The Chris Voss Show - The Chris Voss Show Podcast – Two and Twenty: How the Masters of Private Equity Always Win by Sachin Khajuria

Episode Date: July 10, 2022

Two and Twenty: How the Masters of Private Equity Always Win by Sachin Khajuria The first true insider’s account of private equity, revealing what it takes to thrive among the world’s hungriest dealmakers ONE OF THE MOST ANTICIPATED BOOKS OF THE SUMMER—Bloomberg Private equity was once an investment niche. Today, the wealth controlled by its leading firms surpasses the GDP of some nations. Private equity has overtaken investment banking—and well-known names like Goldman Sachs and Morgan Stanley—as the premier destination for ambitious financial talent, as well as the investment dollars of some of the world’s largest pension funds, sovereign wealth funds, and endowments. At the industry’s pinnacle are the firms’ partners, happy to earn “two and twenty”—that is, a flat yearly fee of 2 percent of a fund’s capital, on top of 20 percent of the investment spoils. Private equity has succeeded in near-stealth—until now. In Two and Twenty, Sachin Khajuria, a former partner at Apollo, gives readers an unprecedented view inside this opaque global economic engine, which plays a vital role underpinning our retirement systems. From illuminating the rituals of firms’ all-powerful investment committees to exploring key precepts (“think like a principal, not an advisor”), Khajuria brings the traits, culture, and temperament of the industry’s leading practitioners to life through a series of vivid and unvarnished deal sketches. Two and Twenty is an unflinching examination of the mindset that drives the world’s most aggressive financial animals to consistently deliver market-beating returns.

You wanted the best. You've got the best podcast, the hottest podcast in the world. The Chris Voss Show, the preeminent podcast with guests so smart you may experience serious brain bleed. Get ready, get ready, strap yourself in. Keep your hands, arms and legs inside the vehicle at all times. Because you're about to go on a monster education roller coaster with your brain now here's your host chris voss ow damn it i burned myself on the hottest podcast known to man or whatever the hell the announcer said ow ow that hurts wow okay i'm gonna need a i'm gonna need a band-aid over here hi folks chris voss here from the chris voss show. thechrissvossshow.com, thechrissvossshow.com.

Welcome to another podcast. Sooner or later after 12 years, we do another one. But I don't know. We figure we do at least one more. Maybe there's another one in the can. I don't know. Tune in tomorrow. Anyway, guys, welcome to the show.

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And be sure to check out chrisfossleadershipinstitute.com. Now back to the show. Today we have an amazing author on the show, and I'm kind of really interested in this because, you know, Silicon Valley, private equity, all that sort of stuff, and a lot of my friends that swim in those pools from the technological era or what they also call technology. He's the author of the newest book that just came out june 14th 2022 the book is called two and 20

which is kind of the same year it came out two and 20 get it i'm just kidding actually it's 20 and two i don't know 2022 never mind anyway his title of his book is two and 20 how the masters of private equity always win damn it no damn it's not at the end of it just always win, damn it. No, damn it's not at the end of it. Just always win. Sachin, help me out here. Kajuria. Kajuria. Sachin Kajuria is on the show. He's going to be talking to us.

It's an amazing book, and I clearly threw my brain right out the window on that intro, making up stupid stuff that makes no sense but hopefully made you laugh. He is an amazing gentleman who's going to be talking to us on the show about all the stuff that goes into his book. He is the founder of Achilles Management and former partner at Apollo, one of the world's largest asset management firms. He has 25 years of investment and finance experience and holds degrees in economics from the University of Cambridge. He's a frequent guest on Bloomberg TV.

Welcome to the show, Sachin. How are you? I'm really well. How are you, Chris? There you go. I'm good. Well, I'm hanging in there. I was just kind of throwing everything today at the intro there, and you throw that much energy and the brain goes, woo-hoo, right out the door, which is pretty much what my

audience is used to. So welcome to the show. Congratulations out the door which is pretty much what my audience is used to so welcome the show congratulations on the new book give us your dot com so people can find you on the interweb edges yeah sure so my family office is achilleslp.com publishers also putting together a website for the book which is going to be two and twenty dot com that'll have all the launch publicity podcast tv interviews and everything. And you'd be able to reach me on either of those as well as on LinkedIn, which is a great platform as you mentioned at the beginning. And there you go.

So who has a better intro, me or MoneySpace at Bloomberg? No, I'm just kidding. I don't even remember what the... There used to be a really cool TV show used to watch on Bloomberg all this time. It had like five or six guys on it. It was pretty good. I don't remember what it was, Money Trend or something like that. You know the one I'm talking about?

There's quite a few. I think I know the one you're talking about. They do a pretty good job. They're good guys. Yeah. Is it still running? But yeah, yeah, there you go. But you don't have to answer that question on which is better, us or TV.

But our jokes are probably better, though. I don't know. Maybe not. Maybe not. You don't have to admit to anything under oath. So what motivated you on to write this book? Sure. So this book is really written for everybody. It's not for a finance store. It's not an academic volume that tries to either attack private equity or that space

or defend it. It's really written for everyone to try and understand. And much like your show, the way you approach your show and how you talk and how you communicate with your audience, it's pretty direct and it's pretty plain in the way it's written. The motivation behind the book is to try to explain to people what private equity is really like behind the scenes. And there's really three reasons for that. Number one, a lot of people don't really think about private equity as if it doesn't affect them. It's Wall Street. It's nothing to do with Main Street.

It's nothing to do with me. I'm not in that world. Why should I care? But the truth is private equity is as important to you as the public equity markets. In other words, any of the companies that you buy goods and services for could be the kindergartens that your kids go to school in, could be a college, could be food retail, could be something to do with your house, your mortgage, could be anything, could be the dating app that you use. A lot of these companies are actually owned by private equity firms. And so the summary is private equity is everywhere. It's all across the economy.

And together with other forms of investment strategy that it partners with, like private credit and infrastructure, it's a $12 trillion industry. So you have to think that, yes, it absolutely is relevant because even if I don't invest in it today, I'm probably a customer of it today, or even a supplier, or maybe my firm, the company I work for, is owned by private equity. Second reason people need to know about it is that it's probably coming to your pension at some point if it hasn't already. If you have a public pension, if you're a teacher or you're a fire provider or one of those jobs, you're a retirement system provider, your pension provider has probably looked at private equity and may be already

investing in private equity, even if you don't know it. So your financial future may in part depend on private equity. And the third point is that even if you're not an investor in private equity today, the rules around who can invest in private equity are changing. In other words, it's not just large institutions and big family offices and so on, sovereign wealth funds. It's also going to be more retail investors, the mass affluent, and then going down the pyramid in check size. So you could be faced with a decision at some point, looking at how terrible the public markets are today, how volatile they are, and say at some point in the near future, could be this year, could be next couple of years, hey, I've got this option to invest in private equity. And the truth is I know nothing about it, or I think I know something

about it, but I'm not really sure. So that's really the motivation behind this book. It's part of what I call the democratization of finance. It's trying to get the word out there so the knowledge is not kind of just held within smaller circles. What is it really like? And most important, Chris, what is the winning mindset behind the firms that always do well? So when I talk about the masters of private equity, I'm talking about the ones who do it very, very well. What is their psychology? What is their winning mindset? That's what it's about. It's written a pretty direct style and I hope people enjoy it. So it's not a tell-all book where I'm going to find out about Marc Andreessen and all his dirty secrets

as to why he has that cone head, that giant forehead that looks like he's from another planet. I'm just kidding, Marc. Don't sue me. It's definitely not a tell-all book. It is actually pretty constructive on the industry, but it's frank.

It doesn't get into this trap that a lot of people get into these days that everything we look at, we either think it's perfect or it's terrible. Is our politics perfect or is it terrible? Is the media perfect or is it terrible? Life's not like that. It's run by people. It's a people business.

It's not run by machines. It's not automated trading like buying an index fund or something like that. It's highly active management. It's people's judgment, buying companies, hopefully improving them, selling them for a profit and giving you your cut of the profit. Hopefully the lion's share of the profit. And so because it's run by people, you really want to understand the psychology. And so it's not really about any one person or any one firm. It's really about how the best players that I've seen in the last 25 years, how they do it

well, and what you should be looking for when you look to invest in private equity. So you know what questions to ask alongside the basics, which is show me the results, show me the returns. You should be looking for some of these factors. So your book hopefully basically is intended to open up a little bit on what goes into these types of investments and encourage people to maybe by knowing more about how they work, maybe invest more? Yeah, I think rather than necessarily saying you should invest more, I think it's more about your menu is changing.

It's not just going to be stocks on the one hand and T-bills or whatever on the other, plus a bit of real estate, your house or something. It's going to be a bit broader than that. And so at the moment, people do look at some mixture of maybe stocks and bonds, their house. Maybe they have some other things. Maybe they do a bit of crypto. I don't know. But in the future, they're going to be looking at a bit of alternative investment as well.

Alternative in the sense of illiquid investing like this. You have to lock up your capital. And so once you have this option, it's better to learn about it in advance. I do a fair amount of this, but I'm independent. I do it for myself. I don't manage money for anybody else. And so the importance of what I'm trying to convey is what do I look for when I'm looking to invest my capital? And therefore, what I think you should be looking for, all of you should be looking for. And you can then decide whether it works for you. You can answer that key question, am I getting adequately compensated for the risks that

some folks are taking on my behalf? You don't want to take that decision blind. That's nice. Yeah. I know, oh, who was it? Fred, what's his face? From Square Partners, Union Square Partners. Fred escapes me. He invested in Twitter and a lot of stuff early on, but I used to talk to him during the Twitter days of doing stuff. And I think I caused some fights at Twitter. So what sort of funding do you have to have to get involved in private equity investing? I mean, how much money do you need to have? I mean, that's really a brilliant question because the truth is it's changing and it's coming down all the time. If, for example, take a few years ago, you're a private individual or it's

a family office, you'd probably have to put several million dollars to work in a big fund, like one of the big guys, right? One of the funds run by one of the big firms. That could be 5 million, it could be 10 million, but it's going to be a few million dollars at least. In some cases, it's much more. What they've now done is they've now cut those checks into smaller pieces. So some investors, I'd call it more the kind of mass affluent category, can probably go into feeder funds. So if you have a bank that manages some money on your behalf, then that fund aggregates checks across a lot of folks like you. And maybe you only need to put in, I say only, you know, $100,000 or something,

but that's also coming down. So you're going from millions to hundreds of thousands to slowly tens of thousands. And so the point is not necessarily, this is on your individual menu today. It could be, you have to talk to your bank, your financial advisor, but it's coming. And that's what I want people to understand. So when it comes, they're not looking at it going, I really have no idea. And what is this? We don't want that. We want people pretty educated, or at least educated enough to decide whether a portion of their long-term savings should be going into this to help with their retirement funding. And I think it's important to remember, Chris, that this form of investing generally works.

I think with the best firms, it works really well. And that's why the big pension funds do it because they cannot just get the returns they need to pay out those entitlement checks, those retirement checks. They can't get that return overall by just doing public markets investing. So private markets is something that big institutions do need. And the question is whether you need it. And so this book is part of kind of helping you get to understand whether it works for you. Nice. So 2 in 20 is the title of the book, How the Masters of Private Equity Always Win. What does 2 in 20 refer to?

So 2 in 20 is pretty much the benchmark fee formula in private equity. Now there's lots of variations. Some firms charge less than 2 in 20, some firms far more. But let me talk about what it means. So what it means is the two is an annual management fee. That's the cost of, that's it going to work for, you know, for you as an investor. Now, if you compare that to, let's say a passive fund, maybe largely run by machines, you know, with some supervision on top, let's say it could be a passive ETF, an exchange traded fund, or, you know, slightly more actively managed could be a passive ETF, an exchange traded fund, or slightly more actively managed could be a mutual fund. 2% looks expensive or looks higher because those funds, those more passive funds that are investing in liquid securities, they might charge you a

quarter of that or a 10th of that, or in some cases, even a 20th of that. But think about what you're getting. You're actually getting the experience of people who are experts at this kind of investing. And so that's what you're paying for, is you're paying for kind of the salaries, you're paying for the lights to be on, you're paying for them to invest in all the technology they need to make their investments. That's the 2%. The more important part, I think, in many ways for you as an investor, is a big part of their motivation is they eat what they cook. And so the incentive is the 20. The incentive is that whatever you make in profit, they take 20%. Now you might say that sounds high, or maybe it doesn't sound high. I don't know.

Let's think about that. It sounds high or maybe sounds different than you may have heard of before because they're doing something you can't do. You're not able to go out and buy a big company, improve it and sell it after five years, 10 years, and for it to take up all of your day job. They're doing that. You get a small slice of that company, they take 20%. In other words, 80% of the profits are returned to the investors. And that incentive of 20% is what is a big part of the alignment of interest. In other words, if they don't make you any money, they don't make any money from that incentive fee. And they're not really doing it for the management fees for the salaries, because you can imagine if they don't produce results, then pretty soon that

firm is not going to go where it needs to go. It's not going to go places. So that's what 2 in 20 means. And it's at the heart of the industry. But what's really interesting, Chris, is how come so many firms have this formula of 2 in 20, but some are able to consistently outperform the public markets, let's say the S&P, they're consistently outperforming, not just in a bad year this year when the S&P is going down by 20% or whatever, but also in good years, in bull markets, they're still able to outperform. Whereas other firms with exactly the same incentive and the same formula, they're not able to. Now, it's not that they have bad people. They're all smart folks. They went to great universities, Wharton, Harvard, whatever.

They may have worked in terrific investment banks, Goldman Sachs, Morgan Stanley. They may come out of consulting. They may come out of industry. So they're all smart people, pretty much. And they're probably all hardworking people who are trying to do a good job. But what I think is really key is the psychology of winning that the big firms have. And that's what I've sort of codified in a bit of a playbook in my book, which is to kind of summarize what are the traits and principles that make those who have them outperform those who

don't have them or have them less, or only have some some of them even though both have this two in 24 does that make sense yes yes so we're excited to announce my new book is coming out it's called beacons of leadership inspiring lessons of success in business and innovation it's going to be coming on october 5th 2021 and i'm really excited for you to get a chance to read this book. It's filled with a multitude of my insightful stories, lessons, my life, and experiences in leadership and character. I give you some of the secrets from my CEO Entrepreneur Toolbox that I use to scale my business success, innovate, and build a multitude of companies. I've been a CEO for, what is it, like 33, 35 years now. We talk about leadership, the importance of leadership,

how to become a great leader, and how anyone can become a great leader as well. Or order the book where refined books are sold. You know, I've had some friends that have done small, you know, 20, 30, 40,000, 50,000, I think, investing in different projects and stuff. And usually it hasn't gone well because a lot of, you know, a lot of stuff fails. I think

Fred Wilson talked about that pretty openly as to the failure rate of companies sometimes that they have, especially, you know, when we were coming up with social media early on. And maybe he would have, some of my friends that did investing would have been better putting their money directly into a venture capital VC firm as opposed to doing a direct investment. What do you think about that? I think it really depends on what your expertise is. I mean, I think if you have the contacts, which means you know the great management teams,

because you're probably not going to run the companies yourself. You're going to have those terrific managers, CEOs, and the second layer and the third layer and the fourth layer of those companies. If you have all those contacts and you could perhaps, you know, participate as an active investor, maybe you go on the board or maybe even if you're a passive investor, you feel like you are getting all the intelligence that you, you know, would need to make a direct investment yourself in a company and take that risk. And as long as you have the check size, of course, because those checks are usually a bit bigger check size, of course, because those

checks are usually a bit bigger, then, you know, it's something to consider. But I think, you know, you're probably of that world in some way as an entrepreneur, as a business person already. I think if you're really just saving for retirement or a particular goal, it could be a college fund or something else. And obviously you're going to want to spread your bets a little bit more and not put all your eggs in one basket. And so I think it really depends on your own background and the sort of capital you have to work with and the sort of networks that you have that you could bring to bear on an investment. I mean, I personally do both. I do a lot of direct investing and I do investing in funds, but that's just because what I've been doing for the last 25 years. And so I'm not sure I would just do it cold. What do you think, you talk about BlackRock in your book, what do you think about them? And,

and, you know, there's, there's some people that, you know, accuse VCs of being job destroying villains. I think there's, I think there's some VC firms now that are running around buying up all the real estate. I don't know if that's correct. I'll let you tell me whether I'm right or wrong on that. Yeah. I mean, I don't want to talk about individual firms. I'm not sure whether you mean BlackRock or one of the others. I'm not sure either.

Yeah. But if we just keep it to sort of thematics, I mean, I think that there's no particular kind of red flag that I see in private investment firms, many of which, by the way, themselves are public now, Blackstone, Carlyle, and these kinds of firms going into a particular sector. And so, you know, let's break that down a little bit. Why do I say that? I think number one, let's look back to the financial crisis. So plenty of banks went bust, right? So many companies went bust. How many private equity firms went bust in the last 10, 15 years? Very few, if any, right?

And so these are generally quite stable firm, you know, at the organizational institutional level. However, of course, plenty of deals do go wrong. And that's why it's important to kind of understand whether there's a theme to those deals going wrong and if there are so many deals going wrong in a particular sector that it's causing an issue in that particular sector. You can identify a sector where lots of private equity deals or private markets deals, whether it's credit or infrastructure or real estate, are actually causing a problem. I'm not sure. I think people have views and comments on private equity went into this industry and this happened and this happened,

you know, but often it's around a couple of data points as opposed to necessarily, you know, an industry-wide view and it may be skewed by those data points. Having said that, of course, and, you know, the book is pretty frank. I mean, you know, is there a role for people to keep an eye on what's happening? Should the regulators be looking at least and doing their job and looking at all these things? Of course they should. I mean, they should be checking that these issues are not emerging.

But I don't think we've found that. I think what we've actually found is more often than not, on the other hand, private capital can end up going into industries where nobody else wants to know. Governments don't want to bail them out. The banks have sort of retrenched from lending. And so there are plenty of situations where if it was not for private markets, firms, private equity companies, private credit providers, a lot of companies would actually have gone to the wall, right?

I mean, just think about the pandemic. And so what were the kind of deals that private equity firms are doing in the pandemic? Well, they were lending or investing in airlines, hospitality, restaurants, all the things that basically had to stop work, right? Those industries were not bailed out. And in many of those cases, things would have been, things were very hard. Things probably are still very hard, and we will have sympathy for that. But they would have been even harder if it wasn't for some private equity firms kind of stepping up and trying to make good investments at an opportune time. So I'm not sure I see those red flags, Chris,

but I think there's a role for people to check and to keep an eye on those things. You know, private equity, you know, probably if it wasn't for them, we wouldn't have social media and all this stuff that has become a thing people live off of between Facebook, LinkedIn, and all this advertising. I mean, both Facebook and Twitter, I mean, I think Twitter's still trying to turn a profit technically. I think it did it two quarters or something or one and a half quarters, but you know, to be funded like they were for almost I think, 10 years before they went public, you know, only something like that, like private equity, you can stand behind them, you know. And Amazon, you know, where, I mean, they lost money forever on purpose to reinvest in funds. You know, most banks would be like, hey, man, we want our money back.

Yeah, this isn't our gig. Let's think about it. A couple of guys in the garage go to a bank and they say, oh, this want our money back. This isn't our gig. Let's think about it. A couple of guys in a garage, go to a bank, and they say, oh, this is a great idea. We're really smart. And we're going to create the world's biggest XYZ or we're going to create some idea.

It was probably more likely to start off in venture capital, so kind of earlier stage investing than private equity. But at some stage, private equity does evolve. I mean, I remember one of the early investments that was at a firm that I was working at, you know, kind of Facebook comes in the door and there's a chance to invest early in Facebook. And there were real questions about, you know, what are their alternatives? And they may have had limited alternatives, although at that stage, they had plenty of people interested in funding them. But it wasn't like banks were sort of, you know, banks were kind of falling all over themselves

to do so. And so, you know, there are plenty of deals that come off in the market in private equity where, you know, growing companies that have had initial venture capital investment then go to private equity to see if they can provide the next stage of funding so they can go from successful startups to really bigger companies, more mature companies. And you're right. Often, it's kind of the only game in town and probably the best game in town for these companies to look at. And that's definitely worth bearing in mind when you punch your next search into your search engine.

Wow. Yeah. What else have we touched on that we can tease out about the book? So I think the most important thing really is for people to try to say to themselves, you know, what do I really think of when I think of private equity? You know, do I think of it at all? Do I have any idea? And if I really don't have an idea, let me do a little bit of research because probably a lot of the things that I'm buying or, like I said, it could be my, you know, your employerterm financial goals, is this kind of investing something that I would ever consider? If not, is it because I don't really know anything about it? And should I at least learn? And so I think those are really big calls to action.

When people ask themselves what they know, and if the truth is they really don't, I would hope they would have a look. And one of the biggest questions I can see people having is, okay, I've read the literature. I did a bit of research on the web. What's it really like? What's it really like to be in these firms? And that's what the book is trying to address. Awesome, Sas. So people can get a peek behind the curtain, if you will, of the veil and find out how they work and also maybe figure out some better ways to invest their money. This has been pretty insightful and people should grab the book. Sachin, give us your.com so people can find you on the interwebs. Yeah, sure.

So they can find me on my family office, which is achilleslp.com or LinkedIn. And the book's website will be out soon. It's not quite ready yet. They're populating with all the interviews we're doing, which is 2in20.com. But they can find the book on Apple Books, Amazon, everywhere. And the publisher, Penguin Random House, has its own page. So if they just go to the Penguin Random House website, they'll be able to punch it in. But, you know, most people just are looking on places like Amazon or Apple Books,

and it's available on hardback, on Kindle, and an audiobook as well. There you go. Get it wherever fine books are sold. Remember, stay on those alleyway bookstores. Only go to the fine bookstores. 2N20, how the masters of private equity always win. Sachin, thank you very much for coming to the show with us today. We really appreciate it. Thank you so much. It's been a pleasure. Thank you, Chris. Thank you. And thanks to my audience for tuning in. Go to youtube.com,

4Chance Chris Voss, hit the bell notification button. Go to iTunes, give us some good referrals, man. Go on there and say some good things about the show. Give us five stars. We certainly appreciate it. Thanks for tuning in. Be good to each other. Stay on there and say some good things about the show. Give us five stars. We certainly appreciate it. Thanks for tuning in. Be good to each other. Stay safe. And we'll see you guys next time.