The Exchanges

Q You had been involved with lots of different companies across sectors. How did you decide to focus on financial services?

A We didn't really make that decision. It was kind of made for us in the sense that Marsha McLennan had a private equity Firm that they own jointly with JP Morgan, and it was set up to basically put capacity into the property cash insurance market after a hurricane or an earthquake or there was a dislocation, and they had set up de novo companies in the eighties called Ace and XL in Bermuda, and then they set up a company called Mid-Ocean after Hurricane Andrew in 1992, and then in 1994, they said, why don't we have a fund, because it's taking us a year to raise the money and set up a company. If we had a fund, we could address the dislocation, the imbalance quickly. So they set up a fund called the Trident Funds, and it was a six hundred and sixty-seven million dollar fund, and that fund was Mostly invested by the time we came in, so Steve and Nick and I joined, and we joined with the understanding that Trident had a one-trick pony. It was the best trick in the rodeo by far. They were the best provider of capital to the property cash insurance industry, but there were many, many periods of time when that was not necessary, when the wind didn't blow, the earth didn't move, Rates were not compelling, so we made a deal with Marsha McLennan that we would take on the Trident funds if they would let us broaden to all financial services, so we could do bank deals, credit deals, process…

AI assessment note: “we made a deal with Marsha McLennan that we would take on the Trident funds”

Q I'm curious about this research process coming before the deal. There are 12, 12, 13 sectors, 70 subsectors. What is that process? What are you doing to prepare for when these opportunities come up?

A Well, everyone here, there's about 60 investment professionals supported by a tremendous team that includes about 120 people in total in finance and accounting and legal and compliance and IT. The investment professionals are all assigned to a small handful of these subsectors or sectors, and their job, we joke, That we do in three or four or five years what McKinsey does in three to five weeks. We basically go out, we call on all the companies, we go to the conferences, we read the newsletters, we meet with the competitors, the suppliers, the customers, the McKinsey consultant that knows the business, and everyone we can meet with. And we are looking for what we call the twenty-foot pole vaulter. And the twenty-foot pole vaulter, Ted, is if you came from Mars, And I took you to a high school track meet, and you saw some kid pole vault 12 feet, I think you'd be blown away. How did that kid go full speed down a track with an enormous pole, stick it in a little hole, bend it, and jump his whole body over twice as high as his height? And I would say to you, Ted, that's great, but that kid's struggling to make his high school track team. The world record is over 20 feet. When we meet an owner-operator in one of these segments, And let's just say for argument's sake, there's 20 competitors in the sector, When we meet him or her, they know more than we do about their business, and we…

AI assessment note: “We basically go out, we call on all the companies, we go to the conferences”

Q So after this long run at Goldman, what was the impetus for you leaving?

A I was one of the happiest partners at Goldman Sachs, and I definitely could have stayed there for my whole life, and I believe that in many ways I was too in love with Goldman Sachs. I was in my mid-forties, and I just had this feeling that I wanted to do something else. I didn't know what it was, and I didn't know that I'd be going into private equity, but I just thought I got to step back And figure out what I want to do, where I want to live, and reset, and there was no trigger to that, and I couldn't explain it to people closest to me. They were wondering what I was thinking, and I ended up spending three and a half years as a senior advisor working on a handful of projects for Goldman, and during that three and a half years, Steve Friedman, who had also left the partnership at Goldman, he had run the firm, and Nick Serbib, who was an Analysts that had rotated out of the three-year analyst program, the three of us had a little virtual firm. We named it Catamount Capital, the Vermont state animal believed to be extinct, but there were three Catamounts walking around, and we were doing a lot of really interesting deals with our own money and without any sort of resources beyond ourselves, and we did that for the late 1995 up until 1998. And it was going well. We were having fun, but we were thinking it would be good to have offices and computers and someone to get you a cup o…

AI assessment note: “I was in my mid-forties, and I just had this feeling that I wanted to do something else”

Q What were the breadth of roles that you played in those twenty-plus years?

A Well, you go to a Goldman now, you're in a product group, an industry group, or a region. Back then, that didn't exist, and so there was a Nascent merger department. There was no capital markets group, and basically you worked on all types of transactions for all industries and all companies and all geographies. We didn't have a big international business in the beginning, but eventually all of us got involved in lots of different things. Everyone tended to find Areas of specialization and focus. One of the jokes was you do one deal in a sector, and you know something, you do two deals, and you're an expert, and you do three deals, and you're the dominant player in it, and so my experience evolved from all types of companies. I tended to spend most of my time in the United States, which most people did back then, and eventually there were certain sectors that I felt more comfortable in Than others. And once you switch from the corporate finance department, because Goldman separated relationship management from transaction execution, so after spending four years executing transactions, I was moved to the new business department where my job was to build relationships and bring all the products and services of the firm to bear to meet the client's needs. Then your role becomes Quite different, and that was a role I was better suited for in many ways than, than actually doing the …

AI assessment note: “after spending four years executing transactions, I was moved to the new business department”

Q I'm curious about this cross section with knowing all these subsectors cold, and the owner operator, and this classic question of which matters more, the industry or the management team. How do you balance being in the right place with being with the top executive?

A That's a very good question. 20 foot pole vaulters, if the business isn't as good as we hoped, they'll figure out how to succeed. And we've got examples of that with people that plan A didn't work, plan B didn't work. They hung in there. We got a great result. If the management team is not special, our fault, not theirs. We're the ones that judge them as special. Then we've got to manage that and figure out how to make it work for everybody involved. There are sectors that you need to stay away from, and financial services is a pretty dangerous space. We divide the world in several ways, but one of the ways we divide the world is capital intensive businesses versus free cash flow businesses. And a capital intensive business would be a bank, an insurance underwriting firm, a big credit platform, and a free cash flow business would be an insurance broker, A third party administrator, an asset manager, an adjudicator, and we will do free cash flow businesses often through thick and thin, through ups and downs, because if they are the best in their sector and they're providing necessary products to their clients, they're going to be okay over a seven, 10 year period, and if we get into them and we don't put too much leverage on them, And they really are the twenty-foot pole vaulter in the space. We'll be okay. We have to be very careful when we get into capital-intensive businesses…

AI assessment note: “20 foot pole vaulters, if the business isn't as good as we hoped, they'll figure”

Q Well, Chuck, I want to take a chance to ask you a couple of closing questions. What is your favorite hobby or activity outside of work and family?

A I just love athletics and sports and sweating, perspiring, so that used to be running marathons, and now it's maybe going for a nice walk, but whatever the activity is, whether it's skiing or golf or tennis or jogging or walking or, Going out on a boat and maybe water skiing and feeling the breeze in the air, I find that to be really invigorating, and one difficult thing about working as intensely as you do is, although you can walk around and get up from your chair, it's not a very physically taxing business, so I try to get as much exercise as I can. And I really enjoy that, because I just feel, I don't have the runner's high on what's at, and I come back a little slower than I used to, but it's just great to feel your heart pounding and breathing heavily.

AI assessment note: “I just love athletics and sports and sweating, perspiring, so that used to be running”

Q So I want to dive into how you've approached investing in this space, and so Let's start with, you have this focus on financial services. How did you take what was initially just this property, casually investment business, and then decide how you're going to tackle a pretty big space?

A Well, again, a lot of debate and discussion among Steve, Jim, Nick, David, and myself, particularly with others. And by the way, many people have now contributed enormously to the evolution of that question because we continue to evolve and the Segments and the sectors that we cover, which are now 70 different subsectors inside of 12 general areas, that has evolved, and basically we started with a number of key concepts, and I'll just give you a handful of them, and obviously this is an oversimplification. We wanted to figure out what we would go after, and we wanted to start this Proactive multi-year outbound targeted search. We really wanted to specialize because it seemed like private equity was like investment banking, where it was going into specialization and generalist funds like general practitioners in medicine and alike. We thought the industry was going to evolve, so we wanted to specialize in financial services broadly defined. We definitely put enormous emphasis on the owner-operator, Again, when I look at my dad and the way he backed owner operators, that was really critical to us. We decided that we wanted to hire and train and mentor and build from within because people that come laterally have a different way of doing things, and we wanted to have this elongated, bass-ackwards investing where you do your homework ahead of time and you really know what you want …

AI assessment note: “we started with a number of key concepts... We really wanted to specialize”

Q What do you do after you've bought a business when you, you know, you've backed, or you believe you've backed the twenty-foot pole vaulter? How do you engage with them as the owner, minority, majority owner of their business?

A Obviously, the first thing you do is try to work out what you're gonna do if and when you partner up before you partner up. And again, having the opportunity to really know these folks ahead of time Hopefully you have an agreement before you get married and find out things that you wish you'd known ahead of time. So we're very aligned with them. We want them to have a lot of skin in the game. We want them to make a lot of money. We want them to be at risk with our investors, and we will sit down with them either before or right after the closing and develop kind of a hundred-day plan. We don't put Operating executives in. We don't sit next to them and micromanage the business. If they are a twenty-foot polewalter, they don't want us or need us to do that. We have to be right that they're really good. We don't tend to replace management teams. We don't tend to micromanage and really get involved in the day-to-day activities of the business. That's not really our model. And when we've made mistakes, And of the 150 deals we've done in over 20 years, we have made a handful of mistakes. We have a very low loss ratio because of the great owner operators we backed. Our job is to find them, convince them to let us be their partner, and then to help them any way we can, which sometimes means getting out of the way. So we have high touch investments, we have low touch investments, and yo…

AI assessment note: “We don't put Operating executives in. We don't sit next to them and micromanage”

Q Why don't you take me back to your early education?

A Happy to. By the way, today's story is about Stone Point Capital, and it's really a story about team and collegiality and cooperation and gang tackling, so I'm happy to talk about myself a little bit, but really, Stone Point Capital is really very much a collective effort of a lot of people. I was very fortunate to grow up in a small town in Vermont. My father was a banker, and he started as a teller and worked his way up to be the CEO, and I had the privilege of going around with him to see his clients, and I learned so much from him, because he would tell me, here's who we're gonna go see, here's what he's like, and then I would watch him talk. I'd be eight, 10, 1214 years old, and then after we'd leave, he would explain to me What just happened, and I learned a couple things that were just invaluable later on in business life. One was there are easy, good businesses, and there are tough, difficult businesses, and some of the difficult businesses my father dealt with were farming, contractor, construction people, one location, restaurants, and then there were some really good businesses that seemed to grow and develop. But the second thing I learned from him was the people are even more important than the business. There were many people that he backed in tough businesses that did well, and there were many people that were in good businesses that were not capable, and they di…

AI assessment note: “When you ask about my early education, I was not a good student.”

Q So you had the experience at Goldman of it being the full private partnership, which in many ways has changed since it went public, I don't know, 20 years ago now. I imagine lots of people come knocking on your door these days to buy a stake in Stone Point. How have you thought about that over the years?

A Well, we're flattered anytime anybody wants to talk to us. Having said that, the team here really is happy with Themselves and with each other, and we constantly discuss this type of thing, and we really want to control our own destiny, and we don't want other people at the table other than the people here that are evolving and moving up the ranks, and we are very carefully and thoughtfully bringing more and more people into the management, into the leadership, Into the ownership of the firm, into the economic upside of the firm, because we want this to be all of our firm, not just the senior people's firm, and that transition is challenging and takes time, so we're very hopeful that the people in this firm will be here forever, will, the firm will continue to share Ownership, responsibility, leadership, management, and everyone will get challenged and given the opportunity to be as successful as their skills and their talents allow them to be.

AI assessment note: “we really want to control our own destiny, and we don't want other people at the table”

Q So when you've gone through this long process of all of this research on these subsectors, identifying the twenty-foot pole vaulter, getting a deal done with them, working with them, figuring out what they need, how in the world do you think about exit strategy?

A That's a toughie. One of the Things you learn along the way about investing is don't fall in love. Don't be passionate. Don't lead with your heart, lead with your brain, and I am definitely flawed in that regard. I do fall in love with these people, and so do a lot of people here at Stone Point. That's something we have to control, because these people just are the reason we're here, the reason we're successful. We live vicariously through their successes, And they're businesses, and we love them. And saying goodbye is brutal. We tend to hold longer than most firms. We have moved firms from one fund to another, which is challenging, but our investors have been supportive of us doing that. We're very excited about the new technology of continuation funds and the like, because at some point a company Reaches a point where maybe you can't get a compounded return going forward. And therefore you really owe it to your investors to do a monetization. But a lot of times these companies have a lot of legs left and we want to own them longer rather than shorter. But what we tell our investors when they ask us, what's the exit strategy going in? This is not meant to be a glib comment, but if this business succeeds, There'll be lots of exit alternatives. If this business does not succeed, all the things we tell you today about how wonderful the exit options will be are not going to be the…

AI assessment note: “if this business succeeds, There'll be lots of exit alternatives.”

Q What's the biggest mistake you've made, and what did you learn from it?

A How much time have you got? I would say as a general comment to that, because I could give you a lot of specific deal mistakes and decision mistakes, is I really believe that That happiness and being comfortable with who you are and where you are is the key to life. And you wanna be a journey person, not a destiny person. And I've had a tendency over the years to say, you know, when I get that deal done next month, I'm gonna be ecstatic. When we raise that fund in three months, I'm gonna be ecstatic. When we close this, when we do that, and always waiting for the satisfaction Of the deal ahead, as opposed to, wow, look at where we are right now. Be happy with that. Enjoy the process of getting that deal done. Don't wait. Don't hold back gratification, happiness, satisfaction for the moment that it transacts. Enjoy it along the way, and I am much better at that than I used to be, But I'm still a delayed gratification person, because we all know, once you get there, that's not that gratifying. The gratification is the process along the way, and it's similar to running a marathon, where you really have to enjoy the training, and the running in the rain, and the, all the things you have to go through, not just the, ah, I'm on the finish line. So, I'd say that's the biggest mistake that I have made, and that I continue to make, is just not living in the moment, not appreciating just…

AI assessment note: “that's the biggest mistake that I have made... is just not living in the moment”