The Exchanges

Q I got a bunch of things coming up. So let's start with that last point. How do you think about the benefits of being in a geographic central region compared to some of the places you mentioned, which are clearly off the radar of Wall Street?

A I think that individual work, doing your unique own homework matters. I think it's always good to know what other people are doing. I remember us talking years ago about how you could look at 13 F's, and back in the day where the Crescent Court was the place in Dallas where all the hedge funds were, is that you could actually just by pulling up their 13 F's, you could tell who had lunch together or who went to the gym together. It's hard coming up with your own ideas, and especially a lot of people Feel they can be wrong, but they can't be alone, which is one reason that you see tremendous overlap in the hedge fund industry. Private equity industry is a little bit different. You used to have the club deals, but those are on managers that are much bigger. And so being in more remote locations where there's less competition allows them to develop that relationship with the patriarch of the matriarch who's running the business, who says, I got five years left. I want to roll some money, but my kids aren't going to get involved. I need somebody I trust. It's first a relationship transaction, and then obviously the financial transaction has to make sense, but many times our managers are not the highest bids in some of these more regional areas. It's because people trust them. They know what they're going to do with their business and how they're going to be as a partner.

AI assessment note: “being in more remote locations where there's less competition allows them to develop that relationship”

Q said, there's almost an insatiable demand by LPs now to invest in private equity funds, and the terms start to ratchet up, right? So it becomes favorable to the GPs. We saw this in the hedge fund industry, kind of pre-crisis, that didn't end particularly well. I know you wrote a piece recently Trying to shed a light on this. Why don't you talk a little bit about that work?

A Sure. So some of my friends at large private equity firms had asked me if this was my Jerry Maguire moment. We have always been vocal, and people joke we get on our soapbox, just about pointing out things that we don't think are right. And it's really not about right or wrong, but it's more about what people should be focused on. And we say that Nobody is forcing limited partners to sign these sub docs. Nobody's forcing them to wire the money in, so it really was written with calling out limited partners, and there's a number of things that you've seen, as you always do in the cycle, which have become very GP friendly. ILPA has done a decent job, but I always point out is that the best disinfectant is sunlight, and so many of these things People, people being the managers, don't want people to know, and so whether it's digging through the audits and looking at other expenses, it's whether it's looking at what they're charging, and it may not be a lot of dollars, and we wrote a similar piece on the hedge fund side years ago, because we had talked to a manager who was charging the Wall Street Journal to their fund, and I said, listen, I will personally pay the 99 dollars. Another manager had gotten up to about three and a half billion, was charging travel, and I said, Listen, we are big fans of Hyatt, so here's my Hyatt number, and if we're paying for the rooms, use my Hyatt cour…

AI assessment note: “it really was written with calling out limited partners”

Q So a lot of these, as you say, they're small things that add up, But do you use them as a sign? If you're in front of a manager that you really like, and industry norm is just shifting slowly in their favor, will you turn down a fund because they didn't want to bother with the 2000 dollar kind of advisory bill that they got?

A No. Listen, at the end of the day, you got to say, what are you going to make net? And I always joke is that if you look at whether it's a David Tepper and Ellie Simmons at SCF, Or, you know, Don Edwards at FlexPoint is if they called me on a Saturday morning and said, hey, I need you to come wash my car, I'd go wash their car. They have been so fantastic, and you get what you pay for. So many people have moved to, well, I want to reduce fees, which has led to the co-investments. I'm more than happy to pay in fees. I actually wake up every morning saying a prayer that I'm going to pay the most in fees that year that I've ever paid, but I'd rather be paying an incentive. And I don't want somebody to make money just for showing up. They got to have skin in the game. And you're seeing a lot of different games, whether it's the utilization of lines of credit, et cetera. At the end of the day, we got to make a decision is Is this person looking to be a partner, and do we think that the overall net return will justify any fees that we pay? So it's not a litmus test, but a lot of times these small things tell you how somebody's going to treat you, and if they're doing something that's dramatically in their favor just because they can, wait till the difficult times, and you and I have had plenty of difficult conversations with managers, and they're not as nice as they were when they we…

AI assessment note: “No. Listen, at the end of the day, you got to say, what are you going to make net?”

Q So what's the laundry list today of things in private equity that are rankling you?

A Looking at, it's almost like a death by a thousand cuts. There's, everything is moving a little bit here, a little bit There, there's not one thing that can necessarily be the golden nugget answer, but it's everything from on the clawbacks. And so for the funds that aren't doing deal by deal carry that have the European waterfall, they have clawbacks. And what you're now starting to see is something as silly as when money is clawed back. We haven't seen this, you know, since Oh, eight, oh, nine is that it's clawed back post the tax bill that the general partner paid. And so to me, that's bad enough. So is a manager collects incentive early on, collects incentive off of early deals, later deals go poorly. So there's a claw back. They've had to pay a tax on that. So they say, okay, we'll give you what we have net of the taxes we paid by the way, then they get a credit. But what you've now had put in even is, It's at the highest possible rate. And I said to one lawyer, I said, forget the fact that you should have, you know, intermittent clawbacks to minimize the possibility of it, is why does it need to be at the highest rate? And they said, well, it'd be too complex to calculate what each partner's tax rate was. I said, so you're asking us to trust you to handle the financial books and records of a number of underlying portfolio companies, but you can't just look at their K-one a…

AI assessment note: “it's everything from on the clawbacks.”

Q Why don't we start with sort of what AIM is?

A Sure. So AIM, which is a very original name of Alternative Investment Management, was actually brought to us by the lawyers about 20 years ago. We started investing with another family that we had known for really the last 40 years. They Had a set up an office here in New York because neither family was based here. They asked us what our name was and we said, it really doesn't matter. It's just the two families. They ended up, well, what are you going to be doing? We said managing alternative investments. And I think they probably spent about four minutes coming up with the original name of alternative investment management LLC and sent us a nice big invoice for that. The way we look at ourselves is we're a family office investing for our family across a lot of different asset classes. But two areas that we've brought outside partners in is in the private equity and in the hedge fund space. And there's an old saying is surround yourself with people who are smarter than you and good things will happen. My wife likes to say that's not very difficult for me. And I keep her minor. She's on my side, but we've ended up creating commingled entities on both those asset classes with the idea that we could bring in CEOs, retired CEOs, heads of private equity firms, Former government officials with the idea that we could be more than just capital and that we could be value add. We joke th…

AI assessment note: “The way we look at ourselves is we're a family office investing for our family”

Q So almost all the time when we talk to people in the business, people say, oh, it's a people business. We want the best people, the best partners aligned. And I know you've taken that very, very seriously. So a couple questions and let's dive into people. The first is, what are you looking for when you say great people or people first?

A It really goes back to one thing that without it, nothing else really matters. And it's what are they trying to accomplish? And how do they view the partnership? And so there are people out there, there's some of the greatest managers out there that could go raise as much money as they want to, but in private equity, they cap their funds, whether it's long, only whatever asset class, they may have capped their funds, or they've even returned capital on the hedge fund side when they've gotten to a size that They feel they can't manage as well. And so many people out there can't even imagine the thought of saying no to incoming capital. And yet some of these managers who I think that if you were to ask me, especially on the hedge fund side, if there was one characteristic to predict a successful manager, what would it be? I'd have to say is, are they willing to return capital? Because are they willing to really think long-term? So Why does somebody get up in the morning? And I can guarantee you that if a manager's objective is to go to the right and your objective is to go to the left, you're going to end up going to the right. And do they treat you as a partner or really as a limited and then in all small font partner?

AI assessment note: “what are they trying to accomplish? And how do they view the partnership?”

Q So let's circle back to, you know, you mentioned we and the family and matchmaking. Where did this all start?

A It all started with my father, who was an investment banker with Solomon Brothers and Lazard, always in Chicago. He was originally born and raised in New York and couldn't understand why anybody would live in New York when you could live in a great city like Chicago. Well, two of his three kids now live in New York. He just sort of shakes his head, but he loves coming to visit his grandkids, so he's back here often. But he always approached his investment banking days on relationships and was always very focused on doing the right thing and being willing to tell people, no, you shouldn't do this deal, even if it meant that they didn't get paid for it. Because he said, if you think long-term, good things will happen. If you're short-term greedy, you'll end up stumbling at some point. He did a fantastic job personally making the transition from investment banker, To an investor. And even when he was in his investment banking days, he sat on a number of investment committees. And back then in the early nineties, late eighties, early nineties, he gives Cambridge a lot of credit because they were the consultant on many firms and the different funds would come in, present to the committee. He would be able to do his own checks and then make a decision whether to invest or not. And growing up, he used to drag me to manager meetings. I like to Just point out that he also took me to a l…

AI assessment note: “It all started with my father, who was an investment banker”

Q You're not throwing things around the office as much?

A Yeah, try and try not to throw things. Best lessons are just no two people are the same. I'm gonna sound like the old guy, but this generation It's really understanding what motivates different people. What I found is that it's network, network, network. Talk to any twenty-two-year-old, and that's all they want to build. You hear this in interviews, and I'm thinking, don't mention network. If you're interviewing someplace, I also have a problem as I look back and I look at a thirty-five-year-old manager, I go, I'd never give them money, they're too young. And then you look at Andreas Halverson, 99 when he started, So it's a little bit of adapting. It's a little bit of perception. It's a little bit of taking a deep breath and trying to think things through a little bit and understanding that things are more individualistic than the straight management style.

AI assessment note: “Yeah, try and try not to throw things. Best lessons are just no two people”

Q So John, there's probably two things you're best known for in this group. One is having the most ridiculous network of anybody. And the second is always being super frustrated About something that's bothering you in the industry. And maybe also the third is being the early warning on cybersecurity. So what's keeping you up at night?

A One thing that's been frustrating for me is just the whole COVID and the attitude of it's all or none. You don't wear a mask or you, you lock down. There's so much that we could do and seeing some of the behavior over the last year, year and a half has really, you know, really bothered me in the sense of, How hard is it just to do something to keep other people safe? So that's a whole full book on that. What's bothering me? What's frustrating me? I don't know if it's frustrating me, but what's concerning me is I think we're asleep at the wheel on a number of things. I think the China relationship, uh, there's a great book called The Kill Chain, which talks about basically over the last 20 years what the Chinese have done with their military, their ability to pivot, Their ability to, if something's not working, you know, stop and change. For example, you look at our F-thirty-five fighter jets. Our systems don't talk to each other. If you want to basically stop the F-thirty-five, you have to go to a hundred congressmen and congresswomen and tell them, hey, listen, we got to cut jobs in your district because we're going to go this route. And we're spending a lot of time on that from an investment standpoint, because the amount of money that's going to be going into this It's going to be extraordinary, and you've already started seeing it. You see in China, basically, Byron Wayne a…

AI assessment note: “what's concerning me is I think we're asleep at the wheel on a number of things.”

Q So John, there's probably two things you're best known for in this group. One is having the most ridiculous network of anybody. And the second is always being super frustrated About something that's bothering you in the industry. And maybe also the third is being the early warning on cybersecurity. So what's keeping you up at night?

A One thing that's been frustrating for me is just the whole COVID and the attitude of it's all or none. You don't wear a mask or you, you lock down. There's so much that we could do and seeing some of the behavior over the last year, year and a half has really, you know, really bothered me in the sense of, How hard is it just to do something to keep other people safe? So that's a whole full book on that. What's bothering me? What's frustrating me? I don't know if it's frustrating me, but what's concerning me is I think we're asleep at the wheel on a number of things. I think the China relationship, uh, there's a great book called The Kill Chain, which talks about basically over the last 20 years what the Chinese have done with their military, their ability to pivot, Their ability to, if something's not working, you know, stop and change. For example, you look at our F-thirty-five fighter jets. Our systems don't talk to each other. If you want to basically stop the F-thirty-five, you have to go to a hundred congressmen and congresswomen and tell them, hey, listen, we got to cut jobs in your district because we're going to go this route. And we're spending a lot of time on that from an investment standpoint, because the amount of money that's going to be going into this It's going to be extraordinary, and you've already started seeing it. You see in China, basically, Byron Wayne a…

AI assessment note: “what's concerning me is I think we're asleep at the wheel on a number of things.”

Q And how do you filter that broad network of relationships? If someone's sending you something, you don't have any statistically significant data, they're just throwing a name of a manager they might like. What do you do with that?

A I always like to joke that I'd rather be around somebody who's wrong a hundred percent of the time than somebody who's right 50% of the time, because then at least I can make a quick decision. And I won't mention names, but I have a couple friends that are pretty good indicators that way. It's really why is somebody making an introduction? What has their track record of introduction? How do they do their own homework? What is their motivation? And it goes back to why do you get out of bed in the morning? If somebody's introducing me to a manager because it's an old buddy, okay, I understand that. I'll, I'll still take the meeting, but is this really somebody that they're going to put their own money with? And we spend a lot of time with our data bank utilizing and tracking and capturing information. It's also then taking a quick look and saying, what did we know in the past? We track, I'm almost at 30,000 LinkedIn connections, which leads to a bit of an issue because I'm getting many emails or calls from friends saying, hey, I see you're connected on LinkedIn. Could you introduce me? And I'm going, I have no idea who this person is. We use my LinkedIn account as a firm, and so when we're meeting with managers, we'll connect to everybody within that firm. We then are able to get graduation years, so we can see everybody that went to Yale, And being able to find a warm connection…

AI assessment note: “It's really why is somebody making an introduction? What has their track record of introduction?”

Q 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. Let's dive in a little bit on private equity. You have pools, you're managing your own capital, but some other people's capital as well. What do you look for when you're picking private equity managers?

A The first thing is, what is the strategy? And what is their edge? Everybody that comes in and that pitches private equity, I think is almost required to say, I have proprietary deal flow. There's a joke recently about three people on a panel, and the first two say, were asked, do you do auction deals? The first two say no. The third one says, I do, because nobody else does. So proprietary deal flow in today's world is very difficult. But there are people who do have it and are able to create an edge. So when looking at private equity, I want to understand why is somebody doing the strategy that they're doing, especially at the size that they're doing. Size can be a real hindrance. It can also be a very positive in some strategies, but in the strategies that we're looking at, which are real fundamental growth, adding value post-close, helping improve the management team. Maybe the son or daughter were Head of sales, and they did an okay job. So it's finding people who are out there pounding the pavement, are willing to say no. And one of the biggest problems in private equity today is how do you make a name for yourself? So if you're a thirty-five-year-old VP at a firm, and the firm's been successful, you're not gonna get credit for passing on a deal. And you only get paid for the stuff that you do do. So it's how do you create a culture of walking away when deals are too big, t…

AI assessment note: “The first thing is, what is the strategy? And what is their edge?”

Q There's a bunch of other, but let's just assume it's just the culture and not there's any unethical or untoward behavior going on. Is that a bad thing? Is that something you avoid? Or is it something that drives people to success at your benefit, even if you wouldn't want to work there?

A Sure. I worked for Senator Alphonse D'Amato, who was a fantastic senator, and I got yelled at. There were even a few swear words that I didn't even know existed. So growing up playing sports, I had coaches yell at me and really sort of push me. So it's really understanding what are they doing? What's the relationship? What is the type of people that work there? And so what is the real culture at the end of the day? And is it a team? Is it a family that can argue all day long and yell at each other and still move forward? Or is it somebody who's just ego driven and the only way they know how to communicate is through raising their voice? So it's really sort of figuring out case by case, bringing people in on January first, just for the sake of bringing people in on January first. I know plenty of people who do that. You know, at the end of the day, people sort of see through it, because how they get treated during good times, you got to always sort of think about if that's not so great, how will they be treated during bad times?

AI assessment note: “So it's really sort of figuring out case by case”

Q I know that across your investing in people, you've also for a long time talked about some risks in the market and the system. That aren't necessarily the same ones other people talk about. What are those risks that you see and what do you do about them?

A So there's some risks that you just can't do anything about because you just don't have any control over them. But if you're not aware of the risks out there, I think you're at a disadvantage. And so we spent a lot of time. I worked on terrorism back when I was in the government and worked on the Ron sanctions bill. Had a lot of friends who were in the intelligence community, and so we're constantly looking, and you know, unfortunately, we lived through nine-eleven. We lived through the blackout. There have been, I think, over 35 attempts, including a recent one in New York, and people have really sort of forgotten about that, and even though you can't do anything about it, you can't walk around every day being afraid, you can be prepared, and so people laugh at me because I have a defibrillator in my car.

AI assessment note: “we lived through nine-eleven. We lived through the blackout. There have been, I think,”

Q And do you have a bias for a certain size fund?

A So we focus on about five hundred million dollars or between four and 600. We do invest in some larger funds. It really comes down to strategy, but trying to find some of the smaller funds where I always love the term emerging managers, yet they have already had a successful career. So sometimes it's people coming out of bigger shops who want to get back to the basics. It's also people who are earlier in their career. There was some study, and I haven't been able to find it, but I think it was fund 2.9 is the best performing fund, and we had a Michigan endowment meeting, and I brought this up, and somebody said, how do you invest in fund 2.9? Do you, do you weight fund three more than fund two? And the answer is you, you don't know, but it's really figuring out why are they doing another fund? Are they passing the business on down to the next generation? Are they increasing in size? You have co-investments, which everybody wants to do these days, which I think is an example of limited partners hurting themselves. You have many people who are doing co-investments because they can sit and go back to their board and say, well, we used to put two hundred million into a manager. Now we put a hundred million into the manager, but do a hundred million in co-investment, and that's at no fee, so we just blended our fee down in half. But what it's forcing managers to do is go up in deal …

AI assessment note: “we focus on about five hundred million dollars or between four and 600”

Q And what's a laundry list of examples, obviously without people's names, of things that happened in the past that led you to pass on a manager?

A So, a manager was sharing information With one investor and not others, we found out and, you know, having relationships and knowing who other investors were, that person ended up coming back and pitching me a new investment about 10 years later, and that was an easy no. We've seen issues with how people have treated their teams. We've seen issues with people that they were associated with, and they say you're guilty by association. But why did they partner there? Something went wrong. They may not have been involved, but why didn't they see it when you see somebody who maybe gated somebody in the past? And it's usually they give you one story, but then you dig and you find out that that story is not necessarily a hundred percent true. Somebody said is I go into every meeting, assuming people are going to lie to me. I said, you mean market? And they said, yeah. And so maybe it's a cynical view, but I I need to figure out when somebody gives me an answer, what's a follow-up question? I mean, it amazes me as people ask some managers is what's your capacity and they give you an answer, but the person doesn't follow up with, well, how did you get there? How did you think about it? The other question that I always love is whenever somebody says I invest it like it's my own money, which I think is probably a hundred percent of the time is we simply follow up and say, well, what's you…

AI assessment note: “a manager was sharing information With one investor and not others”

Q So let's say that example happens. You found out something 15 years ago. Maybe there were some issues. Sometimes those are really damaging issues. Sometimes they're judgment. But now it's 15 years later. What data really that you gather really matters in assessing who these people are?

A Everybody makes mistakes. So please don't ask me on my mistakes today, but we have a saying, which is past performance is not indicative of future performance, unless you're talking about one's character. And at the end of the day, it's all about character and it's how is somebody going to treat us? So if there's an issue in the past, we want to know what it is, what happened, why it happened. And again, we're going for a quick no. So we're okay. Missing great investments, but But if we're looking at an investment that we made three years ago where we knew something that had happened in the past, we're going to kick ourselves. And there's enough great investments out there that we're probably overly cautious. And I got a list of managers that I didn't invest in that I wish I had. I also have a list of managers I did invest in that I wish I hadn't, but, you know, thinking back and trusting your gut on this, I would make this number up, but 99% of the time, you're happy that you didn't go with something that was questionable in the past.

AI assessment note: “we want to know what it is, what happened, why it happened”

Q You're not throwing things around the office as much?

A Yeah, try and try not to throw things. Best lessons are just no two people are the same. I'm gonna sound like the old guy, but this generation It's really understanding what motivates different people. What I found is that it's network, network, network. Talk to any twenty-two-year-old, and that's all they want to build. You hear this in interviews, and I'm thinking, don't mention network. If you're interviewing someplace, I also have a problem as I look back and I look at a thirty-five-year-old manager, I go, I'd never give them money, they're too young. And then you look at Andreas Halverson, 99 when he started, So it's a little bit of adapting. It's a little bit of perception. It's a little bit of taking a deep breath and trying to think things through a little bit and understanding that things are more individualistic than the straight management style.

AI assessment note: “Yeah, try and try not to throw things.”

Q How about philanthropy? You've been deeply involved for a long time. Why don't you talk a little bit about some of the organizations you're involved with and how you spend your time with them?

A Sure. So growing up, we used to go with my parents, My dad volunteered as Santa. I was his helper. I remember as a kid and we were giving kids tennis shoes and a winter coat and watching how excited they were receiving things that I took for granted was a great lesson. And my parents have always been very assertive and you have great advantages in life. Take advantage of them and give back. And I also think it's important. I do stuff with my kids. Have been involved with Robin Hood and UJA and others, and having the kids come along and do things has been the best and most rewarding, because you start seeing it, especially from an early age, and it's hard. We only have so much time out there, but I think it's one of those things that we all need to do in whatever way that we can.

AI assessment note: “Have been involved with Robin Hood and UJA and others”

Q What are you trying to tease out in those reference conversations?

A One, you can call somebody's reference list, and I would say I guarantee that you're going to get good references, but I've actually called somebody on somebody's reference list, and they said, I didn't even know that I was on their reference list, and I can't imagine they did. The number of times we've called reference lists where people have said, oh, you're the first person to call really is amazing, so I always say it's a check the box work where due diligence is probably 80% check the box, and that means making the warm reference calls, but before we do A reference call with somebody on the list that we don't know. We look at their quick bio, and is there somebody that we know? Because if it's somebody that went to Yale with you, I can call you up and say, hey, Ted, did you know this person? And you might say they were in my class. They're going to give you a very different feedback than if I just call up cold. So it's almost doing references on the references before we do it. But then it's also looking and saying, who do we know that knows this person? And going back, and if they came from a prior firm, we have 20 years of documents, presentations. We utilize the database to be able to see where people used to work. It's figuring that out, and there've been times where we were doing a reference on somebody. We saw that they used to work at this firm in O-two, and this was…

AI assessment note: “it's almost doing references on the references before we do it.”