The Exchanges

Q What was different for you in what you saw from the years spent managing fixing portfolios with those two bookends of Columbia at the beginning and then Virginia afterwards?

A I came at it from a quantitative background. My interest in this all was fixed income was easy because you had closed form equations that could solve the pricing. When I got to UVA, I understood how so much alpha was generated by being able to have a more creative thought process about asset pricing. This was when the Tiger Cubs were at the height of their powers. Being able to look at the Lone Pine portfolio and see how Steve Mandel and his team could see into the future about What these high quality businesses would be worth was eye-opening. It was a completely different model for making money than I had understood in the past, and it was so much more potent. It lit a fire in me as far as thinking more creatively about investing, which fit my personal background really well.

AI assessment note: “It was a completely different model for making money than I had understood”

Q 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. I'd love you to dive into the concept of limited time, limited resources, have to focus on the things that are most interesting. How do you go about deciding where to spend your time and energy?

A Primarily, that has come from our relationships with our managers. Some of that has also come from our own research. An example of the latter would be When we started, if you looked back on the last 10 years of our peers and where overseas they had generated all the returns, it really was in China. From the beginning of the admission of China to the WTO to 20 15, that was where the golden years of both the China economy and investing in China. That's right when we started, and we look back, you could see some of the political winds changing in China. You could see some of the political winds changing in the U.S. in regards to its relationship to China. It was also clear to see that that opportunity wasn't the same as it was in 2005. We then started to think about where that opportunity might be. We spent a lot of time in India. Since 2018, India has been Our largest overseas allocation of any region or country. That was primarily driven by an internal iteration of our own research. We've been fortunate to work with some managers who, this is a rare skill set, can see where economic value creation over the next 10 years will be. There was an individual named David Mock, who had done an amazing job at Hill House riding that China wave. We backed him day one when he launched his own fund, Composite Capital. Within two years, he had stopped investing in China and pivoted his portfo…

AI assessment note: “Primarily, that has come from our relationships with our managers. Some of that has also come”

Q If I told you today, hey Bruce, it's time to sell the entire portfolio again, take out liquidity restraints and things like that, but you could rebuild it tomorrow. How different do you think it would be from today's portfolio?

A One of the big changes would be in our private portfolio because we have such a limited private allocation. We try to focus on where the most asymmetric return opportunities are. I do think our venture portfolio has many great managers in it. I don't think we've leaned hard enough into the asymmetry. We should have more managers who are at that smaller level of the fund sizes, two hundred million and below, where their outcomes could be a 50 X or an 80 X. There's good reasons to invest with established managers. You end up paying a lot in fees for returns that might be available in public markets. Might be a better fit for our portfolio to just have a little bit more of that emerging manager risk or smaller fund risk Because the payoff when it works can be so much greater. That's probably the biggest change we would make.

AI assessment note: “One of the big changes would be in our private portfolio”

Q And what was your experience like on the street?

A Another buddy from Duke's dad was looking for an analyst at Smith Barney. My friend recommended me. I had a job in consulting at Anderson Consulting, which became Accenture, like a computer science programming job. Interviewed there, which was fortunate. Did that for a year as an analyst and became a sales trader at Smith Barney. With my math background, tried to get into equity derivatives. There was no seats. I got into interest rate derivatives at Smith Barney, which great first four years, then left there in 1995 to go with a senior trader who's an interest rate derivative trader to Citibank to become a credit derivative trader, which I actually didn't even know what that meant, but I trusted the guy and left with him.

AI assessment note: “Did that for a year as an analyst and became a sales trader at Smith Barney.”

Q Why don't you take me back to what led you into finance in the first place?

A I was a computer science major at Duke my junior year. A good friend of mine gave me a book. He said, I think you'll like this, and it was Liar's Poker. I read it in one night. Literally, it was a party that night. I stayed in my room, read the book in one sitting. I know Michael Lewis thought it was a way to dissuade people, but I took it the other way. I liked math. I liked puzzles. I liked risk, in a sense. Learned how to play poker with my grandparents when I was young. Hadn't really been much exposed to the markets, but after reading that book, I was like, this is something that fits me.

AI assessment note: “after reading that book, I was like, this is something that fits me.”

Q What happened from there? Clearly, GMO has become a lot more than the two hundred and fifty million dollars compounded.

A We fairly quickly got into discomfort with each other having slightly different approach to investing. By accident, we hit on a clever formula, which was to have three divisions. So Van Otelo ran the international, which was brand new. No one did international. Dick Mayo inherited our joint portfolio and managed it for another 15 years. And I started a quantitative division, which started by developing an expert system By telling the computer what we thought were sensible, selective characteristics for a good stock, the computer would come back initially with some terrible ideas. How did that get in? How would we exclude it? So we redefined the formula until slowly but surely over a few months, we got it to kick out a portfolio, which was 90% the same as ours. Interestingly, the 10% that was different did just as well as our 10%. We called it the finished product, and we threw it into battle. Very slowly, we got a handful of big clients. After a while, as we got more confident, we used exactly the same model to test on different stocks. So we had a growth fund, as well as a value fund, and then we had a small cap growth and a small cap value, REIT fund, eventually an emerging market fund. All using quantitative approaches, but also willing to use the brain and look for exceptions on what was going wrong and change the model. Somewhere between a modern quant model and an expert …

AI assessment note: “By accident, we hit on a clever formula, which was to have three divisions.”

Q What aspect of that setup do you think influenced how you thought?

A I think frugality was the big thing in the war. I was up in the north in a coal mining town. Yorkshire, our county, is famous for its frugality anyway. That was two strikes. Then the man in the family, my grandfather, my father was overseas and then died fairly soon in World War II, had been brought up a Quaker. So that was strike three. By the time you had a Quaker In a Yorkshire coal mining town in World War II, you pretty well know that you're going to have frugality deep into your backbone. When I go into a restaurant, I still look at the menu and take price into account. I know there's quite a lot of us who do that. For some of us, it's not a question of whether you've got money in the piggyback. It's a question of what is right, and wasting money by paying more for some silly meal gets pretty high up on the agenda.

AI assessment note: “I think frugality was the big thing in the war.”

Q When you think about taking advantage of the other side of something that statistically is a valuation bubble, you run into the challenges of not knowing how long it's going to go and how far it'll go. How have you thought about those realities in investing capital on behalf of your LPs?

A Seeing the bubble is easy. Getting the timing right is apparently impossible. We have worked on many iterations of that. Keynes said that clients' patience is not as long as the market's ability to be irrational. And that's absolutely true. And in the great bubbles, they don't just reach two sigma, which is bubble territory. They go on to two and a half or three segment, but they go on for years. They're the only ones that really matter. It's the last year or two. That really counts. The clients have become impatient, and they can't stand it. They start to fire you. As we got older and wiser, we were perhaps more careful in how we phrased it. We made it very clear that US stocks are not the thing to own. For a long time now, you should be owning non-US stocks, developed value stocks, and emerging country value stocks. When I'm arguing with people, I don't get the time to say, It's not what you don't own, as in the US stock market, it's what you do own that counts. If you own stuff that does better, who cares that you don't own the US? The US is simply too high priced from top to toe. If you had to own US, and a lot of people do, then you have to own quality stocks, because they have survivability. What people found in 1929 Is the value stocks had a dangerous tendency to go bust in the Great Depression, and the Coca-Colas that were horrendously expensive did not go bust. In the …

AI assessment note: “As we got older and wiser, we were perhaps more careful in how we phrased it.”

Q What's the breadth of the portfolio of what you're doing now?

A We're working on sports stadiums with the airlines and tech with financial services. That's the scope of our creative studio. The creative studio is what I call the group that goes in and figures out how to bring these ideas to life and other industries. And we have our gatherings. We do the welcome conference, which is our big event in New York city, which is more of a Ted talk style thing, but centered around hospitality. It's become the biggest hospitality symposium in the world. It's at Lincoln Center. We have the Unreasonable Hospitality Summit, which is a two-day workshop, training, community gathering, and party, effectively, in Nashville. That's been fascinating to see the different industries represented in that small room. Then we have training workshops. I have a couple of people on my team that travel the country doing training workshops for car companies, travel associations. Then there's me doing some speaking, hanging out with people like you, writing some new books and everything in between.

AI assessment note: “We're working on sports stadiums with the airlines and tech with financial services.”

Q Ed was on the show last year, so just for perspective, before we dive into what's going on in venture capital, why don't you share a little bit about Gresham and how venture fits into what you're doing?

A So Gresham, we're a thirteen billion dollar multifamily office. What that means in practice is we manage money for about a 130 different folks. Think of these as people who generally made the money themselves. A lot of them are GPs. The commonality across that subset is they all are worried about taxes. It's a very important component of our investment mandate. There's a lot of things we can do on estate planning, carry planning, things that are very valuable. They're also very astute investors. They're looking for a high class portfolio. What that means on my side, Is we're trying to build essentially an endowment portfolio that's tax-systemized. The tax side, on the public side, we have lots of strategies. And private's generally a tax-efficient part of the portfolio. If I think about venture specifically, we want venture to be the highest performing part of our portfolio. We lean into the risk. Like most LPs, we certainly have our multi-stage funds. We have two folks we think are fantastic. They give us exposure. They give us alpha. Most importantly, they give us the confidence to think risk forward. What that means for us is the rest of the venture book looks early. It looks small. Most recent deal we did was a fifteen million dollar solo GP. We want to essentially be the first check into a company's life cycle. The real goal there is the last 20 years, it's been the best p…

AI assessment note: “we're a thirteen billion dollar multifamily office... If I think about venture specifically”

Q What brought your interest in finance when you were in school?

A I wouldn't have heard of Goldman Sachs till I was 21, but Hunter High School had a program where you only had to take two classes as a senior. So I worked at a stock brokerage firm in 1987. I was there for the crash. I learned what money management was. Reading the tape, going through the quotrons, going through the annual reports. I wouldn't have said I was particularly interested in finance. I was a numbers guy growing up. I majored in political science in college, but when I got to be a senior, I joined the campus recruiting. Now people are like, hey, my dream is to be an investment banker, but that wasn't the world back then. What you saw was that the highest end kids were going into finance, and there was two choices. You could go down the banking route, or you can go down the trading route. I remember I went to a recruiting dinner at two-thirty in the morning. They went back to work, and I said, wow. Then the O'Connor guy showed up. O'Connor was one of the original trading shops The predecessors to the prop shops. Susquehanna and O'Connor were the two back then. The interview question was, what's 49 times 28? And I say 1372. They say, Mets play the Yankees in the World Series. What are the chances the Mets win in four? I say one out of 16, they say you're hired. So that's how I got into trading.

AI assessment note: “Hunter High School had a program... So I worked at a stock brokerage firm in 1987.”

Q Why don't you take me all the way back to your upbringing?

A I grew up in Queens. My parents were immigrants. My dad was an engineer and a builder. My mom was an accountant. Very excited to be in America. He was in the first wave of immigrants from Asia after the Six to Five Immigration Act. He gave us American names. He said, we're going to be completely integrated. I didn't meet another Indian family till I was 16. He said, in America, you have to learn golf, tennis, and skiing. In my neighborhood, I was the only kid that did that. Just me and my brother. I went to high school in Manhattan. I commuted an hour and 20 minutes each day from Queens. I went to Cornell. I majored in political science, government, and then I went on to Wall Street.

AI assessment note: “I grew up in Queens. My parents were immigrants.”

Q Where did you go when you left the trading floor?

A I ended up going to Credit Suisse Financial Products in 1996. That was the hot derivatives place at the time. For a derivatives trader, that was the ideal place to work. It was a joint venture, part of Credit Suisse versus Boston. I joined the index arbitrage desk. Now you'd call it the equity basis trade, maybe Delta One. Because most banks, the proprietary guy was the end of the desk of that relative group. We had one group with a special forces group, effectively, The job was to trade S&P futures versus the underlying 500 stocks. Credit Suisse Financial Products was a clever place. The guy before me made ten million dollars in P&L, making 40, 50 grand a day. My first year, we made fifty million dollars in P&L. We were treating every index R basket as an option. First, we were buying 500 stocks versus futures. Then I said, why don't we buy 50 stocks versus futures? Then instead of Stocks versus futures. Why not stocks versus stocks? Then if we're doing it in the US, why don't we do it in Europe and Asia? Within a short amount of time, it became a several hundred million dollar business. The first three arbitrages Were take technologists and pay them like traders, which people weren't doing then. So staffing yourself from the IT department and the quant research departments, not necessarily the MBA classes. The second was collecting and storing data and doing things with it an…

AI assessment note: “I ended up going to Credit Suisse Financial Products in 1996.”

Q You saw that both at Australia and then later back home, New Zealand super fund. What are some of the subtle differences in two different sovereign wealth funds applying the total portfolio approach?

A You've got to understand the objectives of each of the organizations. One thing that I spent quite a lot of time thinking about when I arrived at New Zealand Super was why Future Fund and New Zealand Super did things quite differently. Future Fund was set up in 2006, started operating in 2007, so it was later than New Zealand Super, which got going around 2003. They had a lot of similarities, sovereign wealth funds, both in Australasia. New Zealand Super had larger risk appetite than Future Fund. The reason being, it had a longer horizon. It was getting small contributions over a long period of time. The distributions from New Zealand super were going to be some way off in the distance. Future fund had a startup with a lot of money to begin with. Sixty billion Australian dollars. The last thing you want to do when you've got a big money to start off with is to lose a chunk of it. You're going to be conservative. They also started at a time when assets were cheap. They had a lot of liquidity and were able to benefit from those high prospective returns because of those cheap assets. That worked pretty well for a while. Future Fund was discretionary, active, a shorter horizon because the expectation was that they would have to make distributions to the budget come twenty-twenty. It turned out not to be the case, and those distributions have been put off further and further. The te…

AI assessment note: “New Zealand Super had larger risk appetite than Future Fund. The reason being, it had a longer horizon.”

Q There's a lot of steps there. In your time at Wall Street, what were some of the different roles that led you to understand how you thought about markets?

A It's an interesting question because you learn something in each role. When I was at Chase before the merger with JP Morgan, I got to, to sit in the dealing room and to combine different products. I got to sit with the swaps traders, the floating, floating traders, the option traders, and I would structure transactions. Seeing things from different perspectives was very helpful. I still think about going through the pricing on a floating, floating swap. That was insightful. Then moving to the FX options desk, it was quite a revelation because when you come from an academic background, you think it's all about the formula. And you don't really understand how people derive or how they trade implied vol. That was another lesson. There are lots of incidents like that. Those are two early ones that stand out.

AI assessment note: “When I was at Chase before the merger with JP Morgan, I got to”

Q So geographically, it fit. How did you end up professionally deciding to make this move?

A I've been at New Zealand Super for five years. It's a great place, and it's nice being home. I got a call from a recruiter. They mentioned the co-oper's role. Frankly, I wasn't that interested. It's a tough gig. But the call prompted me to think about it some more, to do some due diligence. I thought, there's so much potential there. When the recruiter called back, I was more open, and the recruiter immediately got Marcy on the phone. She's very persuasive and very engaging. Not long after that call, at the same day, the recruiter called me and said, we want you to interview with the board subcommittee. Shortly thereafter, I interviewed with the board subcommittee, and great questions, and I really enjoyed the interaction. That's what I wanted to roll.

AI assessment note: “I interviewed with the board subcommittee, and great questions, and I really enjoyed the interaction.”

Q How do you think about how to measure appropriate diversification in a TPA approach?

A Scenario analysis is important. Let's take a simple example. Equities and bonds. Do they diversify? Is a bond exposure going to diversify an equity exposure? Well, it may. It depends on what's happening. Take the example of an inflation shock. If inflation goes up, nominal bonds are going to be hit. Equities are probably going to be hit as well. If you have a growth shock, it's going to be the opposite. Equity is going to benefit. Bonds are probably going to be hit, so bonds are diversifying there. You need to look at what's driving the event. Rather than simply looking at historical correlations, one needs to be thinking about multi-dimensional scenarios and to think about how the portfolio behaves given those scenarios.

AI assessment note: “one needs to be thinking about multi-dimensional scenarios”

Q Where did that take you in terms of the roles that you played as you got interested in what was happening in the banking system?

A I became increasingly curious about them, and I applied for a job at Westpac, one of the big four banks, Australia's oldest bank. The role I went into was called group controller. It had the potential to be quite a dry roll because its title ultimately meant that you were head of accounting policy, but it gave me great insights to the operations of one of Australia's largest companies. It had Over a 150 years of history at that stage, and there had been some great leaders. The leader of Westpac at the time was a guy called David Morgan. They had survived that banking crisis in the early 19 nineties when there were hedge funds on the register came through, and it was growing extremely well. I took that as a great learning experience. In a five year period We sold a very profitable but low growth finance business called AGC to GE Capital. That was an interesting experience negotiating with a bunch of Americans because that was the peak of their power. We bought one of the asset managers off Bankers Trust. The old Bankers Trust investment bank had a large funds management business in Australia. And I finished my time there on the executive committee of the financial markets team of Westpac in The world awash with liquidity. I clearly had no idea as to what was about to happen, and credit spreads at all-time lows. I was thinking that these asset managers I was curious about, and I …

AI assessment note: “I applied for a job at Westpac... The role I went into was called group controller”

Q What led you to pivot from the GP side to the LP side?

A More happenstance, being lucky in terms of relationships. I was planning to stay on the GP side, but I worried about the firm where I was, great people, wonderful mentors, but was going to face these cyclical and secular declines. But I didn't believe there was a future. Our largest LP was Harvard Management Company. I went to tell the folks at HMC, who remain very good friends of mine, that I was going to leave and I'm going to stay involved with portfolio companies and sit on a couple of boards. They said, hey, would you ever think about joining us? We're going to rebuild the CoInvest platform at Harvard. The Charles Bank team had spun out already. We think you'd be a good addition to the team. That pivoted me from, I'm a GP, I'm a GP, to then thinking about being an LP. The other piece for me in that situation, Ted, I received financial aid when I went to Harvard. The mission-based aspect of that spoke to me of being able to give back in some way while doing something I really enjoyed.

AI assessment note: “They said, hey, would you ever think about joining us? We're going to rebuild”

Q So in markets that are known for having so much volatility, how do you think about the process of risk management?

A One way to think about it is taking this developed market, emerging market dichotomy. In developed markets, you would say, what's my value or risk? What's one standard deviation, two standard deviations, blah, blah, blah. In emerging markets, it is more important to say, if 1998 had happened right now, what would it be? If 2008 had happened right now, what would it be? Scenario analysis is much more important than standard deviations. Because in many of those scenarios, it was a six standard deviation event. I still remember in my time at JP Morgan, I was in charge of commodities, so there was a commodity crash at some point. I was probably 36 years old. They asked me to come to the board to explain what happened. I'm sitting across from Marty Feldstein. That was already a mistake. I then tried to sound smart by saying, well, this was a Six Sigma event that happened in these markets. And Marty Feltzian without missing a beat says, so Nick, we shouldn't expect this in the next 10,000 days, right? Of course, there was another crisis like that a year later. Scenario analysis is more important than the standard deviation stuff, number one. Number two, on public markets, the most important thing from a risk management point of view is to have a currency capability, because currency liquidity almost never goes away in emerging markets. You may have an equity portfolio that is hard to…

AI assessment note: “Scenario analysis is much more important than standard deviations.”

Q As you look today at what you've done since the financial crisis, how many different acquisitions have you done in total?

A We have done around 10 or 11 in total, of which seven are still part of the business today in one form or another. The most recent one you would have read about was in Africa. Two and a half years ago, we took over a business there called Ethos Capital Partners. Very good group of people. I had known them for a long time. It's a love match. Put every effort into growing that business. It was about a 1.6 billion dollar business. One of only half a dozen surviving scale GPs in Africa. Tried four or five different ways of growing the business. Just couldn't get it done. Nobody's particular fault. I wouldn't point a finger. Africa is a tough market for raising money. It's dominated by the development finance institutions, IFC, EBRD, who are particular in the kind of managers and kind of funds they want to back. That's a different chapter entirely. Our typical commercial LPs were not that interested in Africa, so we couldn't get it done. Ultimately, rather than shrink the business to die, The partners there decided to take it back, which we thought was best for the LPs, and best for the business, and obviously, if they thought it, best for them. So that's what happened. But others mostly, if it wasn't clearly an unwind, have stayed with the firm.

AI assessment note: “We have done around 10 or 11 in total, of which seven are still part”

Q What's the breadth of capabilities you have today?

A Today, you should think of us as having three lines of business. We have a public markets line of business, private markets, and a forestry and agriculture business. In public markets, we aren't solely in listed equities, although we have a very strong background in fixed income as well. We have managed local currency debt strategies, we have managed FX strategies, and we have managed inflation-linked bond strategies in emerging markets. Today, we manage Long only equities in three single countries around the world, Turkey, Mexico, and Thailand. Our fourth invests in non-brick EM countries, so mid-sized emerging market countries and frontier, very concentrated, 20 to 30 investments at a time. Our growth is to get up and running, something we've been paper trading for a while now, which is a multi-asset class. EM long only strategy. That is the one-stop approach for emerging market investing. We also are working on a couple of other strategies. One is a carry strategy. One is a equity long short strategy. On the private market side, we invest in private credit, private equity, infrastructure, and renewables. Our biggest presence is in Latin America where we have multiple offices. And Latin America is obviously important to this administration, so I think there will be a lot of strategic capital looking at Latin America right now, for which I think we are well positioned. We have…

AI assessment note: “Today, you should think of us as having three lines of business.”

Q When you thought about how to build a horizontal emerging markets investment firm, How did you think about strategically positioning other than knowing that if you were sitting inside of a bank, you might get silos infringing on what you wanted to do?

A There are two ways to build an asset manager. One is you say, look, this is my activity. This is what I do. I'm a value investor. I'm a momentum investor. I'm a quant investor. I'm a this, I'm a that. Those of you who are interested in this, please come and talk to me. The other way is to say, look, I have these investment capabilities. How can I create a solution for you out of those investment capabilities? In a way, that's what the large asset managers do. It's a supermarket. You want a diet version, you want a full calorie version, you want the low carb version, the vegan version. We've got it all. And people poo-poo the latter. It's not true investment kind of thing. But if you want to build a big firm that is going to outlast you, I was and remain convinced that's what you have to do. I knew I was going to build a solution-oriented firm that was going to work over time backwards from what investors told us. I knew we were going to tailor it to institutional investors because I come out of JP Morgan, I know nothing else. I knew the dedication to EM was going to be the big calling card. That was the thesis. Build an infrastructure that institutional investors will be interested in. Start your first fund with enough capabilities so that you can then spin out different parts as different investors talk to you about them. And that's exactly what happened. The only fund we ever…

AI assessment note: “I knew I was going to build a solution-oriented firm that was going to work”

Q On the margin, what's an example of something you looked at differently because of that dynamic where so much of the capital was on your own balance sheet?

A Up until twenty-twenty-two, from 2010 to twenty-twenty-two, risk-free rate went to zero and basically stayed there. That led to a risking of investors. If you had a fixed return you had to achieve, you couldn't get there in the old way of investing. You had to keep creeping up The risk curve. We'd said that's not always right. One example was the high yield market. In December of 2021, the high yield index was four and a half percent. When I started doing buyouts 30 years ago, if I got my bond deal done inside of 12%, I considered that a good day. At four and a half percent for junior capital in a levered capital structure, that wasn't good risk return. If you looked at our entire footprint at the time, we had virtually no high yield on the Apollo platform. Now, could we have gone out and raised high yield funds? Yeah, absolutely. But it wasn't the right risk return. Similarly, the real estate market. Over the last 40 years, commercial real estate had basically gotten ground down to the point of being a proxy for IG bonds. In 2021, the cap rate on any commercial real estate asset It was probably three percent. Things were getting priced in the twos. So we're sitting here at Nine West. Right behind us is the Plaza Hotel. I remember when that was being sold, we could have bought that at a three and a half percent cap rate for the equity of a hotel that needed a turnaround, or I c…

AI assessment note: “One example was the high yield market. In December of 2021, the high yield index”

Q So after that period of time, the firm is effectively a boutique private equity firm, sounds like, series of funds. When did you start to evolve and say, we could do something more, something bigger?

A That was the GFC, the financial crisis. The financial crisis opened our eyes to a lot of opportunities. One, we had raised a fund right at the beginning of oh eight. So an unbelievable opportunity to deploy capital at Either good valuations or in distress situations where you could buy amazing companies, companies that Apollo never could have acquired at unbelievable valuations. That was a real game changer for our private equity business, but really the culmination of all the hard work over the prior 1520 years. It also opened up a couple of things. When I said how we think about investing in different parts of the capital structure, as the whole Financial systems started coming unglued. Banks wouldn't lend to other banks. The ability to obtain liquidity became problematic for companies, for banks, for other things. We were able to approach banks and buy tens of billions of bank debt at a time at deeply discounted prices. We started accumulating enormous amounts of corporate debt. Not all of it was distressed. It was just the seller was freaking out. The markets were freaking out. So we're buying good paper at discounted prices. It That moment, it became clear to us that the provision of capital to levered companies is the other side of the coin of providing equity in levered situations. Private credit and private equity were two sides of the same coin. We were the first folks…

AI assessment note: “That was the GFC, the financial crisis. The financial crisis opened our eyes”

Q So if we take a step back from the evolution of the products over time, I'd love to dive into your roles. Going from a dealmaker to a leader of the business. At what point in time did you leading the teams at Apollo and working on all these strategic initiatives compared to the day-to-day dealmaking?

A After the GFC, as Apollo and as me personally did some of the best deals that I think we've ever done as a firm, I guess it was about 2010 the founders asked me to become lead partner for private equity. The firm was starting to grow for the first time into these other areas. Founders were spending more time in other parts of the business. For the first time, the PE business needed a leader other than the founders. That was my reluctant first step into the land of management. I was able to be a player coach at the time, still one leg in the deal business, one leg in the leadership business. And I played that role until about 20 18. So from 20 11 to 20 18. At the end of 2018, the firm had continued to grow and scale in a way when myself and one of my colleagues, Jim Zelter, we were elevated to co-president across the whole firm, looking after all of our revenue generating businesses.

AI assessment note: “I guess it was about 2010 the founders asked me to become lead partner”

Q Why don't we start with the capital story?

A We were founded coming out of the Great Depression, which is a really interesting founding of a company, especially one that's in financial services. So we were founded in 1931 with the view that we can manage people's money in a different and better way. There was a lot of speculation in the roaring twenties that led up to the Great Depression and the crash of the stock market. Our founder thought before the Great Depression that there were excesses, and this didn't make sense. He had written about it in the twenties, liquidated ahead of time, preserved his capital, and launched the entity afterwards. Even though he did that for the first twenty-ish years, it was largely a break-even business. He wasn't super successful in scaling assets in the thirties and forties, It was right after the Great Depression, which had a long tail to it. Part of the secret of the Capital's success is he kept the entity a hundred percent owned by himself until it was profitable. He didn't want anyone else to share in any of the losses that would come in any calendar year. Only after in the fifties Capital Group became profitable did he begin to sell little pieces to people at the company to share in the profitability as opposed to share in the losses.

AI assessment note: “We were founded coming out of the Great Depression, which is a really interesting founding”

Q Well, that's the podcast. A lot of excitement. Playlists are going to be super helpful to allow our listeners to access older episodes that they may not have heard before. What else is going on in the business?

A Most of the business is the podcast in our summits, and there's always a series of experiments. We started this coaching business this year. We haven't figured out how to crack it as a business, but we have a bunch of retired CIOs and asset management executives helping managers tell their story, understand the process of marketing. We also started doing a few strategic investments. We sit in this intersection between GPs and LPs. The most obvious way to unlock that would be to cross sell, but I don't want to be a broker dealer. It is wildly profitable, but not the profits we're going to make. So that said, I've come across a couple of great fintech products that either serve the allocator community or the Significantly move the needle in business development. We've done three of those this year. Olwell Labs, Campbell Wilson's business, that is the best tool I've ever seen for allocators to get information on holdings, on personnel moves, on other allocators holdings. And now managers are starting to look at it too, because for their marketing, if you know someone you're talking to is invested in a certain subset of managers, not only can you understand them a little better, but you can then click and see, well, of that manager, who else? One of their clients. So it's a great tool. There's one called Thema, which is a UK-based business that started using AI several years ago to…

AI assessment note: “We started this coaching business this year. We also started doing a few strategic investments.”

Q You have this joke about hedge funds. You ask a room of LPs, do you like hedge funds? They all say no. But then you ask them, do you like your hedge fund managers? They all say yes. Is that what the middle market has become?

A Well, not yet. That's a classic exercise in base rates. The base rate of a hedge fund return, nobody likes that, but of course we like ours. Private equity still has shown returns that meet investor expectations on average. Middle market's been better than large. Small has been better than middle market. Median has outperformed the S&P. Bottom quartile, definitely not. Top quartile by a lot. The question becomes, as prices go up, as exits aren't there, if the returns compress to the point where you can only pencil out the magic eight percent, If you get below eight percent net, then you're going to be in a situation where people don't like the market. They still will love their managers. I've asked at every AGM I've spoken to this year, please raise your hand if you think your private equity portfolio is median or below. And there isn't a single hand that's ever gone up. Everyone playing is playing for the top quartile.

AI assessment note: “Well, not yet. That's a classic exercise in base rates.”

Q How about public markets? How do all of the dynamics that you've just described ultimately impact public markets for both the allocators and GPs?

A Public markets have been quiet for a couple years other than big move to passive, a lot of activity in pod shops, but it's been a sneaky year because active performance is back. Mag seven hasn't really rolled over. S and P's done well, and yet you've got active performance. You have really good long, short equity performance. So people are starting to pay attention, but there's still no dollars flowing because of the bottleneck in the private markets. The biggest impact of that over the next couple of years is that when private markets unlock for liquidity, the first wave of that money from the institutional market is going to go back to the public markets. It's not going to get recycled in the private markets.

AI assessment note: “when private markets unlock for liquidity, the first wave... is going to go back”