Speaker 1: This is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: This week on the podcast, I really have an extra
Speaker 1: special guest. Henry Cornell is a rock star in the
Speaker 1: world of merchant banking and private equity. He currently runs
Speaker 1: about three billion dollars at Cornell Capital. He is the
Speaker 1: guy who effectively built out Goldman Sachs merchant banking division
Speaker 1: both in Asia and the US. He's got an incredible
Speaker 1: history of being a successful investor in a number of
Speaker 1: different areas, incredibly knowledgeable about the sort of private equity
Speaker 1: that has generated really solid returns without taking a lot
Speaker 1: of risk. I know, when we think about private equity,
Speaker 1: we sort of have a tendency to think about the
Speaker 1: wacky l b o s where we just saddle a
Speaker 1: company with a lot of debt and then let him
Speaker 1: eventually die. This is not that sort of merchant banking.
Speaker 1: This is not that sort of private equity. This is
Speaker 1: building a portfolio of companies, getting them capital and taking
Speaker 1: already solid working companies and making them that much better.
Speaker 1: And when you hear some of the names he's been
Speaker 1: involved with, you will really understand this. If you are
Speaker 1: at all interested in private equity in finance in global investing.
Speaker 1: You're going to find this conversation to be absolutely fascinating. So,
Speaker 1: with no further ado, my conversation with Henry Cornell. This
Speaker 1: is Masters in Business with Barry Ridholts on Bloomberg Radio.
Speaker 1: My extra special guest this week is Henry Cornell. He
Speaker 1: is the founder of Cornell Capital. Previously, he was one
Speaker 1: of the original architects of Goldman Sachs Merchant Banking Division.
Speaker 1: He is a trustee for the Navy Seal Foundation as
Speaker 1: well as a trustee for the Whitney Museum of Art
Speaker 1: and the Age of Society. Previously, he was chairman of
Speaker 1: the Citizens Committee of New York City. Henry Cornell, Welcome
Speaker 1: to Bloomberg. Thank you, Barry, very nice to be here.
Speaker 1: I'm intrigued by your background somewhat I too, am an
Speaker 1: attorney who uh is now reformed and working in finance.
Speaker 1: You were at Davis Polk before joining Goldman Sachs. How
Speaker 1: did that transition from attorney to investment banker? Come about? Well?
Speaker 1: I thought, frankly, the hand of God had come down
Speaker 1: and touched me. When I got the job at Davis Polk.
Speaker 1: I went to a small law school and I was
Speaker 1: the first one that ever got there, and I couldn't
Speaker 1: believe my good fortune. They were kind and sent me
Speaker 1: to London for a while and had me doing lots
Speaker 1: of stuff in New York. But my last review there
Speaker 1: they said, you know, you're the lawyer, not the banker
Speaker 1: on the deal, and that set off the bell in
Speaker 1: my head. And I interviewed around the street and liked
Speaker 1: the ethos at Goldman Sachs, which was not as concerned
Speaker 1: about where your parents came from or what college you
Speaker 1: went to, but what you could add to the team.
Speaker 1: And so I was fortunate to get that job in
Speaker 1: the spring of four and it was difficult, frankly. The
Speaker 1: first year or two. I went to a shall we say,
Speaker 1: progressive college where you got to choose your own curriculum,
Speaker 1: which is dangerous for an eighteen year old. So I
Speaker 1: hadn't taken a math course in college, and all of
Speaker 1: a sudden I knee deep in financial terms. So it
Speaker 1: took me a while to get up to speed. But then, um,
Speaker 1: then it finally made sense to me. So you you
Speaker 1: moved to Tokyo in to work on building out Goldman
Speaker 1: Sachs real estate efforts in Asia, and then on to
Speaker 1: Hong Kong. And two, what was your experience like in
Speaker 1: Asia in the late eighties when their market peaked and
Speaker 1: then in the early nineties, well coming to Tokyo and was,
Speaker 1: without a doubt, the hottest city on the planet. I
Speaker 1: was fortunate to have worked on a lot of Japanese
Speaker 1: deals while I was in the States, and my boss
Speaker 1: asked me if I would go and see if I
Speaker 1: could build relationships in Japan. So at age third too,
Speaker 1: I kissed my mother goodbye, hopped on a plane and
Speaker 1: it was crazy. I mean, if you recall at the
Speaker 1: time there was a book a week being published saying
Speaker 1: Japan was going to take over the world. The real
Speaker 1: estate value of the Imperial Palace was more than the
Speaker 1: state of California on paper, and Hamburger costs fifty bucks.
Speaker 1: So it was like the best party you ever went
Speaker 1: to in college. But it was like the worst hangover
Speaker 1: you had in college. People were talking to themselves walking
Speaker 1: down the street. And at that time, Bob Ruben, who
Speaker 1: was the chairman of Goldman, authorized the creation of GS
Speaker 1: Capital Partners, and Hank Paulson was ultimately the boss on that.
Speaker 1: And Hank said, how would you like to go to
Speaker 1: Hong Kong and open up Asia for us. And I said, Hank,
Speaker 1: don't want to really run investment banking anymore. I really
Speaker 1: want to get involved in this investment effort. And his comment,
Speaker 1: you don't really know anything about investing, and I said, well,
Speaker 1: you've got no one else who wants to go. So
Speaker 1: it was a mute ul mutual agreement went down. And
Speaker 1: you know, we had about ten people at the time,
Speaker 1: and you know when I left in two thousand, were
Speaker 1: well over a thousand. So it was extraordinary to have
Speaker 1: been in Japan as it rose and then watched that crash,
Speaker 1: and then get to China as Dung Chao Ping opened
Speaker 1: up the country, and people forget we still are far
Speaker 1: far below that peak in Japan, which was six times
Speaker 1: the valuation of our dot com peak. So the hangover continues.
Speaker 1: You really have been at You're almost like Zeleg from
Speaker 1: the Woody Allen movie at these crucial moments in history.
Speaker 1: So you you leave the peak of Japan in the
Speaker 1: early days of the crash to go to the opening
Speaker 1: of Hong Kong. What was that experience? Like? That had
Speaker 1: have been madness? Also, well, it was frankly extraordinary luck
Speaker 1: to be present at the creation of history. I was
Speaker 1: fortunate literally to watch China go from mouth suits to
Speaker 1: blue suits, bicycles to cars, and the greatest explosion of
Speaker 1: human creativity, human wealth creation, I think in history, because
Speaker 1: it was just unleashed and the appetite for knowledge, the
Speaker 1: desire to build was extraordinary. And to be in a
Speaker 1: position where I had a checkbook and could be the
Speaker 1: financial partner in building out and up the country was
Speaker 1: an extraordinary experience. And even when I moved back to
Speaker 1: the States, I still continued to run Asia and it's
Speaker 1: an important part of my firm strategy today. So it's
Speaker 1: a lifelong it was a lifelong gift. Frankly. So you
Speaker 1: mentioned even when you go back to the States, you
Speaker 1: come back to the US and now suddenly you go
Speaker 1: from investing in real estate to private equity. What was
Speaker 1: that transition like? Well, actually, when I moved to Hong
Speaker 1: Kong and nine two, I ran both the real estate
Speaker 1: private equity group as well as the corporate equity group.
Speaker 1: And when I moved back to the States, I just
Speaker 1: focused on corporate corporate equity. And you may recall at
Speaker 1: the time everybody was doing dot coms and Frankly, there
Speaker 1: were so many investments. I'm not sure anyone really knew
Speaker 1: what the right hand was doing to the left hand.
Speaker 1: And again I went to Hank and said, it's really
Speaker 1: a little crazy, and I would like to get back
Speaker 1: to basics, focus on traditional merchant banking and consumer industrial strategy.
Speaker 1: We had strong presence in financial institution investing. I helped
Speaker 1: to create the energy investing platform. So we went back
Speaker 1: to you know, back to the future, so to speak,
Speaker 1: and did not do what we didn't know, but did
Speaker 1: what we did know. And so turn that around in
Speaker 1: two thousand and o one and o two, and at
Speaker 1: the time merchant banking and private equity was a pretty
Speaker 1: small portion of Gold and Sacks revenue stream. Today not
Speaker 1: so much. It's become pretty substantial, hasn't it. Well in
Speaker 1: the time, I would say from two thousand up until
Speaker 1: two thousand and ten, So as the you know, we
Speaker 1: got through the financial crisis, it was a small group,
Speaker 1: but on a per pound basis, we're definitely punching way
Speaker 1: above our weight. The firm supported the effort and was
Speaker 1: roughly the capital. So when and then you had partners
Speaker 1: and employees also co investing, so roughly thirty cents of
Speaker 1: every dollar was family money, so to speak. So when
Speaker 1: you went to talk to other folks to join you,
Speaker 1: it was effectively investing with Goldman Sachs and that was
Speaker 1: a very powerful fundraising tool and we were frankly, very
Speaker 1: profitable for quite some time, and it worked out for
Speaker 1: our investors and certainly worked out for the firm. Fascinating
Speaker 1: before we get into some of the details of that space,
Speaker 1: can you help me out a little bit with the
Speaker 1: terminology I of people using private equity and merchant banking
Speaker 1: and occasionally forms of commercial banking interchangeably. What what's the
Speaker 1: difference between merchant banking and private equity if any? In
Speaker 1: my dictionary, virtually none. It's really making investments to go
Speaker 1: out and support growth, support businesses, you know. I think
Speaker 1: merchant banking has a historic precedent in British terminology of
Speaker 1: the nineteenth century, and private equity is something that was
Speaker 1: developed in the last thirty years. I remember the first
Speaker 1: time I was in Beijing and saw p I A
Speaker 1: on the back of an airplane. I was like, wait
Speaker 1: a minute. The principal investment area no Pakistani international airways,
Speaker 1: So you know, you have to keep your terms straight.
Speaker 1: I'm glad, I asked that. So, so, what sort of
Speaker 1: deals were you doing when you were building the merchant
Speaker 1: bank division at Goldman Sachs. How did these look? If
Speaker 1: I go back to when we were building it in China,
Speaker 1: what was very apparent is that the consumer sector was
Speaker 1: going to take off, and we invested in a bicycle
Speaker 1: business partnered with Giant Bicycle out of Taiwan when they
Speaker 1: were building factories in China. We owned an interest in
Speaker 1: the largest pork company in China, and Apple Juice Company,
Speaker 1: the world's largest manufacture of sneakers for Nike, Reebok, and Adidas.
Speaker 1: And one of my mentors, Steve Friedman, called me and
Speaker 1: he said, you know, insurance is a very good proxy
Speaker 1: for wealth creation in a country. So I studied hard
Speaker 1: and then we wound up making an investment with the
Speaker 1: ping On Insurance Company in at a very low valuation
Speaker 1: and just watched the company explode in growth over the
Speaker 1: next decade. And when I came back to the States,
Speaker 1: continued investing in insurance. That was a very good lesson.
Speaker 1: Started a couple of insurance companies from Scribe and that
Speaker 1: worked out pretty well. Started investing in the energy sector,
Speaker 1: both upstream prospecting deep sea oil drilling in the Gulf
Speaker 1: of Mexico and off the coast of Africa, as well
Speaker 1: as continuing this consumer industrial focus because the States is
Speaker 1: consumer paradise, and it was if you pick your spots appropriately,
Speaker 1: you can back companies that can go out and grow
Speaker 1: grow an access of GDP. So fast forward to after
Speaker 1: a good long run of what is that almost three
Speaker 1: decades at Goldman, you say I'm gonna launch my own shop,
Speaker 1: and that was what were you thinking in terms of
Speaker 1: advantages of a smaller merchant bank versus a big shop
Speaker 1: with a lot of moving parts like Goldman. Well, after
Speaker 1: thirty years at Goldman, it was a wonderful run. Some
Speaker 1: of my best friends, I met my wife at Goldman
Speaker 1: life experiences I'll treasure forever, but it was time to
Speaker 1: hand the baton to a new generation. And one thing
Speaker 1: I had noticed is when you're in your fifties, people
Speaker 1: think you're at the very top of your game and
Speaker 1: you've still got a lot of energy and all that
Speaker 1: wonderful experience. And when you're in your seventies, they tend
Speaker 1: to say, you know, would you join my board? And
Speaker 1: I was like, I realized I had a window of
Speaker 1: about a decade plus, and so I wanted to form
Speaker 1: chapter two. I got married a little later in life
Speaker 1: and have five young kids, and sitting around in my
Speaker 1: library and my gym shorts is not exactly an inspiration
Speaker 1: for your children. And I'm genetically engineered to work. So
Speaker 1: I knew I had to do something. And I was
Speaker 1: very fortunate to have a number of financial partners so
Speaker 1: I didn't have to run around with a tin cup.
Speaker 1: But spent literally two thousand, thirteen, fourteen and fifteen thinking
Speaker 1: about how the landscape had changed, looking at the lessons
Speaker 1: of a lifetime, what worked, what didn't. Since I could
Speaker 1: create my own own ethos in a new enterprise, what
Speaker 1: would my business principles be? John Whitehead, I think in
Speaker 1: the late seventies sat down and wrote the Business Principles
Speaker 1: of Golden Sacks, which has guided generations. And not that
Speaker 1: I'm John Whitehead, but I took a page out of
Speaker 1: his playbook and put down my own thoughts of Chairman
Speaker 1: Mao and kind of put that into action. And so
Speaker 1: today we have over three billion dollars, We've got an
Speaker 1: up and running Hong Kong office that focuses on Asia,
Speaker 1: as well as New York City. So it um it
Speaker 1: was a good time to leave, and it was nice
Speaker 1: to have the time to think. And your comment about
Speaker 1: small verses large, it's it was very interesting to go
Speaker 1: from running a life for better term in Army Division
Speaker 1: to a platoon of Navy Seals. And I sit on
Speaker 1: the board of the Navy Seal Foundations, so I don't
Speaker 1: take that lightly. And you know, a platoon of seals
Speaker 1: can take over a city just like a vision. And
Speaker 1: so having senior folks who I've worked with throughout my career,
Speaker 1: so we actually could finish each other's sentences, we knew
Speaker 1: how we took our coffee. Was also a very exciting
Speaker 1: opportunity to get the band back together again and have
Speaker 1: a focused strategy and have a small group of investors
Speaker 1: who would write large checks frankly and and support our activities.
Speaker 1: That's quite interesting. So one of the things that I've
Speaker 1: noticed over the past decade or so is a lot
Speaker 1: of the negative spotlight has been shined on hedge funds,
Speaker 1: and private equity seems to be capturing all the positive limelight.
Speaker 1: What is it about this sector of alternative investments that
Speaker 1: seems to have had a golden touch, especially since the
Speaker 1: financial crisis ended well, I think frankly, throughout history of
Speaker 1: private equity, which you know, you can go back to
Speaker 1: the end of World War Two and the start of
Speaker 1: ben Rock, and how how in its essence it is
Speaker 1: supporting growth, It is supporting the establishment of companies. If successful,
Speaker 1: it creates jobs, it creates wealth, and it has a
Speaker 1: long term perspective. You really can't buy a company and
Speaker 1: build a company and do it in thirty days. Some
Speaker 1: of my most successful investments we have owned for well
Speaker 1: over a decade, and frankly, but for the terms of
Speaker 1: each fund, these are things that I would own forever.
Speaker 1: And there are some of the investments where I was
Speaker 1: able to take stock which I own forever and will
Speaker 1: own forever. And I think that aspect of business building,
Speaker 1: of the effect and communities, the effect on labor forces,
Speaker 1: and how it can build globally makes it an attractive
Speaker 1: asset class. And frankly, I think the returns over the
Speaker 1: last few decades have been quite superior to the public markets,
Speaker 1: and I think that attracts a lot of interest. And
Speaker 1: of all the alternative investments, it is private equity is
Speaker 1: the one that is least correlated to the public markets,
Speaker 1: and and that is certainly something that is is appealing.
Speaker 1: You mentioned in one of your investments or some of
Speaker 1: your investments, you've taken stock. When I look at the
Speaker 1: world of venture capital, it's almost all stock. How different
Speaker 1: is merchant banking in terms of the structure versus something
Speaker 1: like venture capital. Merchant banking is probably investing at a
Speaker 1: later stage then venture capital, which could literally be an idea.
Speaker 1: An engineer comes in with a new mouse trap. Experienced
Speaker 1: people who understand what it could do will back it
Speaker 1: even before it has any revenues. Uh. And it's a
Speaker 1: pre revenue concept or just possibly small revenue concept, whereas
Speaker 1: more traditional merchant banking, it's established the revenue, there's a
Speaker 1: business plan, there's a need for capital, for growth, for acquisition,
Speaker 1: for foreign establishment. And so it's just a difference in timing,
Speaker 1: if you will, between coming in at inception and coming
Speaker 1: in with a little more maturity and a track record.
Speaker 1: Quite interesting. Let's talk a little bit about your firm,
Speaker 1: Cornell Capital, which I believe you mentioned has about three
Speaker 1: billion dollars in in assets under management. Tell us a
Speaker 1: little bit about your deal sourcing. Do you go out
Speaker 1: and look for deals do deal? Does deal flow come
Speaker 1: to you? How do you how do you find things
Speaker 1: to put money into? Well, when you consider I've been
Speaker 1: doing this now somewhere between thirty five and forty years,
Speaker 1: and at Goldman, Sachs personally lead an investments into one
Speaker 1: hundred plus companies, which probably means I've spoke to three
Speaker 1: to five hundred CEOs over my career. When I left
Speaker 1: Goldman and retired in two thousand thirteen, I spent literally
Speaker 1: two to three years calling every CEO I ever met
Speaker 1: and just letting them know that I was free. I
Speaker 1: was hopeful that they would call me back, and frankly,
Speaker 1: for every call I made, I got to back. And
Speaker 1: once you can get into the CEO network and they
Speaker 1: understand what you would like to do and they understand
Speaker 1: how you would like to do it, that reference, you know,
Speaker 1: John will call Jane, who will call Jack, who will
Speaker 1: call Susan, and all of a sudden deal flow is created.
Speaker 1: And those personal relationships where they've had a good experience
Speaker 1: when you were a sponsor and back them is just
Speaker 1: fantastic recommendation to someone else who's thinking about capital or
Speaker 1: alternatives and looking for a financial partner. We Also because
Speaker 1: of the time I spent at Goldman, Sachs have a
Speaker 1: pretty good relationship with the other houses on the street,
Speaker 1: and half the world is in auction these days, so
Speaker 1: we maintain a strong presence with um Wall Street, generally
Speaker 1: just to hear what's going on. But it's the key
Speaker 1: I think to our success so far is really having
Speaker 1: proprietary deal flow from our CEO network. So what is
Speaker 1: the process like when a possible deal comes in, how
Speaker 1: do you go through the process of evaluating it and
Speaker 1: how do you decide what's an appropriate funding level and valuation. Well,
Speaker 1: after we put the Luigi board away and realize it
Speaker 1: could be a good opportunity, you basically are looking you
Speaker 1: you put your lines in the water, and you know
Speaker 1: what you'd like to do. So, for example, our expertise
Speaker 1: is an insurance so many of the big departments on
Speaker 1: Wall Street, and many of the insurance executives that I
Speaker 1: know are very kind to call us with many ideas,
Speaker 1: and in our portfolio we have to tow insurance investments.
Speaker 1: We also are very interested in consumer industrial and so
Speaker 1: we own the company that produces pyre X and the
Speaker 1: instant pot and corral dishes. We also own the world's
Speaker 1: largest manufacturer of skincare, also purell um and hair care.
Speaker 1: And so when these calls come in, you understand whether
Speaker 1: it fits the criteria you like, and then you spend
Speaker 1: time and you see what the opportunity could be. And
Speaker 1: so taking our investment in KATC, which is the largest
Speaker 1: manufacturer of skincare, it was dominant in North America, and
Speaker 1: we realized that because of our Asia strategy, we could
Speaker 1: actually help take them to Asia, and we could do
Speaker 1: it in a very effective manner. And one of the
Speaker 1: things we do because we're small, and we've told our
Speaker 1: investors that we will create a very focused portfolio where
Speaker 1: we will routinely commit ten to fift of our capital
Speaker 1: in each investment, and we have a very large co investment,
Speaker 1: which has been secret to our ability to punch above
Speaker 1: our weights. So for every dollar of investment in the fund,
Speaker 1: there's a dollar and a quarter of co invest which
Speaker 1: lowers the cost for my LPs, but it also allows
Speaker 1: them to put more capital to work, which they're all
Speaker 1: interested in doing. And so understanding we could take KATIEC
Speaker 1: internationally was one of the reasons why we were very
Speaker 1: aggressive in buying it. And when we bought it, we
Speaker 1: had roughly a hundred million of EBITDA and today on
Speaker 1: a run rate basis, it's about three hundred million. Having
Speaker 1: acquired the world's largest packaging asset and then acquiring another
Speaker 1: personal and house care business and taking them to China
Speaker 1: and partnering with my old friends at Ali Baba, and
Speaker 1: so our ability when you first get the phone call
Speaker 1: to have the creativity and the vision about what value
Speaker 1: you could add, which is a horrible concept, value add
Speaker 1: value AD. Everyone talks about it, but it's actually true.
Speaker 1: You sit there and say, what can I do to
Speaker 1: this What in my experience or in my relationships will
Speaker 1: allow me to take this very fine company and double
Speaker 1: or triple its opportunities going forward? And it takes time
Speaker 1: to develop that, and so far we've only owned it
Speaker 1: for a year and a half and where you know,
Speaker 1: way I had a plan, even even with the setbacks
Speaker 1: that everyone's experiencing because of the virus. I have to
Speaker 1: ask about some name brands you just mentioned. One obviously
Speaker 1: is PUREL. But before I get to that, what are
Speaker 1: the consumer brands of KATC What name brands might a
Speaker 1: listener recognize? Well, they manufacture, they don't own any brands,
Speaker 1: So we will manufacture for St. Lauder, for l Brands,
Speaker 1: for Laureale, for Johnson and Johnson. We are a contract manufacturer,
Speaker 1: so we own no brands, but we support brands with
Speaker 1: you know, manufacturing with R and D because we have
Speaker 1: three laboratories that are constantly creating new compounds to make
Speaker 1: things better and more ecological, um and just better for people.
Speaker 1: And you mentioned Purell. What's your relationship with Purell and
Speaker 1: how are they managing for a crisis that was tailor
Speaker 1: made for them practically, Well, you know, hand sanitizers. Now
Speaker 1: you can't walk into any building or any establishment and
Speaker 1: not have hand sanitizers. So I think that market was
Speaker 1: already strong and now it has exploded because I have
Speaker 1: them in my car. I'm sure you do. And listeners,
Speaker 1: you have them in the home, you have them in
Speaker 1: every office, every bathroom, and so they're managed. They were
Speaker 1: managing brilliantly, and now their businesses has dramatically improved because
Speaker 1: of the public safety issue around contamination. So that will
Speaker 1: probably only continue and many brands are launching sanitizers and
Speaker 1: it's probably a growth area for the next few years.
Speaker 1: I think everybody was caught a little flat footed when
Speaker 1: the demand suddenly spiked back in February. In March, have
Speaker 1: they ramped up production to meet this massive new demand
Speaker 1: for something that can help keep us safe from an
Speaker 1: infectious virus. Yeah, I think production is in full swing.
Speaker 1: There was probably two or three weeks when it was
Speaker 1: in short supply, but that has been completely taken care of.
Speaker 1: Are you guys located in New York City or where
Speaker 1: are you headquartered? We are ordered at Park Avenue, which
Speaker 1: is the corner of fifty nine in Park in Our
Speaker 1: Hong Kong office is in the Bank of China building.
Speaker 1: So let's talk a little bit about what's been going
Speaker 1: on with private equity, and I want to start by
Speaker 1: putting a few um numbers on this. Typically we look
Speaker 1: at the equity markets and over long periods of time
Speaker 1: we could see an eight to sort of return over decades.
Speaker 1: What sort of returns our private equity targeting these days? Well,
Speaker 1: everyone always tries to double money plus. Uh. Some people
Speaker 1: will advertise plus, some will say depending on the asset
Speaker 1: class and the style of investing. You know, a premium
Speaker 1: of five basis points to the tenure treasury, which today
Speaker 1: does not look that dramatic, even out the Treasury is um.
Speaker 1: So it really depends on who you talk to. I've
Speaker 1: always been a fan of you know, Mr buffettum Bill
Speaker 1: Berkeley at W R. Berkeley. You know, these geniuses have
Speaker 1: basically been making fifteen returns their entire career, so effectively
Speaker 1: doubling plus every five years, with very low failure rates
Speaker 1: and very high success rates. And that's basically the strategy
Speaker 1: that I learned at Goldman and that we are certainly
Speaker 1: employing at Cornell Capital. So one of the things that's
Speaker 1: always confusing when I discuss returns with private equity investors
Speaker 1: is the various ways it's described. Some of it is
Speaker 1: cash on cash returns, some of it is I r R.
Speaker 1: What is the best way to measure returns? If I'm
Speaker 1: a an endowment or foundation and I have a billion
Speaker 1: dollars to put into a private equity funds, how should
Speaker 1: I expect those returns to look like over the life
Speaker 1: of that funds. Well, it's an excellent question, and there
Speaker 1: are many opinions on how they should be measured. I
Speaker 1: try and balance I r R with Mike multiple of
Speaker 1: invested capital. I r R is a wonderful tool for
Speaker 1: measuring performance against other asset classes. But at the end
Speaker 1: of the day, you can't pay electric bills with I
Speaker 1: r R. You pay them with cash or your MIKE.
Speaker 1: And so I understand that you know, many folks that
Speaker 1: manage liabilities for unions or universities measure themselves and their
Speaker 1: folks get paid on I r R. But you have
Speaker 1: to fall back on MIKE at some point because you
Speaker 1: need the cash to actually pay your bills. When do
Speaker 1: no one's going to accept I r R. So I
Speaker 1: think frankly I r R has become more of a
Speaker 1: tool and gets more focus, and I always check as
Speaker 1: to whether I've actually made money as opposed to just
Speaker 1: I r R, because I r R is quite you
Speaker 1: can manipulate I r R. So if I put a
Speaker 1: dollar to work today and within nine months I pull
Speaker 1: out one point one times or one point one five
Speaker 1: times my capital, I'll have I r R. But if
Speaker 1: I get a bill for a hundred bucks to pay
Speaker 1: my car or to pay my mortgage, they're not going
Speaker 1: to take my I r are. They want the cash,
Speaker 1: And so you need a balance as you're putting both together.
Speaker 1: So we have been since the financial crisis in an
Speaker 1: era of unprecedentedly low rates. How does that impact how
Speaker 1: you go about either thinking about making investments or funding companies.
Speaker 1: What's the role of ultra low rates over the past
Speaker 1: decade or so, and how does that impact how you
Speaker 1: do your job. It is quite attractive to borrow because
Speaker 1: borrowing has been historically in this last decade incredibly cheap
Speaker 1: and covenant light, which frankly allows for excess. Throughout my career,
Speaker 1: I have been afraid of leverage, and I have always
Speaker 1: over equitized and under levered when I was at Goldman
Speaker 1: and certainly now as a new fund, as a young firm,
Speaker 1: we didn't want to make a mistake, and so our
Speaker 1: average leverage in our entire portfolio is three point nine times.
Speaker 1: We have no subordinated securities, no mezzanine debt. We over
Speaker 1: equitize everything because I can't predict when a meteor will
Speaker 1: hit the planet or a virus will shut down the
Speaker 1: US economy, and so our portfolio certainly has operational challenges,
Speaker 1: but we have virtually no balance sheet risk because we
Speaker 1: have protected the balance sheet by over equitizing the position.
Speaker 1: Many firms in the last ten years have used leverage
Speaker 1: to their advantage and report and have achieved high I
Speaker 1: r rs. But at a time when a punch comes
Speaker 1: out of left field, that capital structure is not going
Speaker 1: to be in a position to take advantage of the
Speaker 1: environment or possibly not even survive. And so you know,
Speaker 1: I'm an optimistic person by nature, but I'm an optimistic
Speaker 1: person whose glass is always half empty, not half full.
Speaker 1: And so I'm always trying to hope for the best,
Speaker 1: but preparing for the worst. And that's the philosophy in
Speaker 1: our firm. And so that's why at this moment in time,
Speaker 1: and you know, as I said, we have issues we
Speaker 1: are dealing with, but we will be just fine going
Speaker 1: forward because of how we've structured things. People have a
Speaker 1: tendency to for get that, Hey, leverage is a double
Speaker 1: a D sword. If it helps on the way up,
Speaker 1: it's going to leave a mark on the way down.
Speaker 1: That is something I've learned throughout my career and my
Speaker 1: mentors have drilled that into my head. So before I
Speaker 1: leave Private Equity and talk about some of the bogeron,
Speaker 1: I have to ask one question. Vcs are notorious for
Speaker 1: posting their missed opportunities. It's almost a badge of honor.
Speaker 1: Oh I said, no to Apple in four or whatever
Speaker 1: whatever it happens to be. Any major deals that you
Speaker 1: passed on that you look back and say, you know,
Speaker 1: maybe we should have pulled the trigger on that one.
Speaker 1: There's always one or two that got away. Um. But
Speaker 1: I will tell you I I tend to look forward,
Speaker 1: and some of the largest deals I did, you know,
Speaker 1: working with rich Kinder Kinder Morgan to take him private
Speaker 1: fifteen years ago was one of the highlights of my career.
Speaker 1: Carrying his briefcase and learning from a master was an
Speaker 1: extraordinary achievement. You know. Some of the things I was
Speaker 1: not able to do that I wanted to do in
Speaker 1: Asia have proved to be quite successful without our involvement, unfortunately.
Speaker 1: But back then I was not in a political position
Speaker 1: so to speak, to sway the Investment Committee. And today
Speaker 1: I'm in a little bit of a different different position.
Speaker 1: So looking forward, not looking backwards. Henry, you and I
Speaker 1: don't know each other personally, but I really can't picture
Speaker 1: you carrying anybody else's bag. No, No, I'm happy to
Speaker 1: do it. I'd like to be a good student. Believe me.
Speaker 1: There's a lot of good teachers out there. So so
Speaker 1: let's talk a little bit about some of the boards
Speaker 1: that you were on. Um, your trustee at the Whitney Museum. UM,
Speaker 1: I love what they did moving down to the high Line.
Speaker 1: It's it's really a fascinating new uh location. How involved
Speaker 1: were you with that process? Well, the whole board was
Speaker 1: involved with the process. I think the Whitney board is
Speaker 1: like a family. We had a medici, Leonard Lauter, who
Speaker 1: led the charge in supporting the museum, just an unbelievable philanthropist, thoughtful,
Speaker 1: and the board followed his lead and it was, frankly
Speaker 1: a debate. You may recall the Whitney tried many different
Speaker 1: architectural ideas for the corner of seventy in Madison, and
Speaker 1: at the end of the day, the idea of moving
Speaker 1: downtown and creating your own environment was something that excited
Speaker 1: the board and it was a bold move. Frankly, I
Speaker 1: think Madison Avenue did roughly three to four hundred thousand
Speaker 1: visitors a year, and the museum now does well over
Speaker 1: a million, sometimes close to two depending on what the
Speaker 1: exhibit is and align basically being one goal post on
Speaker 1: the high Line and how the whole meat packing district
Speaker 1: has exploded as an exciting center was just fortuitous for
Speaker 1: the museum, and it's it's in really good shape. Although
Speaker 1: right now, due to you know what's going on, it's
Speaker 1: closed down, but I know it will open back with
Speaker 1: a roar and the and the board. It's a terrific board.
Speaker 1: And Adam Weinberg, who is the director of the museum.
Speaker 1: I love Adam. The board loves Adam. He has been
Speaker 1: a fantastic director and he's the one who probably deserves
Speaker 1: Optimistic Lorder the most um accolades forgetting the museum downtown
Speaker 1: and making it a success, as well as the whole
Speaker 1: team at the museum. It's been it's been, frankly, quite
Speaker 1: a quite a wonderful time to be involved with the museum.
Speaker 1: So so let's talk about somewhat different sort of board
Speaker 1: you're on. You're you're involved with the Navy Seal Foundation.
Speaker 1: Tell us a little bit about that organization. What does
Speaker 1: it do and how did you get involved in that? Well,
Speaker 1: you know, unfortunately we all sleep comfortably in our beds,
Speaker 1: and as George Orwell said, rough men have to go
Speaker 1: out and defend the country. And the Navy Seals, you know,
Speaker 1: there are men lost in battle, and you forget that
Speaker 1: these are husband's fathers, sons. And when they come back
Speaker 1: to the States, uh, you know when when if they're
Speaker 1: Gold Star families, they get a death benefit from the government,
Speaker 1: they get an American flag as a triangle and thank
Speaker 1: you for your service. And I heard about this almost
Speaker 1: twenty years ago from a colleague of mine who grew
Speaker 1: up with one of the captains in charge of one
Speaker 1: of the seal teams. And I was flabbergasted that these warriors,
Speaker 1: these heroes literally were their families were not really taken
Speaker 1: care of when they came back, and when you think
Speaker 1: about how they are deployed and they are the tip
Speaker 1: of the spirit, just was extraordinary to me. So I
Speaker 1: got involved early. UM. The foundation supports the children, supports
Speaker 1: the families, and supports the men who come back, some
Speaker 1: of which are been wounded, uh injured, in all levels
Speaker 1: of support. And Robin King, who runs as the president
Speaker 1: of the organization, she's amazing. Her husband's master chief. So
Speaker 1: talk about tough UM. And it's an honor. It's actually
Speaker 1: one of the greatest honors of any of the philanthropies
Speaker 1: that I've ever been involved with. To meet these men,
Speaker 1: to understand what they've done for the country and in
Speaker 1: in some small way, letting them know that God forbid
Speaker 1: their felt in battle, their children, their families will be
Speaker 1: taken care of. And so it grew from a tiny
Speaker 1: idea twenty some odd years ago to today where you know,
Speaker 1: we have a ninety million dollar endowment. We would love
Speaker 1: to double that so that no gold Star child ever
Speaker 1: has to worry about paying for tuition or paying for
Speaker 1: any type of schooling or or anything. And that's, UM,
Speaker 1: that's the goal, is to really support these guys in
Speaker 1: some way while we're back home and they're protecting the nation.
Speaker 1: That is fabulous and amazing, and I'm glad to hear
Speaker 1: that there are people in the country who recognize this
Speaker 1: acrifices that are made and actually you're doing something about it.
Speaker 1: The last board, I have to ask you about your
Speaker 1: chairman of the Citizens Committee of New York City, whose
Speaker 1: goal is to help people in low income areas improve
Speaker 1: the quality of life in their city. What is that
Speaker 1: organization like? What do you try and do to make
Speaker 1: positive impact in New York? Well, Barry, I was the
Speaker 1: chairman for fifteen years, UM, and I did pass the baton,
Speaker 1: but I was honored to be associated with this I
Speaker 1: was born and raised in the Bronx. I'm the first
Speaker 1: in my family to be born in the country, just
Speaker 1: raised by my mom. And this organization was started by
Speaker 1: Oz Elliott and it basically helps the Block Association's neighborhood
Speaker 1: groups throughout the city. They've touched ten thousand groups. So
Speaker 1: if you want to plant to garden, you need money
Speaker 1: to create an after school program, you want to help
Speaker 1: feed the elderly. After nine eleven, you know, the Aybridge
Speaker 1: section in the Bronx, which was my old neighborhood, had
Speaker 1: many people who were not documented working in the restaurants
Speaker 1: in the trade center, and we were the first to
Speaker 1: get up there with checks to support their family. It
Speaker 1: is literally blocked by block neighborhood by neighborhood poverty relief,
Speaker 1: but it's done by the citizens, so it's not imposed
Speaker 1: from above. It is created by the people who have
Speaker 1: the experience that need a solution. And so whether you're
Speaker 1: a libertarian or a liberal, you've got to love the
Speaker 1: fact of how citizens come together get supported by their
Speaker 1: fellow citizens. Because the checks we write to these groups
Speaker 1: are under a thousand dollars, but you'd be amazed what
Speaker 1: a thousand dollars can do to create a block association.
Speaker 1: And it's been around since the mid seventies. It was
Speaker 1: created in the financial crisis of New York City and
Speaker 1: seventy and the way we're spending money right now, it
Speaker 1: wouldn't surprise me if we have another financial crisis coming
Speaker 1: in New York City. But it was a way to
Speaker 1: get citizens to get involved in their neighborhoods, and it was.
Speaker 1: It's a terrific organization and it's continuing now that I
Speaker 1: have retired, so to speak, as their chairman. Quite quite
Speaker 1: interesting and sounds like a worthy organization. I know, I
Speaker 1: only have you for a couple more minutes, So let's
Speaker 1: let's get to our our favorite questions that we ask
Speaker 1: um all of our guests. And let's start out with streaming.
Speaker 1: What are you? What are you watching either on Netflix
Speaker 1: or Amazon or Disney or whatever? What podcasts or are
Speaker 1: what are you doing to stay entertained during this shelter
Speaker 1: in place period? Well, as I mentioned, I've got five
Speaker 1: kids aged seven to fourteen, so I have rediscovered every
Speaker 1: Disney movie out there and price and then I have
Speaker 1: tried to introduce them to some Hollywood classics, Casablanca, the
Speaker 1: man of Shot Liberty Valence. Um. And I'm a little
Speaker 1: less successful in getting them involved with the classics, but
Speaker 1: I've I've become reacquainted with my Disney childhood. That that
Speaker 1: Disney Plus went from almost no subscribers to I think
Speaker 1: they're up to forty million in an incredibly short period
Speaker 1: of time. It's a giant lockdown success story. Um. You've
Speaker 1: mentioned mentors several times. Tell us about your mentors who
Speaker 1: helped helped your career, help who helped you form your
Speaker 1: philosophy of merchant banking. Well, my my first boss was
Speaker 1: Dan Knightick at Golden Sacks and he was tougher than tough,
Speaker 1: but generous with his teaching, and he set me on
Speaker 1: my way. Uh. Steve Friedman made me a partner in
Speaker 1: ninety four, and Hank Paulson was kind enough to take
Speaker 1: me under his wing, and they were my formative mentors
Speaker 1: at Golden Sacks. And then I met Bill Berkeley. M.
Speaker 1: Bill is the chairman of W. R. Berkeley Insurance, a
Speaker 1: spectacular investor and a partner of mine and a very
Speaker 1: tough task master. Uh. You know, he is a little
Speaker 1: older than me, and he's up every morning at the
Speaker 1: crack of dawn and demanding the same from everyone. And
Speaker 1: he's terrific. My friend Farruke Pastiki, who runs the Quait
Speaker 1: Investment Authority, He has been a wonderful mentor for me
Speaker 1: over the years. And then frankly, my wife, the best
Speaker 1: sounding board on the planet. I lay it all out
Speaker 1: for her and her quintessential common sense and deep intellect.
Speaker 1: It's like, no, you're being stupid there, No, that sounds okay,
Speaker 1: you know. So it's a combination of having you know,
Speaker 1: true love at home and wonderful partners in your life
Speaker 1: that basically point out we're acting like an idiot and
Speaker 1: try and set you on the right path. That that
Speaker 1: sounds like a nice group of of mentors. What are
Speaker 1: you reading these days? Tell us about some of your
Speaker 1: favorite books or or what you're plowing through now. Well, um,
Speaker 1: favorite books. I always go back at least once a year,
Speaker 1: and I read On the Road by Jack Carouac and
Speaker 1: The Sun Also Rises by Ernest Hemingway, just because they
Speaker 1: touched me when I was living in Paris courtesy of
Speaker 1: Davis Polk in my twenties, and there are essential truths there.
Speaker 1: I've been reading a lot more history these days, the
Speaker 1: foibles of how we fell into World War One? Because
Speaker 1: I worry a little bit about what's happening in the
Speaker 1: South China Sea. And then my kids, I pulled out
Speaker 1: some old dickens for them. So we're plowing through Tellato
Speaker 1: cities and great expectations. And so that's that's been the
Speaker 1: last that's been the lockdown reading list for the last
Speaker 1: two months. Well, what's the book you mentioned about how
Speaker 1: we fell into World War One? Did I hear the title? Well,
Speaker 1: Barbara Tuckman Guns of August Catastrophe Europe at War by
Speaker 1: Max Hastings. I mean, there's it's just history does move
Speaker 1: in circle. And so seeing how a nations fell into
Speaker 1: cataclysm a hundred plus years ago and I worry a
Speaker 1: little about it today with what's going on internationally, just
Speaker 1: reminds me of, you know, what to do because I
Speaker 1: am involved in Asia society and the Council on Foreign
Speaker 1: Relations and in a small way just try and remind
Speaker 1: people that, you know, we're not immune for making the
Speaker 1: same mistake twice. To say the least. That the book
Speaker 1: that has always stayed with me about the transition period
Speaker 1: from World War One to World War Two is the
Speaker 1: Lords of Finance by Liquidamat. I don't know if you're
Speaker 1: familiar with that, just a terrific book, yep. Absolutely. Um,
Speaker 1: So are our final two questions. What sort of advice
Speaker 1: would you give to a recent college grad or or
Speaker 1: someone of that age who was interested in pursuing a
Speaker 1: career in merchant banking. First, maintain a sense of humor
Speaker 1: and make sure you have lots of patients, because you
Speaker 1: need both in order to be successful. I think I've
Speaker 1: found that broad based liberal arts with an ability to
Speaker 1: understand the world in its totality. So read a book
Speaker 1: of poetry, read a novel, understand history, understand a little
Speaker 1: of science. Just demonstrate a knowledge of the world and
Speaker 1: be open to trends and not locked into specific thinking.
Speaker 1: And obviously work whatever relationships your you have, your friends, parents,
Speaker 1: your parents, your college development group, because getting out and
Speaker 1: talking to as many people as possible is important. To
Speaker 1: find a fit. Because I will tell you how I
Speaker 1: haven't really only had three jobs in my whole life.
Speaker 1: Davis Polk which was spectacular, and then Golden Sacks, where
Speaker 1: I was for thirty years, and now at Cornell Capital
Speaker 1: finishing seven years here. Um, finding that fit where you
Speaker 1: are inspired to do your best, where you have colleagues
Speaker 1: who will challenge and support you. Um. You know these
Speaker 1: are platitudes, but they're also essential truths. And being not
Speaker 1: being afraid to saying you know what, this just doesn't
Speaker 1: work for me, or demanding some attention, or walking into
Speaker 1: your boss's office, make sure you're prepared. Just don't walk
Speaker 1: in there with attitude. You have to walk in with
Speaker 1: a thoughtful point of view and and explain what is
Speaker 1: troubling you or where you'd like to go. It's like
Speaker 1: quite interesting in our final question, what is it that
Speaker 1: you know about the world of investing today that you
Speaker 1: would have found useful thirty plus years ago? I wish
Speaker 1: I was a little smarter about the digital revolution that
Speaker 1: was happening in the eighties and nineties. I remember when
Speaker 1: Microsoft went public and I bought a few shares, but
Speaker 1: I had no idea what they did. Just was one
Speaker 1: of those things that sounded exciting and not really understanding,
Speaker 1: you know, Google and Yahoo and am us On and
Speaker 1: Apple until they were already formed. Um was probably a
Speaker 1: big miss on my part. Now I'm you know, my
Speaker 1: fourteen year old is teaching me, So I feel like
Speaker 1: I've got a great mentor there um, and I think
Speaker 1: that's the one thing I did not put enough emphasis on.
Speaker 1: This changing technology landscape quite interesting. We have been speaking
Speaker 1: with Henry Cornell, founder of Cornell Capital and one of
Speaker 1: the original architects of Goldman Sachs Merchant Banking Division. If
Speaker 1: you enjoy this conversation, well be sure and look up
Speaker 1: an inch or down an inch on Apple iTunes, where
Speaker 1: you can see any of the previous three hundred plus
Speaker 1: such conversations we've had over the past five years. You
Speaker 1: can find that at Apple iTunes, Spotify, Google Podcast, Overcast, Stitcher,
Speaker 1: wherever your final podcasts are sold. We love your comments,
Speaker 1: feedback and suggestions right to us at m ib podcast
Speaker 1: at Bloomberg dot net. Give us a review on Apple iTunes.
Speaker 1: You can check out my weekly column on Bloomberg dot
Speaker 1: com slash Opinion, follow me on Twitter at Ridholtz. I
Speaker 1: would be remiss if I did not thank our crack
Speaker 1: staff that helps put together these conversations each week. Michael
Speaker 1: Boyle is my producer slash booker. Tim Harrow is my
Speaker 1: recording engineer. Michael Batnick is my head of research. A
Speaker 1: Tico val Bron is our project manager. I'm Barry Riholts.
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio