The Wisdom Wall

“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…”

“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.”

“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 ever get liquidity and how they get the premium pricing…”

“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 Peter Principle thing at work sometimes that firms start out…”

“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.”

“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 own it, freeing up your capital, and probably more…”

“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 and say, well, you can sell on the secondary or not, it's up…”

“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 performing, it never performs.”

“A lot more of it is just financial engineering and less differentiated a skill set, so maintaining your edge there is probably harder.”

“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 outlier above that. You cannot have too many zeros in your…”

“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 around that Sequoia and Kleiner Perkins are crawling on their…”

“I think institutions don't do a good job of asking GPs about sell decisions in general.”

“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…”

“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 good at what they do, or they can just have been lucky.”

“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 startup and capital, and you'd look around and say, this group…”

“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.”

“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 are pretty sophisticated and they know what their businesses…”

“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 their face. It was not the right decision to say we're gonna…”

“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, and have they been paid for it?”

“It's a lottery ticket business, and the lottery tickets systematically end up in certain places.”

“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.”

“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.”

“If things got too complicated structurally, that was often a sign of a problem.”

“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.”

“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 flipped tails five times in a row because they don't try to raise…”

“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.”

“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.”

“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.”

“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.”

“We always found it extremely useful to talk to the CEOs and the entrepreneurs of the portfolio companies of the venture firms”

“Trying to find people where the answer is not just they had money is really important. That's true across the private investment world is there are tons of people with money. There's tons of money out there. You need to ask why the people that are making the decision are taking the money from the group that you might…”