Animal Spirits Podcast - Talk Your Book: Private Equity Deals with Ted Seides

Starting point is 00:00:00 Today's Animal Spirits is brought to you by Public. You need to go check out the bond account at public.com. You can check out public.com slash the compound. It's an easy and new way to buy individual bonds all in one account. It's 10 individual corporate and high-yield bonds. You can potentially lock in a 6% plus yield between now and 2028. Yields are coming down, but, I mean, that's still pretty juicy. The majority of my career has been in a 2% to 3% IG bond world, and I like this world better.

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Starting point is 00:01:04 and do not reflect the opinion of Ridholt's wealth management. This podcast is for informational purposes only and should not be relied upon for any investment decisions. Clients of Ridholt's wealth management may maintain positions in the securities discussed in this podcast. We're joined today by Ted Citees. Ted is the brain and brand behind capital allocators. You know him. You love him, Ted. Welcome to the show. Thanks, Jens. Great to be with you. So congratulations on the new book. It is. I was about to hold it up. This is for audio only, so I don't know what I'm doing, but private equity deals, lessons in investing, dealmaking, and operations from private equity professionals. Ted, this is your third book. Why do you,

Starting point is 00:01:47 why do you take the dive again? Mostly because I heard you guys have a stream called Talk Your Book, and I figured that was Money Mangers talking their book. And, you know, I could come on and actually talk about a book. That was the main reason for doing it. Okay. Well, thank you. I mean, that was the, that was the main reason. Other from that, it's kind of in this whole medium of podcasting and in and around investment management, private equity is just not very well covered. And it makes sense, right? Because it's kind of like it was a new technology, so you see a lot of venture. There's a lot of individual investors, so there's a lot of public market investing. But private equity is one of those things, much like a lot of what I've done.

Starting point is 00:02:27 on our show and the kind of allocation game. It just happens behind closed doors. But it's this huge industry. It's much more impactful than, say, venture capital. And growing. And continuously growing, yeah. Did the podcast help you become a better writer of books? Obviously, part of the book is interview format, so that had to help a lot.

Starting point is 00:02:45 But did you find that that is easier? Is it still just as hard as ever? It's much easier when 80% of the book's already written for you because you've done the podcast interviews. Yeah. I'm not sure I want to write another full-fledged book like my first two. But what happened was I had created a podcast called Private Equity Deals. I just thought it would be fun to dive in with GPs and do case studies. And from that, you get a look at an industry, a look at a company, a look at the firm.

Starting point is 00:03:13 And then you also get the deal dynamic, which can be really interesting. So it's just a different idea. And after I did a bunch of them, I kind of woke up one day and said, this is perfect to put into a book because there's an example of almost every different type of deal that came out of those interviews. So that's really what it was. There's a curated version of, in this case, 12 deals and a couple of interviews that give a great overview of the industry itself. And it gives a great reflection of what actually happens in private equity as told by the practitioners. So let's start here.

Starting point is 00:03:49 One of your interviews is with Mario, I'm probably a good brother's name, Giannini. Yeah. So he is the founder of Hamilton Lane, one of these giant alternative asset managers. And he said, I can recall in the 2000s having to explain to people what the hell private equity was and why they should want to be in it. And that was a challenge. And then all of a sudden, the industry exploded, as we know, into the great financial crisis. I know it sounds terrible because there was a great deal of loss and suffering during that period. But that is when private equity established itself. It was the greatest thing that happened to the industry because at that point, everyone hated the public markets. This is one of the big things behind private equity. At the end of the day, it's equity. These are businesses. We've got public equity in Apple. We've got private equity and businesses that don't trade on an exchange. But these are businesses.

Starting point is 00:04:38 And to the point of 2008, the risk appetite coming after that, boy, seeing those marks sucked. And one of the appeals, and it's controversial, and I understand why it is. But one of the big appeals behind private equity is I don't have to see the marks on a daily basis. certainly that is a big portion for the explosion. And there are other reasons that we'll get into, but that's a big reason for the growth of the industry. Would you say that's fair? It's definitely part of the equation. I think it's more than just not looking at marks and that being a benefit. Any type of investing over time where you're trying to compound capital, we all know we get in our own way. And one of the benefits, I guess, of private equity is

Starting point is 00:05:22 it becomes a single decision. So you think about someone who's investing in a private equity fund. They make a decision they're in for 10, 12, 15 years. And you can't reverse the decision. I mean, you can in the secondary markets these days. But relative to that GPLP relationship, historically, you couldn't change that decision. And then if you go and buy an illiquid company and something goes wrong, it's not that easy to turn around and sell it the way you can in the public markets.

Starting point is 00:05:48 And so you have to get in there and try to fix it. Oh, dude, you should see my trading account. I mean, all else equal, not being able to sell. Again, all else equal is probably a good thing. Yeah. Having less turnover in your portfolio, again, all as equal, usually is a benefit. Yeah. Well, Cliff Asnus has this interesting thing where if, if in fact, illiquidity is a feature,

Starting point is 00:06:09 then you should not get it at a discount. You should have to pay a premium to get that feature. I'd pay a premium. I just, I don't know how much. Well, you talk about that in the book, Ted. You say how the EBITDA multiples have been going. up over time. And I think you said, like, it's gone from almost nine to 11. I remember the old stories of like Mitt Romney in the 80s and 90s, and he said he was buying these companies like four

Starting point is 00:06:30 times EBITDA or whatever. And like, that, that world is gone. So that's higher. And this is the kind of thing where people, a lot of people write these stories and they say there's two trillion dollars in dry powder and multiples are higher. So private equity is a bubble. And I think I kind of bought into this a little bit a number of years ago and have totally changed my mind about it, that private equity is such a long game. And to your point, there can be times where you get stuck in the wrong illiquid company and it doesn't work out. But it's not the kind of asset class.

Starting point is 00:06:58 Even if there was this big comeuppance, it doesn't happen on one day or one month, like the stock market where it can just crash. This takes a long time. And these managers have the ability to put more money in through future funds. And so, yeah, what does a panic in private equity look like? I don't want to say by definition it can't happen because, you know, that sounds naive, but bends onto something. So there's a difference between a panic and losses.

Starting point is 00:07:22 So a tough scenario for private equity is what happens in the real economy, right? If you have a recession, historically, these are more highly levered companies than in the public markets and leverages the killer. So if something goes wrong and the economics of the business go down, you could have losses for sure. If you look through history, there are very few private equity funds that have lost money over their 10, 12 year period. So I think Ben's exactly right where there are a lot of critiques you could make about where we are, let's say, cyclically for private equity. multiples have been higher. Could they come down for sure? Rates have been really, really low, which benefits the financing and the leverage. Rates are back up. But those are cyclical periods that tend to reverse themselves over a couple of years. And these are

Starting point is 00:08:13 much, much longer horizon investments. I want to talk about the leverage piece, too, because if you took the whole pool of private equity, and some people would say setting aside like the top quartile-design managers and the bottom quartile-desdile, the whole pool of private equity is just this illiquid equity piece with leverage. So let's say you're buying the S&P with leverage or the Russell 2000 leverage, whatever you want to call it. Do you think that's a fair assessment? And actually, if you're just getting that as an institutional manager or retail investor, like, isn't that a pretty decent way of investing? If you're just, if you're buying and holding equity with a little leverage piece on it for the kicker, is that a pretty good outcome?

Starting point is 00:08:51 Ted, before you answer, let me just quote your old mentor, the late David Swenson, who said, the superior private equity returns come at the price of higher risk levels as investors expose assets to greater financial leverage and more substantial operating uncertainty. Right. So David wrote that 24 years ago. And it's relevant because there's a lot in what Ben said in that comment about leverage as part of private equity. it's changed a lot over the years. So yes, multiples have come up. Let's say it was nine times to 11 times.

Starting point is 00:09:24 Now keep in mind, multiples in the public markets have come up too. Yeah, they had to. But in the private markets, one of the things that happens when multiples come up is that lenders don't necessarily increase the amount of credit that they'll extend. So if a lender is lending mostly based on cash flows and they're comfortable at a certain level of interest rate coverage. Maybe for a certain business, they'll lend, you know, six times, seven times EBITDA. So as the equity multiple goes from what was nine times to 11 times or 13 times, what happens is the private equity firms actually are putting more

Starting point is 00:10:02 equity into the deal and the leverage comes down. So yes, they are levered and they're generally more levered than public companies. But the degree of leverage is actually a lot less than it has been in the past. If you go back to like barbarians at the gate, those deals were almost entirely debt. You have tiny slivers of equity. It was a what, like $24 billion buyout and how much equity, like a sliver? Sliver of equity. Yeah. Well, these private equity firms have more cash to put to work now, too. So they have the ability to pull more equity in, right? That's right. So, so when does the leverage come from? Has that, has that source of financing changed over time? It has. In the past, if you go pre-financial crisis, it was mostly commercial banks. So like,

Starting point is 00:10:42 Chase before J.P. Morgan and B of A were big lenders to private equity firms. And now as the private credit funds, it's sort of like concessuous. Yes and no. I mean, I think financial crisis catalyzed the inability of banks to hold this risk on their balance sheet. And so that really formed what became this huge and growing private credit market so that that credit was getting extended in the hands of asset managers instead of banks, which is actually, it's a very good thing. It's a much better asset liability, man. for sure. So that's exploded and private credits exploded alongside the explosion in private equity and all the capital coming into private equity. All right. So this, I wrote like in big letters

Starting point is 00:11:26 this in the book. So you're interviewing Mario again. Ted, you asked a great question. You said, what are you seeing in terms of the broad-based LP saturation or indigestion because of both the denominator effect in the public markets and the run up in private last year? And what you're getting at is institutions are there. They've got 30% of the portfolio, or whatever it is, like they're not going to 70, right? So these giant, the blackstones of the world, they've got to go downstream and for sure they have. So Mario said, if it's not the single biggest issue in the private markets, it's one of the top three. Can you talk about this dynamic that exists in the market? Sure. So that interview, that question about the denominator effect

Starting point is 00:12:03 came off the wake of 2021. And just to describe what that denominator effect means, if you have a pool of capital and you have some asset allocation structure and public markets sell off as you mentioned the private markets don't necessarily mark all of a sudden your private allocation goes up so if you wanted to have 15% and public market sell off a lot you're now at 18 without doing anything different but you want to be at 15 so the denominator because your entire pool has gone down the private markets haven't adjusted makes your allocation go up that's been playing out over the last couple of years where there's a significant slowdown in the LP money that's getting invested in private equity firms partially because of that, but probably more importantly because going into 2021, you had this

Starting point is 00:12:54 massive acceleration that the private equity managers were coming back to the market faster than they had in the past and with bigger dollars. And the LP community was loving it, so they were funding that money. The nominator effects reversed, right? Because the public markets have bounced back from 2021. So you don't really have a denominator effect, but you do have this kind of, what is it, the pig through the python that needs to work its way through because there was sort of an accelerated of the normalization of capital commitments that went into private equity firms for a couple of years, and that's slowed down since. You talk about your experience with Yale at the beginning of the book. I'm curious, how much of the outcomes for a place like Harvard or Yale

Starting point is 00:13:33 where they have these really big P.E. books, how much of it is the funds they invest in it? How much is it like the direct co-investments that they make? Is that where they really supercharged their returns by these one-off deals? Yeah, it's very case by case. I mean, so Yale doesn't, I mean, to my knowledge, Yale doesn't make co-investments. So that's been entirely from manager selection. And there is this really wide dispersion between the better private equity firms and the weaker ones. I don't know Harvard specifically. There are a lot of institutions that have used co-investment more as a way to kind of get their fees down a little bit than to try to supercharge their returns in the private equity space.

Starting point is 00:14:08 Private equity's been a great return enhancer. Venture capital has been like the game changer for a lot of these over the last 20, 25 years. In terms of the size of the market, all of this institutional money, along with regulation, has made it so that these companies are staying private for longer. So Open AI is trying to raise it at $150 billion valuation, which is, I don't know how people make money on that, but that's a separate story. So you have an interview with John. Who is this John? John Toomey. Yes, that's right, from Harbor Vest. And they famously did a deal with Vanguard, which maybe we can get into later. So he said the scale of the industry is an angel's question. If you look at the size of the global public equity market, it's about 80 trillion or 90 trillion. When you look at the total private equity market cap, it's about eight or nine trillion. And he says, why can't it be 20 or 30 percent? How do you think about, I know it's like a sliding scale and who the heck knows, but how big can it? get relative to public markets. Yeah. It's funny, Mario said in that interview that for 20 years,

Starting point is 00:15:10 people have been saying it can't get bigger and it just keeps getting bigger and bigger. I don't really know the answer to that. I mean, I think that it's easier for me to think about it in terms of asset allocation and the different pools of capital because there's only a certain amount of illiquidity budget, let's say, that someone would have. And the Endowment Foundation community has been at those levels for a long time. The later movers tend to be bigger pools of capital. So I think public pension funds, some of the sovereign wealth funds, certainly the newer sovereign wealth funds. And then, of course, you have this whole question of democratization. You know, can you move more into sophisticated retail and then retail and

Starting point is 00:15:48 private equity? And those are bigger and bigger pools. As a percentage of public markets, or if you think about asset allocation, it probably should only be at most like 20 or 25 percent of pools. And then the question is, what's that global pool and how much bigger can it get? We were talking with Michael Sidgemore a couple weeks ago, and he is really bullish on the RAA wealth management channel. And I think right after we got done talking, Michael went out and bought Blackstone because he was seeing that like these managers are going to benefit from that. And blue owl for the record. Do you spend any time thinking about that or hearing from managers trying to work their way into that new pool of capital? Yeah. So what you're seeing

Starting point is 00:16:30 is particularly the larger managers. So you think about the public companies at Blackstone, TPG, KKR, they have massive resources to try to figure out what underlying vehicle structure works for that channel and then try to figure out the distribution. So you are seeing significant efforts there, but it's very concentrated in the largest managers. I don't know if that's the worst thing in the world, but it's almost like you're going to try to get the beta of private equity. that's not a bad thing. I mean, in my opinion, I think that, listen, if you're, if you're new and you're going to dip your tone in the water, you could probably do worse than beta. I don't think you, right? Like not not getting negative alpha is probably a win. That's a risk management thing too for RAs. Like they don't want to go the newer boutique managers. They want to make sure their operations are all buttoned up. Well, advisors don't know, don't know shit about private equity. And I would say, I would put myself in that pool. Like I know, you know, I listen to the podcast and I know what I know. But I don't really know how deals get that. I don't really know how to diligence one manner. versus the next. But there is now starting to be some some real thin spaghetti. I would say

Starting point is 00:17:34 angel hair spaghetti being thrown against the wall in terms of products that are coming to market. And there's some things that are going to come out for retail that are just not going to go very well. But we've seen that in alternatives for the last 20 years. It started with like hedge funds and Rick structures. And back then, the vehicles that we're putting there were really watered down versions of what you could get if you were kind of in the LPGP structure. It's of real interest to the private equity community to kind of get this right. And so I think some of the efforts and the products are good stuff. So it's closer to what, say, an institutional LP is getting and what they're trying to put together.

Starting point is 00:18:14 Blackstone says a lot of their instruments for advisor and clients are the same thing as the big institutional investors. I'm curious, are you saying anything changing the fees? Because I don't like the hedge fund space. The averages are probably not 2 and 20 anymore, right? maybe for the biggest best funds. Is that same thing happening in private equity where the two and 20 fee structure is coming down, or is that still pretty standard? It's still pretty standard for now. And I think the reason for that is that private equity firms have continued to deliver net of fees of what the institutions need. Now that, as rates go up, as prices get elevated, that gets

Starting point is 00:18:49 harder and harder. What you saw in the hedge fund space is when you crossed through on the downside, that magic number of 8% net, sort of all of a sudden, all the scrutiny came like a title wave. Where you're seeing more critique on that side on private equity is transparency of all the other things. So there have been deal fees and monitoring fees and exit fees in addition to the two and 20. Gross. And so the first, yeah, the first wave there is really getting transparency and understanding what's happening. But by and large, you've still seen so much demand over the last guy. And it's softened a little bit since 2021. But there's so much demand that there hasn't been pressure on fees yet.

Starting point is 00:19:34 One of the biggest areas of explosive growth in the private equity space is private credit. I was listening to an episode with Joe and Tracer recently on private credit. And their guests made some really interesting points that back in the day, these loans were made with a syndicate. And often there was knife fights. And when things went wrong, like it was every man for himself. And now, because there's often one direct sponsor taking down the loan, they're able to negotiate the terms or term them out or do what they have to do to make sure that they could work with these companies. Forgive me for saying maybe this is actually a good thing.

Starting point is 00:20:16 It really all ties to what happens in the economy. So on a case-by-case basis where we are today, yeah, you see everyone has an incentive to keep the company going and try to improve what's happening. And so it certainly is more efficient in the process of how are the lender and the creditor are going to get together and try to figure out how to move forward. Where you run into distress, we're beginning to see what, you know, people are calling it creditor on creditor violence. But the new thing isn't that.

Starting point is 00:20:46 The new thing is sponsor on creditor violence. So red lobster? I don't know the red lobster story specifically. All right. So, go ahead. Yeah. So, you know, historically, you look at how prioritization of claims works. It's like the senior debt gets paid first, and then the MES debt gets paid after that,

Starting point is 00:21:02 and then you work down to the equity. But what's happening now when you have this private credit attached to a private equity firm, the private equity firm has some power. And so they're going after the creditors and trying to pit them against each other so that rather than saying, oh, this business isn't worth the whole debt stack and the equity is wiped out, everyone's going to share in taking a haircut and move forward. So that's a very different dynamic, but it's still early. because you don't have that many companies in distress.

Starting point is 00:21:31 All of this growth in private credit has happened in a strong economy, and it will be stress test at some point in time. I just don't know when that time will come. I mentioned the dry powder thing earlier. What are your thoughts on that? Is that the kind of thing where, because my sense is experience with private equity is, first of all, all the capital rarely ever gets called, right? Because it's mixed with distributions and, I don't know,

Starting point is 00:21:55 75% of a commitment actually ever gets called by the private equity firm. That money can be used for 10 to 12 years. Sometimes there's extensions. It's funny to me that people look at this big pile of cash as like a bad thing for the industry. When I think of it as like it's like a backstop in a lot of ways for some of these companies, right? Like if companies do get in trouble, they're not going to maybe invest in new ones. They're going to, I don't know, double down on some of these ones that hurt. How do you feel when you see these big numbers thrown about and people say that this is reason to worry?

Starting point is 00:22:25 No, I completely agree with you. I think this is, it's a good thing. And we saw that through 2008 and 2009, where private equity firms, if they thought it was the appropriate thing to do, could put more capital into businesses that they own. So, you know, but I don't even know how to think of it as a good thing or a bad thing, as opposed to just a thing, right? There's, this is just a structure, right? This is the structure. There's money that's been committed to funds. They'll be looking for deals. They'll be looking to do deals. Dry powder has never really been like an issue one way or the other. It's just the structure of how it works. There's always certain amount of dry powder. What it does tell you is that the dynamic of

Starting point is 00:23:05 companies staying private for longer, say venture into the private equity world, isn't going anywhere because of all the headaches of going public, you've just seen fewer and fewer IPOs. And as long as companies can access capital in the private markets, across, again, across from late stage venture into sort of private equity and traditional private equity, I don't think that reverses. It's hard to imagine how you're going to go from whatever it is, 3,000 back up to 4,000 public companies from having these private companies all of a sudden decide they won't have a wave of IPOs. So let's talk about the reputation of private equity. I would say probably not great, at least in the public point of view from people that don't know much, they just think evil men in suits, firing people and all that sort of stuff.

Starting point is 00:23:52 And some of it are and some of it, you know, some of it unfair. But talk about public perception and what some of these companies are trying to do to maybe, maybe do some, I don't know, damage control is too strong of a word, but just maybe paint a more complete picture of what they do for the overall economy. So if you look at the history of this, all of the alternative investment categories, if you go back 10, 20 years weren't allowed to talk publicly. They weren't allowed to market. It was SEC regulated. You had to keep shut. Keep your mouth shut. So as a result of that, none of these firms spent time on branding exercises. It was true in hedge funds just as it is in private equity. And then what happens is all that gets reported is what's in the news, and the news is always sensationalized. Of course.

Starting point is 00:24:36 So you have whatever it is, 10,000 businesses held by private equity, guaranteed there are good actors and bad actors. There are companies that are struggling and are companies that are doing great. There are companies that were doing well and a private equity firm took a dividend. and then something happens and it rolls over and that looks really bad. All of that is true, all that exists. But in the public profile, generally all you see is the negative stuff. For sure.

Starting point is 00:25:01 There's a big part of the reason why I want to put the book together because that's just off. That's just kind of completely missing the forest through the trees. What you've seen in the last five years, I'd say, is private equity firms recognizing that that branding piece is important. So you'll see an Orlando Bravo being out in public. You know, what David Rubinstein was always that way, but more and more in public. Blackstone's making a huge push. Blackstone as well.

Starting point is 00:25:27 And they have to if they're going to address the retail market. So that's also, you know, part of that dynamic. That said, you're right. The public perception is still crappy. Yeah. Because it's not easy for someone to fully understand, right? You can go to a cocktail party and say, hey, I own Apple stock. You own Apple stock.

Starting point is 00:25:44 Did you see what Apple stock's doing? It's a lot harder to say, oh, I own this piece of this middle market, you know, buyout fun. It's just, it doesn't flow off the tongue as easily. It's kind of like what the ownership of these businesses are underneath because there's no ticker attached to it. Especially with the companies that you profile that I've never heard of any of them, frankly. Some of them, I mean, the one that's sarcastic to me was Apple buying Yahoo was one of your case studies. And I thought, oh, I forgot they did that. But how did you approach those case studies? Did you just kind of sit down and with your people you were interviewing and say, take me through this deal? How did it work? Because

Starting point is 00:26:14 it does seem like some of the deals are pretty, I don't know, complicated in a lot of ways, depending on how they're structured. Yeah. So I did three seasons of eight episodes to start on the podcast, which then turned into the book. And the first, I just went to some brand name GPs and said, hey, pick a deal. Here's what I'd like to do.

Starting point is 00:26:32 I'll explain that. The second season, I did it with companies that people are familiar with. So people are familiar with Yahoo. They might not be familiar with the deal. People are familiar with tailor-made golf clubs. They might not be familiar with what happened with the company. And then the third, I just did a bunch of mid-market deals. So what I did with the private equity managers was just say, effectively, let's walk through this story.

Starting point is 00:26:55 Who are you? Not like a deep dive, but like, who are you? How do you try to invest? What's the company? Why was it attractive? How did it come on your radar screen? Like, how did the deal take place? And then what was your game plan?

Starting point is 00:27:07 And how did you implement on it? And they, you know, just walk through that whole thing. Some are more complex than others. And that's when you get into kind of the lessons of really learning what goes. on. So it turns out carving out a business from a larger conglomerate, whether it's public or private, is super complicated. Because it's not like, hey, Ben, I just bought this company from you. You sold it to me. And the next day, you go off to the Bahamas and buy a little beachside condo and drink. Well, if you're carving out a business, there's all these complicated things that

Starting point is 00:27:39 have to happen in transition. Who's working where? What are IT systems are using? What financial systems you're using, if you have contracts with suppliers or customers, like who keeps the contracts. So those carve-outs may have dozens, if not more, of what they call transition agreements where the buyer and the seller have to work together for six months a year, 18 months, two years until that company can operate on their own. And so, yeah, you do run into these situations where it can be a lot more complicated than just going to buy shares of a public company. If we could just shine light on something positive within the ecosystem, talk about about what KKR did with one of their deals in terms of giving back to the employees.

Starting point is 00:28:19 Yeah. So this is amazing. KKR bought a company called CHI overhead doors. And CHI is a manufacturer of garage stores, custom garage stores. So you think about that business as when do you buy a garage store, usually when you buy a new house or when it breaks. And when it breaks, you need it immediately if you want to get your car out. If you're buying a new house, that may have a little bit of sensitivity.

Starting point is 00:28:42 But generally speaking, you know, home purchases are steadily rising. So the business itself has been amazing for a long time, steadily grown, it's run incredibly operationally efficient, generates cash flow. They have a lot of kind of proprietary moats compared to their customers. And as a result of that, it's just grown and grown and grown. And a bunch of private equity firms have owned that business. So KKR was the fourth buyer of the business. And they bought it for, I think they put $250 million of equity and they bought it for just under $700 million. Now, KKR is known for improving businesses, not just like financial leverage and this company, they didn't buy it before because it was too small for them. The one thing they

Starting point is 00:29:28 did, Pete Stavros, who co-heads their private liquor group, is broadly distribute ownership to all the employees on the shop floor, all the truck drivers, everyone on the team, not just the management team. And alongside of that, communicated to them throughout there, I think it was seven years of owning the company of what that means. So they'd have a shareholders meeting and they'd go to the employees and say, what improvements would you like to make to our factories or whatever it was? And they tried to tell them, hey, if this works, we're going to, you know, you're going to make $15,000. And for somebody who's making, you know, $20,000, $25,000 a year, that's a big deal. As it went along, they started paying dividends. And by the time they sold the business, they had paid

Starting point is 00:30:08 more dividends than what they had initially promised. And then there was this carrot at the end. So it turned out that when they sold the business, and they bought it for 250 million in equity, they paid out almost 350 million to employees. Love it. And there were truck drivers that made like a million dollars, totally changing their lives. And KKR under Pete created a consortium called Ownership Works. It's not just KKR, a bunch of private equity firms to try to take all the lessons they've learned from broadening ownership. And when is, you know, sometimes it works. Sometimes it doesn't work that well.

Starting point is 00:30:42 Like, what types of companies does it work for? How do you communicate it to the employees? They brought financial planners in. It's not just nice. I mean, it's good business, right? If you motivate the employees, it's just smart. Yeah. But it's not easy to do.

Starting point is 00:30:56 It's not easy to pull off. So one of the things KKR has done is they don't try to keep it as a proprietary secret. They built a nonprofit consortium to try to teach all the other private equity firms what works with this. And it's including things like when you're about to give truck driver. a million dollars, you better have a financial planner in front of them ahead of time. And they went ahead and paid for all that so that these people who were about to get windfalls could know, understand how to do smart things with that money.

Starting point is 00:31:23 All right, back to the bad stuff. No, I'm just kidding. For your institutional talks, how much harder do you think it is to pick a good private equity manager than pick a public manager? Because the public managers, if you find a star fund manager that has a separate managed account or mutual fund or ETF, you know, more than likely you're going to be to put money in there. But if you want certain private equity managers, it might be harder to even. get into the ones you want to get into, depending on your connections or size or whatever.

Starting point is 00:31:46 So do you think it's vastly harder to pick a good private equity manager versus the public markets or not? Well, let's start with the, let's start with sort of what you're playing in, and that the dispersion of returns between good managers and bad managers and private equity is much, much wider. So it does behoove any investor to spend the time trying to figure that out. That's the first thing. The second is, I think the data would show that, although it's not like super persistent,

Starting point is 00:32:15 there's more persistence in, let's say, a top quartile private equity fund from one to the next than in the public markets. And then if you can get into data, until you take like a Hamilton Lane or Harborvest who has north of $100 billion are deploying in the private markets, they've grown into that over 20 years alongside the industry, and they have information of, every deal that every one of their managers has bought and sold for 20 years. And they've assimilated all of that data. So what's the purchase price? How did they change? What happened to revenues? What happened to operating margins? How did they sell it? What price did they sell

Starting point is 00:32:53 it? Who's involved in the deal? Once you start disaggregating all of those drivers, because private equity firms do have control, you can really get away from just, oh, that was the return they generated and understand how did they generate that return and isn't likely to persist. And so there's a huge advantage for the investors that have all of this data. And I think they've done a good job, generally speaking, of picking better managers. One development in recent weeks is the NFL voting to allow private equity companies to invest in the franchise. guys. I think baseball was first. Correct me from marketing. Baseball was first. Okay. So I'm curious like structurally, how does it work? So let's say one, you know, KKR, Blackstone,

Starting point is 00:33:38 whoever buys a piece. I saw this my tweet about the Miami Dolphins. Buy a piece of the Miami Dolphins. Is this its own individual vehicle or does it get in, does it go into a diversified structure? Like how does the money get from the sponsor to the dolphins or whoever it is? So the NFL has been very methodical in laying out rules to allow institutional capital to come in as minority owners without compromising the integrity of the ownership and the league and all of its franchises. So I don't know all the rules, but I do know some of them. So first, there's only four groups today that are allowed to buy. And they were announced in that press release, but it's Arctose partners and- You had them in the book. Arias was one. Arctose is, yeah, we did a Fenway sports group

Starting point is 00:34:26 deal with Arctos or their minority. So the NFL has their set of rules. My understanding is it has to be in a dedicated pool of NFL ownership. So Arctose is going to create a dedicated pool that may be a sub fund of their existing fund, but it has to have its own long time horizon. And then I think they can only today, they can only buy up to 15% of, sorry, any franchise can only have 15% institutional minority owners, and the institutional minority owners can only own, I'm not sure the number, but a certain number of minority shares and franchises. So what happens is these firms will raise a fund, and they'll use that to buy a stake. Today, it was reported that Arctosas in discussions with the dolphins to buy a stake in that franchise. Yeah, they'll have no problem

Starting point is 00:35:17 raising money for that. It's, you know, these sports assets have been very steadily growing for a long, long time. And the NFL is unique in that relative to all the other leagues, it has the highest percentage of shared revenue than any other league. So what that means is almost every NFL franchise has roughly the same economics because the network deals, a lot of the licensing is at the league level and then it's equally shared across the teams. There's some local, you know, the Cowboys have, maybe they have more Jersey sales or something like that. But, Relative to any other league, the economics are closer to parity across all the NFL teams. Yeah, sort of besides a point. But it's interesting. I never thought about it this way.

Starting point is 00:36:02 It's really difficult for lower markets in the NBA, for example. Like, it's difficult for the Pacers. I know they had a good season, but you know what I mean. It's difficult for cities like that to really compete or win titles. And in the NFL, it's you're right. There's parity. There's parity. I mean, you have salary caps in some leagues that create parity as well. Like baseball's just not that way. They have luxury tax. But for the most part, all else equal, you generally see the Dodgers, the Yankees, the Red Sox, you know, there are certain cities where the teams are disproportionately represented in the playoffs. Once you get to the playoffs, there's a lot of noise and what happens. And that's just because it's skewed, right? The local media rights are significant contributors to revenue, say, for the Yes Network and the Yankees. Whereas if it were the Jets and the Giants, they wouldn't have that bump relative to other teams.

Starting point is 00:36:53 Ted, you don't have to give away too many details, but what was your favorite story in the book? They're so different. I'll throw a couple at you for different reasons, and I'm happy to dive in to any of them. So one of my love is a company called Partstown. And the reason I love the story is it's literally the antithesis of what everybody thinks about private equity. It's like this super collaborative story of who the owner was and who was selling and the management team and growth, no layoffs, nothing like that. It's just the opposite of the public perception of private equity. I'm a sports junkie. So Fenway Sports Group, the turnaround of Taylor Made, the distressed deal of the Yellowstone Club are some of my favorites.

Starting point is 00:37:36 And then, you know, you mentioned Yahoo, Ben, being bought by Apollo. This was just like, I called that chapter, you bought what? Yeah. Because you're like, wait, you bought Yahoo? And it's just extraordinary what they've done in a very short period of time with that business. Ted, years ago, like everything's full. more than five years ago, because that's when the pandemic was. You had a guy in your podcast that was buying, I don't know,

Starting point is 00:38:00 fractional shares of a player's future revenue stream before they really made it. Yeah, Michael Schwimmer. How's that going? I know his early funds have done well. They were smaller funds. It was public that he had like Fernando Tatis and Raphael Devers, like on his roster. I think it's a hard business to scale. But they've, you know, they were, last I heard, they were looking.

Starting point is 00:38:23 at NIL stuff, but it's mostly still been in baseball. And it's, it's tricky, right? Like, it's, even though it seems like it's a real win-win, the public perception of it is, again, it's just so negative. It's like, oh, you're going and stealing money from these, you know, Latin American players. I think it's the opposite. Yeah, it's venture capital. Yeah, it's venture capital for baseball players. I love it. So public equity, we had a, there was a staff from Torson Slack. It said 85% of companies with over $100 million or venture backed or something crazy. It's a giant industry. It's not going away. And if you want to learn more about it, I would encourage you to read Ted's book, or if you're not a reader, at least listen to the

Starting point is 00:39:01 podcast, Capital Allocator. Ted's got a newsletter. I love the book. Ted, thank you so much for coming on the show. Michael, Ben, thanks so much for having me.

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Animal Spirits Podcast - Talk Your Book: Private Equity Deals with Ted Seides

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