The Exchanges

Q As you saw that period of time that you said predictably was going to end badly, how did you think about continuing to allocate through it?

A It was a tough question. One of the problems with success is it causes people sometimes to lose track of first principles. Pretty much all of the venture firms we worked with, if in 1995, they were managing a two hundred million dollar fund. By 1999, they were managing a billion dollar fund. And then they were investing the billion dollar fund in nine months, which again, proved to be a very bad idea. We were very cognizant of, there's some crazy stuff going on here, but we also knew that we were not going to be good at calling when the crazy ended. Not that long after the Netscape IPO, I think we started thinking, wow, things are getting kind of nutty here. And that was probably 1995. And instead of the market cooling off, things got even nuttier, and over the next four years, again, we made an absurd amount of money. Literally billions and billions of dollars when the endowment was single-digit billion dollars. We could have pumped the brakes in 1995, and it would have been a huge mistake. Having some faith in the managers that we worked with was important. We knew that there would come a reckoning when returns would not be so great, and we were okay with that. I think that's been true in the venture business ever since. I had a conversation with one of my colleagues after I turned over the venture portfolio to him six or seven years ago now, and he was saying the same thing.…

AI assessment note: “we also knew that we were not going to be good at calling when the crazy ended.”

Q I'd love to go through some of the historical perspective that you've lived through, really the entire maturation of this industry from the early days. You joined Yale in 86. The first notable event was the 87 crash. What was that like inside the office?

A It was a scary time. The person who was chairman of our investment committee was certain that this was 1929 all over again. Wasn't alone in that feeling either. There were a lot of people in the world who were worried about that. And it was really the period in time where David made his reputation. We had spent the prior two years doing a lot of work on laying out what should the asset allocation look like at Yale and institutionalizing that. Then immediately we're presented with this challenge where the publicly traded equity part of the portfolio, which back then was 70% of the fund, was suddenly 25% cheaper. So we were way off of our allocation, and David said, we're going to buy equity, and the chairman of the committee was not excited about that opportunity. David said, look, we just went through this exercise, spent a lot of time on this, and if the minute we're presented with a Challenge like this, we're going to ignore all the work we did, then why did we do all of that work, and what's different now about anything that we thought about as we put this together? He really insisted. He was 33 years old at the time, and he'd been in the job for probably two and a half years, so it was a pretty gutsy thing for him to do. We wound up having to do some things to mollify the chairman, which David wasn't exactly thrilled by, but we mostly got what David wanted, and it proved to…

AI assessment note: “It was a scary time. The person who was chairman of our investment committee”

Q Maybe with that one as an example, there's this great Warren Buffett line that when the tide goes out, you learn who's swimming naked. After a wait, did that actually happen? Could you see that there were certain firms that were swimming naked?

A That quote is absolutely true. One of the formative experiences of my career, this gets back to the internet bubble, I did a lot of work in the oil and gas industry for Yale. Prior to the internet bubble bursting in the nineties, the oil and gas deals were a vastly disproportionate share of the headaches I had to deal with. Even though we had vetted them very carefully and spent all this time getting to know them, turned out to be not good partners. And I'd be like, oh my god, is there something in the water in Houston that causes people to behave this way? And why can't these people be nice like our venture capitalists? Then the internet bubble bursts and a lot of venture firms found themselves in really messed up situations with particularly clawback issues, but portfolios that suddenly had companies that were hemorrhaging cash and having to fire people and having to close companies down. And then you had all these weird dynamics within the partnerships where you had people that had been there for a long time and they'd made a ton of money on the upswing. And then you had people that joined Late in the game and thought like, oh wow, I'm going to be a venture capitalist and make all this money. And now suddenly the business was terrible with the clawbacks who had left the firm and how are you going to get the money back from them. And there was a lot of dysfunction in these fi…

AI assessment note: “That quote is absolutely true. One of the formative experiences of my career”

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

A One is David, obviously. It was a tremendous opportunity to work from him and learn from him, absorbed all of the investment strategies, but one thing I really appreciated about David was he could be incredibly arrogant, not undeservedly so, but he also, I think, had a good sense of his limitations, and he sort of knew what he was good at and what Yale as an institution would be good at, and we didn't try to do other things. And there would occasionally be conversations in the office where somebody wanted to do something and he'd just say, no, we're not good at that. We don't have an advantage there. That doesn't make sense for us. That sense of knowing what you're good at and sticking to it and not wasting time on things where you don't have an advantage. I think that was really valuable. That's something I always told our managers. You should stick to what you're good at and what you like to do and who cares what everyone else is doing. Just do the things that you're good at and make you happy, and then success will take care of itself. So I thought that was a really important lesson that I learned from David. The other answer is my father. My father was a executive at a Fortune 500 company for most of his career. He had a pretty successful career. He definitely showed me that you could be successful in business, but it didn't require being a jerk or neglecting your family. S…

AI assessment note: “One is David, obviously... The other answer is my father.”

Q How did you find your way to the private markets side of the business?

A David Dean and I were pretty fortunate in that Yale had actually been investing in both venture and leveraged buyouts since the mid-nineteen seventies. When I started, those two together were probably two percent of the endowment or something like that. But we inherited some great relationships, particularly on the venture side. Yale was already an investor with some of the preeminent firms in Silicon Valley and Boston. Sequoia, Kleiner, Perkins, Mayfield, people like that. The timing was also really good in that the first venture boom was in the early eighties with Apple and Genentech and Lotus and companies like that. There was very quickly then a bust afterwards because people did the classic too many startups pursuing the same idea and valuations got out of whack and stock market turned down. Some of the longtime investors in the venture business at that point who were mostly insurance companies looking around saying, well, you know, this is kind of complicated and expensive and illiquid and the returns haven't been great lately. And we were looking at it and saying, these firms that we've been with for six or eight years now have produced amazing returns. We should learn more about this. We hadn't sat through the prior three or four years where the returns have been mediocre for a while. Looking back over the longer term, the returns were fantastic. And we said, hey, this …

AI assessment note: “Yale had actually been investing in both venture and leveraged buyouts since the mid-nineteen seventies.”

Q In those early years, what were some of those successes? You think you go through the nineties up until early 2000. What are some of the things you look back on and said that was either a company or a firm that drove a lot of those results?

A It's interesting. I gave a speech at a conference, which I Almost never did, but I went to this one for some reason. I was talking about our private equity program. For both venture and buyout, I wanted to have a slide of, here are some of the successful companies we invested in, and things that drove results. It was very easy to put that list together for the venture program, because there were just so many prominent companies that had come out of it, starting with Apple, with Sequoia, way back when. And then there were all these household name. This was probably in the late-nineteen-nineties, so I think Netscape was on the list, and Compact Computer and Genentech, the first biotech company. A bunch of things that were household names at that point in time. On the buyout side, it was a lot harder to come up with a list like that, because a lot of them were just these obscure manufacturing companies, or a cable television operator, or a company that owned a group of radio stations. It was striking how different those lists were, and I think it points to some of the difference between the two segments. In venture, it's all about winding up in the category defining businesses that go on to become multi-billion dollar enterprises, a lot of which are still around today. The buyout business was a lot more about blocking and tackling and grinding out three and four X's on good solid …

AI assessment note: “starting with Apple, with Sequoia... Netscape was on the list, and Compact Computer and Genentech”

Q of some of the investment strategies and firms in private equity. You have the SoftBank Tiger growth stage in venture. You have the Andreessen full service model to venture. Starting with that lens of you want operational driven buyouts and the certain venture firms that Tend to be where the lottery tickets are housed. How did you think about looking at these different sub areas within the two asset classes?

A Everything we did at Yale was people first driven. Do we want to be partners with these people? Why are they going to succeed in a crowded, competitive, expensive world? And are they going to be good partners that are not going to demand their extra large piece of pie when times are bad? If that wasn't there, it didn't matter what kind of innovation somebody was proposing. And a lot of times, if you were somebody that had already established yourself as, I'm a successful venture capitalist, or I'm a successful LBO firm, you didn't need to offer the LPs some different mousetrap in order to raise money. Sometimes there was a little bit of selection bias that if somebody was coming to us with a different proposition in terms of structure or economics, you'd have to ask, well, why does this person feel like they need to do this in order to attract our capital? As opposed to just doing what has worked for so many others. That's not to say firms shouldn't innovate. Andreessen was very successful in building a different venture model from this traditional, oh, let's have five or six or eight GPs sit around a table and everybody do their own deal and hopefully it all works out to having a ton of internal resources and doing things soup to nuts in terms of stage and ways to try and add value. Innovation like that is interesting, and buyout firms innovating in the way that they worked wi…

AI assessment note: “Everything we did at Yale was people first driven.”

Q As you look back on the 40 years you're involved at Yale, what do you think of as the biggest success factors in private equity and venture investing?

A David had some great insights about what is it going to take to succeed in these two investment strategies. Sticking to those insights was really, really important. Trying to make sure that we were with the very best people in the world, great partners, great stewards of our money in good times and bad. Keeping that bar really, really high was super important. I wouldn't say we spent a lot of time worrying about the ones we missed. There were certainly venture firms that we might have worked with that did very well, but we didn't. The ones that we did work with were fantastic. There wasn't much point in losing sleep over, well, why weren't we with this other one? One thing that was very, very important was a sense of humility in the whole process. One problem a lot of institutions fall into is thinking, I'm just as smart as these guys. Why are they so much richer than I am? I'm on this side of the table, but I could easily be on that side of the table, and they make things confrontational, especially if there are challenges around the firm. They want to play gotcha sometimes. GPs are not going to appreciate that. It winds up being very counterproductive. We always tried to have a sense for, we want them to be great partners for us, but we want to be great partners for them as well, and there are obviously times where Things might diverge and we'd have to do something to protect…

AI assessment note: “Trying to make sure that we were with the very best people in the world”

Q What did you find were the most successful ways that a new manager made their way into your diligence process?

A A warm introduction from somebody would always help. Particularly in the venture world, a lot of the ways that we found firms, whenever we would sit down with somebody in our network, be it another venture capitalist, or if we'd gotten to know entrepreneurs or whomever, always ask, hey, who out there is new and interesting that we ought to get to know? That did identify some opportunities for us. That's harder in the buyout world because people are much less prone to be working together. Normally they're competing with each other and A lot of buyout managers, by definition, if someone outbids them for a deal, then that person is stupid. They pay too much for the company. In that universe, it was a little more taking a lot of meetings and looking for the diamond in the rough, and we'd have a lot of meetings that, 15 minutes in, you sort of knew, well, this is probably not for us, and you'd sit there for an hour, an hour and a half. Maybe you'd learn something about the companies they were investing in that was then useful somewhere else. But occasionally, you'd meet a group where, hey, this is a really interesting story, and they seem like they're doing interesting stuff, or they have an interesting set of backgrounds, and they seem really hungry and aggressive, and let's dig into that.

AI assessment note: “A warm introduction from somebody would always help. Particularly in the venture world”

Q As you're looking at re-underwriting the next fund of one of those firms, How do you try to get an understanding of whether that dynamic is working or not within that firm that goes from specialists to the next generation?

A I think it just comes down to spending time with the GPs and trying to get a sense for who's doing what and how are they doing it together. We had a meeting with a group that has undergone this evolution, and they have four verticals. We sat down with the four different teams, and it was pretty striking how each vertical had a different approach to the market in terms of How they were accessing deals, the size companies they were looking for, the way that they were working with operating talent. You really got the sense that, is this really a cohesive firm, or are these four people that now share an office and have some historical connection but have gone their separate ways? That wasn't really what we wanted to see. It's something a lot of firms are going to have to deal with. Some of the firms that verticalized 10 or 12 years ago are now creating Sub verticals. The industrial team is not the industrial team anymore. There's the aerospace team, and the packaging team, and whatever else. It just seems like things are gonna get more balkanized, and how does that work?

AI assessment note: “spending time with the GPs and trying to get a sense for who's doing what”

Q How do you think that institutions need to adapt the way they consider their allocations to both venture and private equity as a result of some of these changing dynamics and the availability capital in the private markets?

A They need to be very realistic about the results that they can generate, particularly in the venture world. It's a lottery ticket business, and the lottery tickets systematically end up in certain places. If you're a institution that doesn't have those existing relationships or a good reason why you think you can access those firms, you really have to ask yourself some serious questions about, well, what results am I going to get here? Is it going to be worth the brain damage, the illiquidity, the time? And what result am I going to get if I cannot invest with those top tier venture firms? The list of who's a top tier venture capitalist is maybe a little broader than it was 15 or 20 years ago, and there are probably more people that have, from a standing start, been able to move into that realm than was the case for a lot of my career. You want to be very realistic about your probability of actually finding those people if you're saying, well, I can't get into the established Sequoias of the world, so I'll invest in emerging managers, because I think you may find that it's very hard to find the winners, and you may not find the winners often enough to pay for the losers or the mediocre. You have to be very, very realistic about what competitive advantage do you have in terms of accessing that world. The bio world's not quite so hard to access. You need to think a lot about, is …

AI assessment note: “They need to be very realistic about the results that they can generate”

Q On the venture side, on the path from then to now, there's a lot of iterations along the way. How have you thought about investing in that continually changing landscape with more and more institutions initially finding the space?

A Always a focus on who are the people you want to be partnering with. At the end of the day, it is very much a people business. Entrepreneurs, particularly today, can be very choosy about who they want to work with. You want to make sure that the people you're backing have the mind share with the entrepreneurs. That requires spending a lot of time out on the ground, meeting both the venture capitalists, but then also trying to spend time with important people in the industry. That's something the people at Yale have done quite well in the last 10 years. I got out of the venture business probably eight or nine years ago now because it was getting too complicated to do both, but the people I turned the portfolio over to I think have done a very good job of figuring out how do we stay in that information flow when we're a couple steps removed from the coal face. Spending time, particularly in Silicon Valley, but elsewhere, trying to build a network of smart young people that are Probably going to do interesting things and know who they're thinking about. That's really important.

AI assessment note: “Always a focus on who are the people you want to be partnering with.”

Q What now? This has been the one job you've had your whole career, and it's finally time to step away.

A I'm not going to have another nine to five job, but I am interested in finding ways to stay engaged. I've been on a couple of investment committees for two foundations for many years, and I've really enjoyed doing that. I'm interested in more roles like that. There's a European foundation I'm doing a little bit of work with, helping them think about Some of the ways that they establish their operations and build their team, their portfolio. I've gotten some outreach from some firms, particularly in the world of how do younger, newer firms think about how they ought to build themselves, grow themselves, how do they raise money? I could end up involved in something like that. I'm very open to working with individual GPs that might look to have somebody that brings an LP perspective to what they're doing, to think about Issues around firm strategy and growth and evolution and fundraising and all of those things.

AI assessment note: “I'm not going to have another nine to five job, but I am interested”

Q In those early years, what did the deals look like, the numerical aspects of a deal, valuation multiples of the firms that you were investing in?

A There was a time, probably in the early nineties, where people stopped talking about EBIT multiples, earnings before interest in taxes, and started talking about EBITDA multiples, heading in depreciation and amortization. I think they hoped nobody would notice. They were probably right to change the terminology, but it was sort of a way to pretend that valuations weren't creeping up, and the returns from those deals wound up being, for the most part, very good, so. It was all fine, but it was also in a period of a long bull market, so that certainly helped. You could see that competition was getting more intense as more people entered the business. Nature abhors a vacuum. If there's a world where firms are generating consistently 30, 40% IRRs, people are going to notice that, and some people are going to say, hey, I should do that too, and then the returns inevitably get bid down. One thing that some of the early firms we worked with had a real problem with, they were used to underwriting deals to 40% returns, and they'd see others undercutting them on that metric, and they'd naturally be upset and think that, oh, those people are overpaying. We had a firm in particular that said explicitly to us, we're still looking for deals we can underwrite to 40%, and the deals that they wound up underwriting turned out to be pretty risky situations, and a fair number of those risks wound …

AI assessment note: “people stopped talking about EBIT multiples... and started talking about EBITDA multiples”

Q How did you go about measuring and monitoring that aspect of operational improvements along the way?

A Certainly we would spend a lot of time with the managers, try to understand what it is they were doing with their companies once they had bought them, meeting the operating talent and trying to understand what role they were playing. I think one thing we learned pretty quickly was not straightforward to bring in a guy who'd been a successful CEO at a big Fortune 500 company and have him parachute into an LBO situation as a board member or operating partner. You had to find people with the right skill set and mentality. A lot of CEOs are Used to being the boss, having their way. They're used to having a lot of resources around them if they're from bigger companies, and particularly at that point in time, the buyout world, we're typically buying much smaller businesses. So to take some ex-CEO of General Motors or General Electric and expect him to be on the board of a hundred million dollar company and add some value was not a great strategy. Finding people with the right background, skill sets, wanting to be mentors and resources for company managements, but not Undermining the CEO and creating confusion about who's ultimately responsible for success, that became pretty evident. It was one thing to say you have operating talent, getting it to actually produce is another thing. I think a lot of nuances firms had to learn in that process. Particularly as firms evolved and grew, so…

AI assessment note: “spend a lot of time with the managers, try to understand what it is”

Q In those early years, when firms are underwriting, 40%, 30% IRRs, what did the valuation spread look like between a private company that was going to undergo an LBO and a public company?

A It would certainly depend. One thing that changed companies undergoing leveraged buyouts as multiples went up consistently for the 40 years of my career, the multiples in the public market went up a lot too. Some of the success that our managers generated in the nineties and the first half of the 2000 was due to equity multiples going up in general. The whole 40 years until very recently was a story of declining interest rates and multiples ought to go up in a market like that. That's something people need to be realistic about as they're thinking about returns from alternative assets and looking back over the last 40 years and saying, oh, Yale and people like Yale generated these fantastic results from leveraged buyouts and related things. If we're in a period of rising interest rates for the next 40 years, that might not be such a great place to be. And it's obviously very hard to make predictions about the future. Institutions need to be careful to think that something is a panacea. And just because something has worked for a particular set of institutions over some period of time, it's not a guarantee of future success.

AI assessment note: “It would certainly depend. One thing that changed companies undergoing leveraged buyouts”