WEBVTT - Businessweek Extra - Don Gogel

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<v Speaker 1>This is Bloomberg Business Week from Bloomberg Radio. I'm Jason Kelly.

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<v Speaker 1>Welcome to the Bloomberg Business Week Extra. It's our weekly podcast,

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<v Speaker 1>bring you an in depth interview you won't hear anywhere else.

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<v Speaker 1>And this week I got to catch up with Don

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<v Speaker 1>go gil He's a legend in the private equity world,

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<v Speaker 1>been investing for more than three decades. He's ending his

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<v Speaker 1>tenure as the CEO of C D n R Clayton,

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<v Speaker 1>Dubillieri and Rice, one of the best known firms out there.

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<v Speaker 1>They've owned a whole host of businesses. It was a

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<v Speaker 1>wide ranging conversation about the markets right now, about the

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<v Speaker 1>history of private equity, where it may be going, even

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<v Speaker 1>some of what he's learned from working with some of

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<v Speaker 1>the world's most famous CEO s here he is. So,

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<v Speaker 1>Don go Gell, You've seen some things in your time

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<v Speaker 1>in the private equity business, and I want to talk

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<v Speaker 1>about your career in a few minutes, but let's start

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<v Speaker 1>safe to say I think very few would disagree that

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<v Speaker 1>we're in a period of cast right now across the world.

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<v Speaker 1>Um politically, economically, we've got protests in Hong Kong, we've

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<v Speaker 1>got a trade war, with China, we've got breggsit going on.

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<v Speaker 1>We've got a political environment here in the United States

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<v Speaker 1>that is volatile, to say the least. What's the role

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<v Speaker 1>that private equity plays right now in August nineteen. I

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<v Speaker 1>think private equity can be a bit of a buffer

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<v Speaker 1>during these periods. Now. To be fair, private equity firms

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<v Speaker 1>virtually all of them right or not foolhardy and they

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<v Speaker 1>don't say, well, we're just gonna buy on a downturn.

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<v Speaker 1>And in fact, one of the challenges that private equity

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<v Speaker 1>has now to play that buffer role is it's harder

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<v Speaker 1>now to deploy capital than it's been in a while.

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<v Speaker 1>And I say that because, notwithstanding the chaos, valuations in

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<v Speaker 1>private equity transactions, as you know, have remained stubborn lee high.

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<v Speaker 1>Now they've been growing over the last four or five years.

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<v Speaker 1>You can't reverse the laws of supply and demand. And

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<v Speaker 1>with all of the money that's been raised, as you know,

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<v Speaker 1>the phrases sort of uh, this sort of dry powder

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<v Speaker 1>that's available, and the animal instincts of good private equity

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<v Speaker 1>firms to try to put it to work. The equity values,

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<v Speaker 1>the valuations have moved up and up and it's harder

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<v Speaker 1>to put money to work. The only way you justify

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<v Speaker 1>it is if you see this not unbroken but long

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<v Speaker 1>term trend up. And given the chaos in a number

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<v Speaker 1>of industries caused by factors that we don't need to

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<v Speaker 1>Imnumemeber right now. All you need to do is watch Bloomberg.

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<v Speaker 1>You find out all of those factors. It's just harder

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<v Speaker 1>to put money to work. Some of the technical factors, though,

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<v Speaker 1>are still favorable. Although high yield fund flows have been diminished.

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<v Speaker 1>In fact, I think there's been thirty eight straight weeks

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<v Speaker 1>of people taking money out of high yield funds. They're

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<v Speaker 1>still available capital. It's a profit product line. There's still

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<v Speaker 1>investor demand, so the capital will still be there. There's

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<v Speaker 1>planning of equity there. So it's a matter of selectivity.

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<v Speaker 1>But in these periods of time, there is a rush

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<v Speaker 1>to businesses that seem to have a lower risk profile,

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<v Speaker 1>and that then the price gets bit up. So for

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<v Speaker 1>us and I'm sure many others, navigating your way to

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<v Speaker 1>find the right transaction with the right risk reward, the

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<v Speaker 1>right capital structure, of the right management team, the right prospects,

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<v Speaker 1>the right path through regulatory maze. If it's a business

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<v Speaker 1>like healthcare where we invest. Often it's complicated, but I

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<v Speaker 1>still view it as a flexible buffer that can normalize

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<v Speaker 1>economies and companies when needed. You have the ability and

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<v Speaker 1>probably the need, to be talking to CEOs all the time,

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<v Speaker 1>both CEOs of companies that you control, CEOs of companies

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<v Speaker 1>you might want to control of a whole network at

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<v Speaker 1>your disposal. If you can generalize how the leaders of

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<v Speaker 1>big companies and maybe small companies are feeling right now,

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<v Speaker 1>what would you say? There's high anxiety um and and

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<v Speaker 1>appropriately so anxiety about the economic and macroeconomic political conditions

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<v Speaker 1>that you described. But I think public company CEOs feel

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<v Speaker 1>under more pressure than ever to show at least some

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<v Speaker 1>level of performance improvement. And it's of course a function

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<v Speaker 1>both of stock market which gives you a report card

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<v Speaker 1>every day, activists that come in and let you know

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<v Speaker 1>exactly what you're doing wrong and what they think you

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<v Speaker 1>should be doing right, boards that feel that they have

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<v Speaker 1>to respond to a lot of those pressures. And then

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<v Speaker 1>if you look at the statistics, I mean you when

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<v Speaker 1>I'm gonna phrase it in a way that sounds shocking,

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<v Speaker 1>but it's just just math. If you recognize it, about

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<v Speaker 1>one fortune of SMP five CEOs change every year. That

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<v Speaker 1>means that there's a CEO change in the SMP five

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<v Speaker 1>about every four or five days. Wow, that's just it's

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<v Speaker 1>just math, just math. So if you're the CEOs, you're

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<v Speaker 1>looking at those numbers, and you're looking to the left

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<v Speaker 1>and right, and you'd like to have eyes behind you.

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<v Speaker 1>And and it's not that you don't trust your board

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<v Speaker 1>or that people are not going to give you some time,

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<v Speaker 1>but it's just a measure of the environment that it's tough,

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<v Speaker 1>and CEO tenure therefore is being reduced in CEOs. Really,

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<v Speaker 1>I think I have a tough job in public companies.

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<v Speaker 1>It's tough everywhere. Leadership is always hard. I just think

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<v Speaker 1>now the scrutiny social media activists, shareholders twenty four by

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<v Speaker 1>seven global makes it very hard to be a public

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<v Speaker 1>company CEO. Right. So, speaking of CEOs, you are the

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<v Speaker 1>chairman and CEO of CD and R right now. The

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<v Speaker 1>CEO title you will relinquish uh at the turn of

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<v Speaker 1>the year. Succession in private equity is historically a pretty

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<v Speaker 1>tricky thing. Your firm has done it several times now,

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<v Speaker 1>will have done it several times now successfully. Why is

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<v Speaker 1>it so tricky? Well, it is tricky. Uh. Private equity

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<v Speaker 1>firms generally you're organized and operate, at least initially most

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<v Speaker 1>of them as partnerships. And I say that not in

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<v Speaker 1>the legal term, as much as it's a group of people.

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<v Speaker 1>People are complicated, they change, they're they're obtain people knowing

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<v Speaker 1>not a lot of wallflowers. The men and women in

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<v Speaker 1>private equity have strong opinions and they should right. The

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<v Speaker 1>way that you succeed in private equity is to have

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<v Speaker 1>high conviction in your investment ideas and what you think

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<v Speaker 1>is the right way to run a company and who's

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<v Speaker 1>the right CEO for a business. So keeping that mix

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<v Speaker 1>and keeping that balance is really important job. You know,

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<v Speaker 1>when I became CEO, I thought that my most important

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<v Speaker 1>job was to continue to do make good investments. Joe Rice,

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<v Speaker 1>who preceded me, one of the founders of the firm

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<v Speaker 1>and he held that job for twenty years, said, well,

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<v Speaker 1>you got to do deals. But let me tell you

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<v Speaker 1>what you really have to do is keep this partnership

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<v Speaker 1>and culture working together to maintain sort of collegiality support

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<v Speaker 1>at well at the same time, the competitiveness, the challenge,

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<v Speaker 1>the animal spirits, and how you balance that don is

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<v Speaker 1>a full time job. Ye, well he was more right

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<v Speaker 1>than wrong, as Joe typically is on everything. Yeah, And

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<v Speaker 1>what has been if you look back on your tenure,

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<v Speaker 1>what has been sort of the mark of one of

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<v Speaker 1>those cultural things that you've done. What have you instituted

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<v Speaker 1>that you think really helped maintain that collegiality number of things.

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<v Speaker 1>I think we've been able to have a multi generational culture.

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<v Speaker 1>We have people at Clayton douber Leer if I include

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<v Speaker 1>Joe Rice in their twenties, thirties, forties, fifties, sixties, seventies,

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<v Speaker 1>and eighties. Uh, and getting people to sort of crosswalk

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<v Speaker 1>among those generations, to share experiences and energy. And it's

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<v Speaker 1>not that people in their sixties have to sort of

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<v Speaker 1>do it their way that. I think it's a culture

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<v Speaker 1>that says best idea wins. And that is a reason

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<v Speaker 1>that I think we've been able to hold people for

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<v Speaker 1>a long time. It's a very constructive culture. Although it's challenging,

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<v Speaker 1>and it's competitive, and you work too hard and there's

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<v Speaker 1>too much anxiety, but I think people generally find that

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<v Speaker 1>supportive winning helps, right. I mean, people like to be

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<v Speaker 1>part of a winning team. And if you can develop

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<v Speaker 1>a performance culture. You don't have to post who's doing

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<v Speaker 1>what in the firm or who's successful. Everybody knows we're

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<v Speaker 1>in a fish bowl, you know. I mean, one of

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<v Speaker 1>the things that's remarked upon less in private equity than

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<v Speaker 1>it probably should be. We are held to account in

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<v Speaker 1>an extraordinary way. We have investors who we report to,

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<v Speaker 1>of course, and every five years or so when we

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<v Speaker 1>raise a new fund, they scrutinize everything we did, every

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<v Speaker 1>investment we made, every investment we didn't make, the people

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<v Speaker 1>that we hired people in our case, few that left,

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<v Speaker 1>and they want to know everything about it, and they

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<v Speaker 1>vote with their dollars, and they vote with their dollars.

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<v Speaker 1>There they can get out and uh, you know. The

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<v Speaker 1>best firms, of course, have a long history of loyal investors.

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<v Speaker 1>We've been fortunate with university endowments and pension funds and

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<v Speaker 1>a lot of other private foundations to have very long

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<v Speaker 1>standing relationships. Some of our investors go back plus years.

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<v Speaker 1>You have chosen as a firm to stay essentially, for

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<v Speaker 1>lack of better term, sort of a mono line private

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<v Speaker 1>equity firm at a time when some of the biggest

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<v Speaker 1>and best known names, some of the other longstanding names KKR, Blackstone, Carlisle, Apollo,

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<v Speaker 1>others have chosen to become multi asset publicly traded firms.

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<v Speaker 1>Why this path, Well, it illustrates something that I sort

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<v Speaker 1>of said as the predicate here, which is private equity

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<v Speaker 1>has ultimate flexibility. As you look at these firms across

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<v Speaker 1>the eight thousand of them now across the globe, different strategies,

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<v Speaker 1>different sort of approaches to the market and private equity

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<v Speaker 1>and itself compasses everything from infrastructure, venture capital, early stage,

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<v Speaker 1>late stage, distress debt. I mean, there are a lot

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<v Speaker 1>of strategies. A number of firms have decided that they

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<v Speaker 1>like the cross fertilization of having a lot of different strategies.

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<v Speaker 1>We chose the advantages that we think are substantial of focus.

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<v Speaker 1>We have a lot of industry reads that we invest in,

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<v Speaker 1>we have a number of geographies that we invest in,

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<v Speaker 1>but we invest with one partnership, one fund, one intense

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<v Speaker 1>focus on performance improvement through operations. We staff our firm

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<v Speaker 1>that way. Half of our partners or former operating executives

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<v Speaker 1>from some of the best managed companies in the world,

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<v Speaker 1>and we think it's a great advantage. We know we're

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<v Speaker 1>in the minority of the top twenty uh PE firms.

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<v Speaker 1>I think sixteen of them are multi line firms. It's

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<v Speaker 1>proven to be a successful strategy. But if you what

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<v Speaker 1>you really care about is outperformance in building businesses, We've

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<v Speaker 1>chosen a strategy that works for us. When you talk

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<v Speaker 1>about the outperformance, it naturally leads to how successful many

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<v Speaker 1>of the firms, including yours, have been financially. The work

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<v Speaker 1>that you have done has become more and more public.

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<v Speaker 1>It is drawing ever more scrutiny from politicians and regulators,

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<v Speaker 1>Elizabeth Warren being the most notable and most recent. How

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<v Speaker 1>much do you worry about regulatory and political risk here

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<v Speaker 1>in and going into I worry about it. I'd be

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<v Speaker 1>foolish not to. If I were a public company executive,

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<v Speaker 1>I would worry about it. If I were a university

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<v Speaker 1>president with an endowment, I'd worry about it. There's a

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<v Speaker 1>lot to worry about. Now. That said, I hope that

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<v Speaker 1>scrutiny is going to be fact based, not just emotional.

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<v Speaker 1>The risk is that it's not. But if you look

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<v Speaker 1>at the numbers and you look at the beneficiaries, just

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<v Speaker 1>a couple of examples that will be well known. You know,

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<v Speaker 1>our public pension plans in the United States are not

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<v Speaker 1>in great shape generally, and those firms, those pension funds

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<v Speaker 1>that invest in private equity have a three hundred and

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<v Speaker 1>fifty basis point uh delta positive over those that don't.

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<v Speaker 1>Of the hundred billion dollar investors in private equity, I'm

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<v Speaker 1>looking at the investors now about a third or more

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<v Speaker 1>or pension funds. They're now close to four hundred investors

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<v Speaker 1>in private equity that invest at least a hundred billion

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<v Speaker 1>dollars in the asset class and have reaped wonderful rewards.

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<v Speaker 1>Whether you're a teacher getting your retirement of sort of funded,

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<v Speaker 1>or whether you're university using some of the money to

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<v Speaker 1>pay for scholarships. These are all positives, right. And if

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<v Speaker 1>people look at the substance of job creation, which is

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<v Speaker 1>higher in pe back companies, notwithstanding some of the sense

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<v Speaker 1>that there are cases which there are where people lose

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<v Speaker 1>their jobs, but they lose them everywhere, but total job

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<v Speaker 1>creation of p back firms is higher innovation, notwithstanding some

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<v Speaker 1>contrary examples, private equity back companies end up versus their

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<v Speaker 1>comparables investing more in research and development, and it's focused

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<v Speaker 1>because they end up filing for more patents that are successful.

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<v Speaker 1>So if you look at growth and you look at innovation,

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<v Speaker 1>you look at overall sort of success of these entities

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<v Speaker 1>to the end use customer. One of the thoughts of

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<v Speaker 1>g private equity must make their money by raising prices.

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<v Speaker 1>That's bad for consumers. Well, pretty good database out there,

0:14:33.520 --> 0:14:36.040
<v Speaker 1>since there's so many transactions. Over the last twenty years,

0:14:37.040 --> 0:14:44.040
<v Speaker 1>private equity average price increases about one a year. Now

0:14:44.080 --> 0:14:49.160
<v Speaker 1>that's something, But private equity is not raising prices on America.

0:14:50.800 --> 0:14:53.160
<v Speaker 1>There are other things that are prices on America of

0:14:53.200 --> 0:14:57.120
<v Speaker 1>commodity prices and tariffs and other things, but not private equity.

0:14:57.200 --> 0:15:01.040
<v Speaker 1>So I don't mind the scrutiny. And by the way,

0:15:01.240 --> 0:15:04.000
<v Speaker 1>the asset class does have some outliers and there is

0:15:04.040 --> 0:15:07.440
<v Speaker 1>some bad conduct, and I think there are ways to

0:15:07.520 --> 0:15:13.080
<v Speaker 1>address that. But the aggregate net gain I believe for

0:15:13.720 --> 0:15:19.360
<v Speaker 1>a lot of constituencies that need and want private equity

0:15:19.400 --> 0:15:22.600
<v Speaker 1>is I think going to win the day. That doesn't

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<v Speaker 1>mean there won't be a lot of noise, a lot

0:15:24.480 --> 0:15:30.240
<v Speaker 1>of criticism, and presumably some constructive changes, which would be fine.

0:15:30.560 --> 0:15:33.360
<v Speaker 1>And I think most responsible people running private equity firms

0:15:33.400 --> 0:15:37.440
<v Speaker 1>would welcome that, just as an example the increased focus

0:15:37.560 --> 0:15:42.440
<v Speaker 1>on E s. G. Our firm and many others now

0:15:42.640 --> 0:15:48.440
<v Speaker 1>monitor and report on our environmental activities routinely. We think

0:15:48.440 --> 0:15:54.360
<v Speaker 1>our governance stands up against any textbook. Look at how

0:15:54.440 --> 0:15:58.880
<v Speaker 1>you should respond to your constituencies and our social engagement

0:15:58.960 --> 0:16:01.240
<v Speaker 1>both with the community, using the companies that we serve,

0:16:01.320 --> 0:16:04.160
<v Speaker 1>as well as in New York and London where we

0:16:04.160 --> 0:16:07.320
<v Speaker 1>have our headquarters. I think, you know, we can always

0:16:07.360 --> 0:16:11.000
<v Speaker 1>do better. Uh. And there are some things, particularly on

0:16:11.640 --> 0:16:16.320
<v Speaker 1>gender diversity, racial diversity, UH, that are important to continue

0:16:16.320 --> 0:16:19.440
<v Speaker 1>to work on. But you know, these are all things

0:16:19.480 --> 0:16:22.440
<v Speaker 1>that are sort of a net plus as we go forward.

0:16:22.600 --> 0:16:25.320
<v Speaker 1>And that was Don go Gel an important voice, and

0:16:25.440 --> 0:16:28.560
<v Speaker 1>investing maybe getting more important as there's more and more

0:16:28.640 --> 0:16:33.000
<v Speaker 1>scrutiny as you heard about the world of investing. You've

0:16:33.000 --> 0:16:35.840
<v Speaker 1>been listening to Bloomberg Business Week extrava sire to tune

0:16:35.840 --> 0:16:38.760
<v Speaker 1>into Bloomberg Business Week Radio Live Monday through Friday at

0:16:38.760 --> 0:16:41.520
<v Speaker 1>two pm Wall Street Time. I'm Jason Kelly, and this

0:16:41.800 --> 0:16:42.400
<v Speaker 1>is Bloomberg