The Exchanges

Q And so now there's the other side of it, which is there's a growing business in GP Stakes, and you did a transaction like that as well. So why don't you walk through what you experienced in doing that and where you think it works?

A So our life cycle was, we did the seed deal. 10 years later, we actually bought back that stake with the help of a structured deal. And then a few years later, we actually partnered with probably the two largest in the industry. We actually did a deal at the same time with Dial, Blue Owl Capital, and Petersil, which is a division of coal and sacks. And for us, it was fairly simple. As we had grown, we actually had a Fairly LP-friendly fund structure where a significant amount of our carry is in the European waterfall versus an American waterfall, meaning fund, we have to return the old fund versus a deal by deal basis. So what that meant is that as we were ramping up the investments in our old funds, we were not getting that many distributions, and you do have to meet capital goals with cash. So there were two primary reasons for us to pursue a GP of stakes deal. One was To create a base of permanent capital at the GP level that would be used to invest in our own funds. And the other thing is, we always had the idea, right, that we were more than just another private equity firm that was going to raise fund one through whatever realm normally wide. We did think that there were some synergies and some benefits of creating what now we have, which is multiple products under one umbrella. And for us, that meant that we always have the idea of opting to compensate for free from trad…

AI assessment note: “So our life cycle was, we did the seed deal.”

Q Why don't you take me back to your initial interest in the business world?

A I didn't grow up thinking that I was going to be an investor or a businessman for that matter. I actually thought I was going to be either a pilot or an engineer, and I went to school for mechanical and aerospace engineering. The inflection point was in my junior year at Princeton, I basically went a roommate who was a year ahead of me. We actually went to work in Wall Street, went for Merrill Lynch, and that opened up a whole new world for me, a world that I didn't know existed. I didn't know what investment banking was. I didn't know What Wall Street was or finance, but it seemed like a terribly interesting job where he was getting paid to really learn about businesses. You would travel and you were good at math. That was a plus. Seemed like an interesting gig to me.

AI assessment note: “The inflection point was in my junior year at Princeton”

Q And what did you find going from that experience looking, analyzing businesses as a banking analyst to working at a startup?

A And it's something that actually applied to this day. On the one hand, Best and Becky is a great platform to learn about business. As I mentioned before, if you learned about business behind an Excel spreadsheet where in Excel, almost everything is possible. You want to increase margins? Sure. No problem. You want to grow a revenue, you know, five percent or 10% or 50%? No problem. You can just change it. Working at a real business, it was eye-opening. That day-to-day of making base work, Everything from meeting revenue quotas, to getting payroll, to managing your payables, all those are very real things, and most, most importantly is people. You learn that business is really about people very much day-to-day, managing people, motivating people, compensating them, retaining them. That was, to me, a really important lesson, and it's an important lesson because many people in our industry and investing side I've never really had a real job. Never worked at a job where they're selling widgets, making, producing, marketing widgets. I think that that gives you a very different perspective about investing. So to this day, one of the things that we do at Clearlake is that our associates during their time here, they actually spend anywhere between three months, sometimes as much as six months embedded within one of our portfolio. And we're working very closely with the management teams…

AI assessment note: “Working at a real business, it was eye-opening. That day-to-day of making base work”

Q So you definitely have that pitch nailed. Let's dive in a little bit on some of the nuances. So the first is when you have that breadth of opportunity set within an industry or even across a company, how do you think about what the best investment means?

A In the early days, I would have told you, it's a sector that we know well, a company that we know well, and we like the valuation, check, let's go for it. Over time, we have learned that we need to answer a third question, and this is perhaps the most important question. What is it that our team can do with that business, and would that be a partnership with that passion team that is different than whatever everybody else is speaking about, or at least more nuance, or at least differentiating? To change the inflection point of the growth curve of that business. What is that we're doing differently to make that a more valuable, more strategic, more interesting business? Not perhaps now, but in the year, two, five years. And that we have found is what makes the difference between a mediocre investment and a good to great investment. The better we are, and identifying the two or three or four things that really matter in that business, And then making that change in those two or three or four things, we have found that the better the outcome. And then everything else is secondary. Is it better to invest in the economy or that sector is growing? Yes. Is it better to invest? The valuations in that sector are going up? Yes. Is it better to invest at a time where your capital markets are plentiful and you can leverage the business at a low rate with no confidence? Yes, yes, yes, yes. …

AI assessment note: “What is it that our team can do with that business”

Q So I'd be remiss of me as a sports junkie not to ask you a little more about that. In that example, most of what you're doing is tech, industrial, there's a little bit of consumer. How does that come on to your radar?

A Sports is a fascinating world, and it has certainly now become maybe a more stylish, legitimate part of the investing world. When you think about the business of sports, it has a lot of analogs to other businesses, particularly actually tech-related businesses. A lot of the revenue in a traditional major sports league team is actually recurring revenue. That's locked in A lot of that revenue is media related, so a lot of these properties, if we don't think about them as such, they're really valuable, renewable content, essentially, and it's consumed by a lot of the world. You look at the top hundred programs consume or you launch in the US, I think the number is staggering. It's like, seven and five of them are NFL broadcasts. So you have recurring revenue where a lot of the upside or a lot of the analysis revolves around monetizing content, and you see analytics monetize that content. So about ROI, things like that. When you look at the sports side of the world, sports world has been evolving. Baseball maybe being the best example of it, using technology analytics data to provide a better team, a better product on the field, or on the pitch, as we would say, for Chelsea. So when we looked at it from afar, 50,000 of the view, a lot of the elements that we were seeing in some of our other businesses and some of our core sectors, particularly tech, Were very similar to kind of th…

AI assessment note: “elements that we were seeing in some of our other businesses... particularly tech, Were very similar”

Q So with that investment strategy in mind, one of the first things you think about is how do you put those two together in a structure that manages liquidity needs because certain special situations investments can have a much shorter time horizon than traditional private equity?

A But the reality is that when we started the firm, we partnered with a larger firm called Russell Moore Capital to start our firm. And the reality is that we actually didn't have the answer to that question. We fought along about the potential fund structures that would allow us to invest the way we wanted to invest. Ultimately, what we, the Eureka moment was, well, by and large, we're certainly very focused on only companies. That, when we did to kind of war of a private equity, locked out fund structure, and we needed the time, you should not invest in, it was not a trading strategy. We were not investing today and selling tomorrow or in a week or two at a higher price. We needed the time to work with these businesses, turn them around in some cases, Grow them significantly. Make them better businesses. So I get all that pointed to a longer timeframe, locked up capital. But then you have the question that, well, what happens when you're investing in the secondary credit market? And there's some of these investments that have shorter duration. Actually, the multiple might be a little lower than the typical private equity investment target. What do you do? And the answer was simple, by the way. The answer in some ways was staring I was in the base, and there were already a few presidents out there, but the short version is that it was recycled. You look at our funds, additional …

AI assessment note: “during that investment period, we can recycle any of the capital.”

Q 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. So when you set out to do this strategy, somewhere along the way, I imagine you've had an investment that's like a marquee example of what you thought you'd be able to do that was a little bit different. What's that example?

A There are probably a couple that come to mind. I'll pick one, you know, in the industrial space, you know, a partner with a business called Sage Auto. Another sexiest business in the world. They basically did automotive textiles. They had come, heck, that's a carve out of a much smarter platform. Really tough time during the financial crisis. What we identified there is business had great management team, incredible capabilities, But limited reach geographically, or certainly a lot of our teams geographically, and a great, essentially, distribution platform that could benefit from new technologies and new products. And in some respects, it was one of those investments that, at night side of Lipsy, so you bought it that it really attracted multiple. We partnered with the management team, and we bought banks in Italy and Asia, and we did really innovative banks. The company had a joint venture in Asia where they didn't control it, and over time we got to control that, and we did a lot of the blocking and tackling that business, and then we actually sold it to a customer, actually customer slash supplier, and ended up making 10 times our money, and certainly a great outcome. But at the core, I think it was the best of player league in the sense that we identified an asset that people were not quite looking at it the way we were. And we were able to abut that value or revenue poten…

AI assessment note: “I'll pick one, you know, in the industrial space... a business called Sage Auto.”

Q you think about the benefits and drawbacks of generalists versus specialists, and here it sounds like you have an interesting hybrid where you've got specialization over time in an industry, but then you have almost like a generalist sense of how to work with companies. Where have you found that to be both stronger than what you see on the outside, and then what some of the drawbacks of that?

A I think that the most powerful thing about it is that it allows an investor professional to spend all of their time in the sector that they specialize in. But at the same time, really giving you that ability to step back, look at the ecosystem, look at what's going on in that industry sector, and truly finding the best investment opportunities. When we look at the great investors in the world out there, most of them were not hammered by structure. You think that we are Warren Buffett. One of the key things about Warren Buffett success is that he had a very flexible capital structure, very flexible source of capital, and within that The same team, if you think about it, was making buyout decisions, was buying equity in the secondary market, was BEMI doing structured equity deals and then mess up the financial crisis to save some big financial institution, and all the above, full spectrum. And that's the type of investment professional we want to create. So in times like summer of the thousand twilight, where all of a sudden the world changes very, very quickly. When we went from the first week of March where we were having investment committees weekly and talking about buyouts, two weeks later, there were no buyouts in our pipeline. We were having investment committee daily and everything that we were looking at was in the secondary market. Very few people are blessed with that …

AI assessment note: “The difficulty is that sometimes it's a strength and sometimes a weakness”

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

A My first partner at Goldman Sachs in the group that I was in, he was actually a fellow Puerto Rican, and I was really getting to know Wall Street, and really, that was a world that I did not really understand. A few times, he pulled me aside and just gave me right advice, and I really appreciate that. And then the other person that I would say, even though he's a friend, it's always a mentor, but not in the traditional sense. I like calling him every week asking for advice, but Robert Smith, a person that I've known for a long time, And as a fellow entrepreneur in his business, but also as a minority, he's African American, I'm Latino. He's somebody that from afar and sometimes close by, I've seen great different types of barriers. I think we all need role models like that. People that allow you to book up and say, gee, if he or she can do it, I can. Oftentimes, this is one of the reasons I'm doing this podcast with you is that I truly believe that there might be one day somebody listening to it I may say, hey, that guy didn't sound that smart, but if he's that successful, maybe I can do it too. And providing that title is great.

AI assessment note: “My first partner at Goldman Sachs... And then the other person... Robert Smith”

Q So once you own it, you mentioned your playbook, this OPS. Why don't you walk through what that means and how you deploy it?

A I will de-miss it by it sounds fancy, or I think our lawyer itself, uh, you can put a trademark on LPS operations people strategy, but I think of it as very simply, it's what we used to do when we were smaller, and the companies were a little smaller, and they were the things that we used to do that flowed naturally. Lessons learned, all the accumulated lessons learned over time, and now we have to try to memorialize, and we have to try to become more systematic about That is OPS. And how we organize it is what we think are three significant elements of any business operations that may have to do with manufacturing efficiencies and have to do with supply chain, et cetera. People, which is a very significant aspect as we already discussed of any business. So it may be complementing the existing management team, bringing expertise that that team doesn't have, And then strategy, which may mean everything from M&A to just looking at strategic roadmap, the product roadmap, understanding, ah, what do we need? It's geography, isn't it? Some type of technology or expertise. So understanding that and working with the management team to enhance that piece of the business. But at the core, the way I think about OPS is very simple. You start to count the lessons learned, the do's and don'ts that we have learned over about 17 years. And trying to memorialize them and institutionalize them s…

AI assessment note: “three significant elements of any business operations that may have to do with manufacturing efficiencies”

Q When you're in an investment committee meeting talking about some of these ideas, What's that dialogue like in trading off different opportunities for limited amount of capital?

A Yeah, it's interesting. Sometimes we'll get into that relative value game, if you will, but, but we really try to analyze every opportunity on a standalone basis. And the most important things that we look at is the dialogue that we need to have here at Clearlink and that investment committee has to be brutally honest. So if you come to a investment committee at Clearlink with a fancy deck and it's all offside and the objections go up into the right and it Everything's great. You're probably going to come out a little bloody from that investment committee, because there are no perfect investments. So we spent, I think appropriately so, more time thinking about, okay, what's the potential downside of an investment? What are the trends or what are the negatives that we need to overcome? Ultimately, what we want to come up with is a fairly succinct idea about what really matters to that business. And what really matters, you know, there are about to be a few of those things that are going to be positive, right? The business, the underlying market is growing significantly, and the man is planning for, this company has a competitive mode that allows us to have a great margin. So all those types of things are really important. Equally as important is, what are the challenges, and then what is it that we're going to do? You know, what is it that we're going to do differently to make t…

AI assessment note: “we really try to analyze every opportunity on a standalone basis”

Q of the things that's interesting about, Claire, like you started, as you mentioned, with the reservoir of seed capital, you later did a recap, and then on the other side, on the LP side, you've done a lot in continuation funds. We'd love to talk about each of those. Having gone through the experience of having a seed investor, what were the positives? What were the drawbacks of doing that?

A So the first step in our journey was starting the firm. And for us, that meant How do we bring some of those elements that I talked about before, right? Sector expertise, ability to invest in present economic and credit cycle, and operational expertise. How do you bring that all together as a startup firm? And very quickly, we determined, right, we were going to have to have a bigger team that owes startup investment firms. And the best way of doing that was probably to partner with somebody. And that was difficult. Entrepreneurial, a little bit of a distinct of keeping a hundred percent of every bank. I often tell this to entrepreneurs in this business much, much better. We're a good example of that to own 75 or 80% of your business and be able to grow that business and scale that business and make that meaningful and only a hundred percent of nothing. So in our case, we partnered with a firm that's fairly well-known in the seeding world or was a reservoir capital led by Dan Stern and Craig Huff. They provided some of that initial capital. Perhaps most importantly, Having only one LP in that first fund allowed us to experiment. You look at that fund, well, it was set up as a fund, but it was almost an experiment, you know, where we did everything at, now we do, but on their much larger umbrella and different fund structures, we did a little bit of everything that, you know, we…

AI assessment note: “Having only one LP in that first fund allowed us to experiment.”

Q And what's different in your investment process managing 20 times the amount of money you were five, six years ago?

A Clearly the companies are a little bigger, but in a way, parts of our job are easier now. Five, 10 years ago, nobody knew who clearly it was. Now, I think chances are that people in our world, you know who we are. We do very marches actions. That means that we pay a lot of fees to a lot of banks and stuff like that. So we get our cost return a little faster now than we did five years ago. So I think those are all positive things. The companies that we're partnering with By and large, you know, have deeper benches, more sophisticated management teams. What we have found is that the type of change that we bring to the table is actually easier to implement now than it was five or 10 years ago with a smaller company. Not necessarily because these companies are embracing it any more or any less, but they have just a deeper bench and the ability to implement those changes and a little quicker than smaller companies. We also view the bigger challenge and the more interesting challenge in some respects I'm never really sure if it's correlated necessarily with size, but it's people. We have had incredible consistency, a very little turnover almost our team. So, for example, one of my partners that I work with very closely, I hired him 16 years ago. Second job out of school. He was a baby back then, but it's 16 years later. You cannot grow as a firm. You cannot succeed as a firm if you'r…

AI assessment note: “Clearly the companies are a little bigger, but in a way, parts of our job are easier”

Q When you stepped into that organization for the first time in an investment seat, how did the lessons you learned inform how you went about investing?

A Well, there were a few bits. One is that I want to lose sight of the personal aspect of it, where I just have basically got probably characterized as one of my biggest failures in my career. But I had to pick up the thesis, and then to your point, try to basically find the best stuff and apply that to a new job. And I think what it meant for me as it was then the, what click, and again, it goes back to what we just were talking about, that yes, the financial analysis piece of what we were doing was Really important, but to be a great investor, you needed to do more. And to this day, if you fast forward some of the things that we do at a player, like we're sector focused. We have multiple sectors, but we're sector focused. And the reason for that is because we think that understanding a sector industry, understanding companies within that ecosystem inherently makes you a better investor. And I think that's what I learned a lot coming back into a financial world, but now with an investing hat on, I really felt strongly to really understand these businesses. I needed to peel a few more layers of the onion that typical, at that point, special situations. And in many ways, that's the beginning or that's on the foundation of Clearlake as a sector focused drugs that we use.

AI assessment note: “understanding companies within that ecosystem inherently makes you a better investor”