The Exchanges

Q How does that work day to day as you're doing diligence on a potential investment?

A We work collaboratively both within Stockbridge and then across the firm. So across the firm, we chose not to have any walls between the two businesses. It requires us investing in compliance. And fortunately, I think our team members have embraced that on both sides of the firm and being educated and being mindful of the fact that we want to get nowhere near any lines. But we're not looking for information. We're looking for insights, and so that's good. The private equity side is divided into industry teams. We put one of our people on each one of their industry teams, so that way they can learn about what they're learning about the industry. We have access to each other's investment packages. We certainly have one contact database for the firm, and we can use those And we use the investment history over time, and can everyone invest in each other's businesses? So there's all sorts of conversations of just trying to think about what are the trends and what are driving different businesses. Within Stockbridge, we assign a team to every opportunity. There's usually two managing directors on each team along with a principal looking at an idea. Occasionally it's one and one, but we work collaboratively, and then we push everything through a Monday meeting. And so we have a package of material that goes out on Friday, and we discuss all the different investment opportunities on Mo…

AI assessment note: “Within Stockbridge, we assign a team to every opportunity... push everything through a Monday meeting.”

Q So what was it that led Berkshire Partners to decide to get into public equity?

A A couple of things happened. First, we always thought that potentially doing more things might make it a more stable business and bringing more people in that were interested in looking at businesses and thinking about businesses and being smart about businesses would help the firm in general. But we noticed in the period before we started, so 2005, six, seven prices in the private equity market, largely fueled by easy ability to get high leverage. Started to go up. For the first time, we did comparable sheets with public companies, and we were seeing private companies go for more than public companies. So the control premium was higher than the liquidity premium. And we started to scratch our heads and say, maybe there's an opportunity that a lot of the companies we've looked at over the years have gone public and doesn't make them really different companies. Why wouldn't those be good investment opportunities if they're potentially cheaper? The one thing we didn't know was whether we could get to conviction on public-only information, so we figured the way to do it was to try, and we put some money together among the partnership and tried with our own money at first.

AI assessment note: “we were seeing private companies go for more than public companies”

Q How did you think about what makes sense to add as a product?

A I think first on a big picture, we looked at a few things over the years. We held everything we looked at to three major tests. One, was there true synergy with private equity? Did we think both sides would be better for being partnered with the other? Second, did we something that we thought our history and our skills would give us a chance to be pretty good at? And then third, was it a place we wanted to invest our own money? We're the largest investor in our private equity funds, and we're also, as a group, the largest investor in Stockbridge. So we like to have the mindset of, we're investing our own money alongside our partners. And so if it passed those three tests, and we thought this did, we thought it was worth a try. And then the key was, did we think we were getting to conviction on the names we were looking at as we started to build a portfolio and build a team? And have some evidence, at least, that that conviction was well placed, and when we got there, that's when we decided to open it up to others.

AI assessment note: “We held everything we looked at to three major tests.”

Q You've alluded to a couple of different aspects of Stockbridge, concentrated holdings, long-term, As you look across a very large universe of public companies, all this information of thousands of private businesses that Berkshire's owned over the years, how have you filtered what it is that you're looking for in investments?

A We ask ourselves a few questions. First, is a company that we can understand? Is it in a business or industry that we have some ability to do analysis on, or are the trends that are going to drive the ultimate result knowable? So we don't invest in things like, is the drug going to be approved, or where commodity prices will ultimately drive the answer. Then, after that, we look for long-term winners, and we define long-term winners as some mix of stability And growth. And so how do we answer that? First, we look for one, is there a secular tailwind in the industry? We've found that it doesn't have to be a huge growth factor, but there can't be negative growth. If a business is shrinking, it's really hard to make money. Second, we ask ourselves, is the company well positioned within that industry? The best thing we can see is that if they have some level of pricing power, if they could charge their customers more and their customers would still want their product, That's a really good sign, but we do a ton of analysis around that. And then finally, is the management team able to execute on the plan? And we found that managements, ah, are really good at executing, continuing to do what they have done in the past, and that you have to be really, really careful before you're asking a management team to do something different. So, that's the hardest thing to judge from the outside,…

AI assessment note: “We ask ourselves a few questions. First, is a company that we can understand?”

Q So if you go back 20 years, you weren't the only private equity firm that thought of adding a public market effort, and many of those didn't work. The mentality of the private equity managers just didn't seem to mesh with what was happening in public markets. How did you go about it so that you could create those synergies?

A We did two things. First, we went around and talked to everyone and tried to understand why people succeeded, and there were a few successes, I think, in the market where people had done it well and why people had failed, and you're right, there seemed to be a lot more of those. One thing that came to us is that building it internally was important because the relationships of the people were a key to making it work. It wasn't just saying, Geez, Berkshire partners should have a public firm. Let's go hire a team to go do it. That would not get the collaboration that we would need. So doing it internally was one key thing. The second thing was trying to do what you thought you could be good at, as opposed to trying to understand what the market wanted in a sense, which may seem backwards, but when we were doing it, there weren't a lot of Long only funds, and we're essentially long only. We have a right to short, but we've done it only a couple times in our history, and the market at that time didn't really want to have long only funds. They wanted to have people who were going long short, and so we spent some time understanding whether we could short or whether that made sense, and we decided, A, we were unlikely to be good at it because it seemed like very, very few people were good at it, and it took up most of your time. To get shorts. Plus you were in some ways leveraging you…

AI assessment note: “building it internally was important because the relationships of the people were a key”

Q As you look back at this last nearly two decades of investing in the public markets, what are the biggest lessons you've learned along the way?

A One of the biggest lessons that I've learned is that investing's about predicting the future, so there's no set of analysis that will give you an answer. You have to take all the analyses as inputs, but then you're ultimately making a judgment about what's going to happen down the road. Another really important one is that you need to invest with conviction. It's really hard to do what we do and be waffling. That's why we demand unanimity among the senior people to invest in something, because you're gonna get hit with a bump, and so when you get hit with a bump, you have to have enough information, enough belief to evaluate the new information, but be able to stick to your beliefs if they have not changed. And then one of the harder things, shockingly, I think, is we've learned that you need to trust the work. You did the work to make the judgment. Keep trusting that and live by it. You got to keep adding to that work, but ultimately keep trusting the work that you did.

AI assessment note: “One of the biggest lessons that I've learned is that investing's about predicting the future”

Q So both of those examples are examples effectively being right long-term, but selling too early or getting emotional and selling. How do you balance being stubborn and wanting to buy more versus a situation where you're just wrong?

A We certainly have been wrong in our history, or we have decided we were wrong. The fascinating thing about investing in the public markets is in some ways you never know if the judgment you made was good or bad. Investing's ultimately predicting the future, and future's obviously very uncertain. My analogy has always been if you have a coin, That flips, and nine times out of 10 it's gonna flip heads, and one time out of 10 it's gonna flip tails. If you choose heads, which is obviously the wise decision, one out of 10 times you're gonna appear to be wrong. At the same time, you have to recognize that sometimes you might choose tails, and that was the wrong decision, and it could either come out heads or tails, and so that's why if we start to lose conviction, we have to be quick to decide That we got it wrong, and if we have something better to invest in, and so you move on. And moving on is often important and sticking to your guns unless you have really high conviction. Then if you have really high conviction, you stick to your guns until you don't, until it gets shaken. So that's how we try to handle the situation.

AI assessment note: “if we start to lose conviction, we have to be quick to decide”