The Exchanges

Q What was it about credit that led you to dive in and do this independent research?

A Well, the fact that this individual felt he couldn't borrow money because of the color of his skin was obviously very irrational to me. Gary Becker, who became a very close friend and eventually won a Nobel Prize based on human capital. In 1992, many years later, had written this piece in the 19 sixties on why irrational behavior could be rational as to how people view the world, and so I started studying credit, and as a sophomore discovered that what everyone said about credit was wrong, and there was a book by Bradford Hittman on long-term Corporate bond and investor experience, and the riskiest credits were perceived as the best, and the best credits were perceived as the worst. Whether you were the head of the Federal Reserve, or whether you were Secretary of the Treasury, or a major money manager, what you were saying was based on incorrect evidence, and this book, which covered Every single bond issued from 1900 to 1944 through the depression clearly showed that the risk premium was greater than the risk, and even during the depression. So you can imagine what it's like during good economic times or non-depressed economic times. It was self-discovery, and that passion has carried me today, almost 60 years later.

AI assessment note: “the fact that this individual felt he couldn't borrow money because of the color”

Q As you look out across each of these, across finance, healthcare, and education, what opportunities are you most excited about?

A I'm excited about the leveling of the playing field. If I don't know who I'm making a loan to, it's pretty hard to discriminate. So if I'm buying a securitized mortgage, ok, and there's a thousand people that are borrowers, I don't know whether they're born in the United States, Mexico, Dominican Republic, Nigeria, wherever they might have been born. I don't know where their parents are. I don't know where they went to school. And so securitization is a democratization of access to capital in that sense. So I'm excited about that and how that works. Number two, technology. The ability today to drive costs down. So there weren't too many people lined up in the 19 nineties to say, okay, sequence my genome here. I'll give you a billion dollars and I'll come back in 10 years and we'll figure out what the issues are. At a hundred dollars, at 20 dollars, at 50 dollars, it's now available to all of us. Amazon and companies like Amazon now allow us to deliver goods to places that were food wastelands in the country and places you didn't have access to product and services. Today, they can be delivered to your door wherever you might be. The internet, a great leveler of civilization. You might be in a school, there's no physics teacher in your high school, but you can take the class Online. And get credit in your school today. I feel technology affords us. I couldn't be more excited abo…

AI assessment note: “I'm excited about the leveling of the playing field.”

Q When someone comes to you with some type of cancer, and it's early, and they have the opportunity to do something early, are there two or three things that you've learned from your research that are the most important actions for someone to take?

A First, let's find out what your disease really is. So if someone tells you you have breast cancer, There's many kinds of breast cancer. If someone tells you you have prostate cancer, there's many kinds. What do you actually have? Not a generic name. So you can sequence your own genome today. Maybe for a hundred dollars, not three billion, which it cost and took 13 years, but in an hour. Two, you can sequence your microbiome. And three, you can sequence your disease. So let's find out exactly what disease you have. What form? What is the mutation? And my guess is in 10 years, a person will say, I have an XYZ mutation. They're not gonna say, I have this disease that's been identified in a part of my body. Once you know that, things that look like they're not aggressive can be aggressive. Things that look like they're aggressive might be non-aggressive. And for some people, doing nothing. Is an alternative. Then, understanding Where the leading research is. You might have an institutions that are, say, the number one institution in the country in cancer overall, but in a particular form of cancer, they're 40th. And then you want to make sure, like anything, that if you talk to a surgeon, they're likely to suggest surgery. If you talk to a radiologist, they're going to suggest that. And so let's get a few opinions from individuals. And so those are some of the steps in. Nutrition ,…

AI assessment note: “First, let's find out what your disease really is.”

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

A I'd say Gary Becker would be one. He wrote these things in the sixties that I read. He was really The father of the concept of human capital, that the assets not in the balance sheet were the major assets, that maybe 75 to 90% of the assets of a country, a state, a city, are the productivity of the people. We became close friends. He did get prostate cancer, unfortunately died of cancer. About a decade ago, but whereas his work was primarily in the academic area, I applied these concepts, both at our Milken Institute, our foundations, and in business. And the second one was the young man, I don't remember his name, that I met that day, August 1219 65. And the Watts riots started August 1165. Laurie and I got married August 1119 68, so I would never Forget what occurred that day, and I'd say those two people have had a dramatic effect on the path I have chosen over the last 60 years.

AI assessment note: “I'd say Gary Becker would be one... And the second one was the young man”

Q Where did that take you in your studies as an undergraduate and graduate student?

A As a high school student, I had many activities, like all the others, many other kids, athletics, etc., but I was very advanced in math at a very young age. I had written a letter to the president when I was 11 years old after Sputnik went up to run the space program. My qualifications, never missing a math or science problem at that time, and I really never got a return call. But I would say I went to Berkeley with the idea that maybe someday I'd run the space program. I had the most Nobel Prize winners in science. Started out with math or physics courses, etc., But shortly after I arrived at Berkeley, there was the free speech movement in November of. 1964, so long ago. But my career changed and my interest in undergrad changed with the Watts riots that occurred on August 1119 65 in Los Angeles. And my opportunity to meet a young African-American man who had watched the building he worked in burned down. He was married, had a child, had no savings, and now had no job. And he told me that he would never have access to capital or money to go into business because of the color of his skin. His father never did. And he saw that business as someone else's business, not his business. So I decided to go change my major at Berkeley to finance. It didn't make any sense to me that we weren't loaning money to people based on their ability. And so we switched to business at Berkeley and …

AI assessment note: “So I decided to go change my major at Berkeley to finance.”

Q What are some of your other favorite stories of backing entrepreneurs back then?

A Well, some of the best things you do are things you don't do. People think there's a commonality of interest. So with an investment banking firm, you have a merger and acquisitions department. They get paid when you do a transaction. So often the people that are the best is getting people to do things so they can get them to do things. And I would often ask them, have you ever seen a deal you don't like? Okay. You like every deal. Now they get paid up front. Our clients, our investors get paid on the back end long term. Did the investment work out? Did it pay interest? Many of the stories that I enjoy the most are rebuilding stories. In the case of Toys R Us, they came out of interstate department stores in the They had a great company hidden inside a company that was losing a lot of money, and it was hard to see interstate department stores jewel, which was Toys R Us, which at that time in the seventies was very small compared to the overall company. One of the great opportunities that never occurred occurred with Lockheed. In the early 19 seventies, and you had Textron and Linton offer to buy Lockheed. The debt of Lockheed was trading at 15 cents on the dollar. And if you and I had ever sat down and said, we're going to have a meeting in the mid-nineteen sixties with our board of directors, and you were the chairman, and you told them today, we have five years to go bankrupt.…

AI assessment note: “Many of the stories that I enjoy the most are rebuilding stories. In the case”

Q 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. You've seen these cycles in the past, and I'm curious, with so much capital that's come into the hands of private equity managers and credit, how do you think this shakes out over the next five or 10 years?

A I think for the last decade, in many ways, 50% of every kind of being sold by private equity was sold to another private equity firm. Today, if you have longer term debt, you can't really sell the company unless you're selling it to a investment grade type credit. So I think you're going to see a private equity company by part of another company to provide some liquidity. So I think you're not necessarily selling the company. You're going to bring new capital in so you can get distributions. I think that will play out. The sophistication today Of your private equity. Many of your private equity firms are larger credit firms today, and private equity is the smaller part of their business. They're very sophisticated, and in my opinion, they will be buying up the debt of many companies to exchange it for equity as a way of buying, and I see that occurring over time in the future. One of the things I learned over the years, the six lessons of credit that occurred, One, it's credit, not leverage, and so leading into the financial problems of oh eight and oh nine, you saw companies dramatically leverage themselves up to get the same equity rates of return, but they weren't the same credit, and you saw people leverage 10, 20, 50 to one in some of these financial institutions. Now, that isn't the case today. Second, I really have never met a person over a long period of time who's gene…

AI assessment note: “they will be buying up the debt of many companies to exchange it for equity”

Q Where do you think you got that curiosity about those types of facts to interact with adults at that young age?

A I'm not sure, but I was always the student why. In elementary school, I was always the one that had his hand up asking why. Why is that true? A lot of times you find in education, That your teachers aren't necessarily current on facts, and so you can surprise them, and you know, at a very young age, I had concluded that adults had strong opinions, but very few of them ever did research, and if you asked them, where did you hear that, they would tell you someone else told them, and then someone else, but you couldn't find anyone that actually did research, and that's one of the reasons why Rumor start or misinformation occurs, and so I use these evenings. Yes, I discovered very early that not every adult could tell me every state or every capital or the highest mountain, but what I discovered is they had a lot of opinions based on facts that were not accurate, and so my conclusion was if we could do research and understand facts, we'd have a real opportunity to change things by presenting those facts.

AI assessment note: “I'm not sure, but I was always the student why.”

Q When you start talking about that Lockheed example, how do you think about the optimal capital structure for businesses?

A Some businesses are highly volatile. You had almost a decade that if you weren't in technology, and you weren't in real estate, and you weren't in retail, almost no company went bankrupt in 10 years. If you're a supermarket, you might have a totally different capital structure than if you're a tech company. And so for some companies, even a dollar in debt is too much because of the volatility and risk in the business. For others that has very low volatility on their business, you can have higher capital structure. And part of the efforts and the work that I did that say went for my thesis in graduate school was understanding that you could manage the capital structure of a company. The same way you can manage the operating side of the businesses. And in the 19 seventies, because there was so much stress in the early eighties, interest rates overnight going to 21%, et cetera. Often the chief financial officer became the CEO. Today, when we think of the challenges, I think you're going to find many of the people that were the head human resource manager eventually goes to become CEOs. And can you attract the best in priorities? Can you retain those people? Do they believe in your mission? Do they want to work for you? Are they proud working for your company? Many companies have the wrong capital structure. Today, Almost 50% of the 20,000 largest companies in America are owned by …

AI assessment note: “for some companies, even a dollar in debt is too much because of the volatility”

Q As you've taken and distilled all these lessons over time, I'm really curious how you've thought about backing participants in the market with your own capital, with your family office capital, and what are those key criteria you've used to determine how these folks will invest your capital?

A I start with the individual, and do I have confidence? How does the individual see the world? Do they have blinders on? Are they willing to see the world? Can they change in any business? There are changes. What you expect might not occur. The unexpected occurred. COVID occurs. Can you adjust? The very first decision we make is on people. After that, we can make a decision on industry, structure, where in the capital structure you come in. So I have many things on my plate, not the least of which is medical research, Most people don't realize when I'm there that the number one driver of economic growth in the last 200 years is public health and medical research, and so more than 50% of all economic growth can be attached to public health and medical research. I don't sit in a trading desk. I can't look at it on a day-to-day basis, so we are dependent on individuals That we see if there's a change, they recognize the change from that standpoint, and so we really invest in people.

AI assessment note: “The very first decision we make is on people. After that, we can make a decision on industry”

Q Once you assessed out some of these important characteristics of the people, their motivation, having the right skills, the right vision that was aligned with yours, how did you get them to join you?

A If you're on a mission, if you stand for something, a lot of people will join you. You're trying very hard not to hire a person that's going to be a mercenary, that's in it for the money. Now, we probably financed 3000 different companies. I only had one CEO ever tell me he was in it for the money. Now, many of them might have thought that, but if they told me, they would have thought, well, maybe I wouldn't have financed him. And I think when you look at the people that have built industries, built companies, it was passion. And their rewards were their success. I remember with Craig McCall, I told Craig when he came to see me, he was really the person that changed the course of mobile in this country. But his family had built radio stations, cable, Paging other industries, and I told him that he's going to have to sell everything his family had done. That this was going to become so capital intensive. Yes, we could leverage, but he would need to have equity. That if he truly believed that mobile was the future, then he essentially, unless he wanted to be diluted to little to no ownership, Was going to have to make the decision to bet on mobile and give up what the family had done, which he did.

AI assessment note: “If you're on a mission, if you stand for something, a lot of people will join you.”

Q technology you started long ago, your time at Drexel had a group of people working with you that have become, by a large amount, the leaders in this space today. And if I just run off the founders of Apollo, Aries, Blackstone, Canyon, Crescent, Mollus, Richard Handler, CEO of Jeffries, David Solomon at Goldman Sachs. I'd love to hear your perspective on talent. How did you think about assessing talent?

A Well, I had a number of things I did, but I would stress to you, we had a mission, and you felt like you were creating jobs, you were building industries. I remember not one person believed in cellular, mobile, not one. It's hard for someone in 2024 to believe that. But if we're talking early 19 eighties, John Kluge, who we finance believed in it, Craig McCall believed in it. And many people like Craig, I did not have a relationship, but after he knocked on every door and someone told him they would not loan money against mobile, I mentioned to him, why are you going to a veterinarian if you need brain surgery here? And so I would say to you, the mission of financing businesses of the future Of creating opportunities of identifying people with talent and giving them capital. What's dramatically misunderstood is the importance of your managers, your leaders and businesses. People looking at the numbers often don't understand by far the most valuable asset. And that is the human capital. In 1965, after the Watts riots, I wrote down this formula, essentially, that prosperity is financial technology. Thousands of different types of financial instruments serve as a multiplier effect on the world's largest asset, human capital, the world's second largest asset, social capital, And then what you find in a balance sheet, real assets. And the human capital in the United States, if it ha…

AI assessment note: “Well, I had a number of things I did, but I would stress to you”