The Exchanges

Q Well, why don't we talk about your background that led you to writing this book?

A So I'm an investor, 25 years as a partner at Apollo. I'm now a limited partner at a number of firms managing my family office. And prior to that, I spent a few years in investment banking at the start of my career, but mostly an investor for most of my life. And it struck me that a lot of my friends who are Doing great in their own professions, medicine, perhaps, or academics, or what have you, you know, started to invest as they progressed in their own careers for their retirement, for their life goals, and so on. And yet, for some reason, they didn't really understand or have heard much about private equity, even if they came across it in a professional context. And so it occurred to me over the years, we should try to get more people with a baseline level of understanding of private equity, not necessarily from an academic Technical point of view, and probably not even taking sides, but more about what is it really like on the inside as someone who is in the GPs, as well as an LP, and now of course an LP across multiple firms. And that's what led me to the idea of writing this book, which really should be for everybody who either has a pension or retirement plan that may be going into private equity or may meet private equity in their business.

AI assessment note: “And that's what led me to the idea of writing this book”

Q long life. Over time, we've seen deals have, you know, as you mentioned, Brenda, a three to five year life. And more recently, we're seeing private equity firms looking for ways through continuation funds or investing from fund to fund of extending the life. So very specifically about the duration, Sasha, maybe I'll turn to you. Yes, these are transactions, but is the common duration of these investments a problem?

A I don't think it's a problem. Remember who they're doing this for. Of course, there are incentives. There was carried interest in all of that, and there's other forms of compensation. But ultimately, these returns are paid back to investors in cash. It's not paper money. And those investors require those returns in cash to meet their own obligations. Some investors need that cash turning over a certain clip, certain velocity over a certain timeframe. Others are pretty happy to take dividends over a very long timeframe. Others are very happy to take capital gains over a very, very long timeframe. Some are happy with continuation funds where actually there's more work to do, and they don't necessarily need that particular Pot of capital returned straight away. Others want to start off with, hey, if you're raising a permanent or perpetual capital vehicle, I want to put some of my capital in that vehicle, because that portion of my balance sheet, I want to be managed in that way. Durations match, broadly speaking, the requirements of the underlying investor. And the reason that you're seeing increasing Diversification in those durations is not just because the industry is growing, and therefore it's growing in different ways, different products, different slices, different ideas, different angles, different themes, but also because it's taking a little bit more share of the pie of …

AI assessment note: “I don't think it's a problem. Remember who they're doing this for.”

Q Well, let's break that down. Let's start with the good. From the inside, what do you see as what the good things are about private equity?

A The good firms that I've been involved with, and I invest with now, They really do think like principles, not like advisors. They really are in it with an alignment, and this is rare. It's easy to say. It's very, very hard to do day in, day out, good deals, bad deals, return of capital, potential loss of capital. They're really thinking about it as if they had all the money In the deal, as opposed to them having a fraction of money in the deal, and most of the money coming from retirement systems, sovereign wealth funds, what have you. And so that alignment is really powerful when you see people really feel it, Ted. They really feel it, which is like, this is our deal. Or if it's a mess, this is our mess, and we're going to clean it up. It really means that they're fighting for you. They're in your corner. Of course, they're making a great profit out of it if it works out. Of course. There's nothing to hide about that. But if it doesn't work out, they're not consultants. They're not just walking away. And the best firms, they're almost better on defense than they are on offense. So that's number one. Number two, the firms that have gained a certain critical mass They have what I call in the book, the library. They have an amazing network of data, executives, knowledge, know-how, and this gives them a fantastic edge even before you look at things like size and scale. They have g…

AI assessment note: “The good firms that I've been involved with... really do think like principles”

Q As you were writing the stories in this book, what occurred to you that you said, look, there are things that are good with private equity, the things that could be better and the things that aren't there. What's some things that you see that you think could be better?

A It has so many aspects. I think number one, and we should just get it out there because I saw that in the reaction to the book. We had generally some very good reviews, but we also had some comments from people that were reputable publications, but they just hate private equity. I think number one, the industry can do a better job of presenting itself. I think in general, the industry has done a much better job in recent years of, you know, emphasizing the positives it does for communities, for diversity, for all the right things for the environment, social investing. But I think it could do an even better job. And I think the reason that would be helpful is that there will be less noise around the industry so they can kind of get on with their jobs, right? So I think that's number one. Number two, I think it's not unfair to say that That although the industry has gone a long way in spreading some of the returns, and you've seen that on specific deals quite explicitly, where the returns are not just given out of the C-suite, they're kind of spread across the companies that are invested. I think we need to see a lot more of that. I'm not sure you want to get into a world where you sort of necessarily regulate it or force it. It has to make sense and it has to fit with the culture of the firm and all those things. But I think it's so good when you see it being done, when you see …

AI assessment note: “I think number one, the industry can do a better job of presenting itself.”

Q The use of operating executives is far more ubiquitous than it was some time ago. How does the relationship work with the operating executives, the investment deal makers, and then the company in a lot of these firms?

A When it works well, it's seamless. You don't look at one person and say, oh, is that, is that guy from the deal team or is she from the operating executive side? It should be seamless. And naturally people will lean towards their area of expertise and where they think they can help. And so if you have one person who's more a capital structure kind of person, but has good insights on the operating side, And one person who's more an operating person, but has insights on the financing side, ideally they work together. And generally I've seen it to be pretty seamless because when it isn't, those relationships tend not to last very long and the teams tend to change.

AI assessment note: “When it works well, it's seamless. You don't look at one person and say”

Q So as you look out at the potential for that to happen in broadening out these portfolios, we're also looking at a market environment that is more challenging than it had been in the past. Prices up, rates going up, leverage down, as you mentioned earlier. How do you think about, in your own investing, the opportunity set from here going forward?

A So right now, one of the best risk returns is in what I call hybrid capital, or some firms call it tactical opportunities, or things that have a lower possibility of default, right? The chance of losing money is lower, and perhaps you give up a bit of upside. That's quite a good risk return. If you can punch out 15% IRRs, even with inflation where it is, even with rates where there are, but the chance of you losing money is extremely low, That is a good risk return. I wouldn't have said that a number of years ago when actually you could probably add a thousand basis points to it if you were in the right buyout strategy. And a lot of buyouts these days, as we found in the financial crisis, are being done with less leverage or in some cases no leverage. Temporarily, possibly. And so you have to pivot as a private investor. You have to pivot as an institutional investor. You have to pivot, frankly, as a pension fund too. You absolutely have to pivot. Because the next two, three, four, five years are not going to be the same as we've had either pre-COVID or even through COVID. And so I'm looking at those kinds of opportunities. So that's number one. Number two, let's recognize a lot of things are a lot cheaper. Let's look at technology. If you look at a firm like a Silver Lake or another fantastic technology investing firm, the prices at which they're looking at today in the techno…

AI assessment note: “one of the best risk returns is in what I call hybrid capital”

Q not how you would describe your investment management tech, request a demo at ridgeline.ai. And now, back to the show. I'd love to dive into some of your thoughts being inside the industry on aspects of the process. So, on sourcing of deals, you hear a lot about the word proprietary. Everyone wants a proprietary deal. What did you see being inside the industry of how deals actually get sourced?

A It's a fantastic question. I think the reality is that firms of a certain reputation, so firms which are well known, of which there are many, many firms, and certainly firms of a certain size, as soon as you start to do deals which are like a billion dollars per deal or more, right? It's hard to say that no one else will ever look at that deal Other than you, between the time the idea comes up and you closing the deal. No one's ever going to look at that deal, ever. It's going to be totally under the radar screen, and no one is ever going to even have any idea that it's happening. It's a total surprise, ok? That's very difficult. Why is that difficult? Well, let's start with the seller. The seller probably has some obligation to stockholders, to their investors, to actually check That the terms are good terms. And so in some stage, they will probably need to hire an investment bank or themselves or some other broker or something to check that what they're doing makes sense. You know, we're carving out this business. We're selling it to a unit of Carlisle or whatever. Is that the right price? Is that, well, then their advisor will be like, well, have you checked with anyone else? And they say, well, no, we decided not to check anything with anybody. I mean, that doesn't really fly. And so I think there's a certain recognition that you're going to have competition at some stage, …

AI assessment note: “there's a certain recognition that you're going to have competition at some stage”

Q So what's happened since the book came out?

A It's been a crazy experience. It's been incredibly positive. It has worked out pretty well with thousands of copies going across the board from regulators to corporates to individuals, and there's been a lot of talks. There's been a lot of private talks at corporates who've said, we don't necessarily want to sort of advertise this, but can we buy We'll buy three, 500 books, whatever. We'll distribute it to our company. And can you do a couple of one hour private talks where we ask you everything we, we really wanted to ask and get at least one person's perspective on it, one insider's perspective. So I think that's number one. And then number two, as you've seen, the market environment has been a little bit more challenging. So I've tried to make sure I don't take my eye off the ball on my day job, which is actually investing. And so it's only been three months since the book came out, but certainly the markets have kept me pretty busy, and I think we'll do at least for the balance of the year. What I would very much hope, and we have started to talk about this with the publisher, with the agents, is some form of screen treatment or adaptation, because I think there are so many stories that have not been told, and that would be very interesting and also fun for people to see. So I think, uh, two in 20 being on the screen, I think would be A lot of fun for everybody, and, uh, we…

AI assessment note: “thousands of copies going across the board from regulators to corporates to individuals”

Q When you're looking at how you want to deploy capital in the space, how have you decided which funds to invest in, and maybe when to do deals versus investment funds?

A So I think when it's a scale that I couldn't do as a private individual or through a family office, then obviously you're going to be looking at firms that can look at a certain, you know, multi-billion dollar scale. In the same way, there are firms that have certain expertise and things that I don't have a personal background in, or I have done a little bit of, but not enough to sort of feel, let me do this myself. It could be some more advanced areas of life sciences or Commercial real estate or things like that. So I think it's a little bit self selecting in a way. There are things that obviously don't make sense for me to do on my own. But I think when you look at things like distressed, when you look at individual credits, or you look at smaller buyouts, as we talked about before, there's a lot of things I see where actually what I'm being offered as an LP Makes a lot less sense than me doing it myself. Because I, you know, if you take a distress fund or a credit fund, a lot of the things I've been offered, they're taking 10 plus percent risk at least, but they're offering six, seven. Doesn't make sense. And you're better off trying to create your own basket of whatever diversification you're comfortable with if you know how to do it. But I think, I'm not sure that's accessible for everybody, but I think, you know, that's the way I've looked at it is trying to sort of Be h…

AI assessment note: “what I'm being offered as an LP Makes a lot less sense than me doing it myself”

Q And what are the aspects that you think just aren't there?

A This is changing. So if you look at who invests in this industry, It goes back to the first question we had about the perspective and the reason for writing the book. Not many people know about private equity as much as they should. Not many people invest in private equity as much as they could benefit from. So some folks still see this as, oh, private equity is only for people of a certain wealth or only for certain kinds of institutions. Whereas actually you and I both know that a lot of folks' pension plans are invested Or retirement plans are invested in private markets, they probably don't know about it. And so what we don't have, being honest, and I think it's getting increasingly urgent, is a very good baseline understanding of private markets for everyone in the same way that people know about public markets. Why should you only know about the acronyms that make up Apple, Amazon, Microsoft, Alphabet, Google, etc. You need to, as somebody with a retirement account, know about Blackstone, Cardile, etc. You should, because these are kind of the equivalent of those big tech names that I talked about. It's big finance, or it's what I call, you know, mainstream active asset management. And so, that is just missing, because if you asked most folks who maybe dabble a bit in their pension, or they, they keep an eye on their pension, or Maybe even they're slightly active investor…

AI assessment note: “what we don't have, being honest... is a very good baseline understanding of private markets”

Q So, from taking your experience over those years into writing this book to show the inside of how these work, what was your perspective going in?

A Constructive, because I believe in what I'm writing. So, constructive, but realistic. And the way I would describe it, Ted, is trying to hold a mirror to the industry. What are the good things you see as we all look in the mirror? Hopefully a few good things. Probably a lot of things that we wish were better, and maybe a couple of things that we wish just weren't there. And so when you look at it from that kind of lens, holding a mirror to the industry, much like the industry does when it looks at a target, looks at a company to invest in. It's not just looking at all the bad stuff or the good stuff. It's trying to get to the truth of what do we really see? Do we see a business that has strengths? What are they? What are the things that could be done better? What are the weaknesses? And is there anything drastically wrong that needs to change more urgently? And what are the opportunities? And so I tried to look at the industry from that perspective, constructive, but realistic.

AI assessment note: “Constructive, because I believe in what I'm writing. So, constructive, but realistic.”

Q ahead and share the love with whoever is getting a tan next to you. Thanks so much for spreading the word. Please enjoy my conversation with Sachin Kujuria and Brendan Balloon. Brendan, Sachin, thanks so much for joining me. I think to lay the table, why don't we start with each of your core thesis? And Sachin, why don't we start with your experience of the value of private equity?

A So I think we're talking about private markets, not just private equity. The industry has evolved over the past three decades or so to be much more than just leveraged buyouts. So there's no point really today talking about barbarians at the gate or some deal from the 19 eighties or even 19 nineties, frankly, the 12 trillion dollar industry is bigger than the GDP of most nations. And I think it's headed to grow further in the next decade, perhaps to 20 trillion or more. And at the core of the work that I've done in two and 20, and over the course of my career, it's become very clear to me that this is a fundamentally a people business. This is a people business where people act and think like principles, not like advisors. These people are equitized, they have an alignment with their investors, and there's nothing really automated about it. There's a lot of talk about AI these days, analysis of big data, Machine learning. All those things can be incredibly useful to look at the heat maps of what's coming out of portfolio companies and so on. But at the core, you're looking at the judgment of individuals. And what I've tried to break down is what are the winning cultures and traits that I've seen over the last 25 years across different firms. And when deals fail, which of those traits are not working out or absent or forgotten? And I think given the size of the industry, given h…

AI assessment note: “at the core of the work that I've done... this is fundamentally a people business”

Q All right, Sasha, and let's go counterpoint on some of these. So Time Horizon, something that does seem to have gotten shorter over the decades for private equity firms. Love your thoughts on Time Horizon. Is that a problem? Is that an opportunity?

A By definition, this is a transaction. Invest, improve, work with management, hopefully great management to improve outcomes for the investors, the community, everybody. And then exit or monetize at some point. That return could be a loan or bond instrument getting to maturity. It could be some other kind of refinancing. It could be to sell a stake, or it could be to sell the whole entity. Ultimately, in, improve, create value, out. So by definition, it's a transaction. So I think there's no sugarcoating that fact, and I don't think that anyone is trying in the industry to sugarcoat that fact or Somehow disguise the fact that it's not a multi-generational long-term investment like you might find a strategic player would make. But let's really look at that in a fair way and say, well, what restrictions are there on a private individual buying a company and then selling it maybe even after a week, let alone after 10 years? Or a public company buying an asset, changing it a bit, merging it with something else? Happens all the time. And in our market-based economy, we've got to be very careful about saying there's one form of investing Where the horizon is ideal, and another form of investing, which may have very similar horizons, but that horizon is not ideal. So I think it's a good point to say, is the way this investment is being made, run, in the interest of multiple stakeholder…

AI assessment note: “By definition, this is a transaction... not a multi-generational long-term investment”

Q you said there are only a few firms that really kind of get this right. You could look at the economics, you could look at the structure, and firms generally have variations of a theme, but the same economic structure as it relates to, say, alignment with their LPs. So what is it about those few That get it right, that differentiates the ones that don't quite get it right?

A Well, in a rising market, you're going to find all private equity firms or most good private equity firms doing well, whether you're looking at their buyout strategy, their credit strategy, infrastructure, real estate, and so on. It's when things get difficult that you start to see bifurcation, you start to see the tide going out, et cetera. And that's when the culture of the firms, which absolutely has to come from the top, Is really witnessed. That's when they have to bare their teeth because things are difficult. It's not easy to just buy a company, put some debt on it, wait five years, make a double, and then move on, right? And I agree with you a hundred percent. Most firms have two in 20 or some variation thereof. How come some can't beat the S&P, whatever timeframe you look at, and some can. Some continue to provide 500 basis points, a thousand basis points above the S&P for long, long periods of time. How is that? And it absolutely goes to the culture, and it's such an overused word. It's almost like you can dismiss it, like, hmm, culture, yeah, ok, whatever. But what I mean is, it's really the day-to-day, Ted. It's the blocking and tackling. It's not the sixes they're hitting. It's not the home runs. It's the day-to-day, are they really living the deal? And that comes from the folks at the top, who've probably been around a long time, or they've been trained by the fou…

AI assessment note: “And it absolutely goes to the culture, and it's such an overused word.”

Q I'm curious to ask what your view is of, let's just say the mid-market, because a lot of these advantages you're espousing accrue to larger players get more breadth, more scale, more resources, more information. What's your sense of the investment prospects of the larger mega caps with all these resources compared to say the mid-market?

A So I think the ones that do things really well, in my view, are able to adapt very quickly to changing environments, whether it's higher inflation and interest rates, slower macro, dislocation, one in a hundred year events like COVID. And so I think that although they'll find blips, they'll find certain investments don't do well. In general, across a particular strategy or fund, they're going to do quite well. And this is why with the previous question, I started with the strategies they run rather than necessarily the size. I think it's not necessarily just size is the driver. I think it's the people, Ted. If you have amazing people who leave one firm and start their own firm that's, let's say, five billion of assets or two billion of assets, as opposed to 50 or a hundred or 500, it doesn't mean that they're not going to be able to replicate the success. It's because it's, again, it's a people business. It's the individuals. So I tend to look at, okay, who's doing that mid-market strategy, as opposed to the fact that it's a mid-market strategy. But digging into that another layer, historically, some of the best returns have been found in smaller pockets of the market that have been less mined than the larger pockets. Now, I think there's an argument to say that they're harder to find these days, but it's pretty ripe at all size levels, but I think you can scale it. So for exam…

AI assessment note: “historically, some of the best returns have been found in smaller pockets of the market”

Q We hear more and more about, call it the democratization of private equity, the platforms to bring it down to high net worth and eventually retail. As that money seems to be flooding into the industry, how do you see it changing what happens with these firms and their ability to go out and deliver the way they have in the past?

A So I think you might get slightly different products offered to retail investors than you do to large institutional funds. You might have different protections, different risk return dynamics. There's a lot of smart people working on all these things to try to figure out how do we address retail well, rather than just, you know, the first step was like, let's set up a feeder fund and let's feed this multi-billion dollar fund with not just institutional capital, but retail capital for some kind of feeder or some wealth management unit or so on. And then there's like, how do we produce products which are specifically for the retail market? There's lots of different ways. And I think what you'll find is that as the menu available to retail grows, you'll find firms tend to Emphasize or deemphasize what's important to the end investor. So if you have, for example, certain retail funds, which they want to emphasize the social investing component even more, you'll find the strategy offered to them is different than, let's say, other investors. That's a possibility. The other way it could change the firms, I think, and I think this is very positive, is that As soon as we reach that tipping point where it's no longer Wall Street serving a bit of Main Street, but it's Wall Street and Main Street are kind of the same thing. It's just the economy. Because that's really where we are with pu…

AI assessment note: “The other way it could change the firms, I think, and I think this is”

Q So having sat on both sides of the fence of GP and LP, what are the things that you think you either don't have the information to understand or just misunderstood by those on the LP side that haven't sat inside the sausage factory at the GP?

A I wouldn't say I've met many LPs who just don't understand, but I think it's a different thing To know how deals work and to read the presentations and attend the conferences than necessarily seeing how it happens day to day. I'm not sure they need to necessarily see it day to day because otherwise, to a certain extent, Ted, they'd be working there, right? But I think the thing that, the way I'd put it is that what I hope is increasingly appreciated is that private equity professionals do eat what they cook, right? They do act with an alignment, and I think it's one of those things that's kind of so obvious and easy to say and to point out, but until you've really seen it work at every hour of the day, it can be hard to sort of remember or even in some cases believe, and so I think the best way to evidence it, of course, is the results, and that's where some of the most interesting and memorable things that I've worked on Or even that I've just seen on both sides of the fence have been where a deal hasn't worked out in the beginning, but actually the folks have fought tooth and nail to make sure it works out at the end. That's not something that an ETF can do, Ted. That's not something that is going to work out in the passive markets. It's only going to happen with passive management. It's only going to happen with highly active management.

AI assessment note: “what I hope is increasingly appreciated is that private equity professionals do eat what they cook”