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Scott Sperling on Innovative Investment Strategies (Podcast) · Masters in Business

0:02
Speaker 1: This is Mesters in Business with very Renaults on Bluebird Radio.
0:09
Speaker 1: This week on the podcast, I have an extra special guest,
0:12
Speaker 1: Scott Sperling, co CEO of TH H LEE. He's on
0:16
Speaker 1: the firm's management and investment committees. UH TH H LEE
0:21
Speaker 1: is one of the top private equity firms. They've been
0:24
Speaker 1: around since the nineties seventies. They've done countless, countless deals,
0:29
Speaker 1: hundreds and hundreds of deals. Um, you might be familiar
0:33
Speaker 1: with some of their bigger deals. They did to Warn,
0:36
Speaker 1: a music deal that was a multibillion dollar deal about
0:39
Speaker 1: twenty years ago. Duncan is a group of franchises from
0:44
Speaker 1: Dunkin Donuts. Perhaps the biggest deal they did, or or
0:48
Speaker 1: the most mind share was the Snapple deal. They bought Snapple,
0:53
Speaker 1: they took him public, they facilitated the sale to Quaker Roats.
0:57
Speaker 1: That was really the first time I had private equity
1:01
Speaker 1: on my radar. It's like, really, someone just came along
1:04
Speaker 1: and said, here's hundreds of millions of dollars for Snapple,
1:07
Speaker 1: and let's sell them for a billion dollars, take them public.
1:10
Speaker 1: It really fascinating, fascinating story. UH Sparling is as knowledgeable
1:16
Speaker 1: about private equity and valuation and how that sector and
1:21
Speaker 1: entire industry really is changing. Oh I forgot to mention
1:26
Speaker 1: he ran alternative investments for the Harvard Endowment for about
1:30
Speaker 1: a decade. Really super unique perspective and just uh fascinating
1:36
Speaker 1: insights into the sector. If you are at all interested
1:40
Speaker 1: in in private equity, in the nature of these transactions
1:44
Speaker 1: and how alternatives are changing, then you're gonna find this
1:48
Speaker 1: to be really a fascinating conversation. So, with no further ado,
1:52
Speaker 1: my discussion with co CEO of th h Lee Scott Sperling.
1:59
Speaker 1: This is mesters in Business with very Renaults on Bloomberg Radio.
2:06
Speaker 1: My special guest this week is Scott Sperling. He is
2:09
Speaker 1: the co chief executive officer at Thomas H. Lee, of
2:13
Speaker 1: famed private equity firm. He's also a member of the
2:17
Speaker 1: firm's management and investing committees. From four to two thousand
2:22
Speaker 1: and six, th h L raised over twenty two billion
2:25
Speaker 1: dollars in six institutional funds and completed more than a
2:29
Speaker 1: hundred investments. Currently, their flagship funds has about five billion
2:34
Speaker 1: dollars and the Automation funds about nine hundred million in
2:38
Speaker 1: LP assets. Scott Sperling welcome to Bloomberg. Well, thank you.
2:45
Speaker 1: It's a pleasure to be here with you. So let's
2:48
Speaker 1: start a little bit with your background. You were at
2:51
Speaker 1: the Boston Consulting Group long before Uh, you're an asset management.
2:56
Speaker 1: Tell us about your years as a consultant and how
2:59
Speaker 1: did that lead into private equity. Well, I joined BCG
3:04
Speaker 1: out of business school. Uh, And there was no great
3:08
Speaker 1: intent on my part. I was twenty three years old
3:11
Speaker 1: and had lots of loans, and consulting was one of
3:14
Speaker 1: the higher paying jobs you can get in those days.
3:16
Speaker 1: But it was a great experience because it really put
3:19
Speaker 1: somebody who was young and reasonably inexperienced in a place
3:24
Speaker 1: where you can apply the kind of analytics that you
3:27
Speaker 1: get used to in business school to the real world
3:30
Speaker 1: working with C suite executives at very large companies around
3:34
Speaker 1: the world. So the experience there was, you know, really
3:38
Speaker 1: quite intensive, and for me, it was about three and
3:41
Speaker 1: a half years of just being fed with fire hose
3:45
Speaker 1: of exposure to senior managers who were running some of
3:48
Speaker 1: the most interesting companies globally. And you eventually end up
3:54
Speaker 1: running alternative investments for the Harvard Endowment funds. You were
3:58
Speaker 1: there for more than a decade, how did you find
4:00
Speaker 1: your way to the Harvard Investment Company. So it was
4:04
Speaker 1: one of those moments in life where you get a
4:08
Speaker 1: call out of the blue and you're asked to consider
4:10
Speaker 1: something that you'd never considered before or even truly understood.
4:15
Speaker 1: And Walter Cabot, who had started the Harvard Management Company,
4:20
Speaker 1: it's one of the first third party managers of a
4:23
Speaker 1: major endowment. It was wholly owned by Harvard but run
4:26
Speaker 1: completely separately under Walter's leadership, had decided that rather than
4:31
Speaker 1: sticking with a typical thirty five split of U S,
4:36
Speaker 1: domestic equities, and and bonds, he wanted to expand in
4:40
Speaker 1: some new areas. And he made the decision that rather
4:43
Speaker 1: than bringing somebody in with the typical investment management background,
4:48
Speaker 1: they want somebody with more of a business analytics background.
4:51
Speaker 1: And I went in was incredibly impressed with Walter and
4:55
Speaker 1: his vision for where he wanted to take the management
4:58
Speaker 1: company and how he was looking for ways to really
5:02
Speaker 1: give the endowment an ability to participate in areas that
5:05
Speaker 1: he felt had higher risk adjusted returns go forward basis.
5:10
Speaker 1: And he convinced me that this would be a great
5:12
Speaker 1: thing for me to do, and I started there, and
5:16
Speaker 1: we opened up activities in what in those days we
5:21
Speaker 1: thought of private equity, mostly as venture capital, but then
5:24
Speaker 1: moved into the buy out space, investing largely in funds
5:28
Speaker 1: and then doing some co investing. There was some real
5:30
Speaker 1: estate holdings at Harvard already had, but that was an
5:33
Speaker 1: area that I was given and then what we ended
5:35
Speaker 1: up calling commodities, which was largely oil and gas and
5:38
Speaker 1: timber in those days. And so it started with almost
5:42
Speaker 1: nothing and grew to a little over of the endowment
5:46
Speaker 1: by the time I left eleven years later, so that
5:49
Speaker 1: was more than a decade. When did you end up
5:51
Speaker 1: starting there? What was the date? So I started in
5:54
Speaker 1: UM eighty four and left in late we're recording this
5:59
Speaker 1: not long after the David Swinson, who's been running the
6:03
Speaker 1: Yale Endowment for decades has passed away. This seems somewhat
6:08
Speaker 1: similar to the model that Yale was using under under Swanson.
6:14
Speaker 1: How much competition was there amongst the ivys um for
6:18
Speaker 1: performance and how much did each of the endowments that
6:23
Speaker 1: you were familiar with, How aware were each endowment of
6:27
Speaker 1: what the others were doing. Was it sort of collegial
6:31
Speaker 1: or was it, you know, competitive, I would say it
6:34
Speaker 1: was more collegial in those days. As we pushed into
6:37
Speaker 1: some new areas, we would often not only cooperate, but
6:42
Speaker 1: there was some level of collaboration. So we had pushed
6:46
Speaker 1: into again venture capital and and early buyout. In that
6:52
Speaker 1: eight five period, David was starting at Yale and he
6:56
Speaker 1: was similarly doing some of the same things. We worked
6:59
Speaker 1: together are on a number of oil and gas opportunities,
7:03
Speaker 1: so there was a level of cooperation that underlined a
7:07
Speaker 1: lot of what we did. UM. Now, I think Harvard
7:12
Speaker 1: accelerated a little more quickly than some of the other
7:16
Speaker 1: i'ves did into these areas. We had the strong support
7:20
Speaker 1: of the Harvard Corporation UH to UM explore these kinds
7:25
Speaker 1: of activities. I would UH often do presentations to them
7:31
Speaker 1: about how it was going, and we had reasonable early success,
7:35
Speaker 1: which which helps UM and UH I think is UM.
7:40
Speaker 1: As it became comfortable for Harvard to do it, others
7:46
Speaker 1: U others also jumped in UM. I think Yale about simultaneously,
7:51
Speaker 1: and some of the other Ivy League endownments followed quite
7:56
Speaker 1: in drinking, so the world of alternatives has certainly changed,
8:01
Speaker 1: and your involvement dates back almost forty years what do
8:07
Speaker 1: you see as some of the biggest changes that have
8:10
Speaker 1: taken place in private equity? Well, I think the the
8:16
Speaker 1: nature of what we have to do to drive superior
8:20
Speaker 1: returns continues to get more labor intensive, requiring higher levels
8:27
Speaker 1: of value add. Early on, I think there were lots
8:33
Speaker 1: of opportunities UM that did not require the level of
8:38
Speaker 1: intensity of UM, either operational value add or necessarily UM
8:46
Speaker 1: UH the ability to use acquisitions as platforms for UM
8:53
Speaker 1: UH consolidating industries. The returns were often driven by the
9:00
Speaker 1: ability to enter at multiples that are significantly lower than
9:06
Speaker 1: what we typically see today. UH. The use of leverage
9:10
Speaker 1: was not all that well known, particularly in the early
9:13
Speaker 1: part of the eighties and mid eighties, and so in
9:16
Speaker 1: the the the buy outside of private equity UM, there
9:21
Speaker 1: was an opportunity that that really doesn't exist today to
9:27
Speaker 1: to buy things so very cheaply relative to their intrinsic
9:31
Speaker 1: value UH, and then you were able to ride that
9:35
Speaker 1: to relatively strong returns I think today UM. And you know,
9:40
Speaker 1: really for the last decade, you know, pricing has been
9:43
Speaker 1: anywhere from fair to frall fee UM. And in order
9:47
Speaker 1: to generate the kinds of returns that we expect UH,
9:50
Speaker 1: and that our investors expect UM. You know, our organizations
9:55
Speaker 1: are dramatically larger, have much higher levels of that pertise
10:01
Speaker 1: UH and much higher levels of specialization. So UM, you know,
10:05
Speaker 1: it's still a really good business to be in UH,
10:10
Speaker 1: something that I think has brings together both investment skills
10:17
Speaker 1: and UM the ability to participate in UM growing really
10:23
Speaker 1: important enterprises. UH. So you know, as an individual, UM,
10:29
Speaker 1: you know, it's a it's a continues to be a
10:33
Speaker 1: a fun and exciting place to be. But the nature
10:36
Speaker 1: of an intensity of the work that we have to
10:39
Speaker 1: do to as I mentioned, sustain these high returns has
10:43
Speaker 1: certainly increased dramatically. So I know you didn't get to
10:47
Speaker 1: Tom and h Lee until the mid nineties or so,
10:52
Speaker 1: but I have a vivid recollection of the Snapple deal
10:57
Speaker 1: that they did uh in two and really that was
11:01
Speaker 1: my first recognition that hey, private equity has some real
11:06
Speaker 1: firepower the and and back then these were all called
11:10
Speaker 1: l b o s or buyouts or what have you.
11:12
Speaker 1: But but that seems to be like a real turning
11:16
Speaker 1: point UM for pe. What what's your recollection of the
11:20
Speaker 1: significance of that deal? Am I making too much of
11:23
Speaker 1: this or was that like a really big moment No.
11:28
Speaker 1: I think it was a really big moment. UM. You know,
11:30
Speaker 1: I joined in ninety four. UM, the Snapple investment was
11:33
Speaker 1: made in and monetized and the the ability to buy
11:42
Speaker 1: a company and make your money on the growth of
11:45
Speaker 1: that enterprise, as opposed to the traditional buy out up
11:51
Speaker 1: to that period of time, which was to buy large
11:54
Speaker 1: enterprises that might not be as efficient as they should
11:58
Speaker 1: be often had a aggregation of dissimilar businesses where there
12:04
Speaker 1: was value to disaggregating those businesses. You know, A model
12:09
Speaker 1: that applied to the great majority of of of buyouts
12:14
Speaker 1: that were done up through that period was something very
12:18
Speaker 1: different than the ability to identify a company that had
12:23
Speaker 1: the ability to significantly grow revenues where you can bring
12:29
Speaker 1: at least some strategic direction uh to the founders of
12:33
Speaker 1: that company that allowed for the growth to accelerate. And
12:37
Speaker 1: that's one of the things that we saw on Snapple,
12:40
Speaker 1: and that became a model for a lot of other
12:43
Speaker 1: things that happened, UH in the industry. UM. You know
12:47
Speaker 1: in the mid nineties. UM. You know, my UH partner
12:53
Speaker 1: Tony donovi and I, UM we're involved in the UH
12:58
Speaker 1: the buyout of the tr w H business, UM, the
13:02
Speaker 1: information services business that became Experience uh, and some early
13:08
Speaker 1: things like fish or scientific um where we were identifying
13:13
Speaker 1: opportunities um uh where the ability to significantly grow the
13:20
Speaker 1: enterprise was how you were making your money again, not
13:24
Speaker 1: not just on buying something that was inefficient and uh
13:28
Speaker 1: perhaps aggregated in ways that uh made less sense than
13:34
Speaker 1: disaggregating them. So to clarify this isn't just saying, hey,
13:40
Speaker 1: that's a good company, but it's inefficient and we can
13:42
Speaker 1: make it run better. Are you really talking about strategically
13:46
Speaker 1: redeploying the assets of a company in order to generate
13:50
Speaker 1: a faster growth rate, a better return, etcetera. I think
13:55
Speaker 1: that's a fair characterization. Yes. And before we get into
13:59
Speaker 1: more details about private equity, I have to ask CO
14:03
Speaker 1: C e O S, how how is that working out?
14:06
Speaker 1: Some firms I know find it really challenging to do that.
14:11
Speaker 1: I've been doing it for over twenty years. It's worked
14:13
Speaker 1: out extraordinarily well. I think we try to bring together
14:17
Speaker 1: talents that are complementary, and you know, when you're looking
14:21
Speaker 1: at the broad range of tasks at hand with the
14:24
Speaker 1: firm like ours, it's always nice to have a partner
14:27
Speaker 1: to talk to, divide and conquer, makes it makes a
14:30
Speaker 1: lot of sense. So mentioned earlier, some of the valuation
14:34
Speaker 1: concerns that the market is certainly less cheap than it
14:38
Speaker 1: once was. Let's talk about alpha in private equity in general,
14:43
Speaker 1: and the idea that private equity had access to companies
14:48
Speaker 1: at lower multiples across the board, lower than the public markets,
14:52
Speaker 1: lower than a lot of private market pricing. Is that
14:56
Speaker 1: just now a historical footnote and we'll never see that again,
15:00
Speaker 1: or is this one of those cyclical things that rises
15:04
Speaker 1: and falls with like everything else. Well, I've I've long
15:08
Speaker 1: learned the hard way that I'm not great at predicting
15:13
Speaker 1: the future in lots of different ways. So I can't
15:16
Speaker 1: tell you that will never see it again. What I
15:19
Speaker 1: will say is that there is an awareness on the
15:22
Speaker 1: part of sellers of the value of leverage. That was
15:26
Speaker 1: something that was less well known in the eighties and
15:30
Speaker 1: even in the early nine nineties, And the nature of
15:35
Speaker 1: what we do really is much more dependent upon picking
15:40
Speaker 1: industries and sectors and subsectors wisely and then having the
15:45
Speaker 1: ability to drive operational value improvements at these portfolio companies.
15:54
Speaker 1: That is a skill set that requires a large number
15:57
Speaker 1: of expert individuals who have specialization both in domains, the
16:04
Speaker 1: subsectors or industries that we focus upon, and also a
16:08
Speaker 1: high degree of expertise in being able to improve the
16:12
Speaker 1: key business processes of companies in ways that allow that
16:17
Speaker 1: company to increase its competitive position such that we can
16:21
Speaker 1: drive higher rates of growth on the revenue side, make
16:25
Speaker 1: the company more efficient so that we can drive even
16:27
Speaker 1: higher rates of growth on the profit and cash flow side.
16:31
Speaker 1: So so let's stick with this topic because it's really,
16:34
Speaker 1: you know, a key issue underlying markets these days. There's
16:38
Speaker 1: an observation and I'm not sure if I'm paraphrasing or
16:41
Speaker 1: this is an exact quote, but quote, it is problematic
16:45
Speaker 1: for asset valuations when company multiples are disproportionately high when
16:50
Speaker 1: compared to the company's true growth rate unquote. Give us
16:54
Speaker 1: a little more flesh on that. So, you know, generally,
16:57
Speaker 1: we're trying to buy companies reflective of what you might
17:02
Speaker 1: call the intrinsic or fair value of the company. And
17:06
Speaker 1: as we've looked back over time, the key drivers of
17:09
Speaker 1: that would be the return uninvested capital characteristics of the
17:14
Speaker 1: specific company, and more broadly, the industry and Secondly, and
17:19
Speaker 1: perhaps you know over a broader range of calculated outcomes,
17:24
Speaker 1: it would be the sustainable growth rate of the company.
17:28
Speaker 1: So we're very focused on buying companies where the acquisition
17:33
Speaker 1: multiple is reflective of what we believe to be the
17:37
Speaker 1: sustainable growth rates of that enterprise might be. And one
17:41
Speaker 1: of the things that we have learned over time is
17:45
Speaker 1: you can pay a reasonably high acquisition multiple if you
17:47
Speaker 1: believe that sustainable growth rate is about that same category
17:53
Speaker 1: as the acquisition multiple. So for example, you know you
17:57
Speaker 1: could pay fifteen times for a company, but you would
18:00
Speaker 1: like to believe that that's growing at about k you're
18:04
Speaker 1: on the EPIDA or cast flow side. What you don't
18:07
Speaker 1: want to do is pay fifteen times for something growing
18:10
Speaker 1: five or seven percent. And so you know, as we
18:13
Speaker 1: look at the world, there are enterprises out there that
18:16
Speaker 1: that are in the sectors that we think have very
18:20
Speaker 1: significant growth opportunities going forward, and um you know you're
18:24
Speaker 1: going to pay a multiple that is reflective of that.
18:27
Speaker 1: Just try to stay away from paying um uh multiples
18:33
Speaker 1: on the d A of the company that is um
18:38
Speaker 1: a much higher number than that sustainable growth rate. So
18:43
Speaker 1: so capital these days is both plentiful and cheap. What
18:48
Speaker 1: does all this cheap availability of debt due to the
18:51
Speaker 1: playing field, how does it affect both the availability of deals,
18:56
Speaker 1: the attractiveness is of deals and competition? Well, the uh,
19:04
Speaker 1: you know, it's a funny thing people, UM say, what's
19:07
Speaker 1: going to happen when interest rates go up? Is it's
19:10
Speaker 1: going to make your business much tougher. And what we
19:12
Speaker 1: normally see when interest rates rise is the obviously the
19:16
Speaker 1: inverse on multiple side. And that's because there's a clear
19:20
Speaker 1: relationship between you know, the cost of capital and the
19:23
Speaker 1: multiple you can afford to pay for a company. So
19:26
Speaker 1: I think those things tend to self correct UM if
19:29
Speaker 1: we move away from UM this UM uh relatively inexpensive
19:37
Speaker 1: debt debt capital that we are currently seen. UH. Clearly,
19:43
Speaker 1: the very low base rates that we have UM have
19:48
Speaker 1: allowed the markets to achieve overall multiples that are higher
19:53
Speaker 1: than on an absolute basis than we've seen it UM
19:58
Speaker 1: at many points in history. And I would expect that
20:01
Speaker 1: if the base rate increases that you're going to see
20:04
Speaker 1: some contraction in market multiples and that will flow through
20:08
Speaker 1: to to what we see on the buy outside as well.
20:11
Speaker 1: M really really quite interesting. So so I mentioned the
20:15
Speaker 1: Snapple deal from nine two. You guys picked that up
20:19
Speaker 1: for a song before bringing in public and then eventually
20:24
Speaker 1: having it UH taken over by Quaker Roads. UM, and
20:28
Speaker 1: I think the initial price was something like three million dollars.
20:32
Speaker 1: Today we see deals in the billions of dollars all
20:35
Speaker 1: the time. How different is pe deals in terms of
20:39
Speaker 1: size compared with a decade or two ago. Well, a
20:44
Speaker 1: decade ago we were seeing some very large deals. Are
20:47
Speaker 1: you were seeing some billion dollar buyouts. A decade before that,
20:53
Speaker 1: you were orders of magnitude lower. So you know, it's
20:56
Speaker 1: your point. Most deals were being done less than a
20:59
Speaker 1: billion of enterprise value. In the nineties. There were a
21:03
Speaker 1: handful of deals that were done that were significantly larger
21:07
Speaker 1: than that, but that was those were more anomalous than
21:10
Speaker 1: the than the norm. UH. Today, UM, you're seeing again
21:16
Speaker 1: a return to transactions that are in that UH five
21:21
Speaker 1: to billion dollar enterprise value range. And there are a
21:24
Speaker 1: lot of things being talked about that are actually larger
21:28
Speaker 1: than that. So you know, UH, private equity UH will
21:34
Speaker 1: UM continue to look for transactions. UH. Individual firms will
21:41
Speaker 1: look for transactions that are appropriate relative to the size
21:44
Speaker 1: of their funds. UM some of us are focused on
21:48
Speaker 1: what we would call middle market. Uh, we are focused
21:52
Speaker 1: on middle market growth companies. There are other firms that
21:55
Speaker 1: are spanning into you know, what you would call very
21:59
Speaker 1: very large enterprises. And again that reflective of the fun
22:04
Speaker 1: sizes that some of them have raised or our targeting.
22:09
Speaker 1: So when the Warner Music deal was done, I think
22:12
Speaker 1: that was two point six billion. That was a pretty
22:14
Speaker 1: big deal for for Thomas Lee back then you were there,
22:18
Speaker 1: what do you recall of that that deal, which many
22:22
Speaker 1: observers have said is has been transformational for a lot
22:27
Speaker 1: of the music industry. Well, we were looking at the
22:30
Speaker 1: opportunity to buy a iconic company that had been part
22:37
Speaker 1: that clearly was was a key part of the history
22:41
Speaker 1: of Time Warner, but where the parent had kind of
22:46
Speaker 1: moved beyond that particular sector. And we believed that the
22:51
Speaker 1: ability to see a transformation in the way music was
22:56
Speaker 1: distributed presented a broad set of opportunities that we could
23:00
Speaker 1: reasonably quickly take advantage of. And so we and our partners,
23:05
Speaker 1: particularly Edgar Bronfman, who we brought in as the CEO
23:09
Speaker 1: of the business and who had a long and deep
23:13
Speaker 1: experience base in music and entertainment more broadly, had a
23:18
Speaker 1: plan that we were able to implement very quickly that
23:21
Speaker 1: allowed us to see a significant growth in the cast
23:25
Speaker 1: flows of the company. And you know, it was one
23:28
Speaker 1: of the deals that was a precursor in many ways
23:32
Speaker 1: to the model we see today, which is be able
23:35
Speaker 1: to add significant operational value to a company in ways
23:40
Speaker 1: that that allow it to that allowed it to significantly
23:44
Speaker 1: increase its cast flows and sustain higher rates of growth
23:48
Speaker 1: in those cast flows than it otherwise might m interesting
23:52
Speaker 1: and one of the areas that h L specializes in
23:57
Speaker 1: is uh financial services were you've had several exits in
24:02
Speaker 1: that space. Tell us a little bit about how you
24:04
Speaker 1: guys developed on expertise in that area, how do these
24:08
Speaker 1: deals take shape, who are the buyers, etcetera. We had
24:11
Speaker 1: long participated in different parts of the financial service world,
24:17
Speaker 1: early on looking at opportunities in balance sheet driven businesses, banks,
24:23
Speaker 1: reinsurance companies and had developed a successful track record there
24:28
Speaker 1: and that migrated to looking at companies in more of
24:32
Speaker 1: the fintech area. And you know, as I think it's
24:36
Speaker 1: you know, all publicly known, we were the key financial
24:41
Speaker 1: partner in the f I S transaction that was done
24:45
Speaker 1: with Bill Foley and Fidelity National, UM, A couple of
24:50
Speaker 1: our partners, Tom Haggertyness Row, plus a number of others
24:54
Speaker 1: have been very involved in a broad range of transactions
24:58
Speaker 1: since then in that sector. And uh so, as you
25:01
Speaker 1: point out, it has been an area of specialization for us.
25:06
Speaker 1: Let's talk a little bit about health care and some
25:09
Speaker 1: of your funds. I'm familiar with the flagship funds and
25:13
Speaker 1: the automation funds. Tell us a little bit about what
25:16
Speaker 1: their focuses are on and how they differ. Our strategy
25:22
Speaker 1: has been to identify certain subsectors that we think have
25:27
Speaker 1: pretty extraordinary growth characteristics. And one of the ones that
25:31
Speaker 1: we have been involved in and have have talked about
25:35
Speaker 1: a lot over the course of the last five or
25:37
Speaker 1: six years has been automation, where we believe that there
25:41
Speaker 1: are very strong, sustainable secular growth drivers that are going
25:46
Speaker 1: to be sustained for probably at least a decade. And um,
25:52
Speaker 1: we we are in a world where um we know
25:55
Speaker 1: that there are significant labor shortages, UM, where there are
26:00
Speaker 1: um uh strong secular trends like to move to e commerce,
26:04
Speaker 1: all well known to everyone. UH. And we've seen the
26:09
Speaker 1: ability of companies that have developed capabilities and technologies to
26:14
Speaker 1: automate a whole series of processes, both industrial and on
26:19
Speaker 1: the distribution warehouse side, that enable us to fill the
26:24
Speaker 1: gaps that can't be filled because of the difficulty of
26:27
Speaker 1: finding employees, to automate jobs that are more mundane and
26:32
Speaker 1: allow employees to be really focused on the higher value
26:37
Speaker 1: aspects of their of the tasks at hand. And these
26:42
Speaker 1: companies continue to uh to find new areas to expand into.
26:48
Speaker 1: So we're going to see much more automation in the
26:52
Speaker 1: office space, and financial services and healthcare, all again things
26:57
Speaker 1: that will improve productivity, fill gaps unemployment, and allow employees
27:02
Speaker 1: to see the benefit of that improved productivity through higher
27:07
Speaker 1: wages that can accrue to the existing employee base because
27:11
Speaker 1: of the improvements in productivity and profitability. So we've been hearing,
27:16
Speaker 1: i don't know for a century, maybe longer. May go
27:18
Speaker 1: back to malthis that automation and technology is taking jobs
27:23
Speaker 1: away from people and pretty soon half the society will
27:26
Speaker 1: be unemployed. That hasn't really seemed to happen. You you
27:29
Speaker 1: mentioned the skilled service shortage and and the difficulty and
27:34
Speaker 1: filling not just entry level positions, but you know, high
27:38
Speaker 1: level technical positions. Why is there such a skills gap
27:42
Speaker 1: and what is automation going to do to fill that gap?
27:47
Speaker 1: The you know, the skills gap has been, as you
27:50
Speaker 1: point out, well known for quite some time, and I
27:52
Speaker 1: think there is a enormous and appropriate focus on making
27:56
Speaker 1: sure people get the education and the training to allow
28:00
Speaker 1: them to fully participate in the technologies of the future
28:06
Speaker 1: and the the job sets that are opening up in
28:10
Speaker 1: those areas. Automation again is going to be able to
28:14
Speaker 1: fill in for the jobs that um, you know, people
28:17
Speaker 1: really don't want to do, and also allow for improvements
28:22
Speaker 1: in the projectivity that will allow companies to sustain higher
28:28
Speaker 1: levels of compensation for their employees and still deliver the
28:32
Speaker 1: profitability that their shareholders and other stakeholders are looking for.
28:37
Speaker 1: And so automation will play an increasingly important role in
28:42
Speaker 1: broad range of industries as we go forward, and allow
28:46
Speaker 1: for the retraining of employees into areas that again are
28:53
Speaker 1: higher value and are being sought after by employers both
28:59
Speaker 1: in this country and on the world. So let's talk
29:01
Speaker 1: a little bit about the healthcare space. Obviously, the vaccine
29:07
Speaker 1: changed the way a lot of people think about, uh
29:10
Speaker 1: the sector. What opportunities do you see in in healthcare,
29:14
Speaker 1: including pharma and biotech. Well, I think we we have seen, UH,
29:22
Speaker 1: you know, something pretty amazing over the course of the
29:25
Speaker 1: last fourteen months, which is the ability from a standing
29:30
Speaker 1: start to rev into a pretty amazing product. When you
29:38
Speaker 1: think about the the number of effective vaccines that we
29:45
Speaker 1: now have, UM, I think most interesting has been the
29:49
Speaker 1: development of the m r n A vaccines because that's
29:55
Speaker 1: not just a single product, but that is a platform
29:59
Speaker 1: UH that has not produced UM therapeutics or vaccines before
30:06
Speaker 1: that can now be utilized to address a range of
30:12
Speaker 1: both vaccine opportunities, but also on the therapeutic side, yet
30:17
Speaker 1: one more tool against cancer and other rare diseases. So UM,
30:23
Speaker 1: I think the example of UM what we've seen over
30:28
Speaker 1: the course of the last year UH is um UH
30:33
Speaker 1: not just a one off, but is actually a microcosm
30:39
Speaker 1: of the opportunity set UH that exists in healthcare UM
30:45
Speaker 1: as the number of tools and technologies that we develop
30:49
Speaker 1: are allowing both a faster and more effective development of
30:54
Speaker 1: a broad range of therapeutics and diagnostics UM that go
30:59
Speaker 1: right to the heart of solving a number of difficult
31:04
Speaker 1: disease states across various cancers and cardiovascular diseases as well
31:12
Speaker 1: as a number of other areas. So we're going to see,
31:16
Speaker 1: I think, a continued explosion, if you will, of of
31:20
Speaker 1: therapeutics and diagnostics. And there are entire industries that have
31:25
Speaker 1: been set up to support the companies that have the
31:29
Speaker 1: innovative science that they will develop into those drugs and um.
31:36
Speaker 1: The ability to provide services to the specific pharmas and
31:42
Speaker 1: biotechs who have the innovative science is something that you know,
31:47
Speaker 1: we and many others have been focused on. So whether
31:51
Speaker 1: it's the outsourcing of the clinical trials through c ROS,
31:54
Speaker 1: it's the ability to provide a broader range of products
31:59
Speaker 1: and services. It's the ability to take some of the
32:02
Speaker 1: commercialization activity, whether it's salesforce or the development of selling
32:07
Speaker 1: strategies more broadly and help these companies do all of
32:13
Speaker 1: that while allowed them allowing them to focus all their
32:16
Speaker 1: energy on the innovative science. You know, that I think
32:19
Speaker 1: is good for the world as well as presents a
32:23
Speaker 1: broad range of investment opportunities. Really interesting you mentioned things
32:29
Speaker 1: that took place last year, obviously a COVID nineteen pandemic year.
32:34
Speaker 1: How did that change the way you think about investing?
32:39
Speaker 1: What was different for you whether it was working from
32:43
Speaker 1: from home or just thinking about the impact of the pandemic,
32:47
Speaker 1: how did affect the way you think about healthcare invest
32:51
Speaker 1: now UM. I would say that the biggest impact was
32:56
Speaker 1: the recognition that, UM, you know, there are a set
32:58
Speaker 1: of tools out there that allow you to operate in
33:02
Speaker 1: a virtual world incredibly effectively. And for us, those are
33:06
Speaker 1: tools that you know, we had not used before UM,
33:10
Speaker 1: and we're finding that they'll be incorporated in how we
33:14
Speaker 1: do business going forward. In terms of UM the opportunities
33:18
Speaker 1: that in healthcare, I don't know if there was any
33:22
Speaker 1: great UM realization UH of new opportunities coming out of
33:27
Speaker 1: the pandemic, as much as there was a reinforcement that,
33:32
Speaker 1: you know, we are in a world where the you know,
33:34
Speaker 1: as I said earlier, UH, the ability to support companies
33:38
Speaker 1: that are able to provide a broad range of UM
33:43
Speaker 1: of UM services UH to the pharma and biotech industry. UM.
33:50
Speaker 1: You know that that is UH continues to be an
33:53
Speaker 1: enormous and expanding opportunity set UM and the ability to
34:00
Speaker 1: UH support companies that are able to provide various forms
34:05
Speaker 1: of care UM at more effective prices UH so that
34:12
Speaker 1: we can reduce the total medical expense to the system
34:15
Speaker 1: is um is something that is worth focusing upon. So,
34:20
Speaker 1: you know, I think the the pandemic um uh in
34:26
Speaker 1: terms of healthcare investing reinforced a set of opportunities more
34:33
Speaker 1: than created uh any truly new opportunity sets. Huh. Really interesting.
34:40
Speaker 1: I don't know if you can answer this question, but
34:43
Speaker 1: but I have to ask, having observed this from a
34:46
Speaker 1: distance as well as anything I've ever done in terms
34:50
Speaker 1: of medical services, why is the US healthcare system so inefficient?
34:56
Speaker 1: There just doesn't seem to be any universal stand to
35:00
Speaker 1: its for for files or test results. You would think
35:03
Speaker 1: this would be perfect for technology to fix, and yet
35:08
Speaker 1: here it is, and it's as much a mess as
35:11
Speaker 1: it's ever been. Why can't we fix this? You know,
35:14
Speaker 1: it's a really interesting point, and I would say that,
35:16
Speaker 1: you know, first start with the question about what are
35:19
Speaker 1: the right metrics and why can't we measure them uniformly
35:23
Speaker 1: across the system? And one of the things that I
35:26
Speaker 1: found has been in chair of the match RYTHM Healthcare
35:30
Speaker 1: System for a number of years, and it's one of
35:33
Speaker 1: the countries. In fact, the country's leading high end clinical
35:36
Speaker 1: and largest research and teaching institution is the complexity of
35:41
Speaker 1: disease states the nature of patient condition is so complicated
35:49
Speaker 1: that at the very high end, which is where much
35:52
Speaker 1: of the cost is, it's very hard to get apples
35:56
Speaker 1: to apples comparisons. And that is exacerbated by the fact
36:00
Speaker 1: that the most difficult cases will flow to the highest
36:04
Speaker 1: end providers, will flow into a mass General Hospital or
36:08
Speaker 1: Brigham Women's Hospital or Mayo Clinic or Cleveland clinic. And
36:13
Speaker 1: so you know, you might be looking at data that says,
36:17
Speaker 1: people with a certain heart condition, you know, here here
36:20
Speaker 1: the outcomes, but um, it's not as comparable as you
36:25
Speaker 1: would like to see it because the people with significant
36:29
Speaker 1: comorbidities and more complexity are going to flow into those
36:33
Speaker 1: highest end providers. UM and UH. Even though the the
36:39
Speaker 1: the description may be similar, the nature of the condition
36:44
Speaker 1: and what you do to deal with UM that condition
36:47
Speaker 1: UM uh is UM very different. So let's start with
36:53
Speaker 1: the fact that it's hard to get true comparisons, as
36:57
Speaker 1: you were referring to across the entirety of the health
37:02
Speaker 1: care system. But even with that, UM, you know, there
37:07
Speaker 1: there are lots of ways that we can improve the
37:09
Speaker 1: efficiency and information flow to patients and reduce the total
37:15
Speaker 1: medical expense of the whole system. And I think there's
37:18
Speaker 1: a lot of work being done. I know at Massonal
37:20
Speaker 1: Brigram there's enormous work being done to look for ways
37:23
Speaker 1: that we can make sure that a patient with a
37:26
Speaker 1: certain acuity or complexity to their condition is treated in
37:31
Speaker 1: the right place with the most effective but cost effective
37:36
Speaker 1: as well care. And that requires an enormous amount of
37:40
Speaker 1: effort and changes the culture and changes to structures that
37:44
Speaker 1: I think will be something that we see accelerating around
37:49
Speaker 1: the country in order to deal with this issue of
37:53
Speaker 1: of high um medical expense. Now, I would also note that, uh,
38:01
Speaker 1: the United States benefits right now from having extraordinary healthcare. Uh.
38:07
Speaker 1: And you know, one of the proof points of that
38:11
Speaker 1: would be the number of people who come from all
38:14
Speaker 1: all over the world for the care, particularly at the
38:17
Speaker 1: very um high end of the acuity um level. People
38:24
Speaker 1: who are reasonably sick want to come and be treated here. Uh,
38:29
Speaker 1: not as much people here going to other places other
38:34
Speaker 1: than the so called medical tourism. And and that's the
38:38
Speaker 1: strange paradox is the level of care here is so good,
38:43
Speaker 1: and yet systemically the entire operation is it seems to
38:49
Speaker 1: be just so chaotic it's really kind of fascinating that
38:55
Speaker 1: the more granular you get, the more specific you get,
38:59
Speaker 1: the better of the treatment is. But step back and
39:02
Speaker 1: look at the entire system, it's expensive and doesn't always
39:07
Speaker 1: have great outcomes. Well, you know, and again I think
39:11
Speaker 1: it goes to this issue of are we measuring things
39:14
Speaker 1: correctly and do we have the tools, as I mentioned earlier,
39:19
Speaker 1: to actually measure things appropriately And because of the incredible
39:26
Speaker 1: complexity and specific nature of um of patients conditions, it's
39:33
Speaker 1: often hard to do that, and so um the proof
39:37
Speaker 1: points are are more um in the outcomes that we
39:41
Speaker 1: see for patients with extraordinarily difficult conditions. The way that
39:46
Speaker 1: we provide care on you know, the more primary and
39:50
Speaker 1: secondary side is something where it's a lot easier to
39:55
Speaker 1: look on a comparable basis across systems to see what
39:59
Speaker 1: the most uh effective and yet cost effective ways of
40:05
Speaker 1: providing you know, primary and secondary care might be. On
40:09
Speaker 1: the church earing coortinary side, it gets a lot harder
40:12
Speaker 1: for the reasons that I just mentioned. Let's talk a
40:15
Speaker 1: little bit about how rapidly these markets came back and
40:20
Speaker 1: what that might mean for the alternative space. Were you
40:24
Speaker 1: surprised at how quickly the market collapsed and then snapped
40:28
Speaker 1: right back to what it was doing pre COVID. I
40:33
Speaker 1: was less surprised by the nature of the collapse, given
40:37
Speaker 1: the fact that we had this unprecedented shut down to
40:40
Speaker 1: our economy, uh, and much more surprised by the speed
40:44
Speaker 1: at which it came back. I think, you know, early
40:47
Speaker 1: on people were dismissing the possibility of a V shaped recovery,
40:51
Speaker 1: particularly a sharp V. And Um, those of us who
40:54
Speaker 1: were doing that were completely wrong. Uh. I think what
40:58
Speaker 1: we didn't anticipate was the unprecedented level of both monetary
41:04
Speaker 1: and fiscal support uh that that we saw occur here
41:09
Speaker 1: in the United States as well as around the world.
41:13
Speaker 1: M um. And and did that create any unique opportunities
41:17
Speaker 1: for investing during during COVIDD? Did anything bubble up more
41:23
Speaker 1: quickly than it might have otherwise? I would say distressed
41:27
Speaker 1: opportunities were here and then gone in about a nine
41:31
Speaker 1: a second. Uh. There were a few few things that
41:35
Speaker 1: got done in the industry that I think, um, you know,
41:40
Speaker 1: was characteristic of distress investing, But um, you know, primarily
41:45
Speaker 1: that that disappeared as we saw that very sharp V
41:48
Speaker 1: shaped recovery. So much of what what we were doing
41:51
Speaker 1: was again focusing on areas that we felt had that
41:56
Speaker 1: strong secular growth to it. Uh And one of the
42:00
Speaker 1: offits of strong secular growth as it tends to be
42:02
Speaker 1: less adversely affected bicyclical downturns um whether it's caused by
42:08
Speaker 1: a normal economic cycle or in this case by the
42:12
Speaker 1: pandemic that again led to an unprecedented shutdown of the economy.
42:18
Speaker 1: So some folks are describing the current era as as
42:24
Speaker 1: late cycle or late business cycle. What sectors do you
42:28
Speaker 1: find attractive if it's late cycle, What what businesses are
42:34
Speaker 1: you kinds of businesses are you looking at? You know,
42:39
Speaker 1: for us, it's again the areas that we've we've had
42:43
Speaker 1: very long basic experience and that we think, you know,
42:47
Speaker 1: we'll be able to to ride through a more traditional
42:52
Speaker 1: economic cyclical downturn. And so that would be things in
42:56
Speaker 1: the financial services. In tech space, we talked about healthcare,
43:01
Speaker 1: where we see again a broad set of opportunities that
43:04
Speaker 1: tend to be less much less cyclically sensitive. And then
43:08
Speaker 1: the the areas of technology and automation that will continue
43:12
Speaker 1: to be deployed almost regardless of the economic cycle. And
43:17
Speaker 1: it's not to say that these areas won't see some
43:20
Speaker 1: adverse effector economic cycle. I think they they generally will,
43:25
Speaker 1: but it will be a much softer downturn than you'll
43:29
Speaker 1: see in industrial industries, process industries and um, you know
43:35
Speaker 1: other sectors that have tended to m to see much
43:40
Speaker 1: sharper ups and downs as we go through the traditional
43:44
Speaker 1: economic cycles. So you mentioned the financial sector. I have
43:49
Speaker 1: to ask you a little bit about defy and and
43:53
Speaker 1: the potential challenge to centralize finance and currencies and and
43:59
Speaker 1: let's break that into things like financial apps and services
44:05
Speaker 1: versus let's call it blockchain versus crypto. How do you
44:09
Speaker 1: look at that universe. Well, so, we have traditionally been
44:14
Speaker 1: focused on supporting companies that provide technologies to the more
44:21
Speaker 1: asset based part of the financial services world. So we
44:26
Speaker 1: were the sponsor of companies like Black Knight Financial, which
44:30
Speaker 1: is the largest provider of technology services to the mortgage
44:33
Speaker 1: world mentioned f i S. We are very interested in
44:38
Speaker 1: companies that can help the various parts of the insurance
44:42
Speaker 1: value chain do their jobs better. Wealth management, again, is
44:47
Speaker 1: a is a really interesting sector that we've participated in
44:52
Speaker 1: and where we think that there are ways of improving
44:56
Speaker 1: the ability to serve clients through the utilization of technology.
45:01
Speaker 1: So in the financial services world, we've generally been focused
45:04
Speaker 1: on how to help the kinds of companies that directly
45:08
Speaker 1: serve consumers and businesses in their key business processes. Blockchain
45:13
Speaker 1: is an interesting technology in that regard that I think
45:17
Speaker 1: we're still in very early innings. I would separate blockchain
45:21
Speaker 1: from cryptocurrencies like bitcoin, even though they're often put in
45:24
Speaker 1: the same category. We have not really focused upon the
45:29
Speaker 1: cryptocurrency side. It's not it's not in an area that
45:32
Speaker 1: that we have any traditional strength. And you know, obviously
45:37
Speaker 1: we've been fascinated to watch the the explosion and the
45:42
Speaker 1: valuation of these cryptocurrencies, but I don't really have a
45:45
Speaker 1: strong view on it. Kind of kind of interesting, and
45:49
Speaker 1: we've been we've been talking about growth rate and valuations.
45:54
Speaker 1: When you look at spaces like blockchain, how do you
45:58
Speaker 1: come up with a value suation method for a particular company.
46:04
Speaker 1: Are you just guessing at future discounted cash flow? Are
46:08
Speaker 1: you trying to ballpark where the market might go? When
46:12
Speaker 1: a technology is so young, it seems like it's practically
46:16
Speaker 1: impossible to come up with a reasonable valuation. Yeah, I
46:22
Speaker 1: think you're you're pointing to something that that probably is
46:26
Speaker 1: characteristic of the differences between the venture capital side of
46:30
Speaker 1: private equity and the buy outside and growth equity side
46:34
Speaker 1: of private equity. So I think on the venture side,
46:37
Speaker 1: when you're investing in very young technologies, new technologies, you
46:42
Speaker 1: know you are making a very broad based bet without
46:45
Speaker 1: the ability to have any level of precision about what
46:49
Speaker 1: those numbers will look like in any given one to three,
46:54
Speaker 1: let alone five to ten year period. What we're trying
46:57
Speaker 1: to do on our side is invest in companies where
47:00
Speaker 1: we think we have enough data to have a reasonably
47:04
Speaker 1: high probability of achieving a at least a three to
47:09
Speaker 1: five year set of projections. Obviously a lot harder to
47:13
Speaker 1: go past that, and so we spend an enormous amount
47:16
Speaker 1: of time trying to model out, particularly the first three
47:20
Speaker 1: years of growth of of a given company, looking at
47:24
Speaker 1: the broad range of market conditions that allow for that growth,
47:29
Speaker 1: and where that specific company maybe in the competitive set
47:33
Speaker 1: of companies trying to serve that market. And so you know,
47:37
Speaker 1: we're making less of a of a venture bet and
47:40
Speaker 1: more of a bet on something where there's already at
47:44
Speaker 1: least sufficient data to be able to do the kind
47:48
Speaker 1: of detailed analytics that we like to do to have
47:52
Speaker 1: a reasonably high degree of comfort about at least what
47:54
Speaker 1: the next three years are going to look like. Quite interesting,
47:57
Speaker 1: and and I know there's that distinction, and it's really
48:01
Speaker 1: challenging to, uh, to manage it. Do you look at
48:04
Speaker 1: the word disruption and think, oh, not exact cliche again,
48:07
Speaker 1: or is that a legitimate resonant description for for some
48:11
Speaker 1: of the new technologies that are coming along. Oh, I
48:15
Speaker 1: think it's you know, a crucial word in the investing universe,
48:19
Speaker 1: because what we're trying to do is look for companies
48:21
Speaker 1: that are on the right side of disruption and always
48:25
Speaker 1: be aware of the business models that could be disrupted
48:29
Speaker 1: by new technologies or new entrants that bring in a
48:33
Speaker 1: very different model to a given industry or sector. And
48:37
Speaker 1: so we spent a lot of time trying to make
48:39
Speaker 1: sure that, you know, we are on the right side
48:42
Speaker 1: of that, as I just said, as opposed to being
48:45
Speaker 1: put in a position our entire business model can be
48:47
Speaker 1: undermined by new entrance who disrupt the traditional way that
48:52
Speaker 1: business is done in that industry. So so, speaking about
48:56
Speaker 1: traditional ways of doing business, in my research, I noted
49:00
Speaker 1: that when you guys did the Duncan Brands deal in
49:04
Speaker 1: two thousand and five. They were one of the larger
49:06
Speaker 1: franchisers of Duncan Donuts restaurants. You didn't just do that
49:10
Speaker 1: by yourself. You you had Bank Capital and the Carlisle
49:13
Speaker 1: Group as co investors. Is that sort of transaction common
49:18
Speaker 1: it It sounds more like a traditional VC investment with
49:23
Speaker 1: co investors than private equity. So there was a period
49:27
Speaker 1: of time where the size of the transactions or the
49:30
Speaker 1: nature of the transactions in private equity, in the buy
49:33
Speaker 1: outside of private equity, were required more than one firm,
49:37
Speaker 1: and it was a point in time when the availability
49:41
Speaker 1: of capital was really from other gps. Today we're in
49:45
Speaker 1: the world where we have just some phenomenal limited partners
49:49
Speaker 1: who are anxious to be co investors in transactions. So
49:54
Speaker 1: in today's world, we rarely have another general partner in
49:57
Speaker 1: the deal. But back in the too thousands, and in
50:00
Speaker 1: fact even in the late nineties, it was more traditional,
50:05
Speaker 1: given the size of transactions and the size of our funds,
50:08
Speaker 1: to partner with another general partner or more than one
50:11
Speaker 1: general partner um UH to acquire a company. So you know,
50:16
Speaker 1: Main Capital UM was a partner of ours in a
50:19
Speaker 1: number of different transactions. Uh and um, Duncan Brands was
50:24
Speaker 1: one of them. And we partner with Carlisle and a
50:26
Speaker 1: couple of things as well. And UM you know that, Um,
50:30
Speaker 1: that has really evolved more uh in today's world to
50:35
Speaker 1: a single GP buying a company with the support of
50:40
Speaker 1: their limited partners who co invest in that deal. Uh.
50:45
Speaker 1: Now we're also seeing some rather large transactions happen again. Uh.
50:50
Speaker 1: And in those transactions, you might you're starting to see,
50:53
Speaker 1: you know, the so called club deal come back, um,
50:57
Speaker 1: because the the ability to under those transactions may require
51:02
Speaker 1: more than one general partner. Um. Uh. So you know
51:07
Speaker 1: the world you know is you had mentioned earlier about conciclicality,
51:12
Speaker 1: the nature evaluations going up and down. Uh. You know, UH,
51:17
Speaker 1: if you're in this business long enough, you you will
51:21
Speaker 1: often see trends that you thought might have disappeared come back.
51:25
Speaker 1: And I think we may be seen to come back
51:28
Speaker 1: of the so called club deal uh, where you club
51:31
Speaker 1: together uh two or more general partners to acquire a company.
51:37
Speaker 1: That's really that's really interesting. It's um, it's kind of fascinating.
51:42
Speaker 1: I had no idea that the structure. I knew there
51:45
Speaker 1: were calls on LPs who put money into a fund.
51:48
Speaker 1: But I never realized that when a big enough deal
51:51
Speaker 1: comes along, they might be UM less limited than what
51:56
Speaker 1: we traditionally think of as limited partners. Is this the
52:00
Speaker 1: future of private equity? Is this going to be a
52:03
Speaker 1: big aspect? And the reason I asked that is Vanguard
52:07
Speaker 1: and some other large public investor non accredited investor shops
52:14
Speaker 1: have been looking to access more private equity. This seems
52:18
Speaker 1: like a very different model. Well, I think it's something
52:23
Speaker 1: that's been developing over UM, you know, the last decade. Uh.
52:28
Speaker 1: It's something that we've been very focused on. Is the
52:32
Speaker 1: strategic partnership that you can have with your limited partners.
52:36
Speaker 1: I think a lot of firms in the industry h
52:39
Speaker 1: have been thinking about it in a similar way. UM
52:42
Speaker 1: and UH. It allows you, particularly in a world where
52:46
Speaker 1: it's not clear what the pace of investing UH could
52:50
Speaker 1: be if one's trying to sustain, you know, the kind
52:53
Speaker 1: of high returns that our investors expect and that that
52:58
Speaker 1: we want to be able to provide them. UM. Uh,
53:01
Speaker 1: it allows you to size your fund in ways. UM.
53:05
Speaker 1: They give you a reasonably high level of assurance that
53:07
Speaker 1: you can maintain the disciplines UM that you want in
53:11
Speaker 1: order to achieve those returns and allow you to scale
53:14
Speaker 1: up on transactions that are on the larger side of
53:17
Speaker 1: what your target universe uh is So um the strategic
53:23
Speaker 1: partnership UH there I think is important to the GP
53:27
Speaker 1: and for the LPs. It's a way of participating more
53:31
Speaker 1: broadly in private equity where you're not um uh necessarily
53:36
Speaker 1: paying the same kind of fees uh and U profit
53:41
Speaker 1: participation to the GP that you would on the investments
53:45
Speaker 1: that you make directly into their funds. All Right, I
53:49
Speaker 1: know I only have you for another twenty or so minutes,
53:52
Speaker 1: So before I get to my favorite question, I'm gonna
53:55
Speaker 1: throw you a curveball. And that's for For decades, you
54:01
Speaker 1: sat on the board of the Dolins Controlled Cable Systems UM.
54:06
Speaker 1: And this year, first time in a long time, the
54:09
Speaker 1: Knicks are having a decent year. So what's it gonna
54:13
Speaker 1: take to get the Dolins to finally sell the team?
54:16
Speaker 1: What do we have to do? So I was on
54:20
Speaker 1: the board of MSG. I'm not sure it was for
54:22
Speaker 1: quite that long. Uh and um uh. The you know,
54:28
Speaker 1: the team certainly had UM as you point out significant
54:33
Speaker 1: ups and downs and you know even more, I guess
54:38
Speaker 1: um significantly uh you know, a long uh period of
54:46
Speaker 1: not getting anywhere near the success that pants had wanted.
54:51
Speaker 1: And I'm no longer on the MS tad or or two. Um.
54:58
Speaker 1: But you know the team, you know that I really
55:02
Speaker 1: think they're on the right track now, you know, I think,
55:05
Speaker 1: um Leon Rose has done a very nice job of
55:09
Speaker 1: putting together a team UM that has a lot of
55:14
Speaker 1: upside to it, uh with a coach that you know
55:19
Speaker 1: has finally returned the team to its roots of being
55:22
Speaker 1: a very tough, defensive minded um uh squad um uh.
55:28
Speaker 1: And so I'm I'm optimistic about the future. But as
55:33
Speaker 1: a longtime Nicks fan myself way before I joined the
55:38
Speaker 1: MSG board, UM, I'm just very happy to see uh
55:42
Speaker 1: see the success they've had this year. Let's jump to
55:45
Speaker 1: our favorite questions we ask all our guests, starting with
55:48
Speaker 1: what are you speaking of? Of MSG and various channels?
55:52
Speaker 1: What are you streaming these days? Give us your favorite
55:55
Speaker 1: Netflix or Amazon Prime, whatever's keeping you occupied and entertained
56:00
Speaker 1: during lockdown? Well, my wife and I have kind of
56:04
Speaker 1: gone through, um, almost everything one can watch on either
56:09
Speaker 1: of those channels. I mean, i'd say our favorites were
56:11
Speaker 1: things like Queen's Gambit, which I think lots of people
56:15
Speaker 1: UH have really enjoyed. Um. Uh you know, there's a
56:21
Speaker 1: wide range of of um, other things that that go
56:27
Speaker 1: that go across a number of different genres, from Bridger
56:33
Speaker 1: Tin type thing too, um um the great on Hulu.
56:38
Speaker 1: UM you know, so um you know we're always looking.
56:42
Speaker 1: We probably spend ten minutes trying to figure out what
56:45
Speaker 1: to watch almost every night. So um, you know, lots
56:50
Speaker 1: of different fun things. Uh. And UH tell us about
56:54
Speaker 1: some of your early mentors who helped to shape your career.
57:01
Speaker 1: So um you know, I would say one really important
57:04
Speaker 1: mentor very early on was Walter Cabot, who, as I
57:08
Speaker 1: mentioned earlier as the CEO of Harvard Manament Company, actually
57:12
Speaker 1: started Harvard Manasamon company for Harvard. UM and just a
57:18
Speaker 1: remarkable individual who um I think had both great success
57:26
Speaker 1: um in traditional money management and yet also had the
57:29
Speaker 1: foresight to push Harvard into areas that at the time, UM,
57:37
Speaker 1: you know, we're not consistent uh at first thought with
57:41
Speaker 1: what they used to call the reasonable man rule, which
57:45
Speaker 1: was a general rule about how um the nature of
57:49
Speaker 1: the risk one could take with endowment UH and foundation
57:53
Speaker 1: assets UM. And Walter was incredibly supportive of the uh
58:00
Speaker 1: the efforts that he had me undertake to to move
58:05
Speaker 1: Harvard into these UM alternative assets spaces well before almost
58:10
Speaker 1: any other UH endowment or foundation. UM and UM he
58:16
Speaker 1: uh uh you know was just uh an extraordinarily smart
58:22
Speaker 1: and supportive boss to have and really launched me into
58:28
Speaker 1: the career that that I have now. UM and you know,
58:33
Speaker 1: there were people along the way who taught me lots
58:35
Speaker 1: of different things. I remember Floyd Qualmie at Cliner Perkins,
58:40
Speaker 1: who UM we co invested with when I was at Harvard.
58:43
Speaker 1: He was one of the general partners at Clina Perkins,
58:46
Speaker 1: and we served on a number of boards together of
58:49
Speaker 1: early kliner companies and UM you know uh Floyd was
58:54
Speaker 1: a founder of National Semiconductor and UH a individual who
59:02
Speaker 1: had great UH operating and technology experience and really learned
59:08
Speaker 1: a lot about how UM uh young dynamic growth companies
59:13
Speaker 1: work from UM somebody like Floyd. UM you know Tom
59:17
Speaker 1: Lee UH when we worked together. UM you know, Tom
59:22
Speaker 1: had had this great ability to really like UH any
59:27
Speaker 1: deal UH and UM what he was you know looking
59:31
Speaker 1: at was an uh an ability to um uh look
59:36
Speaker 1: for the opportunities that on things and UH learned uh
59:41
Speaker 1: UH learned a lot of that from uh from Tom
59:45
Speaker 1: and UH you know, as I go through um the
59:49
Speaker 1: various uh relationships I've had over many many years, UM,
59:55
Speaker 1: you know, there have been an extraordinary number of of
59:58
Speaker 1: people who U, even though they were more uh on
1:00:03
Speaker 1: the pier side than the boss or older mentor side, UH,
1:00:09
Speaker 1: that I've been able to learn from. And UH. One
1:00:12
Speaker 1: of the great experiences um uh that I had UM
1:00:16
Speaker 1: is working with John MacArthur, who was the longtime dean
1:00:21
Speaker 1: of the Harvard Business School and who first got me
1:00:23
Speaker 1: involved in um the what's now the Master General Brigram
1:00:28
Speaker 1: Health System uh in uh when he was the chair
1:00:34
Speaker 1: of the BRIGOM and then became the founding co chair
1:00:37
Speaker 1: of what was then called Partners Healthcare, which is now
1:00:41
Speaker 1: morphed into the Masioneral Brigram System. And you know, John
1:00:45
Speaker 1: was an iconic figure at Harvard Business School. Uh. He
1:00:49
Speaker 1: and I shared rugby in commons, so I had gotten
1:00:53
Speaker 1: to know him a little bit through that. UH and
1:00:55
Speaker 1: then UM you know watched his ability uh to look
1:01:00
Speaker 1: at m a situation UH in ways that were innovative
1:01:06
Speaker 1: and different than what almost anybody else was thinking, uh,
1:01:10
Speaker 1: and how he was able to turn a lot of
1:01:12
Speaker 1: that into new realities. And UM that's been uh something
1:01:18
Speaker 1: that I've long valued, both the personal relationship with John
1:01:23
Speaker 1: who uh passed away over the last couple of years,
1:01:27
Speaker 1: um uh, and um the learnings I got from uh
1:01:34
Speaker 1: his ability to take a step back, think out of
1:01:36
Speaker 1: the box, and then uh turn some out of the
1:01:40
Speaker 1: box thinking into realities. So let's talk a little bit
1:01:44
Speaker 1: about books. What are some of your favorites and what
1:01:46
Speaker 1: are you reading right now? Um so um you know,
1:01:53
Speaker 1: right right now, I have a few I'm reading kind
1:01:56
Speaker 1: of a range of things. UM. You know, I think
1:01:59
Speaker 1: that and Colins book Built to Last is pretty interesting
1:02:03
Speaker 1: right now as a kind of a a survey a
1:02:06
Speaker 1: wide range of um, different companies doing things differently and
1:02:10
Speaker 1: and um trying to understand um you know, how you
1:02:14
Speaker 1: make breakthroughs and and um places that have um uh
1:02:21
Speaker 1: a long legacy of success. UM. I've had fun reading
1:02:27
Speaker 1: the Dynasty. The Crafts have done such a remarkable job
1:02:32
Speaker 1: at building h a a franchise UM that I think
1:02:38
Speaker 1: sets the standard for sports teams UH and other organizations,
1:02:43
Speaker 1: other types of organizations. UM uh you know there are
1:02:48
Speaker 1: some interesting areas. UM. I've liked AI Superpowers um as
1:02:53
Speaker 1: a way of really understanding China uh and what they're
1:02:58
Speaker 1: doing and how they approach UM. That uh incredibly important
1:03:04
Speaker 1: uh area. UM. I recently reread The Best and the Brightest,
1:03:10
Speaker 1: which was probably about my fifth time, because I think
1:03:14
Speaker 1: that they're you know, there's continued lessons to be had
1:03:18
Speaker 1: about how we approached the world um and the importance
1:03:24
Speaker 1: uh of of avoiding Hubert UM. So you know, there's
1:03:29
Speaker 1: a there's a range of things I think are really interesting,
1:03:33
Speaker 1: uh quite quite fascinating. What sort of advice would you
1:03:37
Speaker 1: give to a recent college grad who was interested in
1:03:40
Speaker 1: a career in private equity? You know, UM, it's a
1:03:47
Speaker 1: great business. It's a great business, it's a great area.
1:03:50
Speaker 1: Um Uh try to get involved in it if you
1:03:54
Speaker 1: really fundamentally love building businesses. UH. They're probably easier jobs
1:04:00
Speaker 1: to have, um if one's looking at it just from
1:04:04
Speaker 1: the financial aspects. UM. I really do think our industry
1:04:10
Speaker 1: is about helping make companies better uh and um uh
1:04:19
Speaker 1: being involved with management teams UH that uh can be
1:04:26
Speaker 1: true partners UM. So if that's what excites you, if
1:04:29
Speaker 1: you're really interested in helping build enterprise. This is a
1:04:33
Speaker 1: great a great industry to do that from. And our
1:04:39
Speaker 1: final question, what do you know about the world of
1:04:42
Speaker 1: private equity and investing today? You wish you knew almost
1:04:48
Speaker 1: forty years ago when you were first getting started. UM.
1:04:54
Speaker 1: So it's a really it's a it's a fascinating thing
1:04:59
Speaker 1: because I'm not sure there's there there there is one thing,
1:05:02
Speaker 1: but you know, I think understanding that, UM, there are
1:05:09
Speaker 1: points there are there are various points where you think, UM,
1:05:14
Speaker 1: you know the downside uh is reasonably limited, where it's not.
1:05:21
Speaker 1: Things can always be dramatically worse than you might ever anticipate.
1:05:26
Speaker 1: But conversely, UH, there there are opportunity sets out there
1:05:30
Speaker 1: that one needs to uh to imagine clearly with some
1:05:34
Speaker 1: analytical basis, but one needs to imagine as upsides that. UM.
1:05:39
Speaker 1: You know you are not part of conventional thought UM,
1:05:43
Speaker 1: and so understanding that the range of outcomes can be
1:05:47
Speaker 1: much more extreme than you think, UH is something that
1:05:51
Speaker 1: that you learned over time. UM. And being unbound by
1:05:58
Speaker 1: often conventional thought is one of them or critical UH
1:06:03
Speaker 1: skills to acquire you're in our industry. Huh really quite
1:06:09
Speaker 1: quite fascinating. We have been speaking with Scott Sperling. He
1:06:14
Speaker 1: is the co chief executive officer of Thomas H. Lee.
1:06:18
Speaker 1: If you enjoy this conversation, well, be sure and check
1:06:20
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1:06:24
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1:06:32
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1:06:49
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1:06:51
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1:07:01
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1:07:05
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1:07:09
Speaker 1: in Business on Bloomberg Radio.