The Exchanges

Q How do you distinguish between a mistake and a failure?

A When you read a new story, those words are almost always used interchangeably. In the first paragraph, it will say, Ted, you made a terrible mistake. And then in two paragraphs, it will say, well, the failure you made was this. Amusingly, when we've gone off and given talks about this book, often the title of the talk will be Steiner and Linton to talk about failures. I'm like, no, no, no, no, no. We're not talking about failures. We're talking about mistakes. We had to really figure out our difference, and our definition is as follows. We think of failures and success as siblings. In both a failure and a success, people come together. They have an ambition. They make a plan. They're trying to achieve something worthwhile. That's why we say it's a successful marriage, but we also say marriages fail. Both cases, people come together. Their plan is to lead a healthy and happy lives together till death do them part. But in one case it doesn't work out. That's a failure. In the other case it does. It's a success. A mistake is very different. A mistake is a decision that you make almost always by yourself, where you're not aware of your surroundings or your emotional state, and it leads to regret. There's no planning. It's a decision you make without self-awareness. That's very different from a failure, which involves careful planning and cooperation. Failure almost always leads to …

AI assessment note: “We had to really figure out our difference, and our definition is as follows.”

Q As you work through your mistake, how did you go about unpacking what that schema was?

A You used exactly the right word, which is unpack. We think of these things as like Russian nesting dolls. You have to keep lifting it up and lifting it up. For both Michael and me, when we started talking about it, we were nowhere close to the real mistake until we'd gone through it several times. We wrote draft after draft of our own mistake, pushed each other, and said, wait a minute, There's something else I think is going on here. Was it just your poor decision-making process, or was it just the fact that you were testifying before Congress and you were a young person? We didn't have a framework for thinking about mistakes, and one of the things we figured out was that each mistake is a three-act play. There's act one, and that's where your schemas are generally developed, either it's in your childhood or in your early professional experience. You form a way of looking at the world. Act two is when you make the mistake itself. You make a decision, probably without self-awareness about your emotional state or your context. And then act three is how do you deal with it? Do you go off and offer apologies to people you've hurt? Do you forgive yourself? Do you process your mistake? When I thought about my mistake, I was super focused on act two. Why had it been so stupid to keep that diary? I didn't think about what had happened in act one, either the fact that I kept a diary in…

AI assessment note: “We wrote draft after draft of our own mistake, pushed each other”

Q There's a dynamic you intimated that there's a difference when you're managing money for other people on your own. Now, for the last bunch of years, you've mostly been managing your own. What's different in trying to make good decisions and make fewer mistakes when it's your own money or there's a very few number of people you're serving compared to say quadrangle regular private equity business?

A We've been doing both, but SSW, we have committed capital from a series of families. That committed capital is what allows us to have a team and to go off and look for large transactions. Simultaneously, over the last couple of years, I've been investing out of my PA in everything from companies in the AI world to the Paris basketball team, where my partner, Eric Schwartz, who's the majority owner and I own, and created a team over the last seven years. It's a pretty binary choice. When you're managing anyone other's money, I don't care if it's your mothers, your cousins, a few families, or large amounts of institutional capital. As soon as you're a fiduciary for anybody else, the standard is entirely different, and the process you have to use is entirely different. I think it's appropriate, maybe foolish, but I don't feel guilty about the fact that on occasion someone will call me up, they're working on an investment, they see a company they think is appealing, The conversation lasts about seven minutes. I make a commitment. Happily, it's money that is my own and my family's. I have a fiduciary duty to no one but ourselves. If it feels like a plausible opportunity, if it's something about which I'm very curious, it will lead to other opportunities. I don't feel compelled to run an extensive diligence process. It may be unwise not to do that. I certainly don't feel any compunct…

AI assessment note: “As soon as you're a fiduciary for anybody else, the standard is entirely different”

Q When did you start trying to understand what drove the decisions you made in that moment?

A Not until years later. I grew up in New England where the key phrase is repress for success. I went off to boarding school at the age of 14. If you do that at an early age, you view emotions as something that get in the way of coping. The way you cope is by playing sports and studying harder and pretending that no one has the capacity to hurt you or upset you. I carried that forward. After Whitewater and after my diary got exposed to the world, I used that same technique. Littered for years later, if anyone ever wanted to talk to me about whitewater, I would make a joke, or I would brush it off. I just wouldn't explore it. I wasn't willing to talk about it. I really didn't even think about it. In fact, if the word diary came up in an article, I quickly moved past that article for fear that they would mention my diary as an exemplar of what you should not do. Fast forward. 2020. Covid hits. All of us, I think, are going through a period of contemplation. Was seeing the impact of this public health crisis on people's lives? Could it happen to me? Should I be looking backwards and trying to resolve some things I'd left unresolved? Also, what can I learn from the past and ensure, hopefully, that the years to come are spent in a healthier, both mental and physical way? I realized that I had made this really bad mistake. I'd gone through this quite embarrassing episode in my life. I …

AI assessment note: “Not until years later. I grew up in New England where the key phrase”

Q There are a lot of people who say if they're managing only their own money, they actually do better than if they're managing capital for other people because of the institutional constraints that might be put on them and running a fund for multiple constituents. How have you thought about that aspect of having a more limited group of investors to serve?

A The question that I would be asking myself is alignment. What are you trying to achieve? If you're working with a group of institutional investors, Or families. And there's really clear alignment about the objective. The opportunity to be as successful is every bit as great as if you're investing on your own behalf. The problem comes when firms are neither as transparent as they should be about alignment or fundamentally structured in ways that don't allow for that alignment. Having seen so many of these firms over the years and been involved in a number of them, that's the most important question. Can you look your partners in the eye and say, your incentives and my incentives, your objectives and my objectives are as closely aligned as possible. If the objective on your behalf is to have long duration capital that is compounding over an extended period of time, and I, as the GP, are willing to put a lot of my own capital to achieve that, and we recognize that we may not have the liquidity that we want when we want it, That you're not going to change your mind and suddenly come to me and ask for your money on short notice. That I have the flexibility to ride through cycles in really high quality business. That's terrific alignment. My guess is you can achieve really good returns. The problem comes when well-intentioned people either change their mind or aren't as transparent a…

AI assessment note: “The question that I would be asking myself is alignment. What are you trying to achieve?”

Q What's an example of something where you might look at it as a mistake, even though there was a good outcome?

A We invested in distressed debt as well as doing regular way private equity. There are times when within the private equity context, we were able to invest in the debt of a company, often a company that where we had looked at acquiring the equity, an LBO would have gotten done. We didn't win that process, went to a higher bidder, a couple of years went by, Business may not have been doing as well as they want, and we were able to buy the debt on attractive terms. Occasionally, that debt would move in our favor more rapidly than we had assumed it would, often for reasons that had nothing to do with our basic investment judgment. The best example would be a change in the interest rate environment. I'm not an investor who would make an investment decision based on the macro environment. The macro environment can move, sometimes in your favor, sometimes against you. When it moves in your favor, you shouldn't be patting yourself on the back unless that was an explicit part of your investment judgment. That just wasn't the case sometimes.

AI assessment note: “for reasons that had nothing to do with our basic investment judgment”

Q If you pull the thread of that mistake, why don't you take me back to one of the first big investment mistakes you made?

A When we started Quadrangle in 2000, it was right after the internet bubble had busted. Three of us, Steve Ratner, Peter Zersky, and I worked together in M&A, and our fourth partner, David Tanner, had a distinguished private equity background. We all knew each other really well. That was part of the thesis, that we didn't want to start a firm with people we didn't know. It's very different to go from investment banking into investing. Brian Roberts, who was the CEO of Comcast, still the controlling shareholder, said to us, I'm so glad you guys are doing this, because you're finally in a business where you can actually keep score. His point was, it's fine to give advice. When you're in the investing business, you know whether you're in fact producing returns We raised a billion dollars, primarily on the back of Steve's reputation, certainly much more than my own. Then we got to work. The first deal I worked on was a company called Pathfire, based in Atlanta, Georgia. It had a terrific premise and a really disappointing result.

AI assessment note: “The first deal I worked on was a company called Pathfire... really disappointing result.”

Q Where did you see the schema that you had developed that led to that mistake come into investment?

A My wife was awesome, many respects. She's a non-profit litigator for many years, and then became a non-profit mediator. One of the things that she did is she got trained as a mediator was understanding how to listen to people more effectively and have more open communication. A recognition that people's emotions and their schemas come into what seemingly are straightforward decision making. The expression that she uses, it's never about the toaster. She works with low-income couples who are trying to separate or get divorced. They will have agreed on everything. They will have agreed on child support and on custody. Suddenly, they're having a fight about a toaster. Turns out that the husband's aunt had given them that toaster. The wife felt that that aunt was always disrespectful to her. She wants the toaster as a way of proving to her husband that that aunt was vicious, and the husband wants the toaster. It has nothing to do about the toaster and everything to do with family dynamics. Because I had spent so much of my life trying to repress the emotional side of what I did, my belief in hyper-rationality, I didn't appreciate that a lot of investing does need to reflect underlying emotions. It needs to reflect the personalities and characters of the CEOs that you're backing. It needs to reflect the fact that consumers aren't entirely rational actors either. The way they're goin…

AI assessment note: “I didn't appreciate that a lot of investing does need to reflect underlying emotions.”

Q In those years of Quadrancle, when you think back to running a team, what were some of the most important mistakes you made?

A I thought a lot about the difference between what looks like a really good manager, someone who reviews people carefully, has a careful compensation plan, who is clear in the feedback, and still not do the thing that ultimately I didn't do as well as I wish I had, and that I now view as one of the characteristics I'm a really good manager. When I go off and interview management teams, I'm thinking about making an investment in that company. One of the questions that I like to ask is how many direct reports you have? The manager, the CEO, or the CFO will say, well, I have six. I say, terrific. Why don't you walk me through those five or six? Tell me the career aspirations of each of those individuals. Tell me what she wants to do next in her life. What job is she trying to get to? Where is she going from here? The vast majority of the time, if you talk to a CEO and she can tell you what the career aspirations of her five or six direct reports are, the likelihood that she's a really good manager of those people is quite high. The mistake that I made at Quadrangle was not understanding that it wasn't enough to put in place those good structures and those good processes. I don't think I invested enough time into the people with whom I was working Understanding what they were trying to achieve, spending enough time making sure that I, as their colleague, in some cases their boss, wa…

AI assessment note: “The mistake that I made at Quadrangle was not understanding that it wasn't enough”

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. If you go back to your quadrangle years, when you're serving a bunch of different LPs, they don't all have the same objectives. How do you tease out the alignment in the traditional fund structure?

A We saw that most acutely during the great financial crisis. Many of us, myself included, thought that period of time in oh seven or eight or nine was one of the most compelling opportunities to invest in generations. You saw assets trading at really depressed values. You were able to buy Credit instrument, which were providing equity type returns, notwithstanding the fact that they were very senior in the capital stack. At the same time, there were a number of our LPs who were focused almost exclusively on liquidity. They wanted their assets returned to them as quickly as they could, and they didn't want to be making new commitments. There were other LPs who saw the opportunity similarly to the way we did and said, yes, please, why aren't you drawing more capital and going out and doing it? It is unquestionably a problem in that overwhelmingly positive construct of private equity and hedge funds that you are going to find LPs who have divergent views. It's understandable. They represent different kinds of institutions. They've made different choices. We had LPs who had made very, very significant commitments to illiquid assets going into the great financial crisis and felt very constrained from a liquidity perspective, and we saw other ones Who had reserved a lot of capital and were looking to take advantage of the downturn. What we tried to do was to remember what we had said …

AI assessment note: “Went back and reviewed the marketing materials and our offering prospectuses”

Q When you talk to people about the mistakes in the book, what are some of the common threads you saw that might be slightly different from your mistake?

A When we started this process, we started making lists of mistakes. We thought we were going to organize this book around types of mistakes, and you, mine immediately begins rushing through all of them. For those of you who can't see it, Ted's smiling even because I'm sure he's thinking about all the types of mistakes that he's made. In fact, we should probably talk about that now that I think about it, and we're going to get there now that I consider it. We're not going to let you off the hook. But your mind immediately goes, and the easiest way to think about it are the seven deadly sins. Greed, lust. There are all these different motivations that lead people to make mistakes. The more we made those lists, the harder it was to categorize them, and the lists just got longer and longer and longer. We realized that we needed a different kind of help. We didn't need ethical help, which is a religious help, which is how we generally thought about mistakes. What we needed was psychological help. We ended up partnering with this fantastic professor from Johns Hopkins, woman named Allison Papadakis, who helped us think about it. Working with her, the common thread throughout was this idea of a schema. Schemas are mental templates, which now is to process. They're as simple as the following. You walk into an elevator, and if you're by yourself, you stand wherever you want. If they're t…

AI assessment note: “the common thread throughout was this idea of a schema. Schemas are mental templates”

Q These days, among other things you've done, you've served on Yale's Investment Committee. I'd love to ask when you take all of those dynamics and put them at a committee level, what do you see playing out?

A I was fortunate to work with David. He was the OG as it relates to this business. He was very generous to me in a whole variety of respects, including putting me on that committee. I'm grateful for it because I learned a lot from him. I learned a lot from the quality of the people that he was able to recruit and retain. It's really astonishing. The people who went off and left Yale and became the CIOs at other major endowments, and it's just an incredible track record. And the team that's there today, led by Matt Mendelson, is fantastic. Almost all the senior leadership was hired by David and mentored by David. David was the master at portfolio theory, thinking about the efficient frontier and thinking about risk adjusted returns. I don't think people fully appreciate how adept he was and how much he cared. About the people with whom he worked. People sometimes think that those individuals exclusively learned the technique from David, but it went far beyond that. It was the mentorship and the values that he instilled in those teams that made him so distinguished.

AI assessment note: “I was fortunate to work with David. He was the OG”