Transcript: Sachin Khajuria – Two and Twenty, An Insider’s Take on Private Equity (EP.

285)

Published Date: December 5th, 2022

Length: 52 Minutes

Web page: https://capitalallocators.com/podcast/two-and-twenty-an-insiders-take-on-

private-equity/

Sachin Khajuria is a former partner at Apollo and twenty-five-year veteran of private equity who recently
authored “Two and Twenty,” a fantastic insider’s account of the private equity industry.

Our conversation covers Sachin’s rationale for writing Two and Twenty, the strengths of private equity,
areas for improvement, and needs for change. We discuss the defining traits of the industry across the
sourcing process, depth of research, use of operating executives, ability to pivot, and democratization of
alternatives. We close by discussing opportunities and risks going forward, and Sachin’s application of
his insights to investing at his family office.

The content and use of this transcription is intended for the use of premium members only. Unless
expressly given permission by Ted, each premium subscriber can share two (2) transcripts with two (2)
non-subscribers, after which they should consider a premium membership. Corporate members can also
share transcripts within their organization (up to 50 employees). Please reach out to Ted at
ted@capitalallocators.com for exceptions.

All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the
opinion of the firms they represent. This podcast is for informational purposes only and should not be
relied upon as a basis for investment decisions.
Capital Allocators Podcast EP.285 Sachin Khajuria Transcript

Ted: 00:05 Hello, I'm Ted Seides and this is Capital Allocators. This show is
an open exploration of the people and process behind capital
allocation. Through conversations with leaders in the money
game, we learn how these holders of the keys to the kingdom
allocate their time and their capital. You can join our mailing list
and access premium content at capitalallocators.com.

00:32 My guest on today's show is Sachin Khajuria, a former partner

at Apollo and 25 year veteran of private equity who recently
authored Two and Twenty, A fantastic insider's account of the
private equity industry. Our conversation covers Sachin's
rationale for writing Two and Twenty, the strengths of private
equity, areas for improvement and needs for change. We
discussed the defining traits of the industry across the sourcing
process, depth of research, use of operating executives, ability
to pivot and democratization of alternatives. We close by
discussing opportunities and risks going forward, and Sachin's
application of his insights to investing at his family office. Please
enjoy my conversation with Sachin Khajuria. Sachin, great to see
you.

Sachin: 01:22 Great to be here. Thank you, Ted.

Ted: 01:24 Well, why don't we talk about your background that led you to
writing this book?

Sachin: 01:28 So I'm an investor, 25 years as a partner at Apollo. I'm now a

limited partner at a number of firms managing my family office.
And prior to that I spent a few years in investment banking at
the start of my career. But mostly an investor for most of my
life. And it struck me that a lot of my friends who are doing
great in their own professions, medicine perhaps, or academics
or what have you, started to invest as they progressed in their
own careers for their retirement, for their life goals and so on.

01:59 And yet for some reason, they didn't really understand or have
heard much about private equity, even if they came across it in
a professional context. And so it occurred to me over the years,
we should try to get more people with a baseline level of
understanding of private equity, not necessarily from an
academic, technical point of view, and probably not even taking
sides. But more about what is it really like on the inside as
someone who's in the GPs as well as an LP. And now of course
an LP across multiple firms? And that's what led me to the idea

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of writing this book, which really should be for everybody who

either has a pension or retirement plan, that may be going into
private equity or may meet private equity in their business.

Ted: 02:44 So from taking your experience over those years into writing
this book to show the inside of how these work, what was your
perspective going in?

Sachin: 02:57 Constructive, because I believe in what I'm writing. So

constructive, but realistic. And the way I would describe it Ted,
is trying to hold a mirror to the industry. What are the good
things you see as we all look in the mirror? Hopefully a few
good things, probably a lot of things that we wish were better
and maybe a couple of things that we wish just weren't there.
And so when you look at it from that kind of lens, holding a
mirror to the industry, much like the industry does when it looks
at a target, looks at a company to invest in. It's not just looking
at all the bad stuff or the good stuff, it's trying to get to the
truth of what do we really see? Do we see a business that has
strengths? What are they? What are the things that could be
done better? What are the weaknesses? And is there anything
drastically wrong that needs to change more urgently? And
what are the opportunities? And so I tried to look at the
industry from that perspective, constructive but realistic.

Ted: 03:56 Well, let's break that down. Let's start with the good. From the
inside, what do you see as what the good things are about
private equity?

Sachin: 04:04 The good firms that I've been involved with and I invest with
now, they really do think principles, not like advisors. They
really are in it with an alignment. And this is rare, it's easy to
say. It's very, very hard to do day in, day out, good deals, bad
deals, return of capital, potential loss of capital. They're really
thinking about it as if they had all the money in the deal as
opposed to them having a fraction of money in the deal and
most of the money coming from retirement systems, sovereign
wealth funds, what have you. And so that alignment is really
powerful when you see people really feel it Ted, they really feel
it; which is like, this is our deal, or if it's a mess, this is our mess
and we're going to clean it up. It really means that they're
fighting for you, they're in your corner.

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05:00 Of course they're making a great profit out of it, if it works out,
of course there's nothing to hide about that. But if it doesn't
work out, they're not consultants, they're not just walking away
and the best firms, they're almost better on defense than they
are on offense. So that's number one. Number two, the firms
that have gained a certain critical mass, they have what I call in
the book, the library. They have an amazing network of data,
executives, knowledge, knowhow, and this gives them a
fantastic edge even before you look at things like size and scale.
They have great information and they're able to capitalize on it.
That's not something you can just replicate by hiring a bunch of
folks. You could hire 20 smart investors from five different
firms, but you wouldn't be able to replicate the knowledge base
that's inside those firms.

05:58 So that's number two. And I think number three, and we talk a
lot about this in the book, the best firms have temperament.
They are very good at pivoting when they need to pivot, sticking
when they need to stick. And really looking at the long term. It's
not a trader mentality, it's not buy low, sell high. It's not like, oh,
what's the hot piece of information we can trade on? It's
nothing like that. It's very much like, we could own this for 10
years or more. What is going to get us to the outcome we want?
How do we recalibrate that outcome continuously? And how do
we then reverse engineer into what we have to do today to be
able to get to that outcome? And that takes temperament, that
takes the ability to leap when there's chaos, the ability to freeze
when you need to freeze. That takes a certain long term
perspective. So those three I think are the key things that I've
come across.

Ted: 06:55 On alignment, you said there are only a few firms that really get
this right. You could look at the economics, you could look at
the structure, and firms generally have variations of a theme,
but the same economic structure as it relates to say, alignment
with their LPs. So what is it about those few that get it right that
differentiates the ones that don't quite get it right?

Sachin: 07:18 Well, in a rising market, you're going to find all private equity
firms or most good private equity firms doing well, whether
you're looking at their buyout strategy, their credit strategy,
infrastructure, real estate and so on. It's when things get
difficult that you start to see bifurcation, you start to see the
tide going out, et cetera. And that's when the culture of the

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firms, which absolutely has to come from the top, is really

witnessed. That's when they have to bear their teeth. Because
things are difficult. It's not easy to just buy a company, put
some debt on it, wait five years, make a double, and then move
on. And I agree with you a hundred percent, most firms have
two and 20 or some variation thereof. How come some can't
beat the S&P whatever timeframe you look at, and some can?
Some continue to provide 500 basis points, a thousand basis
points above the S&P for long, long periods of time. How is
that?

08:09 And it absolutely goes to the culture and it's such an overused
word. It's almost like you can dismiss it like, hmm, culture, yeah
okay, whatever. But what I mean is, it's really the day to day
Ted. It's the blocking and tackling. It's not the sixes they're
hitting, it's not the home runs, it's the day to day, are they really
living the deal? And that comes from the folks at the top who've
probably been around a long time or they've been trained by
the founders of these firms, they breathe it really. That is what
makes the two and 20 work. You can have the formula, but it
doesn't mean you can actually make it work. And that's why I go
to the fact that this is really a people business. There's nothing
automated about it. There's nothing that a super computer can
replicate. There's no ETF version of private equity or private
markets more generally, it's a people business and therefore
you have to understand the traits and DNA of those people
because it's those people that are going to make the two and 20
work or not work.

Ted: 09:13 I'd love to hear an example of something you came across,
whether it was somewhere you worked, somewhere you didn't
work, someone on the other side of the table, where you saw
something that was revealing of the opposite of what you just
talked about, that they weren't doing things for the right
reasons.

Sachin: 09:31 I'm not going to name names or firms of course. And I've
worked at several firms, so we shouldn't make assumptions
where this is from. There's a deal investment committee and a
number of the partners are against it, because the data doesn't
support the thesis. Or at least there's enough doubt in the
thesis that at the purchase price that's mooted, there's not
enough room for error in that purchase price to be as wrong as
one could reasonably be wrong, if that makes sense. Unless

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there's like a Hail Mary solution that comes out from nowhere.
But because of relationships of the partner or partners involved
leading the deal, they get it through. The comment being, "Well,
we're doing this." Or "We're going to make so much money,
we're going to do this." And that did reveal to me, huh, you're
basically bypassing the best bit of the firm and the culture to get
the deal done. Now fortunately, I must say extremely rare, but
also equally unfortunately in both cases resulted in a very poor
outcome. In fact capital loss.

Ted: 10:41 I'd love to touch on this relationship between the library as you
said, all these resources and just the size of the firm.

Sachin: 10:50 Sure it has multiple dimensions. So first let's look at not
necessarily size but scope and scale. If you do one strategy, if
you're a one trick pony, even if you're amazing at it, you're
going to limit yourself in scale until you start to do other things.
We've seen that. Go back to the beginning of my career. You
had TPG, you had KKR, you had Apollo, you have Blackstone,
you have so many amazing firms. Not all of them were the same
size or had the same CAGR 25 years later. And so when you look
at that, you see one of the reasons that some of the firms grew
much more powerfully than others did was yes, their core
strategy worked out well, but they also diversified. They went
into other things that they either knew and did more of, or they
hired great talent from the outside to merge with their own
culture and pursue a new set of strategies too.

11:48 So they may have gone into life sciences or infrastructure or

more credit. And the more products you have on offer, the
more that's on the menu, the more you learn about the
ingredients. The more you learn about the flavors if you will.
And so the more strategies you're running, the different kind of
information you get, but also the different lens of information
you get. You could be a supplier to a particular industry in your
credit business, but in the equity of a competitor in your buyout
business, you could be the infrastructure of a particular
company in your real estate or infrastructure fund and then you
could be the debt provider to the services aspect of that
company in another fund. Or maybe you have a social impact
strategy that's investing in that too. So you can see that the
more games you're in, the more information you're going to
gather. So that's number one.

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12:42 The second dimension to it is, of course many firms are very
careful, as they should be, with information walls. But you are
going to have opportunities where strategies can either work
together because let's say they're tackling a complex situation
that requires more than one fund to look at that strategy. Or
you could have certain individuals that are above those
information walls because they're particularly senior and they
have to take a certain leadership view. And when you have that
ability, that flexibility I would say, to either look at multiple
strategies on the same deal or involve people who sit above the
wall, that also gives a different kind of learning and perspective.
The third dimension I'd put to it is of course that even after
you've sold a business, I think some of the best firms continue
to monitor those industries, not necessarily that same business
that they've just sold, but certainly that industry.

13:38 So if they pop back into that industry at some point in time, it's
not like the best they can look up is a deal from three, five years
ago. They'll still have folks analyzing the significant trends in
that industry long after that business has been exited. And
where it really gets powerful Ted is when you add it all
together, it's not one of these things. And when you add it all
together and you combine it with size, so you're not just able to
do the billion dollar deal, but you can also do the five or even 10
billion deal, then suddenly you get into a class of your own,
you're like in... To use a soccer analogy, you're in the Champions
League of private equity. And that's what we found now that
there's a handful of these firms that are able to look at
information cut so many different ways, so many lenses.

14:27 And as an LP you can look at it and you can say, how amazing is
it that some of these firms can have a flashcard or a CEO survey
of sentiment or they have the heat map of what's happening in
each pocket of the industry ahead of what you read in the
press. And so they can tell what's happening. And of course
they're not the only firms. I mean investment banks would have
this too for their clients and other things. But I think the
perspective's a little bit different as a principal as opposed to an
advisor. And so this I think is a huge information advantage
because not only does it help you scout for new opportunities,
it also helps you I think, defend your existing investments better
if you know what's coming down the road.

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Ted: 15:12 I'm curious to ask what your view is of, let's just say the mid-
market. Because a lot of these advantages you're espousing,
accrue to larger players get more breadth, more scale, more
resources, more information. What's your sense of the
investment prospects of the larger mega caps with all these
resources compared to say the mid-market?

Sachin: 15:38 So I think the ones that do things really well, in my view are able
to adapt very quickly to changing environments. Whether it's
higher inflation and interest rates, slower macro dislocation,
one in a hundred year events like COVID. And so I think that
although they'll find blips, they'll find certain investments don't
do well, in general across a particular strategy or fund, they're
going to do quite well. And this is why with the previous
question I started with the strategies they run rather than
necessarily the size. I think it's not necessarily just size that's the
driver, I think it's the people, Ted. If you have amazing people
who leave one firm and start their own firm, that's let's say five
billion of assets or two billion of assets as opposed to 50 or a
hundred or 500, it doesn't mean that they're not going to be
able to replicate the success.

16:31 It's because, again, it's a people business, it's the individuals. So
I tend to look at okay, who's doing that mid-market strategy as
opposed to the fact that it's a mid-market strategy. But digging
into that another layer, historically some of the best returns
have been found in smaller pockets of the market that have
been less mined than the larger pockets. Now I think there's an
argument to say that they're harder to find these days, but it's
pretty ripe at all size levels. But I think you can scale it. So for
example, if you are a mid-market specialist and you specialize in
let's say five, six different industries, you've been doing that for
a fairly long time or you're staffed by great people that have left
larger firms or other firms who have done that in their careers.
It's not that hard to scale up or down in size. It's probably easier
to scale up and down. I think that's right, but it's not that hard if
you've got the right people.

17:29 And so I'm quite optimistic. In fact some of the things I'm
looking at to invest in from my family office right now are
actually a lot smaller than the mega funds, simply because the
numbers are out of this world. I mean they're producing
incredible numbers and so it deserves a lot of investigation. I
will say however, that in the mid-market, I think you've got to

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be more careful because there are a lot of copycat kind of funds

which do exist in the mid-market that you do find at the higher
end, but I think its perhaps more prevalent in the mid-market.
I'm not sure that's too controversial to say that. But I look at the
people and I look at the numbers and I think all those things are
applicable in the mid-market if you've got the right function
involved.

Ted: 18:11 As you were writing the stories in this book, what occurred to
you that you said, look, there are things that are good with
private equity, the things that could be better and the things
that aren't there. What's some things that you see that you
think could be better?

Sachin: 18:24 It has so many aspects. I think number one, and we should just
get it out there because I saw that in the reaction to the book,
we had generally some very good reviews, but we also had
some comments from people that were reputable publications
but they just hate private equity. I think number one, the
industry can do a better job of presenting itself. I think in
general the industry has done a much better job in recent years
of emphasizing the positives it does for communities, for
diversity, for all the right things for the environment, social
investing. But I think it could do an even better job. And I think
the reason that would be helpful is that there will be less noise
around the industry so they could kind of get on with the jobs.
So I think that's number one.

19:04 Number two, I think it's not unfair to say that although the
industry has gone a long way in spreading some of the returns
and you've seen that on specific deals quite explicitly, where the
returns are not just given out of the C-suite, they're kind of
spread across the companies that are invested. I think we need
to see a lot more of that. I'm not sure you want to get into a
world where you sort necessarily regulate it or force it, it has to
make sense and it has to fit with the culture of the firm and all
those things. But I think it's so good when you see it being done,
when you see so much profits made and it's spread not just
amongst the C-suite, but it kind of passes all the way. I think you
need to see more of that. I think that's fair.

19:45 And then equally, if you look at the size and scale of this
industry, 12 odd trillion on its way to 20 trillion across private
markets in the next decade. This is an important part of the

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economy, period. It's not just important to know if you're on

Wall Street, it's important to know even on Main Street. And
therefore I think if you look at the way the industry responded
to assist in Corona and assisted with donations, with community
service, with all those things, I think that's certainly a lot better
than potentially it was in prior national or even international
crises. But I think there's a ways to go.

20:24 So I think this is an industry that's an important part of the

economy. It's almost a steward of significant parts of the
economy, certain significant industries. And I think once we
start to recognize it as these are sort of modern industrialists in
a financial sense, I think there's a certain responsibility that goes
with that. We're seeing a lot of great things, I think we should
celebrate that, we should be very honest and positive about
that, but I think there could be more.

Ted: 20:49 And what are the aspects that you think just aren't there?

Sachin: 20:51 This is changing. So if you look at who invests in this industry, it
goes back to the first question we had about the perspective
and the reason for writing the book. Not many people know
about private equity as much as they should. Not many people
invest in private equity as much as they could benefit from. So
some folks still see this as, oh, private equity is only for people
of a certain wealth or only for certain kinds of institutions.
Whereas actually you and I both know that a lot of folks'
pension plans are invested or retirement plans are invested in
private markets, they probably don't know about it. And so
what we don't have, being honest, and I think it's getting
increasingly urgent, is a very good baseline understanding of
private markets for everyone. In the same way that people
know about public markets. Why should you only know about
the acronyms that make up Apple, Amazon, Microsoft,
Alphabet, Google, et cetera.

21:53 You need to, as somebody with a retirement account, know

about Blackstone, Carlisle, et cetera. You should because these
are kind of the equivalent of those big tech names they talked
about. It's big finance or it's what I call mainstream active asset
management. And so that is just missing because if you asked
most folks who maybe dabble a bit in their pension or they keep
an eye on their pension or maybe even they're slightly active
investors, they do a little bit of stock trading, they'll have a

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sense of, should I be buying Disney? Should I be buying Apple?

Should I be doing this? And then you say, what about private
equity? No, got no idea.

22:32 But the check sizes are getting smaller Ted. It's not just
multimillion dollar tickets. There are $50,000 tickets, there are
$20,000 tickets, there are now $10,000 tickets coming out. And
it's not fully available to retail but it's coming. And so I think
ahead of that, there should be education for everybody. And
again, I think what that will do in addition to better public
relations, better communication, it'll lower the noise and it'll
help people find private equity more accessible. And that's what
I think is missing at the moment.

Ted: 23:06 I'd love to dive into some of your thoughts being inside the
industry, on aspects of the process. So on sourcing of deals, you
hear a lot about the word proprietary, everyone wants a
proprietary deal. What did you see being inside the industry of
how deals actually get sourced?

Sachin: 23:26 It's a fantastic question. I think the reality is that firms of a
certain reputation, so firms which are well known, of which
there are many, many firms and certainly firms of a certain size,
certainly as soon as you start to do deals which are like a billion
dollars per deal or more, right? It's hard to say that no one else
will ever look at that deal other than you, between the time the
idea comes up and you closing the deal, no one's ever going to
look at that deal ever. It's going to be totally under the radar
screen and no one is ever going to even have any idea that it's
happening. It's a total surprise. Okay, that's very difficult. Why is
that difficult? Well, let's start with the seller. The seller probably
has some obligation to stockholders, to their investors to
actually check that the terms are good terms.

24:19 And so at some stage they will probably need to hire an

investment bank, or themselves, or some other broker, or
something to check that what they're doing makes sense. We're
carving out this business, we're selling it to a unit at Carlisle or
whatever. Is that the right price? Is that, well then their advisor
will be like, well, have you checked with anyone else? And they
say, well no, we decided not to check anything with anybody. I
mean that doesn't really fly. And so I think there's a certain
recognition that you're going to have competition at some
stage. But, if you have competition at the stage where you have

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been sufficiently ahead of the game, you've followed that

industry for a long time, you've possibly looked at that industry
through multiple lenses, the credit lens, the infrastructure lens,
the real estate lens. Maybe you owned the business before or
its competitor.

25:11 Maybe you looked at the business and backed away or maybe
you were beaten at buying the business because somebody else
paid a higher price or maybe you're buying it out of bankruptcy
and you'd looked at it previously when the company was not in
financial difficulty. If you are ahead of the game, then you
developed, I would say, an edge. And it's that edge that counts
rather than necessarily getting so hung up on the fact that it's
proprietary. That's number one. Number two, there are ideas
which are genuinely, people are first movers. So the most
obvious and probably the most important I would think in the
last decade is financial services. The firms that looked at
insurance, banks, ahead of everybody else have found that most
folks at the similar scale have copied them since. And that tells
you something. They had an edge, they had an advantage, it
was proprietary.

26:06 They had an idea. At the time, they did their first, second or
third deals, they were ahead of the competition and they've
probably continued to evolve such that others, even if they are
copying them, maybe those folks are now doing insurance 2.0,
3.0, 4.0 rather than insurance 1.0 right? Similar with energy. A
lot of people when I started investing were looking at energy in
a certain way, then a bunch of people started to do energy in
another way and it was really pretty pioneering. The same
thing, let's say in pharma, buying drugs which are ex patent or
funding new kinds of drugs in life sciences. Or another great
example actually, probably another enormous one of the last 20
years is infrastructure. The folks in Australia had this idea to do
infrastructure, toll roads, airports, towers, when everyone else
thought it was a crazy idea, frankly speaking.

27:00 And I saw it firsthand, what are you talking about? You can't use
project finance principles. This is a leverage buyout. You've got
to use high yield bonds. What are you talking about? You can't
do that. So there are firms that have proprietary ideas, at the
time they've consummated almost any of their deals, closed any
of their deals, they're going to have competition. But it's about
being ahead sufficiently either in the idea or in the preparation

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or ideally both that actually you have the best chance of

winning. Unless Ted, somebody overpays so badly that you'd
actually rather they bought it and then you'll maybe see it the
second time round.

Ted: 27:40 So you talked in the book about the exhaustiveness of the
research process that goes into finding these deals. And I'd love
for you to give some color on what that looks like.

Sachin: 27:50 So a lot of it is pretty under the radar. You have folks in these
firms who are toiling away, getting to know sectors way before
the sun starts shining. They could be out there attending
conferences, industry events, talking to CEOs, building up a
Rolodex can take two, three, four years. And it could be two,
three years before they even look at a deal or start to discuss. I
mean I saw that with infrastructure where again the folks down
in Australia were talking to people about doing things like
carving out telecom towers and buying airports. And it took
years for the sellers to get interested in these ideas and of
course it cost them time, money, and effort to invest that
resource in developing it. But when they did and it came off,
they were miles ahead of everybody else. The same applies for
insurance, the same applies for life sciences.

28:42 And so a lot of it is kind of patient, careful, not particularly

glamorous research that's like what is the thesis that we have?
What are we going to present to the investment committee that
is different? What's the edge I'm trying to create, sell, grow,
develop? And that's basically taking a blank sheet of paper and
try to come up with something new. So it takes a while and the
early stages are not necessarily that high profile, but that's
probably where the hardest work happens.

Ted: 29:16 The use of operating executives is far more ubiquitous than it
was some time ago. How does the relationship work with the
operating executives, the investment deal makers and then the
company in a lot of these firms,

Sachin: 29:30 When it works well, it's seamless. You don't look at one person
and say, oh, is that guy from the deal team or is she from the
operating executive side? It should be seamless. And naturally
people will lean towards their area of expertise and where they
think they can help. And so if you have one person who's more
a capital structure kind of person but has good insights on the

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operating side, and one person who's more an operating person

but has insights on the financing side, ideally they work
together. And generally I've seen it to be pretty seamless
because when it isn't, those relationships tend not to last very
long and the teams tend to change.

Ted: 30:11 You mentioned that some of these large firms are really good at
pivoting when needed, conditions change. I'd love to chat a
little bit about evolution and innovation. We've seen for
example, growth equity become a huge thing in the private
equity community where if you went back 20 years it was a lot
more just cashflow generative businesses on leverage only, now
probably both. Love to hear your thoughts on what's changed
over time and then how that's happened within the firms?

Sachin: 30:43 So I think how it's happened is, from the top, where at the firms
that have evolved the most, you've had people consciously
taking decisions that they want to look at things that make
sense for the investors and grow in a way that the market is
growing, that society's growing, move with the times. So in a
certain sense, these folks at the very top can be generalists,
right? Because their background might be buyouts or distressed
or what have you. But then they look at it and they're like, well
you know what, really need to get into performing credit
because we know a lot about distressed credit, but actually
performing credit makes a lot of sense now or the other way
around. And so it starts at the top with an openness to grow.
And that's a little bit of an emotional decision as well, because if
you don't have personal expertise in the areas you want to
grow, you've got to bring people in. And you've got to make
sure that works, that fits.

31:39 And sometimes there are tough starts and there are restarts
and there are hires that don't work out and there are teams
that don't work out. I mean we've seen it all, it's perfectly
normal. It can happen in any industry. And so I think that
intellectual open mindedness is what starts. You then have a
sort of emotional acceptance that you got to hire and bring
people into your culture, your firm and integrate people and
learn from their culture as they come in and so on. And as that
happens, you find that typically the firms merge a bit of their
own DNA with the culture and expertise of who's coming in. So
let's say a firm that does buyouts and credit starts to look at
infrastructure, it'll take a person or two from the outside and

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they'll work alongside somebody from the inside. And that's

how you get that meld of, here's an amalgam of what we do
well and what you do well, but let's do this new thing in our way
so we can understand it.

32:42 And sure it can continue to evolve, absolutely. And it also needs
to be sellable to investors, right? Because if you're going to go
out and raise capital and the firm has never done that before
and hired people coming in, it probably looks better and it
makes a lot more sense of course to look like a joint effort
rather than let's say buying a unit coming in from the outside.
And we've seen that evolution right throughout. So that's when
it's kind of like a step aways from what the firm is doing already.
And then you have natural evolution. We talked about financial
services, you have firms that are going into the pension space or
going into aircraft leasing, they're doing performing credit and
they start doing private credit. This kind of white space that is
either left behind by the Wall Street banks as we've seen since
the financial crisis or just space that's generated by these firms
to say, well listen, we're doing stuff which is adjacent to this
sector. It's not that much of a stretch for us to learn about it and
try to do some stuff in this sector too.

33:41 And those are areas where you don't necessarily need to hire a
whole team, you may hire one or two people. But you need to
ease your way in through research. And so that's why we've
seen today that private equity, to be honest Ted, is very much
mainstream. It's in everything from not just the big industries in
the economy that you know about, chemicals, energy,
aerospace, defense, telecom, financial services. It's also in lots
of things that you don't associate with private equity. It's in
dating apps, it's in cybersecurity, it's in college textbooks, it's in
nurseries, it's in... To take a recent movie, it's in the Top Gun
fighter jet training school. It's everywhere. It's in Chelsea
football club. And so this is how it's kind of moved and as
private equity starts to mirror the economy, it goes alongside
what I've been saying with, there should be a general
understanding of private equity because private equity has
permeated not just Wall Street but also Main Street.

Ted: 34:36 So having sat on both sides of the fence of GP and LP, what are
the things that you think you either don't have the information
to understand or just misunderstood by those on the LP side
that haven't sat inside the sausage factory at the GP?

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Sachin: 34:52 I wouldn't say I've met many LPs who just don't understand. But
I think it's a different thing to know how deals work and to read
the presentations and attend conferences, than necessarily
seeing how it happens day to day. I'm not sure they need to
necessarily see it day to day because otherwise to a certain
extent Ted, they'll be working there. But I think the way I'd put
it is that what I hope is increasingly appreciated is that private
equity professionals do eat what they cook. They do act with an
alignment. And I think it's one of those things that's kind of so
obvious and easy to say and to point out, but until you've really
seen it work at every hour of the day, it can be hard to
remember or even in some cases believe.

35:50 And so I think the best way to evidence it, of course, is the
results. And that's where some of the most interesting and
memorable things that I've worked on or even that I've just
seen on both sides of the fence have been where a deal hasn't
worked out in the beginning, but actually the folks have fought
tooth and nail to make sure it works out at the end. That's not
something that an ETF can do, Ted. That's not something that is
going to work out in the passive markets and it's only going to
happen with passive management. It's only going to happen
with highly active management.

Ted: 36:22 We hear more and more about, call it the democratization of
private equity, the platforms to bring it down to high net worth
and eventually retail. As that money seems to be flooding into
the industry, how do you see it changing what happens with
these firms and their ability to go out and deliver the way they
have in the past?

Sachin: 36:41 So I think you might get slightly different products offered to
retail investors than you do to large institutional funds. You
might have different protections, different risk return dynamics.
There's a lot of smart people working on all these things trying
to figure out how do we address retail well, rather than just...
The first step was, let's set up a feeder fund and let's feed this
multi-billion dollar fund with not just institutional capital but
retail capital for some kind of feeder or some wealth
management unit or so on. And then there's like, how do we
produce products which are specifically for the retail market?
There's lots of different ways. And I think what you'll find is that
as the menu available to retail grows, you'll find firms tend to
emphasize or de-emphasize what's important to the end

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investors. So if you have, for example, certain retail funds,

which they want to emphasize the social investing component
even more, you'll find the strategy offered to them is different
than let's say other investors. That's a possibility.

37:42 The other way it could change the firms I think, and I think this
is very positive, is that as soon as we reach that tipping point
where it's no longer Wall Street serving a bit of main street, but
it's Wall Street and main street are kind of the same thing, it's
just the economy. Because that's really where we are with
public markets now, if you're an investor in Apple or Disney or
any of these other great stocks, you're not thinking like, oh, I'm
going into a Wall Street product. You know what the company
is, what it does. And I think not too far in the future, probably
next decade or so, where people start to say, yeah, I'm invested
in buyouts. And someone's like, what do you mean buyouts?
What are buyouts? Well, I put $10,000 into this buyout fund
that kind of buys companies, it keeps them private so you don't
get the daily share price movement.

38:38 Maybe I don't understand everything about it, but they basically
add some leverage to it and they try and sell the companies
after five, 10 years and I get a profit off it and they take some of
the profit for themselves. So the more every day the lexicon the
language becomes, the more the firms will become themselves
every day. And you're starting to see it. If you look at the
websites today of the major firms versus those same websites
even five years ago, it's not even close. You have continuous
disclosure on social impact investing, on diversity, on impact in
the community. Our mission is to serve everybody kind of thing.
There were times when a lot of these firms didn't even have a
website. And so as this migration has happened from small
private partnerships to private partnerships managing large
pools of money to in many cases public companies,
corporations, to now corporations managing both institutional
and retail money.

39:35 This democratization of finance, which is one of the key reasons

that I wrote the book, it ends in a place where you realize that
you know what, these are just mainstream active managers. The
difference is they're active. You've got passive investment, you
have active investment. The passive investment guys, a lot of
them do a great job, BlackRock and so on, Fidelity, Vanguard,
whatever. And a lot of these private markets, investors rather,

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they're just active investors, but they're also enormous. And so

how do I construct my own portfolio that balances not just a bit
of let's say treasuries and stocks and some real estate, but also
introduces a bit of private markets into the pie chart so I can
access all of these things in a way that makes sense for me.

40:27 And that's what I would hope all investors can learn in the
coming years, which is not just, oh, I got a pension, I've got a
retirement plan. What do I put in stocks? What do I put in
bonds? Should I buy my house? Should I buy another piece of
real estate? These are my only objectives. To also thinking
should I put 10%, 20%, 30% into private markets? If so, and it's
an if, how? To whom? Who's the Amazon of infrastructure?
Who's the Apple of buyouts, who's the Microsoft of distressed?
That's what we really want people to get to.

Ted: 41:02 So as you look out at the potential for that to happen and
broadening out these portfolios, we're also looking at a market
environment that is more challenging than it had been in the
past. Prices up, rates going up, leverage down as you mentioned
earlier. How do you think about, in your own investing, the
opportunity set from here going forward?

Sachin: 41:26 So right now, one of the best risk returns is in what I call hybrid
capital, or some firms call it tactical opportunities, or things that
have a lower possibility of defaults. The chance of losing money
is lower and perhaps you give up a bit of upside. That's quite a
good risk return. If you can punch out 15% IRRs, even with
inflation where it is, even with rates where there are, but the
chance of you losing money is extremely low, that is a good risk
return. I wouldn't have said that a number of years ago when
actually you could probably add a thousand basis points to it if
you were in the right buyout strategy. And a lot of buyouts
these days as we found in the financial crisis are being done
with less leverage or in some cases no leverage, temporarily
possibly. And so you have to pivot as a private investor, you
have to pivot as an institutional investor, you have to pivot
frankly as a pension fund too.

42:19 You absolutely have to pivot because the next two, three, four,
five years are not going to be the same as we've had either pre
COVID or even through COVID. And so I'm looking at those kinds
of opportunities. So that's number one. Number two, let's
recognize a lot of things are a lot cheaper. Let's look at

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technology. If you look at a firm like a Silver Lake or another

fantastic technology investing firm, the prices at which they're
looking at today in the technology space, which is just about
everything, it's just so much lower than it was a few years ago.
So there's a slightly contrarian aspect of it too, where I think
you've got to be careful how you size it. You don't want to go
too large in your pie chart, but if you can size it right, looking at
stuff that is just generally a lot cheaper and what makes sense
in that, I find attractive.

43:11 And then of course with inflation where it is, you look at assets
that could be a natural inflation hedge. And some people have
talked about doing more in infrastructure or more in real estate.
And so I wouldn't say it's anything particularly revolutionary,
but it's about actually doing it and then actually introducing a
bit of it in your portfolio. And then conversely, it's about
rotating out of stuff that maybe doesn't make sense anymore.
So if you've got capital coming out of a fund, that was a great
strategy in the previous five, 10 years, not necessarily just re-
upping automatically, but also saying, well, let's be honest, are
they really going to be able to deliver that? Or should I sit the
next one out and come back in five, seven years time?

Ted: 43:50 When you're looking at how you want to deploy capital in the
space, how have you decided which funds to invest in and
maybe when to do deals versus invest in funds?

Sachin: 44:00 So I think when it's a scale that I couldn't do as a private

individual or through a family office, then obviously you're going
to be looking at firms that can look at a certain multi-billion
dollar scale in the same way. There are firms that have certain
expertise in things that I don't have a personal background in or
I have done a little bit of, but not enough to feel, let me do this
myself. It could be some more advanced areas of life sciences or
commercial real estate or things like that. So I think it's a little
bit self-selecting in a way. There are things that obviously don't
make sense for me to do on my own, but I think when you look
at things like distressed, when you look at individual credits or
you look at smaller buyouts, as we talked about before, there's
a lot of things I see where actually what I'm being offered as an
LP makes a lot less sense than me doing it to myself.

44:50 Because if you take a distressed fund or a credit fund, a lot of

the things I've been offered, they're taking 10 plus percent risk

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at least, but they're offering six, seven, doesn't make sense. And
you're better off trying to create your own basket of whatever
diversification you're comfortable with if you know how to do it.
But I think, I'm not sure that's accessible for everybody, but I
think that's the way I've looked at it, is trying to be honest and
open about things that I just know I can't do. And then things
that I have done previously and done for a long time, just back
myself and be brave enough to do things on my own in that
sense. And so far it's working out reasonably well.

Ted: 45:28 What are you most worried about with your investments and
the strategies?

Sachin: 45:32 I think again, it goes back to people. You can't control who's
hired, who moves on. You want to see that hunger, that
intensity, that alignment. There'll come a time when I know a
lot of people in a lot of firms, that may change over time as
people go off and do other things. And so that's probably the
thing that I started to be like, who or what? I've no idea who's
doing that deal or who's the lead on that deal? I don't even
have their number. I don't know how to call them. I'm not sure
how to... I think it goes back to the people. That's the number
one thing that I hope stays in the industry, is high quality people
with the alignment.

Ted: 46:14 So what's happened since the book came out?

Sachin: 46:16 It's been a crazy experience. It's been incredibly positive. It has
worked out pretty well with thousands of copies going across
the board from regulators, to corporates, to individuals. And
there's been a lot of talks, there's been a lot of private talks at
corporates who've said, we don't necessarily want to advertise
this, but we'll buy 300, 500 books, whatever, we'll distribute it
to our company. And can you do a couple of one hour private
talks where we asked you everything we really wanted to ask
and get at least one person's perspective on it, one insider's
perspective.

46:53 So I think that's number one. And then number two, as you've
seen, the market environment has been a little bit more
challenging. So I've tried to make sure I don't take my eye off
the ball on my day job, which is actually investing. And so it's
only been three months since the book came out, but certainly
the markets have kept me pretty busy. And I think will do, at

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least for the balance of the year. What I would very much hope,
and we have started to talk about this with the publisher, with
the agents, is some form of screen treatment or adaptation
because I think there are so many stories that have not been
told and that would be very interesting and also fun for people
to see. So I think Two and Twenty being on the screen I think
would be a lot of fun for everybody and we'll see what happens.

Ted: 47:35 What's your favorite story from the book?

Sachin: 47:37 That's such a tough one. I think one of the most impressive is
chapter seven, never react, always respond. And it's about a
leader who is under pressure because of a number of crises and
comes out with amazing temperament and manages just to turn
things around and just go from strength to strength. There's a
lot of sub stories in that chapter you would've seen, but I think
chapter seven is one of my favorites. I also think chapter one,
the best game in town where there's an investment that a
company used to own, and then sold it and then suddenly
they're looking at buying securities as if it's a public markets
investment, but they have great information. That's another
good story. And then I think at the end of the book, there's a
chapter where the private equity firm actually looks to buy out
assets from another firm that's in trouble. I think we're going to
actually start to see a little bit of that. So that's something to
think about for the future.

Ted: 48:34 Great. Well Sachin, I can't let you go without asking a couple of
fun closing questions. So what's your favorite hobby or activity
outside of work and family?

Sachin: 48:42 So increasingly it's tennis. And so outside of work, family,

socializing, I picked up tennis in the pandemic and as a great
outdoor sport, not that much contact involved. I've got to say
I'm hooked. One of the things about writing a book is you
actually start to read a lot more. So I've been reading a lot. I'd
give you those two, reading in tennis.

Ted: 49:05 What's your biggest investment pet peeve?

Sachin: 49:07 We alluded to it before. It's when people leading a deal have an
ability to push something through based on relationships rather
than merit. And it's very rare.

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Ted: 49:18 Which two people have had the biggest impact on your
professional life?

Sachin: 49:22 The first founder I worked for, incredible man, exceptional
talent. And he's seen the movie before so many times. He
remains an enormous influence and I'm incredibly grateful to
have worked for him, with him, with people around him. And
then I would say the founders at the last firm I worked for. I
think a lot of what they've done, one or two of them in
particular speaks for themselves.

Ted: 49:52 What teaching from your parents has most stayed with you?

Sachin: 49:55 Oh, there's many. I would say a number of things related to
basic values, and right and wrong, justice, all those things. All of
that applies to investing. I think more specific perhaps in this
context, and I put a quote at the beginning of the book actually
that is relevant here. It's a quote from a speech by Roosevelt.
"It's not the critic that counts, it's the person in the arena. It's
the person who's trying. And even if they fail, at least they'll
never fail being one of those folks who knows neither victory
nor defeat." That's something that my parents told me at the
very beginning. It's quite hard for a child to grasp maybe. But as
I got older, I realized it's not the critic that counts, it's the
person in the arena.

Ted: 50:47 All right, last one. What life lesson have you learned that you
wish you knew a lot earlier in life?

Sachin: 50:52 Oh, I would say, it's okay to keep things very simple and to just
follow the plan. You don't need to elaborate, you don't need to
get too distracted. If you have certain goals in life, certain
objectives, just follow them. And the way I would put it is, make
a long list of what you think you want in your life and go after it.
And only change it if you really want to change the list.

Ted: 51:24 Great. Sachin, thanks so much for sharing the stories.

Sachin: 51:28 Thank you, it's been a real pleasure, Ted. I'm very grateful.

Ted: 51:31 Thanks for listening to the show. If you like what you heard, hop
on our website capitalallocators.com where you can access past
shows, join our mailing list and sign up for premium content.
Have a good one, and see you next time.

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