The Ledger
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Sullivan: Parachuting former Fortune 500 CEOs into small buyout boards fails
“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 …”
Sullivan: 40 years of PE returns were driven by falling interest rates
“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 mar…”
Sullivan: Founders, not VCs, control modern late-stage startup exit timelines
“The biggest problem is they're not really in the hands of the venture capitalists. They're in the hands of the entrepreneurs. If you're an entrepreneur who doesn't want to bother being a public company, they're real questions for institutions about how do they…”
Sullivan: Scaling buyout funds suffer Peter Principle as target companies grow
“The challenge along the way is that sometimes the skill set that works with the small company is not Applicable to the bigger company. Also, bigger companies tend to be better managed, so maybe there's less you can do with them while you own them. There is a P…”
Sullivan: A $5B fund at 15% pays far more carry than $500M at 30%
“The carried interest on a five billion dollar fund compounding at 15% return is a lot more than the carried interest on a five hundred million dollar fund compounding at a 30% rate return. Plus, obviously, the fees are 10 X.”
Sullivan: Retail private equity investors will face disappointing net returns
“There are going to be a lot of doctors and dentists who are pretty disappointed 10 years from now with the net returns that they're getting from their financial advisor plowing their capital into private equity. Gross returns might be fine, but between the fee…”
Sullivan: Buyout firms routinely overpaid at 20-plus times EBITDA during COVID
“Buyout firms routinely paying 20 plus times EBITDA for quality businesses, but businesses that probably should not trade at that high valuation. Doing that in a world where interest rates were zero, and there was a lot of money being pumped into the economy by…”
Sullivan: Buyout managers anchor to cost basis instead of cutting bad deals
“They get too anchored to cost as a measure of value, and if they can't get cost, they're going to do whatever they can to get their cost back, and in fact, they might be better off to sell an investment that is not going to perform well no matter how long you …”
Sullivan: GP-led secondaries fail to do limited partners a true service
“The problem, from my standpoint, is we always thought at Yale, one of the reasons we hire these guys is because they know when's the right time to sell an asset. And we're sort of relying on them to do that. And then if they default that decision back to us an…”
Sullivan: Private equity will struggle to drive alpha like the past 40 years
“It's going to be very difficult for private equity, broadly defined venture and buyout and related stuff to be the single defining alpha creating strategy for institutional investors the way that it's been over the last 3540 years.”
Sullivan: Systematically finding 20%+ returning VC funds will be very hard
“I'm sure there will be times in the future where we have venture booms again, but the odds of systematically finding firms that are Consistently producing 20% plus returns and the occasional 80% returning fund. It's going to be very, very hard for that to happ…”
Sullivan: Buyout firms likely exit top-performing companies too quickly
“In fact, if anything, I'd say that buyout firms are probably too quick to sell their good businesses. Rather than churning over your good companies every three or four years, maybe you want to let them run a little longer and let them compound for maybe five o…”
Sullivan: Private equity sells winners in 4 years and holds losers for 12
“What winds up happening is the good businesses get sold in three or four years. The bad businesses hang around for 10 or 12 years. The GPs just think, well, I can fix this, and two years from now it'll be better, and a lot of times when an asset isn't performi…”
Sullivan: Maintaining an investment edge is harder in buyouts than in venture
“A lot more of it is just financial engineering and less differentiated a skill set, so maintaining your edge there is probably harder.”
Sullivan: Yale is unsure if PE verticalization will succeed long term
“That's playing out in real time in larger firms that Yale has worked with, and we're not always sure that that's going to be a successful evolution in the long run.”
Sullivan: Buyouts cannot tolerate portfolio zeros like venture capital can
“In the venture world, the winners pay for a lot of losers and it's okay to have half your portfolio return nothing. In the buyout world, typically your winners are somewhere between two and a half and four and a half X, and then occasionally maybe you get an o…”
Sullivan: One peak dot-com VC fund exited its losing investments at 3x
“One of our venture capitalists had a famous quote, our winners we sell for 20 times our money, and our losers we sell for three times our money. And it was true.”
Sullivan: Halting venture allocations in 1995 would have been a huge mistake
“We could have pumped the brakes in 1995, and it would have been a huge mistake.”
Sullivan: Yale walked away from top buyout manager after 7.5x fund expansion
“We had a firm that we worked with. We were in their first two institutional funds in the early 2000 period. They were both spectacularly successful. When they raised their third institutional fund, they set out to raise a fund that was seven and a half times t…”
Sullivan: Buyout firms relying on SBA leverage generally perform poorly
“One thing I never liked was we would have buyout firms come to us and talk about Oh, we're going to get all this leverage from the Small Business Administration. That's going to allow us to goose the returns and do all this clever stuff. To me, that was always…”
Sullivan: Power inverted as top VCs beg AI founders for 3% stakes
“When I started, if you were a smart guy in Silicon Valley, you crawled on your hands and knees up Sand Hill Road to Sequoia or Kleiner Perkins and begged them to invest. They'd invest Three million dollars and own 30% of your company. Now it's the other way ar…”
Sullivan: Institutional LPs fail to interrogate GPs on sell decisions
“I think institutions don't do a good job of asking GPs about sell decisions in general.”
Sullivan: Institutional LPs playing 'gotcha' with GPs is counterproductive
“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…”
Sullivan: Angel investor outperformance often stems from luck across large distributions
“If there are 5000 people in Silicon Valley writing these angel checks to entrepreneurs, Some of whom end up starting the Ubers of the world. You're gonna have a bell curve of outcomes, and somebody can be on the top end of the bell curve because they're really…”
Sullivan: Venture capital is driven by a self-reinforcing success feedback loop
“It is such a feedback loop business where success begets success. The best venture firms would attract the best entrepreneurs. They had the best corporate relationships. They could hire the best partners. If you were an entrepreneur needing help with your star…”
Sullivan: Operating capabilities are table stakes to win modern PE auctions
“Pretty much all of it now has adopted that model because it's become table stakes. And if you don't have those abilities, you can't pay the price that it takes to win an auction for an asset these days. So you need to have those skill sets internally.”
Sullivan: PE firms must pre-position ahead of auctions to manage risk
“In a world where it is so crowded and competitive and expensive, firms need to figure out today a way to get ahead of those processes, not so that they're necessarily buying businesses outside of auctions or buying them at bargain prices because the sellers ar…”
Sullivan: Swensen's aggressive 1987 crash rebalancing was correct for Yale
“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 w…”
Sullivan: KKR's RJR Nabisco buyout proved to be a mediocre deal
“Some of those deals didn't wind up working out very well, and RJR proved to be a very mediocre deal for KER.”
Sullivan: PE adopted EBITDA in the 1990s to mask rising valuation multiples
“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…”
Sullivan: Chasing legacy 40% underwriting targets leads PE managers to failure
“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 up blowing up in thei…”
Sullivan: PE benchmarking requires qualitative risk evaluation beyond raw IRR numbers
“Two firms with 20% IRRs might have very different risk profiles, and so you want to understand that. The problem is a lot of that's hard to quantify, so inevitably you have to just Have a qualitative assessment of what are these people doing, and has it worked…”
Sullivan: Yale's pre-bubble VC gains offset late-90s dot-com fund losses
“We had some spectacularly bad funds in the late nineties that we committed to, but their predecessors More than paid for what we lost in that period of time.”
Sullivan: Venture capital is a lottery ticket business concentrated in specific firms
“It's a lottery ticket business, and the lottery tickets systematically end up in certain places.”
Sullivan: Top-tier VC list is broader today than 15-20 years ago
“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.”
Sullivan: Bad private fund commitments lock up capital for 15 to 20 years
“On the private side, if you make a mistake, you're stuck with it for 15 or 20 years, or you have to take a huge haircut in the secondary market. Sometimes you just will not find people that want to buy your crummy fund.”
Sullivan: Allocators only learn if GPs are good partners during downturns
“The venture business has its bust every 10 or 15 or 20 years, and it's when times are bad that you really learn, are people good partners? It's easy to be a good partner when everybody is making lots of money.”
Sullivan: GP-led secondaries originated around 2010 to resolve zombie funds
“Some of the original GP secondaries came out of that world. That's how that whole phenomenon started, that you had these zombie funds in the 2000 ten-ish era, where it was clear that there was no way for the GP to earn a carry, but There needed to be some kind…”
Sullivan: Overly complex fund structures often signal underlying manager problems
“If things got too complicated structurally, that was often a sign of a problem.”
Sullivan: Sourcing managers via peer referrals is harder in buyouts than venture
“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 mu…”
Sullivan: Yale never reinvested with a manager after dropping them
“There certainly weren't instances where we were an investor with somebody, pulled the plug, and then got back on board. That was often just too hard.”
Sullivan: Yale did not dwell on missed venture capital partnerships
“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…”
Sullivan: Five-deal track records suffer from small sample sizes and survivorship bias
“Part of what went wrong is just that if people have five or six deals in their track record, that's really not a representative set. Maybe they did just flip heads Five times in a row and look good. And one of the problems is you never see the people who flipp…”
Sullivan: Yale's massive China gains stemmed from backing Hillhouse's Lei Zhang
“Whereas we want to make a huge amount of money in China, as China opened up as an investment opportunity, but a lot of that happened because of our relationship with Lei Zhang, who founded Hill House, and he happened to go to Yale's business school, and he hap…”
Sullivan: Bottom-up manager selection outperformed top-down mandates at Yale
“Keeping an eye out for interesting, creative people who maybe are trying to blaze a new trail and seeing how it goes, that was a much more successful strategy for us than a sort of top-down decision to, now we need to be spending time on this.”
Sullivan: Manager selection is by far the most important factor in PE
“People read the book and see all the success Yale has had in the private equity world, in the hedge fund world, in places where manager selection is really by far the most important factor in success.”
Sullivan: Managers should own failed risks rather than blaming acts of God
“It always really bugged me when managers would take a risk, and then the risks blew up in their face, and they'd act like it was some act of God that they couldn't possibly have foreseen and so shouldn't be punished as it were for.”