The Exchanges

Q And what was your progression through the investment banking ranks?

A So I was a young associate at Lehman Brothers working on a whole variety of things, and then somewhere along the way, there was a deal that came in to sell a newspaper in Houston, and they looked at me and said, well, you were a journalist, so you should know how to do this, and I said, well, I don't think about the business of it, but in any event, they put me on that deal, and then I started working on other things in media, and then in 1983 or four, Lehman Brothers was sold to American Express. A lot of people left, including some of my mentors. One went to Morgan Stanley. He said, you should come here and start doing what is now called TMT, then called media. And so I went there and started a media and communications group for them. Morgan Stanley went public, got very big. I like this idea of a smaller partnership environment. I went to Lazard. I spent 11 interesting years there. It's an interesting place. And then I decided to go into private equity with some of my partners.

AI assessment note: “I was a young associate at Lehman Brothers... I went to Morgan Stanley... I went to Lazard.”

Q What was the biggest challenge in getting it done?

A Oddly enough, the biggest challenge was something I didn't even know I was responsible for when I took the job, which were the auto finance companies. So what I learned on the job was that 80% of car purchases are financed in one way or another, and a significant portion, not a majority, but a significant portion by what is now called Ally, used to be called General Motors Acceptance, or by Chrysler Financial, which is now Gone. And there were a whole series of regulatory problems, as well as the fact that this was the one, almost the one place where we had to deal with other agencies of the government, particularly the FDIC, which was run by Sheila Bair, who was particularly difficult. And this caper, as my deputy Ron Bloom used to call it, almost fell apart over that problem.

AI assessment note: “Oddly enough, the biggest challenge was something I didn't even know I was responsible for”

Q And you became known as the car czar, I guess, or the auto restructuring group in the government. Had you been involved in restructurings in your time in investment banking?

A In a minimal way, we had added a distressed debt investing business at Quadrangle. I had done some of it as a banker. We'd, of course, had one or two private equity investments that had to be restructured, so I knew a little bit about it. And you may ask, what did I know about autos? And the answer was absolutely nothing. And so you then may ask, So why did they give you this job? And at the time, I really didn't know, to tell you the truth. I figured it out later, which was they did not view, and there was a lot of blowback after my appointment was announced about why me, but they, by which I mean Tim Geithner, the Secretary of the Treasury, Larry Summers, the head of the National Economic Council, they did not view it as a job of managing the auto companies or even of restructuring their operations. They viewed it as a financial restructuring job. And they thought I knew enough about that to do it because they also wanted someone who had some idea about the sensibility of Washington and how things work differently in the government than they do in the private sector. There are a thousand people they could have picked who knew more about restructurings, who knew more about autos than I did, but they wanted someone who had these different pieces of the puzzle.

AI assessment note: “In a minimal way, we had added a distressed debt investing business at Quadrangle.”

Q So now that you've been running this for, I don't know, a dozen years or so, and you've built up the portfolios, you look at your portfolio today, what are the areas that you're most excited about, and what are the areas that you feel like still need the most work?

A The thing that we're probably, I'm probably anyway, colleagues may differ, most excited about is still probably China, which is highly controversial. And we can talk about it, but I think as I look around the world, I think China is still the most exciting major market, probably in the abstract, let alone on a ratio to value or pricing. I think that the thing that has been probably most challenging for us, and it would be for any firm starting, is to build a quality venture portfolio. Because, and again, this goes all the way back to the research we did back at Quadrangle. When you look at performance dispersion, As you go from fixed income on one end, the place you get to on the other end is venture. The median returns from venture are not, probably the last few years has been better, but when we were looking at this, they were not that great. They were not even as good as private equity, but the performance dispersion is vast, and so one of the early decisions that Alice and I made was that if we couldn't be in what we thought was a top quartile manager, we just wouldn't do it, and so the result was it has taken us 11 or 12 years now And we still do not have as big of a venture portfolio as we'd like to have, and it also takes a long time for that to come to fruition. So that is a, when you ask, like, when I started, what were my disadvantages relative to Yale? That is one of…

AI assessment note: “most excited about is still probably China... most challenging for us... build a quality venture portfolio”

Q So you started in 2008, and you're thinking about a model that Yale and others probably started in the mid to late eighties. How did you approach the thought process, whether it's competition or accessing what you'd want to access when there's a big time gap in between some of those existing relationships and where you're starting out?

A There are pluses and minuses to that. The plus for them, or the minus for us, if you will, Is that they had had 15 or 20 years to build a portfolio, to establish relationships, build a team, and so on, and we were starting fresh. That certainly put us at a disadvantage, particularly in things like venture capital. On the other hand, we also didn't have a legacy portfolio, and what a lot of these firms or institutions have is a lot of illiquid stuff. Harvard is still trying to untangle some of it that they probably shouldn't have done, so we had a clean piece of paper, a clean balance sheet. So there were puts and takes, but Mike knew, and I knew, that it would take several years to build a team in a portfolio that really would be competitive with people who'd been around for a long time.

AI assessment note: “That certainly put us at a disadvantage, particularly in things like venture capital.”

Q And so you started Quadrangle, started off, I guess, was it also TMT focused at the time?

A Yeah. There's an old joke about the difference between an expert and a dilettante, and we'll get to some of this probably later in the conversation, but an expert is somebody who knows everything about nothing, and a dilettante is someone who knows nothing about everything. And so I had spent my whole career as an expert, and I thought it was the easier way to do it, that if you could focus on one industry, know it pretty well, It was a lot easier to get clients, or make investments, or do whatever it is you were trying to do, than if one day you were working on an industrials deal, and the next day you're working on a financial services deal, and the day after that, something else. So yes, we started with that focus.

AI assessment note: “So yes, we started with that focus.”

Q That's a good point. So, well, what's the special sauce?

A What we have done, and it does differ from what some other institutions do, we had also the benefit of Mike having very wisely said, I want you to run a commercial operation. I want you to hire the best people and pay commercial wages, and I'm not going to tell you how big the team has to be. Public institutions like a university are under enormous pressure About how much they pay people, how many people there are, and so on and so forth. So we had that advantage. I had this background in private equity, and so we began to do, and we hired a team to do it, some direct private equity investing in both corporate stuff, and then also with a different team in real assets, oil and gas, and real estate. And that now comprises a reasonably meaningful part of our portfolio. I don't want to say exactly how much, And we think there's some advantages to doing that.

AI assessment note: “What we have done, and it does differ from what some other institutions do”

Q Is there anything that we can do about it?

A I don't have great ideas. I mean, everybody always asks me this, and there have been various efforts along the way of people who are centrist, moderates, which is what I think of myself as being, to kind of come together, but the structure of our political parties, the way our constitution works, the existence of an electoral college, the senate, the filibuster rules, there's so many things that are structural that I almost think that what has to happen is it has to get worse before it gets better. It has to get so bad That the public says to hell with all these people from the extremes of both parties. Let's have a sensible solution, and somehow that happens. We've had these problems before, and this polarization existed in the late 19th century. It's existed at other times.

AI assessment note: “I don't have great ideas. I mean, everybody always asks me this”

Q And has that evolved much? Are you mostly looking at external managers?

A The answer is generally yes, but we do have what we think is a little bit of special sauce here, but it has evolved a little bit in that when we started, we did have these different asset classes pretty heavily siloed, and what we've learned over the years is that there is much more of a relationship among them than you might think, and particularly between public equities and hedge funds. And especially if you're talking about long short equity hedge funds, why is one group of people doing long short equity hedge funds, another group of people doing long equities? There's even crossover between private asset classes and publics, because more and more firms do both, and things like that. And so we still have people whose job it is to manage a certain asset class, but there's much more collaboration and integration than there was when we started.

AI assessment note: “The answer is generally yes, but... it has evolved a little bit”

Q from portfolio accounting to reporting to reconciliation, trading, compliance, and more. In the AI era, asset and wealth management firms moving to Ridgeline gain 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. And how do you think about approaching the traditional public markets?

A We have a very robust allocation to long equities. I believe, and Mike Bloomberg actually has pointed this out to me, and he believes, that no matter how good you are at picking managers, no matter how good your managers are, in a normal world, the bulk of your return is going to come from beta. That alpha is always going to be a much smaller number than beta. That over a long period of time, markets go up. We started investing, as I said earlier, January one of 2008, I think from that point to today, even if you invested all your money on that date, I think the S&P is compounded at seven percent, plus or minus. So the point is that even with the worst financial crisis, as we talked about since the depression, if you had just put your money under the mattress in the S&P, you would have done fine over these last 11 or 12 years. And that's how I think about it. And fortunately, we have very long-term capital. We have more capital that arrives than departs. We have a very Understanding and tolerant client who gets the idea of long-term performance, and so we want to take equity risk. The challenge is that in the U.S. particularly, the market is highly, highly efficient, and even with lower fees than you pay to hedge funds, when the dust settles, really creating alpha in the U.S. is hard. We have done it over time. I would say there have been times when we haven't done it, but it i…

AI assessment note: “We have a very robust allocation to long equities.”

Q So having been on the inside, and call it inside as a general partner, and whether you call it outside as a limited partner, how do you think about the manager selection process in private equity?

A No, not that differently from any other area that we invest in, which is, while we're certainly happy to be opportunistic, we also try to be methodical. So if somebody comes along With a private equity fund that's going to focus on industrials that looks interesting, we would landscape the whole area. We find out who else does something like this, whether the firm that has shown up or that we have found is really a top performer, whether other people who do it better, whether it's the right strategy. So we're always opportunistic, but we also try to be very, very methodical. And fortunately for people on my side of the table, the performance benchmarking, which didn't really exist When private equity for the first probably 10 or 20 years almost of private equity's lifetime has now gotten pretty methodical, and so the whole top quartile, second quartile, vintage year process does give you a fair amount of data to analyze. Now the problem is that just like in other parts of money management, performance persistence is not that great. So a firm that was top quartile in its last fund could well end up being second, third, or fourth quartile in its next one, and then back to first again. And so ultimately, as David Swenson has taught us all, it does come down a lot to the people, and whether you just have that feeling that these people in the long run are going to turn out to be gre…

AI assessment note: “we also try to be methodical. So if somebody comes along With a private equity fund”

Q And how about emerging markets? So in particular, emerging markets encompass a big part of the world. How have you kind of approached picking managers in that part of the world?

A Yeah, the challenge in emerging markets for us is that Putting aside China, India, we don't invest in Russia, I can't imagine we ever would, and maybe Brazil, they're relatively small markets, and so accessing them in a way that's consistent with our philosophy of finding people who really know the space is very hard. So we have tried, with not great success, picking an emerging markets manager sitting in New York or sitting in London or anywhere else in the world. It's been okay, but it hasn't been great. And so the consequence of that is that our emerging market exposure has been narrowed to the couple markets where we are both excited and where we feel there is investing talent.

AI assessment note: “our emerging market exposure has been narrowed to the couple markets where we are both excited”

Q And so what did the structure of that team look like?

A It's interesting because the philosophy of how to structure these teams has evolved over the years, and now there's a debate within the profession between, again, oddly enough, the generalist versus the specialist model. And given my background, it won't surprise you to know that I believed in the specialist model. The idea that you have five or six smart senior people, and they all go off and do whatever they feel like doing, and often they're doing different things from one investment to another, it didn't make perfect sense to me. Other institutions have done fabulously with it, so I don't want to be critical. So we followed a pretty conventional approach of having five or six senior people address each of the obvious asset classes, public equities, hedge funds, private equity, real assets, and so forth.

AI assessment note: “five or six senior people address each of the obvious asset classes”

Q So to last there over eight years, what were the things that you felt you developed like an expertise in?

A I ended up as a economics correspondent, which may not be entirely surprising given both my background and what I've done since then. It was sort of a bit of a backwater in journalism at the time, and so it wasn't the toughest place to succeed as it might have been if I had decided I wanted to be a political commentator or cover foreign policy or something like that, and it was in the 1974, as you'll recall, was a time of a fair amount of economic turbulence in the world in the United States, and so There was lots for me to do and a lot of demand for people who had an interest in doing what I was doing.

AI assessment note: “I ended up as a economics correspondent”

Q I want to talk about a couple other things that come to mind. You know, I know you're on TV every now and then and have political views, particularly when you start talking about China and the trade war. How do you filter your own beliefs on the political side into kind of the investment decisions?

A I try not to, and I hope I succeed in not factoring in my political beliefs into the investment decision, but I think my political views or my insights, if you will, Are really valuable to the investing. I think anybody's are. I don't think you can be an investor. I really enjoy my meetings with our managers because a lot of them have really interesting views on the political side, on the macroeconomic side, on things other than whether a stock is going to go up or down. I think you have to have a view on all that stuff to be an investor, and I do think it's something that I bring a bit of to the party.

AI assessment note: “I try not to, and I hope I succeed in not factoring in my political beliefs”

Q What's your manager level turnover been roughly on kind of an annual basis?

A Too high. I don't know the number. But one of the things that I force the team to do once a year is go back and look at our terminated managers, because it's easy to fire a manager. And in most firms, you fire a manager, nobody's ever going to ask you again, well, how did that manager do? Did you make the right decision or not? And I believe we have to live with those kinds of decisions. And so we very methodically go back and look at our terminated managers. And I would say it hasn't probably cost us a lot of money to terminate managers. But it hasn't made us a lot of money. In other words, if we had simply stuck with the group, because it is, it gets back to this performance persistence thing, and there is a huge temptation that I try to resist, but I succumb to it like everybody else who's human, to fire a manager when you really feel like the bottom is falling out, but that may be the absolute worst moment to fire a manager. And so I think we are trying now to give our managers more rope, just the way we have a fair amount of rope, when we believe that fundamentally they are pointed in the right direction.

AI assessment note: “Too high. I don't know the number.”

Q And then somewhere along the way, we get to the financial crisis. What was going on for you at that time, both on the private equity, and then into what you ended up doing for the government?

A I was happily going about my business working in a private equity firm, and we were investing, we raised a second fund, we were thinking about a third fund, because I think my journalistic experience in Washington, where I spent five of my eight and a half years in the business, I had an interest in public policy, I had an interest in public service, and I had begun to work in the mid-nineties in that world a bit, mostly raising money for candidates, or giving money, a little bit of policy stuff, a little bit of writing. And so, I'd always had it in the back of my head that there might be a time to go into public service. The stars never lined up, not the right administration, not the right time in my life, children, all that kind of stuff, but then the financial crisis came, and it wasn't perfect because we were building this firm, but my kids were mostly grown. We were looking at the greatest financial crisis of my lifetime since the Depression, and as one of my friends said to me, if you're not going to serve now, when are you going to serve? And so, I was open for that.

AI assessment note: “And so, I was open for that.”