The Exchanges

Q What was one of those partnerships that worked really well for you?

A Well, one of the early ones was a group called Douglas Emmett, and they're a public company now, very successful. This was back in the early to mid-nineties, and they were pursuing massive distress in Los Angeles. One example that always resonates with me, when we were underwriting some of their early deals and trying to understand how they look for opportunity, things were so bad in California back then that we underwrote no residual To the assets in at least one deal. It was not even a land residual. We assume that these assets just went away at the end of the lease term because things were so bad. It's almost impossible to get your head around it today. But back then that was not a completely far-fetched outcome that was going to happen. And we would underwrite deals. Is this a reasonable risk-adjusted return, assuming the world comes to an end? And then if it doesn't, we'll do great. I think they had nine funds. They all did very well, and then they went public, and they did a great job for themselves and for Yale.

AI assessment note: “Well, one of the early ones was a group called Douglas Emmett”

Q Why don't you take me back after the thirty-something years of working at Yale, how you got in the office in the first place?

A I was at NYU Business School, and I wanted to get into the real estate business. It was 1990, very rough time in the real estate business. There was a job posting to work at the Yale Endowment, which was something that most people didn't know much about. Endowment management didn't exist. I interviewed for the job, and it took a few months to get through the process, and I picked up and moved to New Haven and was working for some guy named David Swenson that nobody had ever heard of before. The office was not that much bigger than this conference room I'm sitting in now. I was working for Ellen Schumann and Donna Dean, and we started to figure out how to invest Yale's money in real estate. Back in the day, Yale was a direct real estate owner of assets. When I joined, I was put in charge of managing all those assets, and David and Ellen and Donna were pursuing this New model called private equity real estate, and I got the real estate training on the direct asset set, but also got exposure on the ground floor in the private equity real estate business.

AI assessment note: “There was a job posting to work at the Yale Endowment”

Q If you move on to liquidity and illiquidity, how do you think about your budgets for how much you can lock up?

A So when we decided on the 40% number on the 10 plus year liquid type structures, it came from thinking about our ability to rebalance. So we didn't want more than 40 would not allow us to rebalance when we wanted to. And then we thought about unfunded liabilities. So saying, look, at the end of the day, unfunded liabilities and the commitments you make are contractual and callable, so they're leverage, and we don't want too much leverage in the portfolio. And so About 20% was what we were comfortable with in terms of leverage, which if you think about the ratio of unfunded to NAV results in about a 40% illiquid investment. And then on a yearly basis, we try to commit no more than six percent of the AUM to illiquids, so that we don't bust through that 20% unfunded.

AI assessment note: “when we decided on the 40% number on the 10 plus year liquid type structures”

Q From that initial exposure, how did you get from there to the path of a career?

A When I was in high school, I knew that I wanted to go to college, but I didn't know how. First in my family to go to college. And so my strategy was to go into the military. So I went to test Took the entrance exam, the ASFAB, and I'll never forget, the officer came back and he said, you scored really high. You should think about going to college. And that sounds good, but how does that work? And he said, well, they have these ROTC ships, and you should really think about it. I said, okay. So interesting thing, and I don't know why, is I wanted to be a Marine for whatever reason. And in Illinois, there are only two schools that have Marine ROTC ships. Northwestern and University of Chicago. Turns out I was lucky that they happened to be pretty good schools, and I applied to one school. I applied to Northwestern because they had just placed in the top 10 NCAAs in wrestling, and they were D-one, and that was the reason. And the way that the ROTC works is you have to be accepted by the school first, and I got accepted, and I got a full ride, full scholarship. And so it was really by accident that I ended up At Northwestern. And then, this is comical in hindsight, but I saw the movie Wall Street when I was in college with Michael Douglas. I was like, I want to go to Wall Street. And I was recollecting Lewis and earliest days. And I found this program called SEO, Sponsors for Educat…

AI assessment note: “I found this program called SEO... and was placed at DLJ”

Q What is the typical portfolio structure look like?

A We're not didactic around particular hard risk rules or parameters. We think about sizing across four dimensions. So the first is discount to intrinsic. Second is what are the range of outcomes here? Does it have right tail, left tail skew? Third is size and liquidity. And then fourth is correlation. And a target for us would be two and a half percent of capital in the global strategy. So when we're at ideal, we'd have a 40 stock portfolio. You're never at ideal because you're always moving in and out of positions. And so if you step back, we've got 35 analysts across the globe. Each of them is running, call it a 10 stock paper portfolio. So that's 350 names. And In the strategy, we're seeking to narrow that down to call it 60, 70 high conviction positions in the global strategy.

AI assessment note: “a target for us would be two and a half percent of capital”

Q How does the decision making work on the portfolio?

A So, in our global strategy, there are three portfolio managers. I'm one of the three, and I have overall accountability for the strategy and risk. Each of us manages a sleeve, roughly of equal size. And it's an independent decision for each of those of the most compelling ideas that they're seeing around the globe. Now we're in the same investment committee meetings. Every week we're meeting with each of our five teams and interrogating what they're seeing, sharing what we're seeing, driving research direction. We're in the same risk meetings, but We all show up with somewhat different perspectives of the world. And on top of that, I have overall accountability for the strategy. So if there's something that I view as off from a risk perspective or a sizing correlation, then I have responsibility to change that.

AI assessment note: “Each of us manages a sleeve, roughly of equal size. And it's an independent decision”

Q What are some of the ways over time that your portfolios maybe looked, as you say, different because you went about things differently?

A I wasn't at Orbis at the time. You go all the way back to inception, 1990. Japan was 45% of the world index, and we had zero. That was right from the start. You go back to 2008. We had quite a big position in the managed care companies. And so the Aetna's and UnitedHealthcare and Humanas of the world. And the reason was that Obama was going to get elected, and the fear was we were going to go to universal healthcare. When you get the calls from clients like, don't you follow the news? You see that they're going to go to universal healthcare. And we had, I think, more than 10% of the global strategy In that sector at the time on a view fundamentally that they played a really critical role and that wasn't going to change dramatically. And in fact, there was a chance that that could flip and it would become a better business because of some of the legislation that was in play. You can go back years when we were buying some of the memory companies, when the memory industry was consolidating and literally companies were going bankrupt. And our view was that That consolidation actually was going to lead to a healthier DRAM business, but it was tough in the moment, which I think ties back to the core of you have to have the ability to take those independent views. You have to have an aligned client base that allows you to do it because your time horizon is only going to be as long as …

AI assessment note: “Japan was 45% of the world index, and we had zero.”

Q Coming out of HBS, what did you think about doing?

A So when I went to HBS, I knew that I wanted to invest, but that's a wide purview. Didn't know how. And I was thinking about the public side as well as the private side. And what I did for the summer, I actually split my summer. Half of it was at Orbis doing public market investing with a global purview. And then the other half was at a distressed turnaround firm. And so it was a really good exposure to see both sides and what are you most acclimated to. And at the end of the summer, my view was, I like the public side, just the behavioral aspects of it. And so that was my intention. But three of the folks that I worked with at that private equity firm had left to start their own new private equity firm and invited me to join them in founding that. And I felt like that's a once in a lifetime opportunity. I didn't dislike it. So let me go for that. We launched, we were backed by Cerberus originally doing distress turnaround investing, invested two funds. We were raising our third fund. I'm now five years in. And I was just having a Honest conversation with myself. I like this, but I don't love it. And spending a lot of time on the weekends and getting upset when some of the CEOs of my companies call because I'm thinking about some public idea that I like, I got to give this a go. And so I stepped back as a partner and started over. On the public side, and that's when I joined Orb…

AI assessment note: “I knew that I wanted to invest... thinking about the public side as well as the private side”

Q What investment mistake have you made that you'd never make again?

A Man, there's many. Probably the one that stings the most goes back to the GFC. I'll never forget It was right in the middle of the GFC. I was in the office on a Sunday night and I got a call from our broker at Goldman. And she said, we've got the whole trading desk set up. We're trading contracts contingent on whether or not Lehman files by midnight tonight or not. And we're here to serve. And I remember hanging up the phone thinking, wow. And the next morning we had an investment committee meeting to make a decision as to whether or not we were going to add or sell our position in AIG. And we decided to add to it. The mistake, which I'll never forget, is the difference between liquidity and solvency. We spent so much time, Ted, on the fundamental bottoms up of the credit. They had insured these AAA portfolios, and we were convinced they were money good. Problem is they have to post collateral based on marks, and that got them in a lot of trouble, and we know the rest of that story. But just the difference between liquidity and solvency, and I think just We pride ourselves on being contrarian, but it's not just about being contrarian, it's also being right. You don't get paid just to be different.

AI assessment note: “The mistake, which I'll never forget, is the difference between liquidity and solvency.”

Q When you have such a significant internal management effort, you always scratch your head about compensation issues. In the Maple Eight and the large Canadian plans have done a wonderful job of being able to attract and retain talent. Why is it that that seems to work in Canada when it doesn't in a lot of places elsewhere around the world?

A Getting the compensation model right and that alignment of interest right is something that the Maple Eight figured out early on. Ontario Teachers, Canada Pension Plan, and then the others really thought hard about that and realized that the pool of talent we wanted to attract was from asset managers, and so in order to attract and retain that, the idea was we needed to pay at least in the same zone. I would say the pension space doesn't quite pay at the same level as some of those areas, but it's not too far off. We also attract and retain those like me who care about why they come to work every day. So we are able to take advantage of that work motivation and satisfaction piece of really being aligned with pensioners. So that's a bit of an ability to shave a little bit off relative to some other areas in the capital markets. But it's worked in Canada really well because the pools of capital are large and we're able to make the investment in the governance models to have the sophistication of board members that's required in order to understand this alignment. We've also got the strength of governance whereby we're separate from government. It's not political here in Canada. The expertise on the boards is part of what gives comfort into the process, but it's the precedent that really was set early on, and the fact that it has led to strong performance and that alignment of int…

AI assessment note: “we're able to make the investment in the governance models to have the sophistication”

Q from portfolio accounting to reporting to reconciliation, trading, compliance, and more. In the AI era, asset and wealth management firms moving to Ridgeline gain a decided advantage. That's why customers call it miraculous, game-changing, and an awakening. If that's not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. How have you decided to implement across internal and external management?

A At Imco, our implementation of internal versus external is different depending on the asset classes, and it's different because to some degree of the history of the development of those asset classes. We have a combination of internal and external and co-investments and direct investments really across every asset class. Of the private asset classes, infrastructure is the most global and has a very high proportion of direct investments. As a result, we have a very sophisticated team, and that's an evolution. You go from fund investments to co-investments to direct investing in general, and that asset class has evolved quite rapidly over the last 15 years to really having a lot of chunky direct investments across the globe. In real estate, we have a lot of direct investments there as well that were largely focused in Canada, and then over the years, Diversified into more of the developed markets, primarily the US and Europe. And that's a combination of direct and some funds. So that's a complex portfolio with a lot of smaller investments in it. And in private equity, we're mostly funds and some co-investment. That's an evolving area for us. In private debt and loan, we have a strategy to grow, and that's really the impetus behind our New York office. Is expanding our investments in private debt and loan and increasing the proportion of direct investment there. Obviously with dir…

AI assessment note: “our implementation of internal versus external is different depending on the asset classes”

Q How did you go from the initial seven and change million learning these different asset classes to beginning to scale into what became an OCIO business?

A So we had to get twenty-five million dollars in year one, or something called U.S. Blue Sky Laws would have made our legal bills just astronomical. We hit twenty-five million at the end of the year just by adding the two asset classes, absolute return, and municipal bonds for the U.S. taxpayers. Then in year two, we'd hired people like Will Fox, who's still running North America with us today, and we said, we're not paying ourselves anything. If we don't get to a hundred million dollars, recognizing that breakeven was probably three hundred million dollars, If we didn't have the momentum, we weren't going to carry on, but in that second year, 2003, we actually got institutional clients. They were the institutions that knew about the Yale model, the endowment model, but they were a little bit rebels. They weren't the traditional people who were worried about what somebody else was going to think, and so they were going to hire the new guys on the block. Gonville and Keys College Cambridge hired us in that year. We hit the one hundred million dollar target with a mix of high net worth individuals, private equity GPs mainly, and smaller institutions, and then the next year, Will Fox and I said the same thing. We hired John Collis, who's just retired after 20 years, who ran Europe, and we started adding clients in the institutional market, mostly in Europe at that point. We hit fou…

AI assessment note: “So we had to get twenty-five million dollars in year one”

Q How do you balance the notion of static risk with the concept that there may be something like structured credit that you think is an opportunity?

A So we break our tactical asset allocation model into three layers. We call Layer one is just absolute risk. So we convert all those different betas and factors into one measure. We call it ENAB, equivalent net equity beta. It's equity-like risk. And we set the target, say, at 75 for a given endowment. And then when markets move it to 73, we rebalance up. Markets move to 77, we move it down. So we never time markets on level one. Level two, we have 13 asset classes or seven betas, whichever way you want to look at it. And we've got targets for each one of those, markets move those, or we have valuation views on level two, say, one of the 13 asset classes of emerging market equities, if we think that's gotten cheap, we'll do something there. That's also very difficult to do, so we don't do a lot of it. The third level is sub-asset class, tactical modes. So those are where our managers are giving us some insights, railways. That was one of our recent ones. We had, as an unsuccessful one, community banks going into 2023. Okay. Anyway, that's our level three tactical moves, and those tend to generate at least enough alpha to pay for our fees, if not a little more.

AI assessment note: “we break our tactical asset allocation model into three layers.”

Q Which two people have had the biggest impact on your professional life?

A Number one, it was my second family. I was very close to Dr. Tom Eliason in Fresno, California, where I grew up, and his wife, who was my den mother in Cub Scouts, and I spent so much time with them because their son was my best friend. Dr. Eliason was a leading cardiologist, and he was my role model. The impact he had on me was to be calm and thoughtful. My family Was full of drama. And so it must be the Portuguese DNA or whatever it is, but he gave me a sense of perspective and calm that compared to my siblings is distinctive. I think most of my work colleagues would say, really? I haven't noticed, but they have to understand what it could have been. And then secondly is a gentleman named Archie Norman. He's a serial CEO and chairman. He was the CEO of ASDA, Turnaround ASDA, Energis, ITV, and he's currently the chairman of Marks & Spencer, and I worked with him when he was at ASDA when I was a strategy consultant, and he has two unique characteristics as a leader, and one is that he just doesn't like doing anything ordinary, anything normal. He just strives to do things that surprise people out of the ordinary, and he taught me to always be Brutally honest and face into the unvarnished truth. I'm the chairman of the board of Partners Capital. You don't go into the board meeting to convince them that our investment performance is great. You find the area that's not great. You …

AI assessment note: “Number one... Dr. Tom Eliason... And then secondly is a gentleman named Archie Norman.”

Q There's probably nothing that's changed more in these 20 years than hedge funds and your next asset class you tackled way back when. How are you investing in hedge funds today?

A So first of all, we break them into two totally different groups. Hedged equities, anything with a beach of more than .2 to the equity markets. We call it an equity manager. And frankly, the learning is the same as in the long only equity space. But we do have more alpha from the hedge equity managers. They just tend to be deeper, more fundamental, and more specialists in a lot of cases. So our biotech managers are mostly equity long short. But in the absolute return space, first of all, more managers is better than few managers. There's a minimum where you debate whether it's 12 or 20, and you're all about Diversifying your sources of alpha. So what we learned is you can create, say, with 20 managers with the right mix of strategies and a very consistent source of alpha, call it three to four percent, not big numbers, with only three percent or even two percent alpha volatility, so information ratios of 1.2, and then what do you do with that information ratio? You leverage it. Ok, so that's how we invest in absolute return hedge funds. We create a very stable, solid stream of alpha, and then we leverage it.

AI assessment note: “We create a very stable, solid stream of alpha, and then we leverage it.”

Q So how did you take that initial high level idea and dive in and start to learn how you were going to go about implementing the strategy?

A One of the things I learned at Evolution Global Partners was to take things slow because we took it really fast there. The backers were Bonderman and Coulter of TPG, and Byers and Schlein of Kleiner Perkins, and then there was a Bain investment with John Donahoe, and they were just pushing us so hard. We hired 35 expensive people overnight, built these two offices that never spoke together. It was not a good way to build a business, so I took it really slow. We started with three employees, with one in Boston and two in London. We just chose the very next Asset class, and it was right on the back of the tech bubble. Nobody wanted any more equity exposure. So what did the doctor order? Absolute return hedge funds. We just started studying the hedge fund space. It was very much the market neutral end, so equity market neutral strategies, merger arb, fixed income arb. And we just found, and we got access to, just through relationships, things like Tudor and Caxton. And so we were off to the races. We just went to the next asset class, and the next asset class, and the next asset class, pulled out a blank sheet of paper, reminded ourselves what the Swenson book said, but really pulled out a blank sheet of paper and said, how do we invest in municipal bonds? What's the right way? Should it be high yield? You know, what duration? You know, just every single aspect of every asset clas…

AI assessment note: “pulled out a blank sheet of paper and said, how do we invest”

Q What else have you done in the more modern version of what you've applied to the original endowment model?

A I mentioned two, so the risk management and then the tactical asset allocation. The third one is just focus on being a value added LP is very intense. We have actually a best demonstrated practices book. It's about 70 pages on post acquisition operating value added that we share with private equity managers. So that's a very meaningful part of it. On top of that, I'd say this focus on beta as a risk measure, not volatility, is very important. A lot of people out there in our business think about the average endowment portfolio should have 10% standard deviation around its annual returns, 10% volatility budget, which makes no sense, because what happens when markets go down, volatility goes up, all of a sudden your portfolio is over risked, what do you do? To de-risk it, you sell right after the market got cheap. So you're selling into lower prices. And the opposite, when markets go up, vol goes down, and you're buying at expensive prices. So that's another aspect of it. There's some main changes.

AI assessment note: “The third one is just focus on being a value added LP is very intense.”

Q think about that area, the 12 to 20 managers, as you define a manager, can mean a lot of different things, because so much of the assets have gone into these platform hedge funds that are effectively doing that aggregation diversification for you. So how have you balanced the ability to put capital in some of those strategies with, say, a Millennium or a Citadel, an individual single strategy manager?

A We probably should have allocated to the Citadels and Millenniums. Ok, we should have. We, Just always look at the fees. We have an acronym for everything, as you've highlighted. EROC is our excess returns on costs. The EROC is terrible. And another way to think about it is, of the total gross alpha, how much do they keep? It's about 80%. We get 20% of the alpha. The alpha's huge. Absolutely huge. But we could never get comfortable with only getting 20%. So what do we do? We allocate it to their spinoffs. And it's mostly Citadel spinoffs. They've done very well, and they're closer to two and 20, and we get roughly 50% of the gross alpha, and we diversify. They'll be specialists in consumer or specialists in tech, and we have to create a diversified portfolio of those.

AI assessment note: “So what do we do? We allocate it to their spinoffs.”

Q How about some aspects of what became known as the L model?

A To me, the Yale motto was really about maintaining this equity orientation in the portfolio, but then also diversifying into asset classes, which at the time were alternative and were inefficient enough that if you really selected the best managers, they could outperform. And then the third piece of it was really focusing on talent and trying to find the best managers around the globe. This model really still holds true today, although I remember seeing some analysis that suggested that half of the value that Yale had added over time relative to peer endowments was from asset allocation and half was manager selection. And my guess is if you fast forward, there's gonna be more of that from manager selection over time because so many people have just copied this asset allocation model.

AI assessment note: “maintaining this equity orientation in the portfolio, but then also diversifying into asset classes”

Q So what was your path at Wellington from large stock picking to getting involved in privates?

A For the majority of my career at Wellington, I was a diversified portfolio manager on the public side over the course of that first decade. And during that, I was starting to notice that companies were starting to stay private longer. And I think a lot of this came out of Sarbanes-Oxley and some of the issues from the last recession. Companies were starting to look for alternatives for capital because it was a little more onerous to go public. The regulatory framework was a little higher. The cost of going public was a little higher. I started probably as early as 2006 in making some investments out of my public funds into some private companies because many of those funds had the latitude to have illiquid securities. After the great financial crisis, companies like Uber and Airbnb and Peloton and many, many others were seeking capital from a variety of opportunity sets, and that included the mutual fund companies like ourselves and the Fidelities and the T-Rows. But I started to realize That, that model of taking illiquid securities and putting them in daily liquidity vehicles maybe was not the best model for the longer term because it's just uncertain. Obviously right now we're seeing this where the IPO market has shut down and now you're ending up holding these companies for three, four, five years rather than 18 to 36 months. And so I went back to our alternatives group and…

AI assessment note: “I went back to our alternatives group and I said, hey, would we consider doing”

Q How did you eventually find your way to Wellington?

A I came out of business school in 1991 in the middle of a recession. So there were not a lot of jobs out there. My choices were between this job at Cigna as a tech analyst, and then I was to be a institutional salesperson at Smith Barney. But based on what I wanted to do, that was going to be the best job. And then I was fortunate that eight months after I got there, the old State Street Research, we're looking for a tech analyst and somebody to be an associated portfolio manager. And so within eight months, I was in Boston. And then I actually left Boston and I went to Montgomery Asset Management on the West Coast. Turned out my family didn't like being on the West Coast. We ended up going back to State Street Research where I then ran a small cap fund. And then about a year later, myself and another portfolio manager spun out. We started a hedge fund when hedge funds were still reasonably new. And I did that for a couple of years. Wellington was looking for some younger portfolio managers. I started talking to everybody there and I just loved The vibe in terms of how collaborative everybody was and how collegial everybody was, and so after the typical 25 Wellington interviews, I finally got an offer to go there, and I was gonna run an institutional account and also part of one of the hedge funds. I was running maybe one hundred twenty million dollars. I really felt strongly th…

AI assessment note: “Wellington was looking for some younger portfolio managers... in 1999... I joined Wellington Management.”

Q Brendan, curious what you've seen as you've looked across the industry. What's your sense of whether private equity firms are improving the businesses that they own?

A I really appreciate Sachin's model here, and I think that is sometimes what private equity is, and what I hope through proper regulation, it can be even more. My concern is it goes back to the initial problems that we were talking about. The duration of focus, reliance on leverage and fees, and insulation from liability means that oftentimes private equity managers' incentives are different from those of the portfolio companies and leads to bad results. We can go through some of the anecdotes, That also is borne out at least in some of the sort of quantitative studies, suggesting, for instance, that private equity-owned portfolio companies are 10 times as likely to go bankrupt as non-private equity-owned peers. In the best circumstances where firms are thinking for the long-term, taking responsibility, bringing that focus that they need to bring, it can lead to positive outcomes. The example that I keep coming back to is when a firm bought a timber mill in Arkansas. Invested for a decade or longer, used very little, if any, debt, continued to maintain investment even after it sold its majority stake and kept two board seats. Ultimately, they helped revive this plant and helped to revive a whole town. I think where things are going wrong is when people are applying their expertise, not necessarily to building better companies, but to using and growing the legal loopholes that we…

AI assessment note: “private equity managers' incentives are different from those of the portfolio companies and leads to bad results”

Q Now, Brendan, before we start putting the layers on the layer cake, any thoughts on that?

A No, I think that's exactly right. And I think it's important to talk not just areas where we may have differences, but areas where we agree. I think all of us really believe in a capitalist market. It's not an issue that I really think about that much as a lawyer, but in the course of this project, I think I became much more enamored of a working capitalist system and also a working financial system. As long as you want To build a new factory or hire new people, you need investment, you need people who are willing to take the risk and try to make those things happen. I agree that the problem of time horizons is not unique to private equity. I do think that there are certain things that we did in the law that empowered this, whether it's changes to ERISA in 1979 that revised the prudent man standard, or to go back to our earlier point about Insulation from liability and piercing the corporate veil. When you have a situation where it's typically very hard to hold the investor responsible for the actions of the company that invests in, which often makes sense, but may not in a situation where somebody has a majority stake in the company, that insulation encourages a slightly shorter term thinking, because if things go well, the investor is going to be rewarded. If things don't go well, they can typically walk away without anything beyond the money that they stake. So I think if we…

AI assessment note: “No, I think that's exactly right. And I think it's important to talk”

Q Let's just say on the corporate side, what does new underwriting look like today compared to two years ago?

A The new business is very easy from a corporate direct line. I mean, it's five to five and a half times debt to EBITDA. Quality of EBITDA is actually good instead of not so good, which it was for years. Much better documents, very lender friendly in that regard, and it's probably a SOFR plus 600 or six 50 over. With fees if you're leading the deal. So I mean, it's an, it's an 11 or 12% return with fees. So it's easy for us. It's pretty exciting vintage. You see a fair amount of people out there saying, oh, it's the golden age of private credit. It's the greatest time. It is. It's great. It's easy. But I put an asterisk on that because as I say a lot to a lot of people, you can't finance the US economy with senior debt at 12%. You'll create a depression. So it's a nice point in time. Do I think it's going to last for the next four years?

AI assessment note: “five to five and a half times debt to EBITDA. Quality of EBITDA is actually good”

Q So without going step by step, what is Aries today?

A So Aries today is about 2600 people. We have 30 offices. The rough breakdown today is about 700 in New York, 700 in L.A. and about 400 in London. And then the balance are either folks out originating new deals or looking for clients. 360 something billion of AUM. But we're really still known as a credit first shop, right? We're about two hundred and fifty billion of credit. And that kind of leads everything that we do. And it's led us into a bunch of other businesses. You know, private equity was there when we got there, but a lot of what we're doing in our private equity business is credit oriented. Core buyout reserves, probably a third to a half of what they do for restructuring and reorganization type situations where they'll go in and either buy debt or do some sort of hybrid security that they think will put them in a position to own a company. The other half of the fund is sort of just regular way buyouts. And we actually run our entire distressed and opportunistic business alongside the private equity group, and they have 10 plus billion in capital. So a lot of the distressed investing we're doing, we're doing with long-term ownership-oriented private equity mindset, not trading, you know, loans and bonds. We do that too, but it's a less significant part of the business.

AI assessment note: “Aries today is about 2600 people. We have 30 offices.”

Q If you want to think about it that way, what are the types of situations where you'll get involved in the equity?

A So the simplest one is private equity transaction where we co-invest with private equity, right? So it's three hundred million dollar MES deal on a thirty million dollar co-invest alongside sponsor XYZ. That's the most common place. But in a lot of our non-sponsored deals, what we find is we're the only real institutional capital because your counterparties are family businesses, entrepreneurs, folks who have scraped it together and generated a lot of sweat equity, and then they're either trying to build a plant, They're trying to buy a competitor, and while they have money on paper, they probably don't actually have any real money. They don't want to sell their company because they believe there's upside, so they look to somebody like us that says, we can provide some sort of flexible debt plus some sort of equity participation to help you accomplish what you're trying to accomplish. Those are probably the top two.

AI assessment note: “So the simplest one is private equity transaction where we co-invest with private equity”

Q Where did that take you as you got older and went through college?

A So I was really fortunate. My uncle Paul, my mother's brother, lived in New York, and he was a tax attorney and an old, old friend of Max Heine, who was the founder, head of Mutual Shares. My uncle introduced me to Max when I was junior In college, and I got a job for the summer, and then ultimately an offer to come back full time when I graduated, which was in January of 79. So that's how I got to mutual shares in my history there. I continued to hold stocks, trade stocks, and read, but the key was getting that job. It was a value investing mutual fund. Mike Price had started by then, and was Max's protege, and running a lot of the activities day to day. It was like being let in on a secret that you could read about it all you want, but when you actually start doing analysis and you see individual companies trade at a discount from what they're pretty obviously worse, it's easy to get excited. There's some inefficiency here, and you have a chance to really add value and do well.

AI assessment note: “My uncle introduced me to Max when I was junior In college”

Q What investment mistake have you made that you'll never make again?

A This isn't a profound one, but it's my first one, and I don't know that anybody knows about it. I've never talked about it, but in the earliest days of Baupost, we had this great idea that was a closed-end publicly traded mutual fund that had omitted some dividends, and it was in arrears, and as you know, they have to clean those up before they can pay common dividends, and this company had announced that they were going to be cleaning them up and paying a giant dividend, and the stock went up a lot to what I thought was full value. So I sold it. And then I realized I was two weeks away from going long term. So giant mistake just from sloppiness. Now I have an operations team that would never let that happen. Back then I didn't. I knew it, but I didn't stop and check. So it just made me realize again how you have to check every detail.

AI assessment note: “And then I realized I was two weeks away from going long term.”

Q Why don't you walk me through your experience in those decade and a half at NEA?

A It was an amazing time. I joined in the DC office. It was a smaller office back then, and it was very much an apprenticeship model. This is the old days of venture capital. Peter Barris hired me, ran the firm, ended up running the firm for 20 years, and so really sitting at the feet of giants like Peter, Scott Sandel, and some other tremendous investors. I joined as an associate, just worked my way up, principal partner, general partner. Started as a generalist, but really found enterprise software and also started our fintech efforts about 11, 12 years ago, well before it was called fintech. It was really company building and also the ethos of the firm from Dick Kramlick was one of the founders, very focused on the entrepreneur and really being a good partner and a long-term capital partner. And those are just lessons that I still hold pretty sacred.

AI assessment note: “I joined as an associate, just worked my way up, principal partner, general partner.”

Q What was some of the pushback that you'd hear either from new potential LPs that decided not to invest or someone that had a stake in the game all along the way?

A Two pushbacks from new LPs. One, this was such a foreign concept. They'd never seen such a big venture secondary that wasn't a closeout fund or something else. That was one. The second is they were trading in discounts that were far greater than the discount for this group of companies, and that was just because, well, when you're dealing with lesser companies, the discounts are higher, and some folks just couldn't grok, well, wait, This is a higher quality group of companies, so hence the discount needs to be much more mild. And then there's some existing LPs that thought, wait, this discount is too high. So it's one of those things where the best negotiations are on both sides are not a hundred percent satisfied. And I think one of the articles that came out, they interviewed a bunch of LPs, and that was some of the sentiment which led me to believe it worked out because there was not one group that was ecstatic and the other despondent.

AI assessment note: “Two pushbacks from new LPs. One, this was such a foreign concept.”