Feb 1, 2021 · 1h 1m · capital-allocators
Private Equity Masters: Paul Salem – Providence Equity Partners (Capital Allocators, EP.175)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
In this episode of Capital Allocators, host Ted Seides interviews Paul Salem, Senior Managing Director Emeritus at Providence Equity Partners, exploring the power of sector specialization, the 'nice guy' cultural edge in dealmaking, fund scaling economics, GP stake monetization, and Salem's post-retirement ventures in philanthropy and corporate governance.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 19.4% of the talking time here. How this is scored →
Ted as informed peer 4.1 Guest teaching 4.1 Guest disagreement 0.9 Ted pushing back 0.1
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 45:27 Every private equity fund claims top-quartile status
Salem humorously and cynically punctures industry marketing claims, pointing out that allocators are told by 100% of pitching GPs that their performance is top-quartile.
Hardest push from Ted ▶ 41:32 Challenging the friction of fund duration against LP expectationsTed pushes on how GPs can practically structure long-duration holdings when institutional LPs are conditioned on traditional 5-to-10 year liquidity cycles.
Biggest teaching moment ▶ 35:35 PE investors should not pretend to know operations better than CEOsSalem educates the audience on board governance, emphasizing that private equity investors who think they know more about operations than their CEOs have picked the wrong leaders.
Ted holds their own ▶ 17:41 Drilling into the massive fund scaling from $2B to $12BTed demonstrates keen LP expertise by pressing Salem on the internal operational risks and return drag that accompany exponential fund size growth.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Career Beginnings, Failed Interviews, and Morgan Stanley | 3 | 3 | 1 | 0 | Ted opens with an open-ended narrative prompt asking Salem about his early career and what private equity was like in the early 1990s. Salem recounts his post-HBS job hunt struggles and his brief, unhappy stint at Morgan Stanley in an engaging, self-deprecating storytelling style. | |
| Prudential Experience and Early Connection to Providence | 3 | 3 | 0 | 0 | Salem continues his career journey, explaining how working at Prudential taught him the power of carried interest and led him to discover the founders of Providence Ventures. | |
| Joining Providence and the Western Wireless Triumph | 3 | 4 | 1 | 0 | Salem outlines joining Providence as a junior partner on a $171M fund and backing John Stanton in Western Wireless and VoiceStream. He emphasizes how early industry specialization yielded massive returns when conventional wisdom doubted media-focused PE. | |
| The Strategy of Media Specialization | 4 | 4 | 1 | 0 | Ted asks why industry specialization worked so well fundamentally. Salem explains that insider industry knowledge in capital-intensive sectors like European cable created structural advantages over generalist firms and public market hedge funds. | |
| Scaling Providence and the Challenge of Fund Size | 4 | 4 | 1 | 0 | Ted probes the massive jump from a $2B fund to a $12B fund in 2007. Salem candidly reflects on how fund size becomes the enemy of returns and explains Providence's scrappy, 'nice guy' hiring culture based in Rhode Island rather than NYC. | |
| Competitive Deal Dynamics and Strategic Partnerships | 5 | 4 | 1 | 0 | Ted asks about competitive dynamics with generalist megafunds. Salem details partnering with Goldman Sachs PIA, founding Benefit Street Partners after buying distressed senior debt in 2009, and launching Providence Strategic Growth. | |
| Sourcing Trends, Market Evolution, and Private Equity Economics | 5 | 5 | 2 | 1 | Ted and Salem discuss modern private equity sourcing dynamics, including private-to-private flips, cold-calling platforms, SPACs, and the resilience of the 20% carry model despite compressing future return expectations. | |
| Mid-Roll Sponsor: Ridgeline | 4 | 4 | 0 | 0 | Following the mid-roll ad read for Ridgeline, Ted asks for deal combat stories. Salem recounts the high-stakes bidding war and union negotiations for Ireland's Eircom alongside Tony O'Reilly and George Soros. | |
| Operational Value Creation and Backing Exceptional CEOs | 4 | 5 | 1 | 0 | Ted asks about operational levers versus financial engineering. Salem asserts that backing hall-of-fame CEOs and retaining translators like operating partner Barry Allen matter far more than private equity investors pretending to know operations. | |
| Stepping Back and Monetizing the GP via Dyal Capital | 4 | 5 | 1 | 0 | Ted inquires about Salem's decision to step away. Salem details his sabbatical realization, firm succession dynamics, and Providence selling a GP minority stake to Dyal Capital to fund GP commitments internally. | |
| Structural Evolution and Longer-Duration Capital | 5 | 4 | 1 | 0 | Ted asks about aligning duration preferences with standard 5-to-10-year LP fund structures. Salem argues that selling winners to peers makes no economic sense and predicts the rise of permanent capital and long-duration partnerships. | |
| How Allocators Should Evaluate PE Firm Culture | 5 | 5 | 2 | 0 | Ted asks how allocators should evaluate private equity fund culture and performance. Salem quips that every GP claims top-quartile status and advises LPs to spend full days inside firms to assess operational culture and co-investment alignment. | |
| Changing Valuation Metrics in Private and Public Markets | 4 | 4 | 1 | 0 | Ted asks how valuation levels affect private equity returns. Salem expresses bewilderment at public market valuations like Tesla and warns against private equity shifting valuation metrics from EBITDA to revenue multiples. | |
| Direct Entrepreneur Investing through the Family Office | 4 | 3 | 0 | 0 | Salem describes his post-retirement work chairing Year Up, leading MGM Resorts as chairman during COVID-19, and deploying family office capital into local entrepreneurs, followed by concluding lightning round questions. |
Statements from this episode (28)
Salem: Prudential was the largest early institutional investor in private equity
“My job before Harvard Business School was working for Prudential Insurance Company, and Prudential Insurance Company was the biggest institutional investor investing in the very first private equity funds.”
Salem: Having a sector-specialist angle in private equity consistently pays off
“And it was funny because no one thought being a specialist private equity investor was a good idea. And we were kind of the first to really be specialized. And I guess the one thing I guess we proved is having some kind of angle and investing really pays off.”
Salem: Providence Equity Owned More European Cable TV and Made More Money There Than in US
“We owned the most cable TV in Europe than anybody at the time, and we made more money in Europe on cable TV than we ever did in the United States.”
Private equity is a superior business to hedge funds given inside access
“Where a hedge fund is operating from the outside in, we're operating from the inside, and it's just a much better way to invest. I've always been a big believer that private equity is just a much, much better business than the hedge fund business.”
Salem: Providence targeted $8B and received $18B in LP demand in 2007
“We went out to raise eight billion dollars. So the funds kept on doubling. And we had about eighteen billion of demand.”
Private equity firms scaling over ten funds inevitably suffer performance dips
“When you go from fund one to fund 10, you're going to have a dip in there, and you can look at all the firms that have had those dips, And we were one of them.”
Salem: Providence Consistently Beat New York PE Rivals by Being 'Nice Guys'
“Whenever I would go head to head with a New York Well-known private equity firm. We would always win because we were the nice guys.”
Salem: Private Equity's Bad Reputation for Egos Is Partially Well-Deserved
“Private equity gets a bad rap because of the outsized egos. And the truth is, Some of it's well-deserved”
Salem: No Specialist Private Equity Firms Existed in London in 1999
“Back in 1999, there were no specialist private equity firms, and so we were fishing in a pond that was just ripe for pickings”
Salem: Providence did more deals with Goldman Sachs PIA than any other PE firm
“We did more deals with Goldman Sachs PIA, you know, private equity division of Goldman Sachs than any other private equity firm because they knew we weren't a threat.”
Salem: PE firms must grow to attract and promote young talent
“And I think the private equity firm that has outsized returns and stays at pick a number of billion dollars and never grows. It's hard to attract young talent because the older folks get a little embedded. And it's hard for the younger ones to break through. S…”
Salem: Increased Competition from SPACs Will Force Private Equity Returns Down
“And I think SPACs aren't going away. And so I think there's even more competition. So I just think there's just one overarching fact here is returns have to go down. They just have to.”
Salem: Providence Strategic Growth Employs 30 Junior Staff Cold Calling Targets
“We set up a group called Providence Strategic Growth. They have 30 young kids cold calling companies.”
Providence Equity historically charged a 25 percent carried interest rate on funds
“We used to have a 25% carried interest”
Salem: Providence cut thousands of idle workers at Eircom
“And so we had to get rid of thousands of workers who literally just weren't doing anything.”
Salem: Providence made 2.3x on Eircom over 2.3 years
“We made 2.3 times our money, and turns out it was coincidental when we took it public again in 2.3 years in the company.”
Salem: If an investor knows more than their CEO, they backed the wrong CEO
“For me or Providence Equity, I always say, if you go into a board meeting, and you know more than the CEO, or you think you know more than the CEO, you got the wrong CEO.”
Only three in ten operating partners at Providence were actually good
“And of the 10 operating partners, three were good, three were mediocre, four were not so good.
Not because they were bad.
They just didn't want to work.”
Salem: Providence Equity was first PE firm to sell GP stake to Dyal
“We were the first firm to ever do a deal with Dial Capital as a private equity fund, and we did a deal where we sold
A percentage of the general partner to a few LPs and to dial capital, and we didn't take the money out of the business.”
Salem: Secret to PE is investing maximum personal capital into own deals
“Really is the secret to private equity is to be able to invest as much money as you can in your own deals.”
Private equity will shift to longer hold periods and midterm carry payouts
“And I think over the next 20 years you're gonna see That change in private equity where You're going to own your winners longer, and you're going to find ways to pay out, in essence, carry halfway through the point, because people still want to get paid.”
Salem predicts private equity returns will inevitably dampen to single digits
“So I do think private equity will have a dampening of returns, meaningfully dampening, but when the 10 years trading at. Maybe if returns are only single digit for private equity, that's still good enough. I just think returns have to come down.”
Salem: PE managers will increasingly partner as quasi in-house teams for mega-LPs
“You're gonna see, I think, people partnering with these big sources of capital and almost become in-house private equity teams for them, because every big asset allocator now wants to have their own private equity team, and so if they structure it the right wa…”
Salem: Thoma Bravo took Providence Equity's specialization model to a new level
“So the Toma Brava. They are reincarnated Providence Equity. We started off as specialists. They took it to a whole new level, this to a whole new level.”
Blackstone effectively operates as a private equity index fund with good returns
“And then you have guys like Blackstone who just can raise money like no one else. And then they have some really smart people and they still have, you know, the best returns in the business, but they have good returns. And that a lot of people are happy to inv…”
Salem: Private Equity Is Shifting from EBITDA to Revenue Multiples
“You're seeing the same thing in private equity. Everything used to be a valuation based on EBITDA. We're slowly getting to valuations based on revenue. And the only reason why you do it based on revenue is because you can't do it based on EBITDA because there …”
Salem: Year Up hires stayed 4-6 years at State Street versus 7-month elite grads
“And what we found is State Street would bring in these young year up kids and they would work their butts off and then end up staying for four, five, six years versus hiring the Boston College grad who would get trained, last for seven months and leave. And so…”