Tim Sullivan – Yale's Private Portfolio (EP.456)

Today's show features one of the biggest industry legends you may never have heard before. My guest is Tim Sullivan, who recently retired from overseeing Yale University's private market portfolios for 39 years. He joined the Yale Investments Office upon graduation from Yale College in 1986, just one year after David Swensen took the helm. He worked alongside David to build and manage the most successful institutional private equity and venture capital programs in history. Tim lived through the 1987 crash, the early years allocating to privates when no one else did, the dot.com boom and bust, the institutional adoption of alternatives after David published his book in 2000, the GFC, the ZIRP aftermath that created a bigger boom until the hiccup in 2021. We weave in and out of that history, as Tim shares lessons from how Yale managed its portfolios along the way. Tim carries a quiet conviction and sharp analytical mind developed from the front line of the greatest success in institutional investing for decades, and he weighs in on the increasing challenges of repeating that past success going forward. Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup Editing and post-production work for this episode was provided by The Podcast Consultant (https://thepodcastconsultant.com https://thepodcastconsultant.com/)

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:01Ted Seides?

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• 3:32Ted Seides?

  Hello, I'm Ted Seides, and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  All opinions expressed by TED and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators or podcast guests may maintain positions in securities discussed on this podcast.

• 4:18Ted Seides?

  Today's show features one of the biggest industry legends you may never have heard before. My guest is Tim Sullivan, who recently retired from overseeing Yale University's private market portfolios for 39 years. He joined the Yale Investments Office upon graduation from Yale College in 1986, just one year after David Swensen took the helm. Tim worked alongside David to build and manage the most successful institutional private equity and venture capital programs in history. Tim lived through the 1987 crash, the early years of allocating to privates when no one else did, the dot-com boom and bust, the institutional adoption of alternatives after

• 5:03Ted Seides?

  David published his book in 2000, the GFC, the ZIRP aftermath that created a bigger boom, until the hiccup in 2021. We weave in and out of that history as Tim shares lessons from how Yale managed its portfolios along the way. Tim carries a quiet conviction and a sharp analytical mind, developed from the frontline of the greatest success in institutional investing for decades, and he weighs in on the increasing challenges of repeating that past success going forward. Before we get going, it's time to remind you about Capital Allocators Coaching, an initiative we started this year to help managers tell their story.

• 5:44Ted Seides?

  We gathered an all-star cast of former CIOs and asset management executives and have seen a lot of traction in the early going. We've had interest from lots of small funds as well as different portfolio management teams from multi-product shops. Our coaches get it. They've been in these meetings thousands of times and can help in every aspect of the pitch, the why, the what, the how, and everything in between. We offer one-offs and continuing engagements depending on your needs and interests. And while there's a cost to the service, it's at a massive discount to the value our coaches provide. They're all in it to help and improve communication across the industry. If you're interested, go to capitalallocators.com/Coaching to learn

• 6:29Ted Seides?

  more. Thanks so much for spreading the word about Capital Allocators Coaching. Please enjoy my conversation with Tim Sullivan.

• 6:40Ted Seides?

  Tim, thanks for doing this.

• 6:41Speaker 02

  Hey, my pleasure.

• 6:42Ted Seides?

  It might be fun to start with the bookends of your career and talk a little bit about what it was like when you first joined Yale 40 years ago and how that compares to now.

• 6:53Speaker 02

  It's totally different. When David Swenson got the job in 1985, there were no articles in the Wall Street Journal about him getting a job at the Yale Endowment. Over the years, I'd have people from Yale's School of Management or wherever email me about how do I get a job in the endowment management industry? And I'd say, well, I'm not really sure I can help you because there was no endowment management industry when I started. I just needed a job. The office was 12 people on half of a floor, a couple stories up from the Burser's office at Yale in this fairly old building with no air conditioning, which wasn't very pleasant in the summertime, especially because we all wore suits back then. Of the 12 people that were there, really only five or six at the most did what we do today. A lot of the other people were involved and we had a security lending operation that

• 7:38Speaker 02

  we shut down years and years ago because the spreads got too tight in that. Apples and apples, there were five people in the investments office versus today, there's over 50, plus support staff. Assets under management, literally orders of magnitude different. It was one and three-quarter billion when I started and over 40 billion when I left.

• 7:57Ted Seides?

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

• 8:02Speaker 02

  Dean and I were pretty fortunate in that Yale had actually been investing in both venture and leveraged buyouts since the mid 1970s. When I started, those two together were probably 2% 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 80s with Apple and Genentech and Lotus, 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

• 8:44Speaker 02

  of whack and the stock market turned down. Some of the longtime investors in the venture business at that point, who were mostly insurance companies, looking around saying, ah, 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 had been mediocre for a while. Looking back over the longer term, the returns were fantastic. And we said, hey, this is really interesting. Let's learn more about it. We were knocking on people's doors at a time where not that many other people were. And then we also had this existing roster of managers that we could call up and say, hey, who else in the business should we get to know? Who do you

• 9:26Speaker 02

  respect? Who do you like to work with? So we made a list of 15 different firms, went out and met all of them. Within five years, we were investors with virtually all of those firms. And most of them did fabulously well for us in the 90s and many since then. And some of them are still in our portfolio.

• 9:43Ted Seides?

  How easy or difficult was it to figure out who those 15 you'd want to have your money with were?

• 9:48Speaker 02

  It wasn't that hard. 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 backed these successful companies. I should talk to them. And it's a lottery ticket business and the winning lottery tickets tend to Make their way to certain places. Firms don't always keep that franchise. They can blow it along the way. And we had a few of those over the years. But once you create that positive feedback loop, it's a pretty powerful thing in the venture business. Buyout business was harder. A lot more of it is just financial engineering and less differentiated a skill set.

• 10:31Speaker 02

  So maintaining your edge there is probably harder. One insight David had early on particularly was financial engineering as a commodity. Wall Street was teaching lots of people how to do fancy things to balance sheets. But could you then do something with the business when you owned it to make it a better business? And that would be a really powerful thing. So we very early on focused on firms that brought more than just financial skills to the table, really brought some operating capacity. That was really something we looked for right from the start. That was great insight on David's part. I think we were fortunate too that we met the Clayton and Dublair people early on in that process. And they're sort of a prototype of that model of combining the financial expertise with real operators.

• 11:16Speaker 02

  That was a good template for us.

• 11:17Ted Seides?

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

• 11:23Speaker 02

  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 them to be on the board

• 12:06Speaker 02

  of a $100 million company and add some value was not a great strategy. Finding people with the right backgrounds, 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, sometimes the people that were good at working with smaller companies then weren't so good at working with larger companies. They sometimes had to change these people out and that would be a complicated process, too. What were some of the other subtle things you learned along the way? We'd always had this focus on operating capability.

• 12:51Speaker 02

  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. One thing I've become more appreciative of is the deal making process. Twenty years ago, thirty years ago, we dismissed that as important, but it's really not key because it's hard to differentiate yourself. And there are a lot of smart people who can play in an auction and leverage a balance sheet. 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.

• 13:31Speaker 02

  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 are worth. And they know how to get several people engaged in a process and get a fair price. But to have a long enough period of time to think about an asset, understand it, understand the industry, understand what you can do with it while you own it. Is it the right asset for you to own? Is it the right asset for you to pay the price that it's going to take to win the auction? So having several months or a couple of years to figure that out, instead of just showing up in a six weeks investment bank run auction where you have very little access to management and very compressed timeframe.

• 14:11Speaker 02

  It's just a much better way to control the risk of whoops, I paid the high price and it turns out that was a big mistake. That was definitely something that's evolved over time and I think become a lot more important in finding success for firms.

• 14:24Ted Seides?

  Curious how that correlates with the size of the firm. You can imagine trying to source deals multiple years ahead of time might require a lot more resources.

• 14:33Speaker 02

  A lot of the firms we work with have grown quite a bit over time, particularly in terms of headcount. One thing a lot of firms have done is firms that used to be generalists have verticalized. And instead of there just being a group of people that get together and talk about the deals that they're working on, you might be talking about a manufacturing business one day and a technology business the next. Now they have dedicated vertical teams. There's an industrial team and a technology team and a healthcare team and a retail team and whatever sectors they've decided to focus on. So to have that industry knowledge is a step in creating that understanding and intuition about do I want to own this business at this price? A lot of people have done that and there are obvious advantages to that.

• 15:15Speaker 02

  I think the thing we worry about is what does that do to the cohesion of the firm in the long term? It's one thing when, if you have a firm that 10 years ago was a generalist, the partners all worked together to some extent, now you have a much more verticalized organization. The people who are at the top of the organization who worked together closely 10 years ago, they know each other, they respect each other, that probably still works. But as those people start leaving the scene, how do you bring up the talent from the different verticals and then suddenly have them at the top of the firm or as part of the investment committee and opining on deals in a bunch of sectors where they have no experience? How does that work? How do they trust each other? How do they have confidence in each other?

• 15:57Speaker 02

  How do they respect each other's questions when the guy who spent his whole life in healthcare is looking at a technology deal? Does he know the right questions to ask? Does the technology guy respect the question when he receives it? 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.

• 16:18Ted Seides?

  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 specialist to the next generation?

• 16:30Speaker 02

  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're accessing deals, the size of 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

• 17:13Speaker 02

  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 going to get more balkanized and how does that work?

• 17:30Ted Seides?

  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?

• 17:47Speaker 02

  It was a scary time. The person who was chairman of our investment committee was certain that this was 1929 all over again. I 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 were 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.

• 18:31Speaker 02

  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 be exactly the right thing to do. It really set David on the course to success, that he had the courage of his convictions

• 19:15Speaker 02

  and stuck by them in a challenging time and with a lot of pressure on him and he made the right call and it was the foundation of his success.

• 19:24Ted Seides?

  As you saw 2% venture and buyouts, some interesting relationships. And then around 89, a couple of years in, you have the huge KKR RJ and Nabisco deal. What was it like being in that space when all of a sudden there's a deal that's so much bigger than anything that had happened previously?

• 19:43Speaker 02

  That turned out to be a good thing for us. It's not unlike the venture bust in the early eighties I just described. Suddenly leveraged buyout in the Wall Street Journal was sort of a dirty word. It was a good time for us to be talking to leveraged buyout firms and saying, hey, we're actually interested in giving you money when a lot of other institutions were not doing that. We tended to avoid firms that did big things in the public markets. The whole bidding war that erupted around RJR and similar assets in that period, we were pretty insulated. Some of those deals didn't wind up working out very well and RJR proved to be a very mediocre deal for KKR. So our portfolio never really suffered from that because we weren't really working with firms that were in that part of the market.

• 20:25Speaker 02

  It just made it a good fertile ground for us to be out there looking for smart people doing smart things.

• 20:30Ted Seides?

  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?

• 20:39Speaker 02

  There was a time, probably in the early 90s, where people stopped talking about EBIT multiples, earnings before interest and 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

• 21:19Speaker 02

  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 up blowing up in their face. It was not the right decision to say, we're going to stick to our traditional

• 22:04Speaker 02

  metrics, or at least do that without considering, this isn't just a one-dimensional measurement of what we're trying to do. There are other factors at play here. Ignoring the risk of failure turned out to be a big mistake for that firm. And it took a long time for them to recover from that.

• 22:20Ted Seides?

  How did you think about that balance, then, of taking risk to be able to buy companies more cheaply, or just accepting the market is moving and they have to keep playing?

• 22:31Speaker 02

  As long as we thought our managers were going to be delivering premiums to public market alternatives, that we were okay with that. Forty percent returns were great, but I think we knew that that was not going to continue forever. Obviously, you wouldn't expect those kind of numbers from the public equity market and returns had to come down. We also always had an appreciation for what does leverage mean relative to your return? And David was one of the first people to think about, we ought to be measuring these managers, not just against absolute return, but to say, well, how do they compare to a levered S and P 500 or some benchmark like that? And so to try and have a more nuanced appreciation for, okay, what are the factors at play here?

• 23:16Speaker 02

  And what risks are they taking? And some of it too was always just qualitative assessment. It was very easy for institutions, once Cambridge Associates and people like that started publishing benchmarks for vintage years and whatever other metrics they would produce, for people to just start slotting managers into quartiles. But I always felt that people were often missing a really important part of the equation. It's the risk side. What did you do to achieve those returns? Two firms with 20% IRRs might have very different risk profiles. And so you want to understand that. 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?

• 23:57Ted Seides?

  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?

• 24:10Speaker 02

  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 90s and the first half of the 2000s 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. About is 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

• 24:54Speaker 02

  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.

• 25:13Ted Seides?

  In those early years, what were some of those successes? You think you go through the 90s up until early 2000s. 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?

• 25:28Speaker 02

  It's interesting. I gave a speech at a conference, which I almost never did, but I wanted 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 are 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 1990s. So I think Netscape was on the list and Compaq 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 are just these obscure manufacturing

• 26:13Speaker 02

  companies or a cable television operator or that 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. Multibillion 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 Xs on good solid businesses, but not businesses that the guy on the street is necessarily going to have heard of. Sometimes the businesses that did have that profile like RJR would be the poster child for this. Those wound up not being great successes.

• 26:56Speaker 02

  So occasionally we'd have something like Snapple Beverage back in the 90s, which was a huge success for Thomas H. Lee. That was probably a 20x deal over a pretty short period of time. So occasionally there'd be something that would break through like that from our buyout portfolio, but that was very much the exception. It was much more grinding out win after win. It also points to 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 portfolio or else the net returns just really start to collapse.

• 27:35Ted Seides?

  What was it like going through the dot com boom and then bust?

• 27:40Speaker 02

  It was definitely the craziest time of my career. You would go out to Silicon Valley and visit the firms we were invested with and they were all making absurd amounts of money. I just said, it was okay if half of your deals lost money. They'd have funds where 90% of the companies they invested in were profitable deals. So it wasn't just that they had some big home runs. Everything worked. 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. We'd go from door to door, up and down Sand Hill Road. You would think all of the venture capitalists would be absurdly happy that they were doing so well, and instead they were all miserable. There was just so much stress that if you took the afternoon off to get a haircut, well,

• 28:24Speaker 02

  what if the guy with the next great idea was going to come to your office that day, but you missed him? And then he went across the street and somebody else invested in Yahoo instead of you. No one was happy and they were all working like crazy. The timeframe to do deals compressed dramatically. Somebody with an idea could put together- A couple of slides and raise what then was a huge amount of money over three days around the barest outline of a deal. Predictably, that all ended very badly, but we made so much money on the way up that it ultimately didn't matter that it ended badly. We had some spectacularly bad funds in the late 90s that we committed to, but their predecessors more than paid for what we lost in that period of time.

• 29:05Ted Seides?

  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?

• 29:13Speaker 02

  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 $200 million 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 then instead

• 29:55Speaker 02

  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 a 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've 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. Oh, things are getting crazy. This is when Snowflake went public and traded up and was selling it 200 times revenue. It's a fantastic company and a fantastic product, but 200 times revenues.

• 30:40Speaker 02

  What the heck is that? And he was saying the same things. This feels really dangerous. It is dangerous, but we've made a ton of money over the last five years. We'll probably make a ton more money before the music ends and there'll be some lean years, but start to finish, it'll be great. And that's how it's played out. Who knows what returns look like going forward. But if you're with the right people who you hope are going to do the right thing, at least enough of the time, hopefully you come through the valleys and still get to enjoy the peaks.

• 31:10Ted Seides?

  One of the biggest dynamics that's changed from the dot com era and today was the exit to public markets.

• 31:18Speaker 02

  Those were actually probably more often sold to strategic buyers. The strategic buyers, big corporations are like, oh my God, we're missing out on this. We need to have our play on the internet or in fiber optic communication. It would be AT&T buying a networking startup or Time Warner saying, oh, we need to have some online thing. So we'll buy this platform. And there were certainly IPOs that were not barn burners, but in 98, 99, most things that went public, went public and then tripled and went up from there. And the key there was more, how do we control our exposure to those things? How do we get as much money off the table as quickly as we can in those? And we certainly got caught holding the bag at the end with some of them. But again, we had taken so much money off the table previously that it worked out very well, start to finish.

• 32:03Ted Seides?

  How do you think about that today where those private companies that are successful are still private and are still in the hands of the venture capitalists?

• 32:11Speaker 02

  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, there are real questions for institutions about how do they ever get liquidity? And how do they get the premium pricing that you sometimes get in the public market? That's been a challenge in the venture business for the last 15 years. Occasionally there are periods of market exuberance that draw companies out. There's still going to be IPOs. I think there are going to be systematically companies that want to stay private as long as possible. And in some cases, that might mean for years and years and years. Stripe is at least 10 or 12 years old now. Every year it's on lists of, oh, here are companies that might go public this year. And it doesn't, and it's been able to raise huge amounts of capital.

• 32:55Speaker 02

  And the entrepreneurs and the employees have probably all taken lots of money off the table in secondary sales. So they haven't felt that pressure to exit. So you do wonder if you're a venture fund or an institution in a venture fund, how do you monetize that asset at a compelling price? It's going to be a challenge.

• 33:12Ted Seides?

  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 of capital in the private markets?

• 33:25Speaker 02

  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 an 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 results 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,

• 34:08Speaker 02

  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 this going to be worth the time and effort and illiquidity? Am I getting paid for the risk that I'm taking?

• 34:53Speaker 02

  One of the risks that people do not think about is if you hire a public equity manager and two years later you've decided, oops, I made a mistake, you fire them and you get the money back. And oftentimes, because it's liquid, the cost of selling is not particularly high. 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. That's another... Big risk with illiquid assets that I think people do not think about properly is what is the risk that my money is stuck here for some very long period of time earning a very mediocre rate of return? That makes it all the harder for you to generate good total programmatic returns. Your winners have to work that much harder to make up for it.

• 35:38Speaker 02

  If you've got your money stuck in a fund for 12 years and it generates a 3% return, that's a really bad outcome.

• 35:46Ted Seides?

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• 36:24Speaker 02

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 36:29Ted Seides?

  And now, back to the show.

• 36:33Ted Seides?

  Leading into the financial crisis, and particularly in private equity, you had this period of time where firms that you invested within started to grow. There had been these boutique firms and they started to take on more capital, do more things. How did you think about managing, up until '08, as firms that you had invested in as a boutique, became less boutique and making those decisions of whether to stay with them or not?

• 36:59Speaker 02

  Most of the firms that we invested with did stay as boutiques. The change was more in assets under management and consequently the size of company they were buying. We were very cognizant of our firms growing. In ways that are appropriate. In the buyout world, people by definition start out small because when you don't have a track record, you can't raise that much money. If you're successful, you can raise more money. You have bigger funds. You can buy bigger companies. And buying the bigger company feels good while you're doing it because bigger companies just tend to be better companies. They have deeper management. They're not as reliant on a few clients. They have better systems. They're easier to finance. They're easier to sell. A lot of buyout managers, as they're growing, they think, oh, this is great.

• 37:43Speaker 02

  I'm buying these much better companies and I don't have to go spend six months as the emergency CFO in the middle of nowhere at some company because we don't have a CFO. 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 small, they do well, they grow, they buy bigger companies, but the bigger companies are more expensive. It's more competitive to buy them. There's less you can do with them when you own them. Do the returns start to stagnate? But then the problem for the institutional investor is that there are actually some firms that have made that transition well. How do you know which ones are going to be the right ones and which ones are not?

• 38:28Speaker 02

  It's hard. If it was easy, everyone would do it. 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 the size of the first fund we had invested in. And in the interim, that first fund had 20 companies in it. The fund they were now talking about was going to have 100 companies in it. And the firm had gone from being two head guys and maybe eight people underneath them to now being the two head guys and 80 people underneath them. And this is all in the space of five years. And they had opened several offices, including at least one in Europe.

• 39:11Speaker 02

  And the two head guys were still basically making all of the decisions. They really hadn't grown out of management team around them that you had confidence that there was a lot of seniority there. We looked at that and said, look, this train is headed in a direction we're just not comfortable with, so we're getting off the train. We asked them a lot of tough questions in that process. And their reaction was, why are you guys being so mean to us? We've done so well for you and all the other LPs are ecstatic that we're raising this big fund because they can give us more money. Why are you guys asking us all these tough questions? So we didn't do that fund. They then 18 months later raised a much larger fund than that fund. Then 2008 happened. Those two funds certainly didn't match the performance of the two funds we were in.

• 39:53Speaker 02

  I don't think they were total disasters, but they're very mediocre outcomes. That was to us a perfect example of a firm that was growing too quickly along too many different dimensions without enough thought about what are we good at? Why are we good at it? How can we grow in a manner that is consistent with that? How do we build out a talent base and a decision-making process that enables us to continue to be effective as we grow? Spending a lot of time trying to understand, is the growth for good reasons? Or is it because there's a lot of money out there? And if we collect it, we'll get a lot of fees and we'll figure out how to invest it later. And by the way, the carried interest on a $5 billion fund compounding at 15% return

• 40:35Speaker 02

  is a lot more than the carried interest on a $500 million fund compounding at a 30% rate return. Plus, obviously, the fees are 10x. Always trying to understand what is the competitive advantage this firm has? Is it going to be enduring? Is the firm getting better as it grows, as it cycles through people, as it evolves its strategy? Very, very important to us. Your point on boutiques becoming broader firms, we always worried a lot about people having distractions. We really liked the idea of being able to know that when our managers woke up in the morning, they were thinking about the fund that we were invested in, not their real estate fund, or hedge fund, or credit fund, or whatever else they had going on.

• 41:17Speaker 02

  People that focus on doing one thing and being the best in the world at it is what we really like, as opposed to people thinking, oh, I've got this brand name that I can franchise. It'll be great for my valuation of my management company, but who cares what it means for the LP returns.

• 41:31Ted Seides?

  Maybe with that one as an example, there's this great Warren Buffett line that when 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?

• 41:45Speaker 02

  That quote is absolutely true. One of the formative experiences of my career, this goes 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 90s, the oil and gas deals were 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 would 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 by portfolios that suddenly had companies

• 42:28Speaker 02

  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 firms and it sometimes manifested itself in problems with the LP base. But it really made me think, oh, the difference between the oil and gas business and the venture business is the oil and gas business has a boom and a bust every two years as oil prices shoot all around. The venture business has its bust every 10 or 15 or 20 years.

• 43:12Speaker 02

  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. We would have deals with our managers that basically said, this is the way we are going to divide the pie. When the profits are realized, the manager would have it in their head that, well, I need to have at least this much pie. And if, because the environment was bad for whatever reason, suddenly the pie was Much smaller, they'd say, but I still want my pie. Where I can get my pie from is from my LPs. And we'd have to say, no, no, no, that was not the agreement. Those conversations got very difficult. That happened with some of the post 2008 firms too. Although the post 2008 era was not as bad as I think we feared it was going to be.

• 43:55Speaker 02

  There were certainly a lot of businesses that in 2009, we were like, oh my God, these things are zeros. That by and large proved not to be the case. The LBO managers spent five or six or eight years digging out from having paid too high a price at the wrong point in the cycle. But by and large, they had bought quality companies that could survive, you know, volatile world. And a lot of those deals wound up being 1.4 times your money after eight years, which is not a great outcome, but is a lot better than a zero. There weren't as many situations where a firm just completely imploded because its portfolio was just dead. I can only think of one firm off the top of my head, maybe two, that were holes in the ground. And then how do you deal with the damage?

• 44:38Speaker 02

  And how do you pay somebody to turn off the lights when there's no incentive compensation left to give anybody?

• 44:43Ted Seides?

  What'd you do in that situation?

• 44:45Speaker 02

  You just had to work through it. It was hard. 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 2010ish era, where it was clear that there was no way for the GP to earn a carry. But there needed to be some kind of resolution and you needed to figure out a way to pay the people that were still around to work out the assets and bringing in some fresh capital to provide liquidity to LPs that just wanted to be gone. And to provide some ability for these management teams to have some income and maybe some fresh capital to do new deals and reestablish their credibility and so on. That's how that started and then it morphed into what it's become today. A much bigger business.

• 45:28Ted Seides?

  As you look at the last 15 years, there've been a lot of innovations or evolutions of some of the investment strategies and firms in private equity. You have the SoftBank, Tiger, Growth Stage and 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?

• 46:03Speaker 02

  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,

• 46:44Speaker 02

  "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 with their portfolio companies, or in the way in which they tried to generate investment opportunities, we always wanted to understand those things.

• 47:28Speaker 02

  Some of the structural innovations never really appealed to us. If things got too complicated structurally, that was often a sign of a problem. 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 a code for, "Well, these people can't raise money in a normal way. They have to go to the government to get a lot of their capital." By and large, those firms did not do very well. There's some value in sticking with things that you know, particularly from a structural standpoint. We've seen firms... Evolve their businesses in ways that might be good for the general partners and

• 48:12Speaker 02

  good for the value of their management companies, but are not good necessarily for LP returns. And the very large firms going public and managing these giant pools of insurance assets and they're really more credit businesses now than they are LBO businesses. And the LBO business is kind of on the side, even though it's what the brand name is still associated with. To me, that doesn't seem like a way for LPs to be expected to generate exceptional rates of return. Similarly, a lot of those firms now turning to the wealth management world is their next source of capital. 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.

• 48:56Speaker 02

  Gross returns might be fine, but between the fees that the GP is charging and the fees that the investment advisor are charging, the net might not be very interesting.

• 49:04Ted Seides?

  The other big questions today is this liquidity bottleneck, particularly in the private equity side. I'd love just your perspectives on how this might play out over the next several years.

• 49:16Speaker 02

  There have obviously been a series of issues in the world that have contributed to it. The change in interest rate environment, the stock market's been up and down and up and down and up and down, the tariffs, all of these factors that have contributed to the problem. But I think the fundamental problem in the buyout world, and probably to some extent in the venture world, is that not unlike 2006, 2007, people in 2020, 2021 paid too high a price for assets in a world that is now very different. Buyout firms routinely paying 20 plus times EBITDA for quality businesses, but businesses that probably should not trade at that high a valuation. Doing that in a world where interest rates were zero and there was a lot of money being

• 50:01Speaker 02

  pumped into the economy by the government in the COVID era, they just paid too high a price at the wrong time in the cycle. They're quality businesses. A lot of them will be able to play through, but it's going to take a long time for the GPs to sort of amortize their overpayment. There are going to be a lot of those assets that the GP makes 1.4 times their money after eight years. It's very hard for them to decide to make 1.4x their money after four years because there's always the hope that things will be better. Oh, and if we bring in a new CEO and give him a couple of years or if we do this clever thing. One problem buyout managers have is they think they can fix everything. And sometimes they do fix things, but they get too anchored to cost as a measure of value.

• 50:46Speaker 02

  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 importantly, freeing up your time. So you can actually go out and do a good deal today and spend your time working on that instead of trying to make a bad deal into a mediocre deal. There's a lot that needs to happen in terms of people coming to grips with the reality that, look, I paid too much for this business and I'm going to have to accept a mediocre outcome. And then it's compounded by, it's obviously been a tough fundraising market. And so if you sell an asset for 0.8x your cost after three years, that doesn't look good in the next fundraising pitch.

• 51:30Speaker 02

  I don't know what breaks the logjam. It seemed like a pretty consistent refrain over the last three years that the buyout managers would tell us, oh, the investment bankers tell us six months from now, things will be better. Whatever the date was, it would never get here. People are going to need to recognize that reality and deal with it. The other challenge that might be different this time around is those 2006, 2007, 2008 deals. Took a long time for managers to decide to get out of those. But at least they were selling those assets for mediocre returns in an era where then the deals that they did in 2009, 2010, 2011 are actually doing pretty well. And they were selling those things after three or four years and earning good returns. Because it's been hard for people to buy things over the last three or four years

• 52:14Speaker 02

  for all the idiosyncratic reasons in the market. There may be not going to be as many good 2022 deals that were sold in 2025 for three and a half times your money and you look like a genius. It might be harder for firms as a whole to protect their reputations the way that maybe they were able to do after the financial crisis.

• 52:34Ted Seides?

  How do you think the secondary market plays into all this?

• 52:37Speaker 02

  It does, in some ways, maybe take some pressure off the GPs that they can tell the LPs, "There's liquidity if you want it, and either you go out and sell your interest in our fund, or we'll arrange a GP-led secondary for some portion of our assets. And then it's up to you whether to buy or sell." And 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 to you." We don't know how to do that. You're the ones that know this is the good price for this asset, this is the valuation at which you should trade.

• 53:20Speaker 02

  That's not our skill set, and that's not something we've spent time historically doing. And so, the idea that we're just being given this option, it isn't that great. It's not really doing your LPs a service. The haircuts that you wind up taking to get liquidity, particularly in situations that are not really humming, those are probably not good exits.

• 53:38Ted Seides?

  How does that dynamic playing out, layered onto the environment that we're in, where there's questions about distributions and deal activity, given the economic environment, given the pricing environment? You have to put those two things together at the same time.

• 53:54Speaker 02

  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 35, 40 years. Looking back on when I started, a lot of what we did was pretty obvious if you started from first principles. Now, the successful strategies have been copied by so many people. There's so much more money, there's so many more smart people trying to be successful in these fields, that it's gotten very, very, very efficient. I think there will still be firms in both the venture and the buyout world that you look back on and say, "Wow, those guys did a fantastic job."

• 54:37Speaker 02

  It's going to be harder to prospectively identify them and know that, "Well, these are the horses you want to bet on, and the returns will take care of themselves." Institutions have to be really realistic about the returns they can expect from these categories, particularly in the venture world. Things have changed there so much in terms of the balance of power between the entrepreneurs and the funding sources. The math is just completely different. 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 $3 million and own 30% of your company. Now it's the other way around. That Sequoia and Kleiner Perkins are crawling on their hands and knees to the hot person in the AI startup and begging to invest $50

• 55:22Speaker 02

  million and own 3% of the company. And maybe the outcomes today are bigger, so maybe that makes up for some of it. And 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 happen with any regularity.

• 55:48Ted Seides?

  On the venture side, on the path from then to now, so 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?

• 56:02Speaker 02

  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

• 56:43Speaker 02

  flow when we're a couple of steps removed from the coalface. 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.

• 56:58Ted Seides?

  Over the years, when you're doing it on the venture side, what were the magic questions you would want to ask?

• 57:03Speaker 02

  We always found it extremely useful to talk to the CEOs and the entrepreneurs of the portfolio companies of the venture firms. And we had a sort of eye-opening experience. This was in late 80s. There was a venture firm we backed. It was the first time we backed a firm that wasn't a brand name firm. Well, these guys, they don't have the marquee of a Kleiner Perkins, but they seem smart and hungry and interesting. And we were then at their annual meeting a few years later. My colleague Dean Takahashi was sitting next to the CEO of one of their companies, and this group had just invested in the company's Series B round. He took money from four Series A venture firms, and they happened to be four firms that we worked with. So we have reasonable exposure to this company, which

• 57:45Speaker 02

  actually then was a zero ultimately. Dean asked him, why did you pick those four firms? And he had a very good reason for each one of those firms. This one was going to help them recruit, and that one had the corporate relationships. But very discreet reasons why he wanted that firm and maybe even that person from the venture firm to be on his board. And then we said, well, why did you pick this firm for the Series B, the new firm that we had invested with? And he said, oh, they had money. And that was not a good answer. Trying to find people where the answer is not just they had money is really important. That's true across the private investment world. 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

• 58:27Speaker 02

  decision are taking the money from the group that you might be investing with.

• 58:31Ted Seides?

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

• 58:39Speaker 02

  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 paid 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

• 59:24Speaker 02

  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.

• 59:48Ted Seides?

  In the private markets, when you have a manager that's under pressure, maybe the businesses aren't doing that well, maybe the returns aren't going to look good if they sell some of those assets. There aren't as many data points to try to assess, are they clear headed and making good decisions about when to sell as compared to the public markets, when there's so much more turnover of ideas? How do you think about getting inside the head of a GP that you have money with, where the premise was supposed to be, you buy, you improve, you sell, and you try to do those all well. But now there are these confounding factors about the sustainability of the business, the future generations of their business, that impact how they might think about that game theory of a sell decision?

• 1:00:32Speaker 02

  You just have to try and have good candid discussions with managers about, what are you thinking with this asset? It doesn't seem like it's going somewhere. What are your plans for it? I think institutions don't do a good job of asking GPs about sell decisions in general. When we're sitting down with a manager for the first time, one of the questions we always ask in the initial meeting is, you've told us a lot about how you buy these businesses. Tell us about how do you decide to sell? And a lot of times, the response I get is, oh, no one ever asks us that question. And I'm not saying this is somebody who thinks, oh, a good business ought to be sold in three years. 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

• 1:01:14Speaker 02

  run a little longer and let them compound for maybe five or six years instead, or maybe even longer. 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. Having frank discussions with GPs about when is the right time to exit. It's important in any environment, understanding the firm's strategy and mentality. Particularly in a time like this, you want to know that firms have some understanding that this capital is precious and there's a clock ticking. And it's fine to hold things if you think the incremental return is worthwhile.

• 1:01:56Speaker 02

  But if you're just holding this in the vein, hope that someday things are going to be better. If there's not a good reason to expect that, it's time to exit. That's all said with knowing that if a business isn't performing, it's pretty hard to sell it.

• 1:02:09Ted Seides?

  In all your experience, I'm curious about times when a manager made mistakes or you saw business mistakes, you chose not to invest. And then later, maybe they learned lessons you were comfortable with. You came back, revisited a manager you chose not to invest with at some point in time.

• 1:02:28Speaker 02

  There were certainly people who we might've thought, well, this is early. And then later on, we're like, okay, yeah, we ought to do this. 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. I don't want to say emotionally, but it was hurt feelings or people getting angry. It's a big hurdle on both sides to overcome. A lot of times when we would pull the plug on a manager, they take it very personally. I would say most of the time when we passed on something that we ultimately did later, it was more, let's let this mature as opposed to screwing something up now. And then they come back and say, well, we fixed those mistakes.

• 1:03:06Ted Seides?

  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?

• 1:03:17Speaker 02

  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.

• 1:03:59Speaker 02

  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 our interests or to have unpleasant conversations with people.

• 1:04:39Speaker 02

  But to always try and face those situations with respect and courtesy and try to work to a solution that works for everybody as opposed to defending your turf at all costs. Getting that balance right of being supportive, but also being demanding in a way that everyone can feel good about it afterwards.

• 1:05:00Ted Seides?

  Some of the misses that you had, maybe separated in venture and buyouts. What are some of the lessons that you tried to take away? Even if you're not going to dwell on, oh, we missed that one, in improving your process to get the next selection right?

• 1:05:15Speaker 02

  One challenge just inevitably is sample size. There's a firm that we worked with that were a couple of guys and then some people underneath them who had done some deals, basically on a deal by deal basis in a couple of different formats, and they had done quite well. There were probably five or six or seven of those deals, which had performed very well in total. And then the firm didn't perform and we were in two funds that collectively produced probably low, single-digit return for us. And we said, well, what went wrong? And thought, well, 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 looked good.

• 1:05:58Speaker 02

  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 money. Obviously, they can't. How you deal with these small sample sets? And I think it gets back to the difficulty of picking emerging managers. One thing we thought a lot about on the venture side was in the mid 2000s, there certainly emerged some firms where people who'd been successful entrepreneurs then became angel investors and they'd put $50,000 here and $50,000 there. It turned out one of them was Twitter and one of them was Uber and whatever else. And wow, these guys are really good. But we think if there are 5,000 people in Silicon Valley writing these angel checks

• 1:06:40Speaker 02

  to entrepreneurs, some of whom end up starting the Ubers of the world, you're going to 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. How do you distinguish? We were probably slower to back people that came out of that world than maybe some other people were. Some of those people actually wound up being pretty good at what they did and being successful. And so maybe we did miss out on some opportunities there, but I'm certain we missed some that, again, the people were just in the right place at the right time and that was not repeatable.

• 1:07:16Ted Seides?

  In all the years you're doing this, and particularly through Yale's prominence, all the people you worked with that became CIOs elsewhere, curious to ask why you chose to stay in the same spot until it was time to retire?

• 1:07:29Speaker 02

  I never wanted to be a CIO. One of David's true talents was he was really good at a lot of different things. I sort of looked at a lot of those things and thought, I would be terrible at that. Dealing with the faculty and the alumni and dealing with the students, that aspect of the job, I would be terrible at. I could then have gone to a non-endowment place, but there were parts of the job that didn't interest me. So what Yale's bond portfolio should look like, I have no insight into that. I always felt like I was very lucky to have wound up by accident in this private equity world where I dealt with a bunch of really interesting people doing really interesting things. And why would I want to do something else? Why would I want to have to spend time thinking about what Yale's spending policy ought to be? I was very happy to let David and Dean

• 1:08:13Speaker 02

  build their models and do all their thinking about that stuff. And it gave me the time to then do the things I was interested in. There were also some reasons why staying at Yale was a great opportunity. The people I worked with were fantastic. The Yale name always opened a lot of doors that would not have been open if I had gone somewhere else. I have some family ties to the New Haven area, so being in New Haven made sense for that reason. There was just never a good reason to leave, so I stayed.

• 1:08:38Ted Seides?

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

• 1:08:44Speaker 02

  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

• 1:09:24Speaker 02

  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.

• 1:09:39Ted Seides?

  There's always this question of what's next. In the early years, venture and LBOs, then private equity was the thing. How do you think about that question with people you're working with, foundations you work with now?

• 1:09:51Speaker 02

  Yeah, well, let me know when you find the answer. It's obvious in hindsight, but if it was easy to know the answer to that, then everybody would be doing it. I sure don't know what's next. I think it's going to be really hard for institutions to have the kind of success that particularly the endowments had over the last 30, 40 years and to do that systematically and repeatedly. It's amazing to me how much more quickly areas of opportunity become saturated. It just seems like competition for high return assets, it just gets more and more intense all of the time. And they're in a world where there's a lot of capital, returns and interesting situations get down very quickly. We were always willing to experiment and try new things.

• 1:10:36Speaker 02

  I don't think we ever viewed our skill set as being, oh, now's the time to invest in this particular industry. Or now's the time to invest in this particular geography or even this particular asset class. If we met smart, interesting people who were doing pioneering work in a category, we might decide this is worth learning more about. Let's give them a little bit of money, let's see how it goes and see where it goes. It didn't always work out. We spent a long time looking for opportunities in the mining and minerals world and really could never find the right firm to work with. That was one instance where we did say, oh, let's spend time proactively looking at this sector

• 1:11:16Speaker 02

  because as part of our natural resources effort, maybe that would be an interesting arrow to add to the quiver. And we couldn't find the right managers to work with. We had a similar experience in farmland, 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 happened to intern in our office. And David and Dean were smart enough to recognize Here's this really smart, really interesting guy who's pursuing this virgin opportunity. And let's go along with him and see how it goes. We had definitely had an interest in emerging markets generally, but it wasn't as if, oh, now China's the thing to do.

• 1:11:59Speaker 02

  It was, oh, we found this really great guy and let's back him and see what happens. 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.

• 1:12:21Ted Seides?

  So David came out with his first book around 2000 and that opened the door to other people understanding everything that was happening at Yale. I'd love to hear what that felt like when, on the one hand, it really cemented Yale's reputation. On the other hand, it probably encouraged a lot of competition.

• 1:12:41Speaker 02

  I'd put it a little earlier than that. It was when Josh Lerner did his first Harvard Business School case study on our office, which was focused mostly on the private equity world. And I always felt if David were the CEO of Coca-Cola, that he gave away the secret formula. I'm certain that every fund to fund manager in the world brought that reprint of the case study on their trips and left it behind and said, read this. And if you invest with us, you can be like Yale. So I was always very ambivalent about it. One of the things he really liked about being at Yale was the sort of educational mission he got to be involved in. And that had a lot to do with funding the place, but he also loved teaching the classes he taught and interacting with the students who interned in our office and all of that stuff. And I think he looked at first the case study and then the books as part of that educational mission.

• 1:13:26Speaker 02

  Yale's fulfillment of its mission is not just in the classroom, but it's in its example to the rest of the world and its things it does on a day to day basis. It's hard to argue with that. The worry I had with the books is, is it the Lake Wobegon effect where everyone thinks that they're of above average ability and of above average intelligence, but turns out half of the people are below average in each of those things. People read the book and see all the success Yale has had in the private. Equity world and the hedge fund world in places where manager selection is really by far the most important factor in success. And they think, well, I'm a pretty smart guy. I can do that, too. Somebody's backing those lower quartile funds and not everybody is,

• 1:14:10Speaker 02

  turns out to actually be a pretty smart guy. And he had some disclaimers in the book about, you should make sure that you really have the skill set and the resources and everything else to execute on this program. But that's the sort of thing a lot of people would brush over and say, well, of course I do. So I did worry that he was maybe putting a loaded gun in some people's hands. It's a model that worked very well for my career. I think there is a question about what the model for the future is going to be, and it may not be the same model. But if I knew the answer to that, I'd probably be doing something else today.

• 1:14:42Ted Seides?

  All right, Tim, I want to make sure I get a chance to ask you a couple of closing questions. What is your favorite hobby or activity outside of work and family?

• 1:14:49Speaker 02

  I love to travel. One of the great things about my job was it enabled me to go to a lot of interesting places on Yale's dime. But I've always traveled a lot in addition to that. And now that I'm not working full time anymore, we'll have more bandwidth to do that. And related to that, I do a lot of photography when I travel. The combination of those two things is something I've always really enjoyed and will do so even more.

• 1:15:11Ted Seides?

  What's one thing that most people don't know about you that you find interesting?

• 1:15:16Speaker 02

  A lot of people who know me will know that I like beer, but they may not know how much I like beer. I counted it up yesterday. Since the start of 2000, I have been to 616 different microbreweries in the United States and several other countries. Been a fun way to see places. Now, I've gone to London a million times, both for work and pleasure. And I've seen every sort of touristy thing ever to do in London. The last time I was in London, I spent most of my free time riding the tube and then walking around neighborhoods on the outskirts of London to go to these little breweries, which tend not to be in places where the real estate is expensive. So I got to see parts of London I'd never seen before and it was a fun way to experience a different part of the town.

• 1:15:58Ted Seides?

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

• 1:16:02Speaker 02

  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

• 1:16:42Speaker 02

  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. So getting that work-life balance right, that was a really important lesson for me.

• 1:17:26Ted Seides?

  What's your biggest investment pet peeve?

• 1:17:29Speaker 02

  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. We talked a bit about RJR Nabisco, but that was, to me, always the poster child of that. The deal didn't go very well for KKR. I think it was a single-digit IRR over a very long holding period. One of the big reasons for that was that shortly after they bought it, the government really cracked down on smoking and regulations around tobacco and lawsuits against tobacco companies. And tobacco was an important part of RJR's business. We were not investors with KKR at that time. We never really had direct

• 1:18:11Speaker 02

  conversations with them about it. But my sense was that they would say, well, the deal didn't go well. The government did this and we couldn't have foreseen that.

• 1:18:19Ted Seides?

  How could you not have foreseen that? Of course it was a risk.

• 1:18:22Speaker 02

  Maybe the risk would play out one way or another or whatever, but you took a bet that the regulatory environment around this reasonably controversial business would be relatively benign and it wasn't. Just own it. Conversely, we had a manager who, this is a recent deal where they did a very complicated carve out. Turned out the carve out went very badly for all kinds of different reasons. And the deal has really struggled. They've been very upfront about, in hindsight, we really blew it. We didn't think the carve out would be as hard as it's been. We thought the management team was up to it and they weren't. And we're going to do our damnedest to fix this thing, but we really screwed up. That's a much better conversation to have. They took the risk and it didn't pay off and they're upfront about that.

• 1:19:05Ted Seides?

  Tim, last one. If the next five years are a chapter in your life, what's that chapter about?

• 1:19:09Speaker 02

  Going to do a lot of travel. We have some pretty complicated trips coming up. I also just, four weeks ago today, became a grandfather for the first time. That's a new chapter for us and exciting and fun so far. And I'm sure will continue to be. Just looking for ways to engage with interesting people in the financial world, be it on an investment committee or as an advisor or consulting. I don't have any firm plans as to exactly what that ought to be and who it ought to be with, but I'm open to ideas and we'll see what comes of it. I'm in the fortunate position of I can just work with people that I want to work with and enjoy working with and respect and be choosy about what I do. And if I wind up doing nothing and just travel and spend time with the family and all of that stuff, that'll be fine.

• 1:19:53Ted Seides?

  Tim, thanks so much for taking the time.

• 1:19:54Speaker 02

  Hey, my pleasure.

• 1:19:57Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings and sign up for premium content, including podcast transcripts, my investment portfolio and a lot more. Have a good one and see you next time.