Ted Seides of Capital Allocators joins Nick to discuss Lessons from Top Allocators, David Swensen’s Principles for Investment, Insights on Private Equity Deals, and What Strategies are Timeless vs. Fleeting. In this episode we cover:
- Evolution of Private Equity and Its Role in the Economy
- Challenges and Opportunities in the Private Equity Industry
- Impact of David Swensen and His Philosophy
- Key Insights on Allocation and Alignment
- Team Structure and Decision-Making in Private Equity
- Innovative Models and Persistence in Private Equity
- Insights on Allocation of Time and Resources
Guest Links:
- Ted’s LinkedIn
- Ted’s Twitter/X
- Capital Allocator’s LinkedIn
- Ted’s podcast/Company Website
- Ted’s book: Private Equity Deals
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0:18
Ted Seides joins us today from Greenwich, Connecticut. He’s the Host and Managing Partner of Capital Allocators, a podcast that explores the people and processes behind allocation. Ted is also the author of three books including the recently published “Private Equity Deals.” Ted, welcome to the show!
0:35
Thanks, Nick.
0:36
It’s such a pleasure to have you. You’re like, you know, a luminary in the podcast space and the the allocation space. You know, I’d love to hear a bit about your backstory and your path to where you’re at today. I’ll
0:47
keep it as short as I possibly can. First job out of college, I worked for Dave Swenson at Yale, learned what a stock was the same day as a hedge fund, the same day as a private equity deal, and worked there for five years alongside all of the people who became the first wave of kind of Yale cubs in that business, went to business school at Harvard, came out thinking I wanted to pick stocks, realized I didn’t know what I was doing and wasn’t enjoying it, tried private equity, not terribly dissimilar experience, and went back to picking funds at a time in between when I left Yale And I went to business school. David wrote his seminal book, pioneering portfolio management. So no one had ever heard of Yale investments office outside of, like, niche money managers when I was there. But suddenly everybody started calling me about, hey, like, why don’t you join us? So I ended up having an opportunity to co found what became a hedge fund funds called protege partners. We were investing in early, like, kind of small and early stage funds and seeding new funds. And it’s a good run. Did that for 14 years left and wasn’t sure what to do. And among other things, the podcast came out
1:55
of it. Amazing, amazing. So do you continue to allocate today? You know? Are you active on that side as well.
2:01
Yes and no, I do with my own capital. It’s not an institutional sized balance sheet by any stretch, but I do love having relationships with managers and finding interesting opportunities on usually longer ideas than capital. But I wouldn’t say I do it with the kind of it’s very much an 8020 rule, like I do it with people I really like, who I think are great, who I also think I can help and have a relationship with, which is a little bit different from just, you know, trying to maximize your profits as an LP. So I do, and I love it. It’s a big believer in active management and the relationships that come with that. So yeah, I do spend a fair amount of time on that as well. So
2:42
obviously, you’re a student of the game. I mean, you’re you’re writing about it, you’re interviewing people. You’re endlessly curious is, is the podcast like an outlet? You know, is it a passion project? Is it a core part of your business model in some way? You know, I know how we do, you know, our show and our firm, but I’m kind of curious how you think about that. It’s the
3:03
hub of a flywheel, is how I would describe it. Now, in a funny way, the podcast has a more similarity than difference to how I spent my whole career, because as an allocator, what you’re doing is interviewing money managers all the time and then having conversations with your peers. So it’s a different use case, it’s a different structure, but I do spend a lot of time just talking to people that are money managers and talking to people that are other allocators, and I’ve been doing that for, you know, close to 30 years. So so that part of the podcast has become my outlet for that activity, for sure, and then. But it’s not, you know, it’s, I guess it’s a business in and of itself, it’s fine. It’s not like a big, robust business. It’s not a business with moats or anything that you’d want as a great business. It’s just a little needy asset. But the relationships that come with it have allowed us to do a whole bunch of different things. So we do some pretty boutique gatherings of kind of high end decision makers in the investment community, and do a little bit of advising, and then I do my own investing. So it all does come around the podcast, but I don’t necessarily look at the podcast as like the end. It’s just a fun way to spend time and share those conversations, which is, I had the conversations before, but it was all behind closed doors, and it’s really fun because of the feedback that you get and the learnings that other people get, to be able to share it.
4:24
Well, I must say, you’re the best in the business, at your craft, in in your space, before we get into some of the insights and the learnings and, you know, teasing out these lessons from over the years, maybe we can do some some framing just at the top level. So we often discuss on this show how VC has evolved from a cottage industry to a mainstream you know, over the past 10 years that I’ve been hosting TFR, help us frame out kind of the growth of PE and its role in the greater economy. You know, over the 30 years that you’ve been involved in PE. I
4:58
mean, in some sense. A similar path to venture with a slightly different time horizon and significantly accelerated in size and scale because it can so when I got started in the business in the early 90s, venture was a cottage industry, for sure, private equity was a cottage industry. Private Equity had a public heyday in the kind of late 80s with the barbarians at the gate, RJR Nabisco deal. And I love trying to put that in context. It’s kind of extraordinary. I think it was an 89 so KKR buys RJR Nabisco for $12 billion the entire industry raised 24 billion that year. So if you thought about that today, that would be somebody to like, somebody doing like $150 billion buyout or something. You couldn’t even imagine that. But then right after that, you had the problems that Drexel high yield bond market kind of collapsed. And so it really never took, even though that was a huge deal, it never took on that kind of institutional hold, but it still existed. The acceleration kind of came in and around the financial crisis, by and large, the promises of some of the other assets say, you know, hedge funds, where I was involved, as hedge funds grew in size, people thought differently about the outcome compared to the inputs and all of that incremental dollars. Just thought you were always going to make money. And then when hedge funds didn’t innovate, people soured, began souring on hedge funds, and private equity kind of did their thing, and you had the Fed coming in, and sort of default really didn’t happen. So you looked through that cycle, and private equity all of a sudden had these returns at the same time interest rates go to zero, so bonds weren’t going to help people get returns. People this has been kind of the longest prospective bear market. What I mean by that is, like, no one’s actually believed it was going to be a bull market in equities for 1520, years, even though it’s continued to happen. So people would say stocks and bonds aren’t going to get us there. Hedge funds aren’t going to get us there. What about this private equity thing? And and then you saw it take off, and it’s, you know, your it benefits the leverage benefits from having low rates. You had this great, favorable environment, a good economy, everything you’d want, and the returns have been there. So more and more and more money came in, and you had these super sophisticated people who kept finding ways to put that money to work and continue to deliver for their client. So you’ve had this incredible growth to now where it’s, you know, the numbers are, I don’t know, six and a half, seven, $8 trillion of enterprise value of 10,000 businesses. And some people say, Oh, it’s 40,000 I don’t know what it is. It’s a huge number. And some people include venture as part of that. But really, when you get to scale, venture doesn’t scale. The winners have the massive power law, but it’s really private equity where you have huge, huge dollars that are put to
7:45
work. Yep, wrong, wrong career choice on this side of the table. I guess you know, we have a lot of Optimists on the program, especially with this wave of AI. We also have some VCs that have been on the show that say, Hey, the best deals have been done and the industry has matured, and much of the potential gains have been armed away by too much supply side of capital, you know, fully pricing or overpricing deals. Where do you think the p p industry is at in its life cycle? And, you know, is alpha potential declining or will it persist?
8:20
Yeah. I mean, the big players would tell you that for 30 years, people have been saying there’s too much money in the industry, and that’s true. So you could look out and say, cyclically, it kind of feels like this is a tough time. Rates are up. Rates aren’t high, but they’re up. You’ve had valuation expansion, both from lower rates and more and more money coming into the space for the better part of 20 years, and it’s hard to imagine you’re gonna have multiple expansion which means that you’re now at a period of time where for private equity to continue to generate the kinds of returns that their clients need, they need to do it from operational improvements in the businesses that they own. They’ve been doing that for a long time, they just also had these other levers they could pull. So I think, you know, evaluations have been high, and it’s going to take time to reset. It’s why deal activities slow down a lot. And you could look at that and say, Yeah, I’m not so sure the next bunch of years will be as good as it has been. And that’s probably right. I think that’s just a cyclical phenomenon and something that has very, very long duration. And so, yeah, this might not be the best time, but it’s pretty good relative to the alternatives.
9:33
Are there, are there pockets sort of in the industry that are attracting, you know, the most capital at the moment? Yeah, I
9:40
mean, there’s always, it’s so big and it encompasses everything. So there’s always different areas. Some of those today, like, there’s intrigue about Japan, right? There hasn’t been deal activity. You’ve got real change in the corporate governance structure Japan. So you’re at the very beginning of that. There are always some sectors, right? We see more and more activity happening in sports as the. Leagues have opened up to private equity capital NFL most recently. So there’s always places where there’s areas of interest and software, which has been a huge area and probably will continue to be, people are less enthused by because it was so much predicated on growth, and we’ve seen that growth, but it’s harder to rely on that going forward. So you have within you’re encompassing literally everything. Every type of business has been touched in private equity at some point in time. And so you’re going to have these some areas of interest today, but a year from now, it might be something else. Yeah,
10:33
I saw an announcement yesterday from the NBA Commissioner that expansion is a likely possibility. You know, two teams and happen to be talking to the guys over at Redbird capital yesterday, and, yeah, you’re pretty active on the sports side. So it’s, it’s kind of interesting, all the different types of alternatives where one may spend their time, you
10:54
know, then, then you also have criticism in certain areas, so like healthcare. And today I saw this. It’s strange, but you see this all the time. So there’s an article in the Wall Street Journal about this hospital chain that’s gone bankrupt, that Cerberus, years ago, had taken out a big dividend and sold, and then they really struggled during covid. And generally speaking, I think hospital deals have struggled the same day. There’s an article about a like a digital processing company in the space that Bain Capital has been involved in with Parthenon that they’re selling a stake in at a huge winning price. That’s just a growing business. So people say, Oh, healthcare is terrible. It’s like, well, some, some has been challenged, and in other places it’s been really successful.
11:33
Interesting, you know, I’m curious kind of you’ve interviewed so many folks in the industry. You’ve studied many of the best. You know what allocators had the most impact on kind of your understanding of investment and why in private equity
11:48
in particular? Yes, I think it’s been the bigger ones. So you think about like a Hamilton Lane harbor vest that you know have. So they have $100 billion or 150 each allocating just to private equity in different ways. And the reason for that is when you’re big, sophisticated and have been doing it for a long time, you just get better and better and more and more clever. You know, they have more data than anybody else, and they can start to analyze data about deals with their own data set that nobody else has from all of that experience. And so they are all at the forefront of, is it co investing? Is it secondaries? Is it changing fees and terms what sectors or sub sectors, are they leaning into and and being able to spend some time with them, you really gain an appreciation of what’s possible in terms of gaining an edge over even, say, other allocators because of the resources that they can deploy into finding these opportunities, very
12:49
good. And you’re a Yale guy. I know you know. How much you know experience did you have working with David Swensen, and how has kind of his philosophy impacted you and permeated kind of the broader allocator market.
13:05
Yeah, well, I spent my first five years out of college working for Dave, and I learned everything that I learned from him, and I usually couch that into two buckets. So one is, sort of, what is the work that you do that goes into making a good investment decision? And the other is, how do you think about investing? And I would say pieces of both of those have been the foundation for my entire career. And by and large, as you know, I left and invested on my own at protege. And you test theses, you say, Well, I know David thought this was the case, but I don’t really know if I agree with that, and you’d and by and large, I would always come back to his first principles, because generally speaking, he’s just, he was just spot on, and they worked so hugely influential, certainly to me and everyone who worked there. And then, when he wrote his seminal book that came out almost 25 years ago, it completely changed the way institutions thought about investing, because back then, it was a lot simpler. It was kind of stock, bond portfolios, less diversified. And he laid out a case for private equity, a case for venture capital, a case for hedge funds, and that allowed committees and institutions to say, oh, there’s good reason, backed by first principles and academic research, of why these things can add value to our portfolio. And you saw guilt force changes in how that money got allocated. I think for the better of all those end user institutions, for a long, long time, are
14:37
there specific things aside from assets, asset allocation that, you know, specific evaluation criteria, or, you know, bedrock principles that David would use when selecting and diligencing investment. Yeah,
14:53
absolutely, it’s hard because there’s, there’s, you know, I’ll say art and science. That’s a simplified way of doing. It and the art part is very, very hard to express, like how good he was at just his judgment and where he would go in conversations and draw conclusions. But there are some parts that you could say are science, the biggest of which is alignment. How do you set up partnerships between an LP and a GP so the LP as aligned as possible with the GP. And, you know, he had some rules of thumb that some people don’t like, which is, he would never want to invest in a fund that had an outside owner, whether it was a fund that was seeded or, you know, later stage someone took a stake in that business. Because he said, Look, if, if I want to be aligned with that manager, I want them earning all the money that I’m paying them. And there are lots of reasons why you can make very sensible exceptions to that rule, but he generally said, this is a rule that works over time, and so he would stick to that. You know, that’s that’s one example. There are a lot he really favored fundamental research over, let’s say quantitative models, or macro or anything like that. And that is true in the public markets. It would be true in the private markets, like he would favor managers that made operational improvements as the focus for how they drew value in a private equity transaction. It isn’t that he wouldn’t want them to take advantage of capital markets or being able to buy cheaply and sell expensively, but he said, anybody can do that, what that’s a commodity. To some extent, the real value add comes from being able to drive improvements in a business. So in each aspect of how, depending on the asset class, depending on who the manager was, he really thought carefully about what drives success, and create principles so that you’re pretty consistent and yet extreme discipline in this and making sure that all of your investments follow those principles, so that it eventually expresses itself in the portfolio as a whole. Perfect.
16:53
So I’ve had a chance to peruse a copy of the new book. You know? Why’d you write it? What was the motivation? Well,
16:59
I like saying after I wrote a first book, which was the bucket list, I realized what it was and would never do it again, and so I wrote my second book, as I am definitely never doing it
17:08
again, it’s like launching a podcast. It’s like
17:12
the impetus for this book was kind of similar to an impetus for a new podcast I had created a couple years ago called private equity deals and and that was that private equity is pretty badly misunderstood and certainly misrepresented in the public eye. You mostly only read pretty negative things. And an industry as big that covers as much as private equity, you’re going to have bad things. You’re going to have deals that gone bad. You’re going to have bad actors. You’re going to have all you’re going to have great actors and deals that go really well and everything in between. So the concept that what’s in public is so pervasively negative bothered me, and I thought it would be fun to do, you know, go to some GPS and just have them walk through a case study of a deal. And so you get a little bit of a taste of an industry, an investment, and then the deal dynamic, which is often pretty colorful, like, how did they actually come to buy a deal? So I started that podcast, and it occurred to me over time that not so much by design, but of say, the first 16 or 20 of the deals I had done, you had one of every type of deal you could imagine. So you had one deal that was a great business that went from private equity firm to private equity firm to private equity firm to private equity firm, and they all won along the way. And you had one software deal, because everybody was talking about like, what VISTA and Thoma Bravo were doing in software. And you had an industry focused deal that, in this case, stone point capital and financial services like that, they really understand the vertical well. And then you also had, like, hairy deals. So you had a distress deal, a turnaround deal, a carve out and all these different situations. I said, you know, if you put these together, it’s not that you’re representative of the industry, but you would see how the actual people in the room do each of these different types of transactions. I didn’t really want to write another full book, but David Rubenstein had created these two wonderful books, how to lead and how to invest. And they were curated versions of his past podcast episodes so that I could do because 80% of the book was already written. And I just, you know, framed them as to what they were and some history around it, and put it together, and then you put it out and see what happens. I think it’s even though it all exists, all the deals, at least exist in the form of the podcast anyone could go listen to. It’s quite different from when you package it all together and you see them side by side, and can sit down in one sitting or a couple settings and read through it. So that was the idea of just to kind of share that collective wisdom, and something that I think is rightfully positive for the industry,
19:43
perfect and during the process of writing the book, during the process of hosting this show over a number of years. Now, what would you say is the biggest surprise to you the
19:54
breadth of the audience? So when I started it, and really the idea was to you. I focus mostly on the allocator side, the CIOs, the world I lived in, and then also managers, because that I’ve just lived in between those two. I thought I kind of knew everybody in the business already, like I’ve been doing it for 20 years. I knew a lot of people, and I had no idea, like, how many of these serious pools of capital existed all over the world. And so that has become this both gratifying piece of it, but then also this perpetuating. Like my friends would say, how are you going to do this? Like you’re going to run out after 50, you know now you’re at 500 and people say, Oh, you’re going to run out. I was like, Are you kidding me? Okay,
20:36
growing as well, right? And I haven’t even gone
20:38
back to most of the 400 that I’ve had one with and said, No, let’s do another one. So it’s, I think that’s been the biggest surprise is, is how big and serious the world is, and that leads to different people thinking about the same challenges in different ways. And so being able to triangulate on all that and share it is just been tremendous amount of fun. What
20:59
do you think most allocators get wrong? So I and
21:03
it could go both ways, but I think that there are these knowledge gaps between allocators and managers. And so what allocators get wrong is understanding, sometimes the business reality of a manager. So what I mean by that is, if you come from the Yale world, and David Swensen would say the only thing he cared about is investment performance. And there are certain characteristics of managers that he liked. He wanted them to stay small, single product, all those types of things that works always in the event of success, but in the event there’s a wobble or something goes wrong, all of a sudden, that model for the business, for the manager isn’t as good as if they had, say, a more diverse client base, or whatever it was. And so the what I came to view that allocators sometimes miss, is they want their managers to have long term successful performance. That’s what they all want for a manager to do that, they have to, number one, be around for the long term, and they have to have a long term successful business that supports that performance, so that they can invest for the long term. And sometimes that gets lost in the shuffle, because there’s so much of the dogma of Swenson that people ascribe to, which is right in its own way, but it was really right for Yale, and doesn’t mean it’s right for everybody else. You’ve
22:27
talked about alignment a couple of times. You know, between LPs, between GPS, there’s a section in the book about the perspective of each do you find that there’s areas where they’re most often out of sync, or, you know, there’s a lack of alignment in a relationship.
22:44
Yeah, it when there is, it’s mostly lack of transparency, I would say. So where you hear it most are kind of in terms. So think of fees as the easiest one, and I’ve never quite understood that. Because if a manager, you know, venture capitalist, comes out and they’re charging two and 20 and an investor wants to invest in that for the next 10 or 15 years, at that point in time, they’ve agreed that that’s a fair price, and based on supply and demand, like, you know, you have your funds and they’re growing, and you’ve got investors that agree that that’s a price. The thought of like, six years later saying that wasn’t a fair price, because the market conditions change. I’ve just never understood that, like, prices are determined by supply and demand, fees are determined by supply and demand, not because I think it’s fair, or do you think it’s fair? And then there are people who can set terms and things like that because they’re their size, or because they’re Yale and they’re prestigious, or whatever it is. So that’s a big one, where the alignment sometimes, like, you don’t want a situation where manager gets rich but the allocators don’t do well, and it doesn’t happen that often, but it can happen. You don’t want a situation where there’s a lack of shared understanding of what the manager is trying to do, and then something inevitably goes wrong, and there’s friction. Those are all types of alignment. Another one’s like alignment of risk. There’s this really interesting question of how much of a manager’s own net worth should be alongside the client. And some people say, well, it should be all of it. And the problem with that is that their their risk appetite, might not be aligned. Is there data showing correlation there? I don’t I don’t know how you’d measure it like it’s very hard to measure someone’s risk appetite, but you could think about like a hedge fund manager who starts and 20 years later is managing a $20 billion fund, and they’re a billionaire that their own personal risk appetite for their personal balance sheet is going to change over that time. Yes, they’re probably going to become more risk averse over time, like they don’t need to roll the dice anymore. So there’s a lot of examples like that, where you want Andy golden at Princeton, who just retired after 30 years, describes it as alignment of. Tights, not alignment of interests. Most people are used to the phrase alignment of interest. It’s like, Well, okay, but it’s not quite the same thing.
25:08
What does that mean? Appetite instead of it’s
25:10
kind of risk appetite, like you want to be aligned, like the risk that you want that manager to pursue in markets. You know, if it’s a venture capital, right? Like risk, maybe that’s only appropriate for 10 or 15 or 20% of that GPS personal balance sheet.
25:26
Got it so, you
25:27
don’t want them having all their money at risk, because they’re going to be a little bit more conservative than they should if it’s if your risk appetite isn’t aligned with theirs.
25:34
Very interesting. You know the the most valuable resource is time. You know, what insights have you learned about allocation of time and resources, both functionally and also across a portfolio of assets? Yeah.
25:49
Well, I guess for any individual, the hardest thing becomes as you get more successful and busier, you have to learn how to say no, and depending on who you are, like for me, that was never an easy thing. And so it comes down to sort of finding ways to say no that feel comfortable. So managing your time is incredibly important. There’s a lot of tools that people can figure out how to use to make sure that say your calendar is being driven by your goals and not by the goals of people who want your time, want your capital, whatever it is, and then in a portfolio, I guess it’s similar. In managing time, it sort of what’s the most important thing you’re trying to achieve, and how do you focus both your time and, say, your team on those objectives? There’s a figure remember the top of my head, a term in the military of just simple called focus of effort. And so the idea is, like, if you have, as in the Marines, a bunch of different teams, but the focus of effort is one particular mission. You know, they might get more ammunition than everybody else, and everybody needs to understand what the focus of effort is. So you’re not, you know, if you’re on the other team, you don’t feel slighted. So you could think about that as like a deal team, and who’s getting the capital to put the deals? Well, if you think healthcare is really interesting, but there’s someone who’s only doing AI, and the team says, well, we don’t think the AI opportunities are very good. They’re going to feel very slight unless they understand, no, we’re all trying to drive returns together, and the focus of effort should be in healthcare today. So it’s sort of a simple mind, a mental model to understand, like, how do you get a team aligned with trying to achieve the objectives that you’re doing as a whole, and not for the individuals? Yeah,
27:28
tricky one, I guess. While we’re talking about team, curious to hear your thoughts on team structure, you know, there’s different models. Sometimes separate groups for investing, deal making, operating. Sometimes it’s integrated. And, you know, it’s a team kind of working together on all three any observations on what works better? I mean, I imagine some degree of customization here, but we think about this in venture too. You know, should the people sourcing and selecting deals be the same ones that are managing the portfolio and helping them thrive and succeed?
28:00
Yeah, I haven’t seen like, the silver bullet model. You’ve seen everything. You’ve seen generalist teams and specialist teams. You’ve seen kind of command and control and shared decision making. Yeah, you’ve seen teams that grow and scale like an Andreessen, or teams that say small like a benchmark. So it’s really hard to say, like, this is what works. It’s easier to say what doesn’t work. So there’s a fair amount of science now in decision making, like, what are best practices for decision making, which really comes down to if you looked at the behavioral finance work of Kahneman and Tversky and all the behavioral biases that we all struggle with, those aren’t going away. But how do you mitigate them. So you go from something like Andy Duke’s first book on the subject thinking and bets, to what’s the proper size of teams to make decisions, to how do you run a meeting such that all of the information that’s available can get presented before you have to make a decision to like, why don’t consensus decisions work? And how do you mitigate that? You know, blind voting, all these kinds of things. So what happens in all of these things is it’s hard, it’s hard to achieve investment success. And on top of that, you can have unforced errors. And so you really need to mitigate unforced errors if you’re playing tennis in the US Open against, let’s say it’s Yannick center, because he just won. Like, it’s going to be really hard to beat him. It’s going to be even harder if you’re making mistakes all the time. And I think it’s the same thing, like investment success is really, really hard, but organizations that don’t figure out how to maximize their ability to make good decisions put themselves even more behind the people.
29:38
Yeah, yeah. And you know, when it comes to team focus and team time, we talk a lot in venture about, you know, you got to spend your time on your winners, but often firms end up spending a lot of time on, you know, the problem children and the deals that are struggling. And clearly the returns in this industry lend themselves well to spending your time on. Winners because of the power law and private equity, it might be a little different, right? Because you can’t maybe survive a zero on the books. Like, have you thought about that at all? Like, where the best allocation of time is within, you know, the companies in a in a PE portfolio, for instance, yeah.
30:17
I mean, I think you’re right. I think the band of returns in a typical PE portfolio are a lot narrower than everything in investing is a lot narrower than the outcomes you have in venture and so another dynamic in private equity is oftentimes when something’s working, a big part of that is you have a management team that’s doing so well that they even surpass whatever your model says, because they’re the innovators and they’re the entrepreneurs, so you can be very supportive of them, but when it’s really working, it may not take as much for your time. And one of the things you do find with private equity firms is they’re really good at ownership. And what I mean by that is, if something’s not working, they will put the resources into it to fix it. And so, you know, I don’t think it becomes either or in most kind of well structured and staffed private equity firms, they do the right number of deals so they can dedicate the proper amount of time and resources to all of them. Got it.
31:14
What would you say the best deal makers do exceptionally well? Well,
31:18
I suppose there’s a deal piece, and then there’s an owning a company piece, which are different. I’m not much of a negotiator. I’m not in the room, but you hear about a Steve Schwartzman, and people say, yeah, no, he’s one of the best, like, deal maker negotiators and and then so you get into like, what makes for a good negotiator? And what you learn over time is it’s a lot more about listening and being able to put yourself in someone else’s shoes than it is, you know, being a strong arm winner of a negotiation and tactics and things like that. So that’s the the deal side of it. Now, of course, how do you find the deal? How do you get engaged with the company? How do you win a deal in a negotiation, all of those pieces, and then, you know, running the businesses like we touched on earlier. A lot of it is, how do you improve operations and and as the private equity firms have gotten bigger and bigger and have had more money to deploy into call it their own R and D, or their own SG and a, you’ve seen more and more really fantastic operating partners be involved. So in the early years, like Clayton DOOL and rice, had this operating partner model, and now, by and large, any mid market or larger private equity firm has a team of, say, former Dan or her execs, if they’re available, who they can parachute into a company and work side by side with the CEO to, you know, are they trying to drive, You know, manufacturing improvement or change their marketing message, or whatever it is that’s going to help drive the top line or the bottom line. Having someone who’s been there and done it before really helps in that process.
32:49
What are some of the more innovative models in the allocation space you know, that you’ve seen, and may, you know, impact or change the industry moving forward? Yeah,
33:00
I’m not sure there’s like anything wildly new under the sun. And the simple way of thinking about it is, with lots of variability, depending on the needs of a particular organization. Everybody has some version of, let’s say, a 7030 risk tolerance, or an 8020 or 6040, stock bond at the level of risk. And then the question is, how do you get there, and how do you implement it? So when Dave Swenson wrote his book, that was the first meaningful shift in how people thought about it, and that was an asset allocation model. It just had more asset classes, what you’ve seen more recently, particularly with the availability of data to understand at more granular levels, what you own. So I didn’t just invest in a private equity fund, but that private equity fund owns these eight businesses that are in these sectors with this much leverage, and you can have and integrate all that data, you’ve seen a little bit of a more precise calibration of risk. And so there’s a model, if you want to call it, called the total portfolio approach, or TPA, and places like GIC and Singapore and New Zealand Superfund and the Australia Future Fund and some of the Canadian pension funds use this. And it’s not terribly dissimilar in the intent if, let’s say our risk tolerance is 7030 but rather than saying we’re going to get to 7030 by having this much in US equities and this much in venture capital and this much in private equity, they say, Well, let’s start with assuming we just have index funds giving us 7030 if we want to add a venture capital manager, that’s really twice the risk of buying stocks. So we’re going to put 10% in venture capital, and we’re going to fund it by 5% of our stock allocation, and so there’s this more precise calibration of what do you own, thinking of the portfolio as a whole, and all of the risks of each piece of the portfolio as a whole, funded from some benchmark level, rather than we’re going to have a bunch of different asset classes that we think you. Know, and using some mathematical model, tells us that they get to the same outcome. Super
35:04
interesting. Are there certain areas within the alternative space, certain asset classes within alternatives where we’ve seen consistent, best, persistent, persistence, you know, fund over fund at
35:17
the manager level? You know, in venture it feels like there’s more serial correlation, right? Like you’ve seen that at the big name venture firms, whether it’s a benchmark or Sequoia, and there are others. There’s Greylock and Sutter Hill. There’s lots of them. You can make it. I could tell you a story of why that’s the case. I don’t know if there’s any way to prove it, but if, in fact, everyone knew which new ventures were going to be the most successful. Let’s, let’s assume everybody knew that in AI like these, this sub sector and these three companies are going to be the most successful, it’s probably more likely that those top venture firms are going to be the ones that can back those companies, because part of that is a signaling effect. Part of that is they have incredible knowledge of their own experience and resources from the prior successful companies they’ve backed, and relationships with prospective clients and all those kinds of things. So you could make a case that if it were a perfectly efficient market, that the winners would stay winners. We’ve seen that. I don’t think that’s the cause and effect. Nobody knows exactly which companies are going to be the ones that are successful. But by and large, if you know, maybe there’s an entrepreneur who people generally think of as the great operator, they can bring people in. You do see that in venture more than other areas. I think in private equity, there’s some persistence, at least in, say, the top half of performers. But you don’t see a lot of you know, the top quartile stays the top quartile stays the top quartile. You see it at times. But generally what happens is a firm that is really, really delivering, gets demand and grows a little more, and it just makes it that much harder to keep delivering, that much better than everybody else. And if you’re in the top quartile, because the dispersion of returns between a great performer and a weak performer are so wide, the allocator only needs a certain level of return. And if you’re making 25% a year, they’d be thrilled if you were making 20. And you can’t, like pinpoint that. But there are these slippages that come from when people grow, and there’s a lot of economic incentive for the manager to grow. But there’s also demand, right? You have, you have a business, more and more people want access to what you’re delivering, and all of them are okay. If you don’t do quite as well, you can actually make more money in total, for all these investors, you just don’t make as high of a rate of return. So it’s irrational that someone would grow and try to contribute more dollars to foundations, endowments, pension funds at the end of the day, families. But that’s what happens. And so it makes it very, very hard for someone who’s like a top performer and has the ability to scale their business to stay that way. I
37:55
mean, we’ve seen that in venture you know, as firms grow too large, you know, the returns drop. But at the same time, I think I had Chris duvas on years ago, and he spoke about how venture has shown more persistence as an asset class than, you know, many of the other alternatives. And so I think venture has, you know, the same dynamics as a lot of these other spaces. When you have success, it begets more success, and things start to grow and returns decline. But I wonder if there’s also some other factors, like maybe in mid market, PE or private credit or or some other factors that cause persistence to just generally be lower. Besides, you know, assets growing, it’s
38:39
easiest probably to point to asset growth, and what that does as an organization, private credit is almost too new as a scaled asset class to know, and it feels like it’s driven much more by, you know, call it the beta of the activity, just your returns are mostly driven by where rates, Where spreads, and can you avoid losses because your upside is capped when you’re making a loan? So I don’t know. I’m not, I don’t know that. I would point to any particular factor that would sort of drive and you could think of, does success change someone’s personal disposition and their motivation? You know, maybe, but you can’t measure that to understand is that a driving factor? Right?
39:25
Right? Any other insights we talked about David Swanson quite a bit, but I’m curious kind of the institutional allocation game. Any insights around what strategies feel timeless versus parts of the framework that do have to adjust with cycles and trends over time. Well,
39:43
the higher level you get, the more you know, I’d say, the more you’re talking about underlying beta or drivers of markets, the more timeless you’ll get. So like, do you want to be exposed to the stock market, public equities, yes. Fixed Income, yes. Private equity, yes. Venture capital, yes. Real Estate, mostly when you get below that, there’s a lot that can change. There are certain tried and true principles, like some of the simple ones we talked about, about trying to have your interests aligned as an LP with the GP and size being the enemy of performance. Another one we’ve talked about, which is tautologically true being contrarian is something that works and will continue to work over time, because it’s based on behavior, but that also makes it hard to do. When you get a little more into the weeds, it’s a little bit tougher to say something that’s like tried and true forever value investing, buying cheap stocks that was academically proven for a long time, and now it hasn’t worked for a long time, maybe because everybody knows about it. The old private equity deals in the 80s had like, one to 5% equity. That’s so different from where we are today, right? Crazy. So, like, is leverage an enhancer? Absolutely, is it a very dangerous risk? Absolutely, like those principles, those first principles of investing, never really go away. But within that, then, when you really get into like, any kind of detail, there’s a lot more things that come and go and whether it’s cyclical or stylistic or terms, then necessarily stays tried and true forever. If
41:20
there’s one case study from the book that you you recommend everyone that’s you know, a practitioner in this field has to to read. Which one would it be? I
41:31
can’t answer that. I can. I can give slightly different answers. If you hate private equity, the deal you should read is parts down by Berkshire, okay? Because it’s like, this collaborative everyone I titled chapter everyone wins. You know, if you think private equity is like, you know, great business, everybody just passes it, you know. But that’s all it is. You should read Yahoo that Apollo bought, which I chaptered, you bought what? And then, if you’re, you know, there’s a bunch that are different angles on different industries. So if like, you like sports, there’s Fenway Sports Group and what’s happening, which is a great story of, like, what’s happening with all these minority ownership of sports teams. And then there’s also, like, distressed the Yellowstone Club, which a lot of people love reading about, because it’s such an amazing, you know, elite experience and story. So there’s, there’s people can read it because they like the industry or the company or the story or the deal type,
42:31
you know, a couple unique, innovative models in my backyard, you know, are the rickets or think like Justin ishby at shore capital. Have have you done deep dives or interviews on either of those?
42:43
I haven’t. I’m I’m actually interviewing Tom Ricketts with Ian Charles at a charity event in Chicago called invest for kids in October. But I have not met him, so maybe that’ll lead to one, Oh,
42:57
very good fun Ted if we could feature anyone here on the show, who do you think we should interview and what topic would you like to hear them speak about?
43:05
Let’s see, in the venture world, I mean, you can never go wrong with Josh Wolfe. I could interview Josh every week and have a completely different set of topics and subjects come up that’s always going to be fascinating. So he’s pretty close to the top of my list in the venture world. And then I always think, and this happens with me, just because of my duration in the business, that getting back to some of the people who may not be in the business anymore, but like, you know, who are the retired folks? I mean, Gurley is doing a lot of this stuff, but who are the retired folks from Kleiner, when they talk about the ups and downs of Kleiner, you know, some of the more legendary people in the business from 15 years ago, sure, and getting them to reflect on what’s happening now is often really insightful. Yeah,
43:52
yeah. I’ve been aiming to get like Pierre Lamond on the on the show, perfect exam like that would be great TED. What? Book, article or video, besides your own listeners, private equity deals.
44:03
So let’s steer you to this. So the book that I am most fond of recommend recommending is unreasonable hospitality, by will Gadara. So Will was Danny Meyer’s partner in a restaurant New York, 11 Madison, when it became the number one restaurant in the world. And the book is the story of that. But it’s really not. It’s really about what does it take to create you know, he described it unreasonable hospital, but just extraordinary customer service. It’s a it’s become a wildly popular book. I think it’s top 50 books sold on Amazon, and it’s just extraordinary. So now, tied to that, if you like the book, he was involved in the production of the bear, yes, on Netflix, which is intense and super cool and, like, I would actually say beautiful, which is not a word I would ever use to describe, you know, television or movies, but it’s like extraordinary in a lot of ways. But those are two off top my head.
44:57
Very good. Ted. You. Any habits, tactics or behaviors that are a force multiplier.
45:03
I am huge on trying to sleep better and more and integrating that in everything I do. So I’m big on the wearables I use, the aura ring. You have an aura on. I only wear it at night. I don’t love it during the day, but I’ve worn an aura for years, and I wear a whoop and, you know, also, we have an Eight Sleep mattress to temperature control, but that gives metrics too. So I have, like, triple metrics. That’s one. I’m a big exercise guy, and I’m always fooling around with, like, how much. And my most recent thing is realizing that, like, days off are really productive for my sleep, which I have, don’t often do because I have changed around how I worked out over the years. That’s I think that’s most of it. And then
45:47
finally, here, what’s the best way for listeners to connect with you and follow along with all your efforts? Everything
45:52
we’re doing is on our website, capitalallocators.com My email is very complicated. Ted@capitalallocators.com reach out to me that way as well. All
46:01
right, he is Ted CITES. The book is private equity deals, and the show is capital allocators, Ted. Thank you so much for the time. This was a lot of fun, something I’ve been looking forward to for many years. So thank you for doing it.
46:13
Thanks Nick. Really enjoyed it.
46:20
All right, that’ll wrap up today’s interview. If you enjoyed the episode or a previous one, let the guest know about it. Share your thoughts on social or shoot them an email. Let them know what particularly resonated with you. I can’t tell you how much I appreciate that some of the smartest folks in venture are willing to take the time and share their insights with us. If you feel the same, a compliment goes a long way. Okay, that’s a wrap for today. Until next time, remember to over, prepare, choose carefully and invest confidently. Thanks so much for listening.
