Scott Sperling on Innovative Investment Strategies (Podcast)

with some of their bigger deals. They did to Warn, a music deal that was a multibillion dollar deal about twenty years ago. Duncan is a group of franchises from Dunkin Donuts. Perhaps the biggest deal they did, or or the most mind share was the Snapple deal. They bought Snapple, they took him public, they facilitated the sale to Quaker Roats. That was really the first time I had private equity

on my radar. It's like, really, someone just came along and said, here's hundreds of millions of dollars for Snapple, and let's sell them for a billion dollars, take them public. It really fascinating, fascinating story. UH Sparling is as knowledgeable about private equity and valuation and how that sector and entire industry really is changing. Oh I forgot to mention he ran alternative investments for the Harvard Endowment for about

a decade. Really super unique perspective and just uh fascinating insights into the sector. If you are at all interested in in private equity, in the nature of these transactions and how alternatives are changing, then you're gonna find this to be really a fascinating conversation. So, with no further ado, my discussion with co CEO of th h Lee Scott Sperling. This is mesters in Business with very Renaults on Bloomberg Radio.

My special guest this week is Scott Sperling. He is the co chief executive officer at Thomas H. Lee, of famed private equity firm. He's also a member of the firm's management and investing committees. From four to two thousand and six, th h L raised over twenty two billion dollars in six institutional funds and completed more than a hundred investments. Currently, their flagship funds has about five billion dollars and the Automation funds about nine hundred million in

LP assets. Scott Sperling welcome to Bloomberg. Well, thank you. It's a pleasure to be here with you. So let's start a little bit with your background. You were at the Boston Consulting Group long before Uh, you're an asset management. Tell us about your years as a consultant and how did that lead into private equity. Well, I joined BCG out of business school. Uh, And there was no great

intent on my part. I was twenty three years old and had lots of loans, and consulting was one of the higher paying jobs you can get in those days. But it was a great experience because it really put somebody who was young and reasonably inexperienced in a place where you can apply the kind of analytics that you get used to in business school to the real world working with C suite executives at very large companies around

the world. So the experience there was, you know, really quite intensive, and for me, it was about three and a half years of just being fed with fire hose of exposure to senior managers who were running some of the most interesting companies globally. And you eventually end up running alternative investments for the Harvard Endowment funds. You were there for more than a decade, how did you find

your way to the Harvard Investment Company. So it was one of those moments in life where you get a call out of the blue and you're asked to consider something that you'd never considered before or even truly understood. And Walter Cabot, who had started the Harvard Management Company, it's one of the first third party managers of a

major endowment. It was wholly owned by Harvard but run completely separately under Walter's leadership, had decided that rather than sticking with a typical thirty five split of U S, domestic equities, and and bonds, he wanted to expand in some new areas. And he made the decision that rather than bringing somebody in with the typical investment management background, they want somebody with more of a business analytics background.

And I went in was incredibly impressed with Walter and his vision for where he wanted to take the management company and how he was looking for ways to really give the endowment an ability to participate in areas that he felt had higher risk adjusted returns go forward basis.

And he convinced me that this would be a great thing for me to do, and I started there, and we opened up activities in what in those days we thought of private equity, mostly as venture capital, but then moved into the buy out space, investing largely in funds and then doing some co investing. There was some real estate holdings at Harvard already had, but that was an area that I was given and then what we ended up calling commodities, which was largely oil and gas and

timber in those days. And so it started with almost nothing and grew to a little over of the endowment by the time I left eleven years later, so that was more than a decade. When did you end up starting there? What was the date? So I started in UM eighty four and left in late we're recording this not long after the David Swinson, who's been running the Yale Endowment for decades has passed away. This seems somewhat similar to the model that Yale was using under under Swanson.

How much competition was there amongst the ivys um for performance and how much did each of the endowments that you were familiar with, How aware were each endowment of what the others were doing. Was it sort of collegial or was it, you know, competitive, I would say it was more collegial in those days. As we pushed into some new areas, we would often not only cooperate, but there was some level of collaboration. So we had pushed

into again venture capital and and early buyout. In that eight five period, David was starting at Yale and he was similarly doing some of the same things. We worked together are on a number of oil and gas opportunities, so there was a level of cooperation that underlined a lot of what we did. UM. Now, I think Harvard accelerated a little more quickly than some of the other i'ves did into these areas. We had the strong support of the Harvard Corporation UH to UM explore these kinds

of activities. I would UH often do presentations to them about how it was going, and we had reasonable early success, which which helps UM and UH I think is UM. As it became comfortable for Harvard to do it, others

U others also jumped in UM. I think Yale about simultaneously, and some of the other Ivy League endownments followed quite in drinking, so the world of alternatives has certainly changed, and your involvement dates back almost forty years what do you see as some of the biggest changes that have taken place in private equity? Well, I think the the nature of what we have to do to drive superior returns continues to get more labor intensive, requiring higher levels

of value add. Early on, I think there were lots of opportunities UM that did not require the level of intensity of UM, either operational value add or necessarily UM UH the ability to use acquisitions as platforms for UM UH consolidating industries. The returns were often driven by the ability to enter at multiples that are significantly lower than

what we typically see today. UH. The use of leverage was not all that well known, particularly in the early part of the eighties and mid eighties, and so in the the the buy outside of private equity UM, there was an opportunity that that really doesn't exist today to to buy things so very cheaply relative to their intrinsic value UH, and then you were able to ride that to relatively strong returns I think today UM. And you know, really for the last decade, you know, pricing has been

anywhere from fair to frall fee UM. And in order to generate the kinds of returns that we expect UH, and that our investors expect UM. You know, our organizations are dramatically larger, have much higher levels of that pertise UH and much higher levels of specialization. So UM, you know, it's still a really good business to be in UH, something that I think has brings together both investment skills and UM the ability to participate in UM growing really

important enterprises. UH. So you know, as an individual, UM, you know, it's a it's a continues to be a a fun and exciting place to be. But the nature of an intensity of the work that we have to do to as I mentioned, sustain these high returns has

certainly increased dramatically. So I know you didn't get to Tom and h Lee until the mid nineties or so, but I have a vivid recollection of the Snapple deal that they did uh in two and really that was my first recognition that hey, private equity has some real firepower the and and back then these were all called l b o s or buyouts or what have you. But but that seems to be like a real turning point UM for pe. What what's your recollection of the

significance of that deal? Am I making too much of this or was that like a really big moment No. I think it was a really big moment. UM. You know,

I joined in ninety four. UM, the Snapple investment was made in and monetized and the the ability to buy a company and make your money on the growth of that enterprise, as opposed to the traditional buy out up to that period of time, which was to buy large enterprises that might not be as efficient as they should be often had a aggregation of dissimilar businesses where there

was value to disaggregating those businesses. You know, A model that applied to the great majority of of of buyouts that were done up through that period was something very different than the ability to identify a company that had the ability to significantly grow revenues where you can bring at least some strategic direction uh to the founders of

that company that allowed for the growth to accelerate. And that's one of the things that we saw on Snapple, and that became a model for a lot of other things that happened, UH in the industry. UM. You know

in the mid nineties. UM. You know, my UH partner Tony donovi and I, UM we're involved in the UH the buyout of the tr w H business, UM, the information services business that became Experience uh, and some early things like fish or scientific um where we were identifying opportunities um uh where the ability to significantly grow the enterprise was how you were making your money again, not not just on buying something that was inefficient and uh

perhaps aggregated in ways that uh made less sense than disaggregating them. So to clarify this isn't just saying, hey, that's a good company, but it's inefficient and we can make it run better. Are you really talking about strategically redeploying the assets of a company in order to generate a faster growth rate, a better return, etcetera. I think

that's a fair characterization. Yes. And before we get into more details about private equity, I have to ask CO C e O S, how how is that working out? Some firms I know find it really challenging to do that. I've been doing it for over twenty years. It's worked

out extraordinarily well. I think we try to bring together talents that are complementary, and you know, when you're looking at the broad range of tasks at hand with the firm like ours, it's always nice to have a partner to talk to, divide and conquer, makes it makes a lot of sense. So mentioned earlier, some of the valuation concerns that the market is certainly less cheap than it

once was. Let's talk about alpha in private equity in general, and the idea that private equity had access to companies at lower multiples across the board, lower than the public markets, lower than a lot of private market pricing. Is that just now a historical footnote and we'll never see that again, or is this one of those cyclical things that rises and falls with like everything else. Well, I've I've long learned the hard way that I'm not great at predicting

the future in lots of different ways. So I can't tell you that will never see it again. What I will say is that there is an awareness on the part of sellers of the value of leverage. That was something that was less well known in the eighties and even in the early nine nineties, And the nature of what we do really is much more dependent upon picking industries and sectors and subsectors wisely and then having the ability to drive operational value improvements at these portfolio companies.

That is a skill set that requires a large number of expert individuals who have specialization both in domains, the subsectors or industries that we focus upon, and also a high degree of expertise in being able to improve the key business processes of companies in ways that allow that company to increase its competitive position such that we can drive higher rates of growth on the revenue side, make the company more efficient so that we can drive even

higher rates of growth on the profit and cash flow side. So so let's stick with this topic because it's really, you know, a key issue underlying markets these days. There's an observation and I'm not sure if I'm paraphrasing or this is an exact quote, but quote, it is problematic for asset valuations when company multiples are disproportionately high when compared to the company's true growth rate unquote. Give us

a little more flesh on that. So, you know, generally, we're trying to buy companies reflective of what you might call the intrinsic or fair value of the company. And as we've looked back over time, the key drivers of that would be the return uninvested capital characteristics of the specific company, and more broadly, the industry and Secondly, and perhaps you know over a broader range of calculated outcomes, it would be the sustainable growth rate of the company.

So we're very focused on buying companies where the acquisition multiple is reflective of what we believe to be the sustainable growth rates of that enterprise might be. And one of the things that we have learned over time is you can pay a reasonably high acquisition multiple if you believe that sustainable growth rate is about that same category

as the acquisition multiple. So for example, you know you could pay fifteen times for a company, but you would like to believe that that's growing at about k you're on the EPIDA or cast flow side. What you don't want to do is pay fifteen times for something growing

five or seven percent. And so you know, as we look at the world, there are enterprises out there that that are in the sectors that we think have very significant growth opportunities going forward, and um you know you're going to pay a multiple that is reflective of that. Just try to stay away from paying um uh multiples on the d A of the company that is um a much higher number than that sustainable growth rate. So

so capital these days is both plentiful and cheap. What does all this cheap availability of debt due to the playing field, how does it affect both the availability of deals, the attractiveness is of deals and competition? Well, the uh, you know, it's a funny thing people, UM say, what's going to happen when interest rates go up? Is it's going to make your business much tougher. And what we normally see when interest rates rise is the obviously the

inverse on multiple side. And that's because there's a clear relationship between you know, the cost of capital and the multiple you can afford to pay for a company. So I think those things tend to self correct UM if we move away from UM this UM uh relatively inexpensive debt debt capital that we are currently seen. UH. Clearly, the very low base rates that we have UM have allowed the markets to achieve overall multiples that are higher than on an absolute basis than we've seen it UM

at many points in history. And I would expect that if the base rate increases that you're going to see some contraction in market multiples and that will flow through to to what we see on the buy outside as well. M really really quite interesting. So so I mentioned the Snapple deal from nine two. You guys picked that up for a song before bringing in public and then eventually having it UH taken over by Quaker Roads. UM, and I think the initial price was something like three million dollars.

Today we see deals in the billions of dollars all the time. How different is pe deals in terms of size compared with a decade or two ago. Well, a decade ago we were seeing some very large deals. Are you were seeing some billion dollar buyouts. A decade before that, you were orders of magnitude lower. So you know, it's your point. Most deals were being done less than a

billion of enterprise value. In the nineties. There were a handful of deals that were done that were significantly larger than that, but that was those were more anomalous than the than the norm. UH. Today, UM, you're seeing again a return to transactions that are in that UH five to billion dollar enterprise value range. And there are a lot of things being talked about that are actually larger than that. So you know, UH, private equity UH will

UM continue to look for transactions. UH. Individual firms will look for transactions that are appropriate relative to the size of their funds. UM some of us are focused on what we would call middle market. Uh, we are focused on middle market growth companies. There are other firms that are spanning into you know, what you would call very very large enterprises. And again that reflective of the fun sizes that some of them have raised or our targeting.

So when the Warner Music deal was done, I think that was two point six billion. That was a pretty big deal for for Thomas Lee back then you were there, what do you recall of that that deal, which many observers have said is has been transformational for a lot of the music industry. Well, we were looking at the opportunity to buy a iconic company that had been part that clearly was was a key part of the history of Time Warner, but where the parent had kind of

moved beyond that particular sector. And we believed that the ability to see a transformation in the way music was distributed presented a broad set of opportunities that we could

reasonably quickly take advantage of. And so we and our partners, particularly Edgar Bronfman, who we brought in as the CEO of the business and who had a long and deep experience base in music and entertainment more broadly, had a plan that we were able to implement very quickly that allowed us to see a significant growth in the cast

flows of the company. And you know, it was one of the deals that was a precursor in many ways to the model we see today, which is be able to add significant operational value to a company in ways that that allow it to that allowed it to significantly increase its cast flows and sustain higher rates of growth in those cast flows than it otherwise might m interesting and one of the areas that h L specializes in is uh financial services were you've had several exits in

that space. Tell us a little bit about how you guys developed on expertise in that area, how do these deals take shape, who are the buyers, etcetera. We had long participated in different parts of the financial service world, early on looking at opportunities in balance sheet driven businesses, banks, reinsurance companies and had developed a successful track record there and that migrated to looking at companies in more of

the fintech area. And you know, as I think it's you know, all publicly known, we were the key financial partner in the f I S transaction that was done with Bill Foley and Fidelity National, UM, A couple of our partners, Tom Haggertyness Row, plus a number of others have been very involved in a broad range of transactions since then in that sector. And uh so, as you point out, it has been an area of specialization for us. Let's talk a little bit about health care and some

of your funds. I'm familiar with the flagship funds and the automation funds. Tell us a little bit about what their focuses are on and how they differ. Our strategy has been to identify certain subsectors that we think have

pretty extraordinary growth characteristics. And one of the ones that we have been involved in and have have talked about a lot over the course of the last five or six years has been automation, where we believe that there are very strong, sustainable secular growth drivers that are going

to be sustained for probably at least a decade. And um, we we are in a world where um we know that there are significant labor shortages, UM, where there are um uh strong secular trends like to move to e commerce,

all well known to everyone. UH. And we've seen the ability of companies that have developed capabilities and technologies to automate a whole series of processes, both industrial and on the distribution warehouse side, that enable us to fill the gaps that can't be filled because of the difficulty of finding employees, to automate jobs that are more mundane and allow employees to be really focused on the higher value

aspects of their of the tasks at hand. And these companies continue to uh to find new areas to expand into. So we're going to see much more automation in the office space, and financial services and healthcare, all again things that will improve productivity, fill gaps unemployment, and allow employees to see the benefit of that improved productivity through higher wages that can accrue to the existing employee base because

of the improvements in productivity and profitability. So we've been hearing, i don't know for a century, maybe longer. May go back to malthis that automation and technology is taking jobs away from people and pretty soon half the society will be unemployed. That hasn't really seemed to happen. You you mentioned the skilled service shortage and and the difficulty and filling not just entry level positions, but you know, high

level technical positions. Why is there such a skills gap and what is automation going to do to fill that gap? The you know, the skills gap has been, as you point out, well known for quite some time, and I think there is a enormous and appropriate focus on making sure people get the education and the training to allow them to fully participate in the technologies of the future and the the job sets that are opening up in

those areas. Automation again is going to be able to fill in for the jobs that um, you know, people really don't want to do, and also allow for improvements in the projectivity that will allow companies to sustain higher levels of compensation for their employees and still deliver the profitability that their shareholders and other stakeholders are looking for.

And so automation will play an increasingly important role in broad range of industries as we go forward, and allow for the retraining of employees into areas that again are higher value and are being sought after by employers both in this country and on the world. So let's talk a little bit about the healthcare space. Obviously, the vaccine changed the way a lot of people think about, uh the sector. What opportunities do you see in in healthcare,

including pharma and biotech. Well, I think we we have seen, UH, you know, something pretty amazing over the course of the last fourteen months, which is the ability from a standing

start to rev into a pretty amazing product. When you think about the the number of effective vaccines that we now have, UM, I think most interesting has been the development of the m r n A vaccines because that's not just a single product, but that is a platform UH that has not produced UM therapeutics or vaccines before that can now be utilized to address a range of both vaccine opportunities, but also on the therapeutic side, yet

one more tool against cancer and other rare diseases. So UM, I think the example of UM what we've seen over the course of the last year UH is um UH not just a one off, but is actually a microcosm of the opportunity set UH that exists in healthcare UM as the number of tools and technologies that we develop are allowing both a faster and more effective development of a broad range of therapeutics and diagnostics UM that go right to the heart of solving a number of difficult

disease states across various cancers and cardiovascular diseases as well as a number of other areas. So we're going to see, I think, a continued explosion, if you will, of of therapeutics and diagnostics. And there are entire industries that have been set up to support the companies that have the innovative science that they will develop into those drugs and um. The ability to provide services to the specific pharmas and biotechs who have the innovative science is something that you know,

we and many others have been focused on. So whether it's the outsourcing of the clinical trials through c ROS, it's the ability to provide a broader range of products and services. It's the ability to take some of the commercialization activity, whether it's salesforce or the development of selling strategies more broadly and help these companies do all of that while allowed them allowing them to focus all their

energy on the innovative science. You know, that I think is good for the world as well as presents a broad range of investment opportunities. Really interesting you mentioned things that took place last year, obviously a COVID nineteen pandemic year. How did that change the way you think about investing? What was different for you whether it was working from from home or just thinking about the impact of the pandemic, how did affect the way you think about healthcare invest

now UM. I would say that the biggest impact was the recognition that, UM, you know, there are a set of tools out there that allow you to operate in a virtual world incredibly effectively. And for us, those are tools that you know, we had not used before UM, and we're finding that they'll be incorporated in how we

do business going forward. In terms of UM the opportunities that in healthcare, I don't know if there was any great UM realization UH of new opportunities coming out of the pandemic, as much as there was a reinforcement that, you know, we are in a world where the you know, as I said earlier, UH, the ability to support companies that are able to provide a broad range of UM

of UM services UH to the pharma and biotech industry. UM. You know that that is UH continues to be an enormous and expanding opportunity set UM and the ability to UH support companies that are able to provide various forms of care UM at more effective prices UH so that we can reduce the total medical expense to the system is um is something that is worth focusing upon. So, you know, I think the the pandemic um uh in terms of healthcare investing reinforced a set of opportunities more

than created uh any truly new opportunity sets. Huh. Really interesting. I don't know if you can answer this question, but but I have to ask, having observed this from a distance as well as anything I've ever done in terms of medical services, why is the US healthcare system so inefficient? There just doesn't seem to be any universal stand to its for for files or test results. You would think this would be perfect for technology to fix, and yet here it is, and it's as much a mess as

it's ever been. Why can't we fix this? You know, it's a really interesting point, and I would say that, you know, first start with the question about what are the right metrics and why can't we measure them uniformly across the system? And one of the things that I found has been in chair of the match RYTHM Healthcare System for a number of years, and it's one of

the countries. In fact, the country's leading high end clinical and largest research and teaching institution is the complexity of disease states the nature of patient condition is so complicated that at the very high end, which is where much of the cost is, it's very hard to get apples to apples comparisons. And that is exacerbated by the fact that the most difficult cases will flow to the highest end providers, will flow into a mass General Hospital or

Brigham Women's Hospital or Mayo Clinic or Cleveland clinic. And so you know, you might be looking at data that says, people with a certain heart condition, you know, here here the outcomes, but um, it's not as comparable as you would like to see it because the people with significant comorbidities and more complexity are going to flow into those

highest end providers. UM and UH. Even though the the the description may be similar, the nature of the condition and what you do to deal with UM that condition UM uh is UM very different. So let's start with the fact that it's hard to get true comparisons, as you were referring to across the entirety of the health care system. But even with that, UM, you know, there there are lots of ways that we can improve the efficiency and information flow to patients and reduce the total

medical expense of the whole system. And I think there's a lot of work being done. I know at Massonal Brigram there's enormous work being done to look for ways that we can make sure that a patient with a certain acuity or complexity to their condition is treated in the right place with the most effective but cost effective

as well care. And that requires an enormous amount of effort and changes the culture and changes to structures that I think will be something that we see accelerating around the country in order to deal with this issue of of high um medical expense. Now, I would also note that, uh,

the United States benefits right now from having extraordinary healthcare. Uh. And you know, one of the proof points of that would be the number of people who come from all all over the world for the care, particularly at the very um high end of the acuity um level. People who are reasonably sick want to come and be treated here. Uh, not as much people here going to other places other

than the so called medical tourism. And and that's the strange paradox is the level of care here is so good, and yet systemically the entire operation is it seems to be just so chaotic it's really kind of fascinating that the more granular you get, the more specific you get, the better of the treatment is. But step back and look at the entire system, it's expensive and doesn't always

have great outcomes. Well, you know, and again I think it goes to this issue of are we measuring things correctly and do we have the tools, as I mentioned earlier, to actually measure things appropriately And because of the incredible complexity and specific nature of um of patients conditions, it's often hard to do that, and so um the proof points are are more um in the outcomes that we

see for patients with extraordinarily difficult conditions. The way that we provide care on you know, the more primary and secondary side is something where it's a lot easier to look on a comparable basis across systems to see what the most uh effective and yet cost effective ways of providing you know, primary and secondary care might be. On the church earing coortinary side, it gets a lot harder

for the reasons that I just mentioned. Let's talk a little bit about how rapidly these markets came back and what that might mean for the alternative space. Were you surprised at how quickly the market collapsed and then snapped right back to what it was doing pre COVID. I was less surprised by the nature of the collapse, given the fact that we had this unprecedented shut down to our economy, uh, and much more surprised by the speed

at which it came back. I think, you know, early on people were dismissing the possibility of a V shaped recovery, particularly a sharp V. And Um, those of us who were doing that were completely wrong. Uh. I think what we didn't anticipate was the unprecedented level of both monetary and fiscal support uh that that we saw occur here in the United States as well as around the world. M um. And and did that create any unique opportunities

for investing during during COVIDD? Did anything bubble up more quickly than it might have otherwise? I would say distressed opportunities were here and then gone in about a nine a second. Uh. There were a few few things that got done in the industry that I think, um, you know, was characteristic of distress investing, But um, you know, primarily that that disappeared as we saw that very sharp V shaped recovery. So much of what what we were doing was again focusing on areas that we felt had that

strong secular growth to it. Uh And one of the offits of strong secular growth as it tends to be less adversely affected bicyclical downturns um whether it's caused by a normal economic cycle or in this case by the pandemic that again led to an unprecedented shutdown of the economy. So some folks are describing the current era as as late cycle or late business cycle. What sectors do you find attractive if it's late cycle, What what businesses are

you kinds of businesses are you looking at? You know, for us, it's again the areas that we've we've had very long basic experience and that we think, you know, we'll be able to to ride through a more traditional economic cyclical downturn. And so that would be things in the financial services. In tech space, we talked about healthcare, where we see again a broad set of opportunities that

tend to be less much less cyclically sensitive. And then the the areas of technology and automation that will continue to be deployed almost regardless of the economic cycle. And it's not to say that these areas won't see some

adverse effector economic cycle. I think they they generally will, but it will be a much softer downturn than you'll see in industrial industries, process industries and um, you know other sectors that have tended to m to see much sharper ups and downs as we go through the traditional

economic cycles. So you mentioned the financial sector. I have to ask you a little bit about defy and and the potential challenge to centralize finance and currencies and and let's break that into things like financial apps and services versus let's call it blockchain versus crypto. How do you look at that universe. Well, so, we have traditionally been focused on supporting companies that provide technologies to the more

asset based part of the financial services world. So we were the sponsor of companies like Black Knight Financial, which is the largest provider of technology services to the mortgage world mentioned f i S. We are very interested in companies that can help the various parts of the insurance

value chain do their jobs better. Wealth management, again, is a is a really interesting sector that we've participated in and where we think that there are ways of improving the ability to serve clients through the utilization of technology. So in the financial services world, we've generally been focused on how to help the kinds of companies that directly serve consumers and businesses in their key business processes. Blockchain is an interesting technology in that regard that I think

we're still in very early innings. I would separate blockchain from cryptocurrencies like bitcoin, even though they're often put in the same category. We have not really focused upon the cryptocurrency side. It's not it's not in an area that that we have any traditional strength. And you know, obviously we've been fascinated to watch the the explosion and the valuation of these cryptocurrencies, but I don't really have a

strong view on it. Kind of kind of interesting, and we've been we've been talking about growth rate and valuations. When you look at spaces like blockchain, how do you come up with a value suation method for a particular company. Are you just guessing at future discounted cash flow? Are you trying to ballpark where the market might go? When a technology is so young, it seems like it's practically

impossible to come up with a reasonable valuation. Yeah, I think you're you're pointing to something that that probably is characteristic of the differences between the venture capital side of private equity and the buy outside and growth equity side

of private equity. So I think on the venture side, when you're investing in very young technologies, new technologies, you know you are making a very broad based bet without the ability to have any level of precision about what those numbers will look like in any given one to three, let alone five to ten year period. What we're trying to do on our side is invest in companies where we think we have enough data to have a reasonably high probability of achieving a at least a three to

five year set of projections. Obviously a lot harder to go past that, and so we spend an enormous amount of time trying to model out, particularly the first three years of growth of of a given company, looking at the broad range of market conditions that allow for that growth, and where that specific company maybe in the competitive set

of companies trying to serve that market. And so you know, we're making less of a of a venture bet and more of a bet on something where there's already at least sufficient data to be able to do the kind of detailed analytics that we like to do to have a reasonably high degree of comfort about at least what the next three years are going to look like. Quite interesting, and and I know there's that distinction, and it's really

challenging to, uh, to manage it. Do you look at the word disruption and think, oh, not exact cliche again, or is that a legitimate resonant description for for some of the new technologies that are coming along. Oh, I think it's you know, a crucial word in the investing universe, because what we're trying to do is look for companies that are on the right side of disruption and always be aware of the business models that could be disrupted by new technologies or new entrants that bring in a

very different model to a given industry or sector. And so we spent a lot of time trying to make sure that, you know, we are on the right side of that, as I just said, as opposed to being put in a position our entire business model can be undermined by new entrance who disrupt the traditional way that business is done in that industry. So so, speaking about traditional ways of doing business, in my research, I noted that when you guys did the Duncan Brands deal in

two thousand and five. They were one of the larger franchisers of Duncan Donuts restaurants. You didn't just do that by yourself. You you had Bank Capital and the Carlisle Group as co investors. Is that sort of transaction common it It sounds more like a traditional VC investment with

co investors than private equity. So there was a period of time where the size of the transactions or the nature of the transactions in private equity, in the buy outside of private equity, were required more than one firm, and it was a point in time when the availability of capital was really from other gps. Today we're in the world where we have just some phenomenal limited partners

who are anxious to be co investors in transactions. So in today's world, we rarely have another general partner in the deal. But back in the too thousands, and in fact even in the late nineties, it was more traditional, given the size of transactions and the size of our funds, to partner with another general partner or more than one general partner um UH to acquire a company. So you know, Main Capital UM was a partner of ours in a number of different transactions. Uh and um, Duncan Brands was

one of them. And we partner with Carlisle and a couple of things as well. And UM you know that, Um, that has really evolved more uh in today's world to a single GP buying a company with the support of their limited partners who co invest in that deal. Uh. Now we're also seeing some rather large transactions happen again. Uh. And in those transactions, you might you're starting to see, you know, the so called club deal come back, um, because the the ability to under those transactions may require

more than one general partner. Um. Uh. So you know the world you know is you had mentioned earlier about conciclicality, the nature evaluations going up and down. Uh. You know, UH, if you're in this business long enough, you you will often see trends that you thought might have disappeared come back. And I think we may be seen to come back of the so called club deal uh, where you club together uh two or more general partners to acquire a company.

That's really that's really interesting. It's um, it's kind of fascinating. I had no idea that the structure. I knew there were calls on LPs who put money into a fund. But I never realized that when a big enough deal comes along, they might be UM less limited than what we traditionally think of as limited partners. Is this the future of private equity? Is this going to be a big aspect? And the reason I asked that is Vanguard and some other large public investor non accredited investor shops

have been looking to access more private equity. This seems like a very different model. Well, I think it's something that's been developing over UM, you know, the last decade. Uh. It's something that we've been very focused on. Is the strategic partnership that you can have with your limited partners. I think a lot of firms in the industry h have been thinking about it in a similar way. UM

and UH. It allows you, particularly in a world where it's not clear what the pace of investing UH could be if one's trying to sustain, you know, the kind of high returns that our investors expect and that that we want to be able to provide them. UM. Uh,

it allows you to size your fund in ways. UM. They give you a reasonably high level of assurance that you can maintain the disciplines UM that you want in order to achieve those returns and allow you to scale up on transactions that are on the larger side of what your target universe uh is So um the strategic partnership UH there I think is important to the GP

and for the LPs. It's a way of participating more broadly in private equity where you're not um uh necessarily paying the same kind of fees uh and U profit participation to the GP that you would on the investments that you make directly into their funds. All Right, I know I only have you for another twenty or so minutes, So before I get to my favorite question, I'm gonna throw you a curveball. And that's for For decades, you sat on the board of the Dolins Controlled Cable Systems UM.

And this year, first time in a long time, the Knicks are having a decent year. So what's it gonna take to get the Dolins to finally sell the team? What do we have to do? So I was on the board of MSG. I'm not sure it was for quite that long. Uh and um uh. The you know, the team certainly had UM as you point out significant ups and downs and you know even more, I guess um significantly uh you know, a long uh period of not getting anywhere near the success that pants had wanted.

And I'm no longer on the MS tad or or two. Um. But you know the team, you know that I really think they're on the right track now, you know, I think, um Leon Rose has done a very nice job of putting together a team UM that has a lot of upside to it, uh with a coach that you know has finally returned the team to its roots of being a very tough, defensive minded um uh squad um uh.

And so I'm I'm optimistic about the future. But as a longtime Nicks fan myself way before I joined the MSG board, UM, I'm just very happy to see uh see the success they've had this year. Let's jump to our favorite questions we ask all our guests, starting with what are you speaking of? Of MSG and various channels? What are you streaming these days? Give us your favorite Netflix or Amazon Prime, whatever's keeping you occupied and entertained

during lockdown? Well, my wife and I have kind of gone through, um, almost everything one can watch on either of those channels. I mean, i'd say our favorites were things like Queen's Gambit, which I think lots of people UH have really enjoyed. Um. Uh you know, there's a wide range of of um, other things that that go that go across a number of different genres, from Bridger Tin type thing too, um um the great on Hulu. UM you know, so um you know we're always looking.

We probably spend ten minutes trying to figure out what to watch almost every night. So um, you know, lots of different fun things. Uh. And UH tell us about some of your early mentors who helped to shape your career. So um you know, I would say one really important mentor very early on was Walter Cabot, who, as I mentioned earlier as the CEO of Harvard Manament Company, actually

started Harvard Manasamon company for Harvard. UM and just a remarkable individual who um I think had both great success um in traditional money management and yet also had the foresight to push Harvard into areas that at the time, UM, you know, we're not consistent uh at first thought with what they used to call the reasonable man rule, which was a general rule about how um the nature of the risk one could take with endowment UH and foundation

assets UM. And Walter was incredibly supportive of the uh the efforts that he had me undertake to to move Harvard into these UM alternative assets spaces well before almost any other UH endowment or foundation. UM and UM he uh uh you know was just uh an extraordinarily smart and supportive boss to have and really launched me into the career that that I have now. UM and you know, there were people along the way who taught me lots

of different things. I remember Floyd Qualmie at Cliner Perkins, who UM we co invested with when I was at Harvard. He was one of the general partners at Clina Perkins, and we served on a number of boards together of early kliner companies and UM you know uh Floyd was a founder of National Semiconductor and UH a individual who had great UH operating and technology experience and really learned a lot about how UM uh young dynamic growth companies work from UM somebody like Floyd. UM you know Tom

Lee UH when we worked together. UM you know, Tom had had this great ability to really like UH any deal UH and UM what he was you know looking at was an uh an ability to um uh look for the opportunities that on things and UH learned uh UH learned a lot of that from uh from Tom and UH you know, as I go through um the various uh relationships I've had over many many years, UM, you know, there have been an extraordinary number of of people who U, even though they were more uh on

the pier side than the boss or older mentor side, UH, that I've been able to learn from. And UH. One of the great experiences um uh that I had UM is working with John MacArthur, who was the longtime dean of the Harvard Business School and who first got me involved in um the what's now the Master General Brigram Health System uh in uh when he was the chair of the BRIGOM and then became the founding co chair of what was then called Partners Healthcare, which is now

morphed into the Masioneral Brigram System. And you know, John was an iconic figure at Harvard Business School. Uh. He and I shared rugby in commons, so I had gotten to know him a little bit through that. UH and then UM you know watched his ability uh to look at m a situation UH in ways that were innovative and different than what almost anybody else was thinking, uh, and how he was able to turn a lot of

that into new realities. And UM that's been uh something that I've long valued, both the personal relationship with John who uh passed away over the last couple of years, um uh, and um the learnings I got from uh his ability to take a step back, think out of the box, and then uh turn some out of the box thinking into realities. So let's talk a little bit about books. What are some of your favorites and what

are you reading right now? Um so um you know, right right now, I have a few I'm reading kind of a range of things. UM. You know, I think that and Colins book Built to Last is pretty interesting right now as a kind of a a survey a wide range of um, different companies doing things differently and and um trying to understand um you know, how you make breakthroughs and and um places that have um uh a long legacy of success. UM. I've had fun reading

the Dynasty. The Crafts have done such a remarkable job at building h a a franchise UM that I think sets the standard for sports teams UH and other organizations, other types of organizations. UM uh you know there are some interesting areas. UM. I've liked AI Superpowers um as a way of really understanding China uh and what they're doing and how they approach UM. That uh incredibly important

uh area. UM. I recently reread The Best and the Brightest, which was probably about my fifth time, because I think that they're you know, there's continued lessons to be had about how we approached the world um and the importance uh of of avoiding Hubert UM. So you know, there's a there's a range of things I think are really interesting, uh quite quite fascinating. What sort of advice would you give to a recent college grad who was interested in a career in private equity? You know, UM, it's a

great business. It's a great business, it's a great area. Um Uh try to get involved in it if you really fundamentally love building businesses. UH. They're probably easier jobs to have, um if one's looking at it just from the financial aspects. UM. I really do think our industry is about helping make companies better uh and um uh being involved with management teams UH that uh can be true partners UM. So if that's what excites you, if

you're really interested in helping build enterprise. This is a great a great industry to do that from. And our final question, what do you know about the world of private equity and investing today? You wish you knew almost

forty years ago when you were first getting started. UM. So it's a really it's a it's a fascinating thing because I'm not sure there's there there there is one thing, but you know, I think understanding that, UM, there are points there are there are various points where you think, UM, you know the downside uh is reasonably limited, where it's not. Things can always be dramatically worse than you might ever anticipate.

But conversely, UH, there there are opportunity sets out there that one needs to uh to imagine clearly with some analytical basis, but one needs to imagine as upsides that. UM. You know you are not part of conventional thought UM, and so understanding that the range of outcomes can be much more extreme than you think, UH is something that that you learned over time. UM. And being unbound by often conventional thought is one of them or critical UH

skills to acquire you're in our industry. Huh really quite quite fascinating. We have been speaking with Scott Sperling. He is the co chief executive officer of Thomas H. Lee. If you enjoy this conversation, well, be sure and check out any of our previous four hundred such conversations. You can find those at iTunes, Spotify, wherever you feed your podcast fix. We love your comments, feedback and suggestions right to us at m IB podcast at Bloomberg dot net.

Sign up for my daily reads at rid Halts dot com. Check out my weekly column on Bloomberg dot com slash Opinion. Follow me on Twitter at rit Halts. I would be remiss if I did not thank our crack staff that helps put these conversations together each week. Michael Boyle is my producer. Attica val Brun is our produ manager. Tim Harrow is my audio engineer. Michael Batnick is my head of research. I'm Barry Retolts. You've been listening to Masters in Business on Bloomberg Radio.