Nov 18, 2019 · 56m · capital-allocators
Steve Rattner – Overseeing Michael Bloomberg's Family Office (Capital Allocators, EP.113)
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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 Steve Rattner, Chairman and CEO of Willett Advisors, discussing his multifaceted career spanning journalism, investment banking, private equity, and government service, alongside the investment philosophy and institutional portfolio strategies used to manage Michael Bloomberg's wealth.
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 24% of the talking time here. How this is scored →
Ted as informed peer 5.0 Guest teaching 4.1 Guest disagreement 1.8 Ted pushing back 1.4
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 49:03 Forceful defense of shareholder primacy against stakeholder capitalism
Rattner strongly rejects popular modern ESG and stakeholder capitalism concepts, arguing corporations should focus strictly on shareholder value rather than fixing problems government failed to solve.
Hardest push from Ted ▶ 33:55 Challenging active public equity management with indexingTed directly challenges Rattner on why Willett does not simply index US public equities or use factor overlays given the acknowledged difficulty of capturing alpha net of fees.
Biggest teaching moment ▶ 29:09 Defining hedge funds as fee structures rather than asset classesRattner deconstructs the hedge fund industry by explaining that the two-and-twenty structure is merely a fee mechanism that leaves limited partners with meager net returns in lower-return regimes.
Ted holds their own ▶ 41:05 Probing the criteria that separate winning managers from the packTed presses Rattner on his supermarket peas metaphor to extract the specific qualitative filters and owner-operator traits that allow Willett to select concentrated high-conviction managers.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Early Journalism Career at The New York Times | 4 | 3 | 1 | 1 | Ted guides Rattner through his early career shift from journalism at The New York Times to investment banking at Lehman Brothers and Lazard. Rattner explains how journalism skills like due diligence and relationship management transferred to banking. The dynamic is conversational and reflective. | |
| Moving into Private Equity at Quadrangle Group | 4 | 4 | 1 | 1 | Rattner recounts founding Quadrangle and being appointed by Tim Geithner and Larry Summers to lead the Obama administration's auto restructuring task force. Ted asks targeted questions regarding restructuring expertise, while Rattner candidly describes navigating TARP funds and auto financing. | |
| Founding Willett Advisors and Adopting the Endowment Model | 5 | 4 | 1 | 1 | Ted explores how Willett Advisors was established to manage Michael Bloomberg's wealth using the endowment model. Rattner explains adopting David Swensen's Yale framework while having to start from scratch right into the 2008 financial crash. | |
| Building Willett's Specialist Team and Portfolio Structure | 5 | 3 | 1 | 1 | Ted and Rattner discuss team structure, specifically the debate between generalist and specialist models. Rattner explains his preference for specialists across asset classes and how team collaboration has evolved across public and private markets. | |
| Direct Investing and Willett's Internal Strategy | 5 | 4 | 2 | 2 | Ted presses on Rattner's mention of Willett's special sauce. Rattner explains their direct investing capability in private equity and real assets to mitigate private equity fee drag and manage unfunded liabilities effectively. | |
| Private Equity Environment and Manager Evaluation | 5 | 4 | 2 | 1 | Ted asks how Rattner evaluates private equity managers given his background on the GP side. Rattner notes that past quartile performance persistence is low, agreeing with Swensen that manager selection ultimately comes down to judging people. | |
| Hedge Funds, Fee Models, and Industry Outlook | 6 | 5 | 3 | 2 | Rattner offers a sharp critique of hedge funds, asserting they are a fee structure rather than an investment strategy. Ted probes on allocator expectations in low-return environments, and Rattner notes an inevitable industry shakeout. | |
| Public Equity Strategy, Beta Dominance, and Geographic Exposure | 6 | 4 | 2 | 2 | Ted probes whether Willett considers passive indexing or factor overlays given market efficiency. Rattner firmly argues that beta drives the bulk of returns, acknowledging the difficulty of generating US public equity alpha while dismissing factor timing. | |
| Manager Retention, Portfolio Concentration, and Owner-Operators | 5 | 4 | 1 | 1 | Ted asks about manager turnover and decision making. Rattner shares his supermarket peas analogy regarding portfolio concentration and emphasizes backing driven owner-operators rather than large conglomerates. | |
| China Opportunities, Dispersion, and Venture Capital | 5 | 5 | 3 | 2 | Rattner makes a contrarian bull case for China over India and discusses the difficulty of breaking into top-tier venture capital. Ted asks about evaluating managers on the ground, and Rattner points out the high proportion of successful female fund managers in China. | |
| Political Insights, Media Presence, and Economic Perspectives | 5 | 5 | 3 | 2 | Ted asks about stakeholder capitalism versus shareholder primacy. Rattner delivers a forceful defense of Milton Friedman's shareholder model, warning that forcing corporations to fix governance failures is misguided. |
Statements from this episode (24)
Rattner: 2009 auto restructuring nearly collapsed over Sheila Bair's FDIC
“Particularly the FDIC, which was run by Sheila Bair, who was particularly difficult. And this caper, as my deputy Ron Bloom used to call it, almost fell apart over that problem.”
Rattner: Banking and private equity skills do not translate to asset management
“People assume, and maybe Mike assumed this, that because I had been a banker and a private equity guy, I could run an investment management firm, but it's like asking a cardiologist to look at your elbow that you think you might have broken that's really belon…”
Rattner: Bloomberg's family office fortunately launched with mostly cash in 2008
“We actually opened our doors for business, his business on January one of 2008, which I mentioned because you know what happened in 2008. And so we went right down the water slide with everybody else. Fortunately, most of our money was in cash in 2008.”
Rattner: Willett faced a severe venture capital disadvantage starting in 2008
“They had had 15 or 20 years to build a portfolio, to establish relationships, build a team, and so on, and we were starting fresh. That certainly put us at a disadvantage, particularly in things like venture capital.”
Rattner: Harvard is still untangling illiquid investments it shouldn't have made
“What a lot of these firms or institutions have is a lot of illiquid stuff. Harvard is still trying to untangle some of it that they probably shouldn't have done”
Rattner: Endowments should use a specialist model rather than generalists
“I believed in the specialist model. The idea that you have five or six smart senior people, and they all go off and do whatever they feel like doing, and often they're doing different things from one investment to another, it didn't make perfect sense to me.”
Rattner: Bloomberg's family office will always manage most capital externally
“Most of our money is and always will be managed externally because we do believe in diversification.”
Rattner: Private equity has the largest fee drag of any asset class
“The advantages of doing it internally are that, quite frankly, the fee drag of private equity is the biggest of any asset class, and I Sort of knew what it was when I was on the other side, but as a limited partner, I really knew what it was. It's enormous.”
Rattner: Willett maintains a far lower unfunded liability ratio than typical endowments
“And so our unfunded liability ratio is very, which again, I don't want to get into specifics, is very low compared to what the typical endowment or foundation has.”
Rattner: Private equity still delivers a return premium over public markets
“I do think the return premium Which, while it's smaller now, probably, certainly than it was, is still there. I think the way that private equity guys and ladies think about driving performance, not getting caught up in being a public company, being very comme…”
Rattner: Private equity performance persistence across consecutive funds is weak
“Now the problem is that just like in other parts of money management, performance persistence is not that great. So a firm that was top quartile in its last fund could well end up being second, third, or fourth quartile in its next one, and then back to first …”
Rattner: Hedge funds are a fee structure, not an investment strategy
“I think I wrote a piece for Business Week years ago, in which I said that hedge funds are not an investment strategy, they're a fee structure.”
Rattner: Willett willingly pays high fees if net performance is demonstrably superior
“I believe that it's a little bit of reverse engineering, that I'm willing to pay almost any level of fees if I believe the net performance is going to be superior. So we have people that we pay very high fees to, because I really believe they're exceptional pe…”
Rattner: Nobody is actually good at market timing or factor overlays
“We're not good, I frankly don't think anybody is, at market timing or even factor overlays”
Rattner: Willett Advisors avoids investing in Russia and likely always will
“We don't invest in Russia, I can't imagine we ever would”
Rattner: New York investment managers cannot match on-the-ground talent in China
“I don't know how a guy sitting in New York can be as effective in China as people who are on the ground there.”
Rattner: Willett is significantly underweight Europe due to profoundly unattractive fundamentals
“We're way underweight Europe. There are many days when I wake up and think we should just leave altogether. There's nothing attractive about the fundamentals.”
Rattner: Firing underperforming fund managers rarely creates value compared to holding them
“One of the things that I force the team to do once a year is go back and look at our terminated managers, because it's easy to fire a manager. And in most firms, you fire a manager, nobody's ever going to ask you again, well, how did that manager do? Did you m…”
Rattner: Over-diversifying across 100 fund managers guarantees index-like mean reversion
“If you do the math, right, a firm has, let's just say, a hundred managers. So each manager has one percent of your capital on average. And each of those managers has 20 top positions. What is that? Five basis points of your capital is in some given position. N…”
Rattner: Willett's most successful managers are fiercely independent owner-operators
“We like owner operators. We want Firms that are owned by the people who are actually managing the money, not part of some colossus. We want the lead person, or lead couple people, if that's what it is, to just be so driven that you can feel that they taste thi…”
Rattner: Willett strictly avoids non-top-quartile venture managers, slowing portfolio growth
“One of the early decisions that Alice and I made was that if we couldn't be in what we thought was a top quartile manager, we just wouldn't do it, and so the result was it has taken us 11 or 12 years now And we still do not have as big of a venture portfolio a…”
Rattner: China lacks true private equity and remains primarily a venture market
“There isn't really a true private equity market in China yet. It's more of a growth equity and venture market, and probably also cheaper than the US.”
Rattner: Willett backs more female-led private managers in China than the US
“I'll make one observation you didn't ask about, but it does, I found it fascinating, which is that we have more investment managers in China on the private side with a senior partner or the CEO of the firm as a woman than we have here, because here we have zer…”
Rattner: A company's primary fiduciary duty is to responsibly serve its shareholders
“And I'm almost with Milton Friedman, who wrote that famous New York Times Magazine piece in 1970, which said that the job of a company is to go out and make money ethically, legally, responsibly, but ultimately to serve the shareholders.”