these things now?
So one of the things I've learned from doing this that I didn't fully appreciate is
Let's just talk about the auction type deals.
Wow, that's true.
The firms that have size, scale, and history
are preparing to do deals five years from now today.
And so
There'll be a business.
That yeah, it goes to an auction.
But if you show up for the auction
There are three other really good firms that have been on top of this company for years. And probably one of those has a better relationship with management than the others.
And then you get into these dynamics of well
Is that the management team that's driving who's gonna win the auction?
Or are they cashing out and it's somebody else?
So I think most of the time
You do get this pairing of the right owner.
With the right seller?
And it can rotate around.
What expertise are you bringing this time around? By the way, if it goes from private equity firm to private equity firm to private equity firm.
Those are like different chapters in a company's life.
And depending on where they are in that stage.
a new private equity firm might bring a different expertise that's gonna really help the company for the next three to five years.
The current owner
doesn't have because the current owner did something else with them in the prior three to five years.
So
On the one hand, I'm sure there are deals that happen. It's just like who's paying the best price. And particularly if you're in that middle, you're not
differentiated in any way, you're just playing the game. Well, you may have to play that game. Not a great game to play.
But more often what I've seen is that there's so much work that goes on in advance because these firms are so sophisticated.
And understand their business so well.
And have these armies of people.
of both operating executives and deal teams, and they're deep in the verticals of the industry is that they know the companies. They know the teams.
And then when a company is ready to do transaction.
They try to be there before everybody else.
What is the most entertaining
deal that you covered in this series.
It's probably the Yellowstone Club.
So the Yellowstone Club is this private ski club in Montana, Big Sky Montana.
And
I knew about it'cause I was brought there.
Pre-restructuring, which is important to talk about. But this was a private ski mountain that was built by an entrepreneur, a guy named Tim Blixith.
And he had aggregated a bunch of land parcels and
turn this thing on and make an exclusive ski resort.
Where it got entertaining was
He spent
Wildly. And so they had this spectacular clubhouse and people would have to
Build homes.
But then
in a great story of the pre financial crisis credit markets.

A very large
Lone.
I think it was two hundred fifty million dollars from credit suite.
And he basically paid himself the dividends.
He'll recap. One of the problems with paying himself a dividend.
If there were other equity owners he didn't include in that dividend. Including Greg Le Mond, the Tour de France cyclist.
And that wasn't public until he went through a messy divorce.
And it came out in the divorce papers.
So
People that were
In the club love the experience.
And this thing was in trouble.
And Sam Byrne and the team at Cross Harbor Capital, which is a very opportunistic real estate private equity fund.
Sam had been a member, loved the experience, and started working with the family to try to figure out they provided a
Like what do we need to do here?
And they had a deal signed up in
Early O eight.
And they had signed the papers and it was done.
And then
The family
They were s fighting so much they never counter signed.
And then they went into the financial crisis.
The thing went bankrupt.
So
Cross Harbor took this out of bankruptcy at like half the price they would have paid a year before.
And it was a real estate play.
So they spent tons of money
improving everything around the experience and then they
Built real estate, sold it.

Sam said that so funny you'd think this is billionaires row. I mean, this is the exclusive of the exclusive.
And they had nine hundred homes to sell.
Where you're gonna find these people. And and as they got closer to selling out.
He's like these people just come out of the woodwork.
And the prices kept going up and up and up.
So they ended up having a great
Investment result.
Which was not predicated on an exit. It was just a pure real estate play and they're very close to now turning the keys back over to the members for the whole thing.
But just the combination of
Some people have heard about the Yellowstone Club, this private ski experience. If you're lucky enough to have been there, you could experience it.
And this wild and a whole restructuring deal and then what these guys were able to do with it's just extraordinary.
Another one that I found really interesting,'cause a number of friends were involved in one way, shape, or form was the Burger King one.
And if you think about three G and what they did.
And their weird cool structure where they raised this big fund to basically do one transaction. I think it was a billion dollar fund and they had a just insane return on that capital.
What did you learn from that one? Like everyone's eaten at Burger King, but they probably don't know the interesting backstory.
As far as I know.
The Burger King, the three G Burger King deal has been the highest returning private equity deal ever.
So not venture capital, private equity.
So three G
A while back was known for the zero cost budgeting. They'd slash out all these costs and they bought Burger King. It was just sort of a funny story.
of the affinity of theirs to Burger King.
And they started running it better.
And that helped, but what really helped was international expansion.
So they really grew this business and it was doing really well.
And then they had an opportunity to buy Tim Hortons.
And they literally re levered the entire thing.
Like almost did they had this wildly successful LBO.
And then they risked it all again.
And they made it work again.
And then they did it again. And so they've owned this for something like fourteen years. I don't remember the multiple, but it's something like
I was gonna say twenty nine times, maybe it was thirty nine times their money, and they still own it.
And they've dividended out multiples.
It's a great story because there's combination of like this operating model that three G has
And this vision
ability to take risk.
But also a very different private equity structure.
So they don't have a fund. These are all single asset funds.
And they didn't really have a problem.
rolling it and now it's fourteen years and
they find ways to get some people some liquidity if they want, but most people are like, No, no, no, keep doing what you're doing. It's working really well.
That's one of the things we're doing now with those is finding these one off classic deals.
That one unfortunately didn't make it in the book'cause it was too late.
What other deals
that you've studied, if any, have made the biggest investing impressions on you.
having now learned about them, you view the investing world differently or something.
Well there are two or three things.
I take quick lessons and then I can give examples of deals.
One is how incredibly collaborative some of these deals are.
Which is the antithesis of how they're perceived in the public. So that was one.
The second is
I've known all along that multiples were going up.
And I kept thinking about leverage buyouts, leverage buyouts, leverage buyouts. Well, it turns out that lenders will only lend, say, six or maybe seven
Turns of Ibata.
So when you go from paying
Eight times.
To fifteen times.
These leverage buyouts aren't that levered.
So that was a big realization as all this equities capital's coming in.
the leverage part, yes, rates are going up and that hurts, but it doesn't hurt as much as people think because there's a lot more equity in these deals.
And then the third
Really is all in and around carve outs.
And how
Unbelievably complex these transactions are.
You could go to any one of those three, like the collaboration piece.
The expansion of multiples and then carve outs.
And there's examples of each of those in the book.
I'm especially curious about the first and the third. Maybe we'll go backwards.
What do you mean by carvets and the complexity?
So
Most people think of doing private equity transactions like Patrick, like I'm gonna buy this business from you.
And we agree. And that day we close it.
You go to the Bahamas, you drink a bunch of cocktails, and I go try to run this business and make it better and I own this thing.
What happens in a carve out is typically a conglomerate.
Can use an example.
I had in the book of Blue Triton brands, which was
Nestle's bottled water business. So it included Poland Spring. They did a Tuck and acquisition of Saratoga.
Firm's one rock capital.
When you go
And buy that business.
You have to live with the seller for a long time.
Because
It's a division of a company. It doesn't have its own financial systems.
You have customer contracts and supplier contracts that are embedded inside Nestle and you have to figure out which ones you want.
There may be R and D and you have to decide who owns R and D.
There's another example in the book of Tailor Made, where they had five hundred contracts with athletes.
And you have to transfer all those contracts over from Adidas the seller to KPS the buyer.
And so what happens is
It's this
force collaboration between the buyer and seller and they create what's called transition services agreement.
And sometimes there are
twenty of those, and more likely there are eighty different ones.
And that has to get negotiated in the deal. And then they live together for six, twelve, eighteen more like
twelve to twenty four months as co owners of the business.
And so that also means so there should be some earnout involved because you've got to make sure the seller's behaving.
So it's just a super complicated transaction.
And it's just not as simple as
I bought this thing from you and now you get to enjoy your cocktails. And what about the collaborative? What's your favorite example of deep collaboration?
There's a deal called Partstown and Parts Town makes
Lots and lots of different small parts for restaurants.
This screw for this fryer type of thing.
And it's a great business.
Dave.
been much better than Amazon in what they do and it's been around for a long time.
The firm that bought it.
Yeah.
called Berkshire partners up in Boston. And they are known as being collaborative. And inside that organization, there's no corner offices, there's no managing partner. When they say deal teams, they're teams, the people have all been there for twenty or thirty years together.
And almost every deal they've done.
Maybe like seventy or eighty percent, the sellers have rolled into their deal.
They keep the management teams in place. They don't slash and burn. They look at growth opportunities.
And in this case you had this great business.
They had studied the industry. They saw it was the best one. It was owned by Summit Partners, another Boston based private equity firm.
And in some period of ownership.
Berkshire got to know the management team and they looked at an add on acquisition alongside of some at the management team. It ended up not working.
And when summit came time to sell.
Berkshire was the natural owner.
And so Berkshire buys this business, Summit rolls in, the management team rolls in. This business had grown month over month.
For years.
Until Covet.
And then they manage through it. And it's just everything about the firm, everything about the deal, everything about the company.
It was just collaborative from beginning to end.
So after
All of this learning.
Now you've got this
Would you call it a nonprofit investment banker role? You know
Everyone on both sides of these
Strategies, fund investments, transactions.
We've seen it all.
Before you did this, you did the famous bet with Buffett.
on hedge funds versus S P five hundred.
It's like the Nas and Talib thing, like don't tell me what you think, just tell me what's in your portfolio.
How do you express all this in your own all this learning in your own investments? Poorly. I think the truth is
All of this.
Is so
Interpersonally fulfilling and intellectually stimulating.
I don't even have time to
Do real work on my investments.
If there's a change in how I invest
It's the
Almost all of the investments I make still mostly invest in funds.
They're with
People and relationships where
I feel like I can help in some way.
And that doesn't necessarily have anything to do with
Maximizing returns. But
Even though my dollars are tiny compared to
What I used to push around.
with the podcast, with the nature of the relationships, with joke around about like
I love bringing people together to create value.
So I refer to it as a nonprofit investment banker.
that the investments I've gravitated to are the ones with people who I both have incredible respect for as investors and are friends.
And I don't do the work like I used to.
It's my own eighty twenty rule and judgment.
And I probably don't optimize opportunities like I used to, whether or not that actually adds value.
But that's been the biggest difference is that there's much more of a relationship focus on the margin.
Then
optimizing on the investment opportunities.
If you think about the things other than returns.
Obviously every wants good returns.
But I think
The
not so hidden secret of this industry is there's a lot of other variables that GPs and LPs are solving for with their behavior.
What are the key ones for people to understand?
So
I think relationships is a
Big part of that.
And it's not so much
What I'm talking about. Like you're my friend, therefore I want investment. It's not that at all, actually.
It's that nobody knows what returns are gonna be. And maybe there's some pattern and some strategies in the past you expect to repeat.
But people want
Two
Trust.
That they're doing the right thing.
And
I think a lot of times
When people just chase returns and it's not tied to like who the people are.
And the nature of a relationship.
You just run into situations where you know you're gonna make the wrong decision.
Something goes wrong.
And you don't want to stand by it.
It's a very vague answer, but it gets tied to communication.
And people, I think on the LP side
They want access to information.
They want transparency and I take transparency a little bit in the people and the investments, but also like process.
And they wanna know that
They're your partner.
In the private strategies, it's called a limited partner.
But they wanna be a partner, not limited.
And so
That's a
big part of it because any individual
Who's running a pool of capital in a different seat.
Solving for different things.
And those things can also change over time.
So you need the nature of a relationship and an open dialogue to be able to figure out if you're my partner, I want to be able to call you and ask like, Hey, I'm trying to figure this thing out. Can you help me solve it?
One of the things that I've seen you
Get interested in in Sports.
over and over again across the eight or nine years.
Is
communication, messaging, marketing, and how to do this really well.
What keeps you
drawn back to those set of topics.
And what would you tell people about?
What you've learned in the various
explorations that you've done.
I don't know exactly why I keep coming back to it. My most recent one's been on storytelling.
'Cause I guess that's what we're doing.
I decided this year I was gonna read a whole bunch of books about storytelling and see if I'd learn anything, and sure enough, there's a lot to learn.
I think what I learned
in my years investing is that
That pure analytical exercise
I'm trying to figure out is this an investment I wanna make or not?
is just so tied to behavior.
And psychology.
And that
Someone who's a great
Investment manager.
But can't explain it.
Usually doesn't get very far.
There are exceptions, but they usually don't get very far. And so
Proper communication.
ends up being
At the least.
the driver of hey, you had a bad period of performance and people are going to give you more time. Cause that's all you can ask for.
If you suck for long enough.
They're gone.
They're all gone.
But if you suck for a little period of time
Which everybody does. I mean that's the path to investment success. Embrace the suck.
But
If people really understand what you do
why you're doing it and how you do it.
They're just gonna give you more time and
most people in this industry
Grow up
Learning the investment discipline.
But not that.
piece of the equation. And then it's kinda like
You start as a junior consultant at McKinsey and you just do analytical work and you rise and at some point in time you're just a salesperson.
But those two things are completely different.
It's something that
Even in my years at Proge, when we were working with managers, we seeded, I kind of naturally liked trying to help people tell their story. And I've seen so many thousands of pitches.
that I can tell to some extent what resonates and what doesn't.
And so I just enjoy
sharing that information and then trying to learn because that's what I see more than anything.
I can't at this point in time.
Tell people how to invest better.
I'm a good seven, eight years out of it myself.
But
That's only part of the equation, and that's one of the things that most investment managers miss.
So what does resonate? Is it originality? Is it
Clarity is it
A story is it
All that
It's all of it.
All of it unites under authenticity.
To try to say
Well
I think I should tell this story'cause this is what I'm hearing from someone else.
You can only be as straightforward and honest
If you're a very difficult person
You probably should be a difficult person in front of your LPs.
Because you need that consistency that comes from
being deeply authentic with who you are.
But all those things matter.
Being able to articulate what you're doing.
Matter a lot.
It matters particularly when you want to make a change.
Because
most investment strategies evolve in some way, shape, or form at some point in time.
And being able to communicate that.
Signal it.
let people know ahead of time is really important because
LPs do not want surprises.
So I think all of it.
goes into telling a proper story.
But it's not even so much storytelling. As I'm reading about storytelling, I'm like, Yeah, that's not what this is. I mean it's fun to learn about it, but
It's really just
Transparent communication.
And being able to explain what it is that you're doing.
Why is there not a Y C for investors?
The idea behind Y C being, of course, like if you can get some general exposure to like a huge index of these startups, you get
enough outlier coverage.
that you make a lot of money on it.
And you can have a expensive program behind it and justify the cost.
Whereas an asset manager, like we've kinda named all the firms so far, it's not necessarily a thing you want.
An index out or something like that.
It's existed at times.
I spent a lot of years in the seeding business of hedge funds.
And you've definitely seen
some seeding of asset managers. I think over time it's just proven not to be a great
Risk reward.
And maybe it's because
it's really, really hard in the later mature stages of an industry to build a startup.
And so you don't have the unbounded upside that goes alongside the failures.
But it's not a new concept.
There is
a long wave of cedars of hedge funds and I was part of that for a long time.
Basically none of them exist'cause
There aren't a lot of new successful hedge funds these days. And if they are
It's an already proven person who doesn't need that kind of seed capital.
And I think it's probably also true active management.
No one's chomping it the bit.
to give incremental money to active managers these days. So
If you back a new one, is that really gonna be a great proposition?
I think that's why it doesn't really exist as much outside of startups.
What's next? What things are you
Excited to do more of what things are you excited to do for the first time?
Well the thing that
has been newist. You and I even haven't talked that much about us bringing together some of these people that I had on the show. So we've done a couple of boutique gatherings, we call them Cap Allicator Summers, and it's senior decision makers on both sides.
With no panels and no
presentations and no one on ones. It's just really interesting small group discussions. I just love being in the room with that.
So continuing that is super fun. We're gonna do another one next year for smaller managers.
And my favorite thing about doing all this
Is that
There's so much optionality.
that comes from knowing all these people
And
ideas that come from having a platform that
I have no idea what that next thing's gonna be. There will be something new that we play around with next year.
I just don't know what it is yet.
And showing up every day wondering like, Oh, is this the day someone's gonna say, Hey, we thought about this?
I get a lot of you shoulds.
You should do this and most of that I've thought about and there's some reason to do it or not do it.
But I don't know exactly what that's gonna be going forward.
In those small group discussions.
What has worked.
What are the sorts of prompts that have been uh
Most
Juicy entertaining.
We've done four of them and we've got our fifth coming up next month. So
There are a couple of little things you figure out along the way. The first is
having facilitators to the discussion. So you bring six people together
And they're all participants.
And if you just leave them to talk together.
The extrovert ends up taking over.
So we bring in
People my partner called it Ted's adult bar metva, so it's like my friends from the industry.
Come and help facilitate that discussion. And that's a bill.
The other one is that
In most
of these industry gatherings.
You really have like opposing sides.
You have the LPs.
who are protecting their time and their energy from the GPs who are like trying for their money. Maybe being frenzy to sell them. This is like the beat. And so
We've done a few things in ours to completely change that dynamic and say no, we are all investors.
We are not here to sell each other. It's both relationship building and information sharing. And there are a couple of little fun
tools that we've figured out from doing it that just help bring that dialogue together.
Anything you can share, or is it secret sauce? Yeah, no, I don't think it's a secret sauce. I mean, one is describing that dynamic.
Each year I'll have a new presentation and this year it's about tribes. So I talk about tribal affiliation and
And then I have a slide up.
They chose these two warring tribes and you say one's the investors and one's the allocators.
And so just explaining that, that's not why we're here.
Another one is in our small group discussions, we always start with a personal question.
We call it an icebreaker.
It's not too deeply personal, but it's personal enough that
all of a sudden you're sitting around with a group of people.
And at least in that moment you forget, Oh, wait, which side of the table are you on? And then you go into the discussion. That helps a lot. And then the last one, which
I think everyone who's come to one of our events has talked about is
There's like a very strict and stated everywhere no assholes rule.
And
In our events, I define precisely what it means to be an asshole.
Unfortunately.
We've never advertised it. It's a little bit on our website.
But it's already like in an excess
demand situation. So people actually come to me like okay, I'm not going to be an asshole. What's the definition? You got to tell us. Yeah, definition is you do not take out your cell phone when you're in one of these small group discussions.
And if you do
We're not telling you you're a prisoner for the next hour. Just go walk away from the group.
And go on your cell phone.
So you figure out things along the way, but I take notes on my cellphone. So we're like, Okay, you do that.
And then I noticed if you're swiping left and right, it means you're single.
And if you're swiping up and down, it means you're like on Instagram or Twitter. But neither one of those things is taking notes. So that's one
In these small groups.
You really try to balance out introverts and extroverts. So if someone's truly dominating the discussion and not looking others, that's considered an asshole.
One conversation happening at a time.
So the person who diverts on the side conversation and won't stop?
That's called being an asshole. That's about it.
You're not trying to say you better be polite. I mean, it's just
There are a couple of things that show respect for each other and that you would never
do if you were trying to engage with those other people around you.
It's been so cool to watch you build this all the news that's fit to print equivalent in the LP GP world over all these years.
I love every new thing that you do. It's so interesting to watch. People should definitely read the book. It's such an interesting categorization of these deals and
I think you leave it with a pretty clean understanding of like how this world actually works versus the outside perception.
All right, you know my traditional closing question, what's the kindest thing anyone's ever done for you?
I love having this opportunity.
In the early years of doing the podcast, I was really in between
what this has become as a business and like trying to figure out
What I was gonna do. And
I mean, you know this, you remember from back then, pretty stressed about life.
And in the early years, I had Paul Black from W C M investment management on the show.
It's a growth equity firm that had this incredible growth trajectory.
And he felt that coming on the show was
The single best thing they had done for their marketing.
About
Nine months later.
They called me up.
And said, Look, we just had this great year. We think you're a big part of it.
We wanna pay you
A bonus.
And
At the time, he had no idea how important that was to me.
I've had a lot of people on the show that have benefited economically.
He may be the only one, certainly the first one.
Who then paid it forward and did something about it.
I've let them know.

how important that moment was and that time was. And then I did some consulting with them and
We created a whole history of their
Firm through podcast. Yeah. How we built this.
But
It is by far
The kindest thing that anyone's ever done for me at a time
Where they didn't really even know how important it was. Hm. Incredibly cool. What a cool story. I didn't know that story. Great place to end.
Thanks, but
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