Invest Like the Best with Patrick O'Shaughnessy
00:58:01 · Vlad Barbalat, Patrick O'Shaughnessy
I think if you are an equity investor, you should look at the equity risk first and then decide what is the best way to get it. We have not stopped by any means investing in the private markets. There are other reasons why our balance sheet specifically is probably not best suited for public market exposure that is specific to our balance sheet. Doesn't mean we don't participate, doesn't mean we don't take opportunities when they look particularly compelling, but we will continue to largely focus in the private space [00:58:30] S0: for our equity exposure. You and your senior team came from Goldman, what cultural crossover happened there? What did you take with you? What did you leave behind? [00:58:39] S2: Goldman is one of these places where when you're there, you're amongst such talented and driven people. It's a hard place to be and it's a thrilling place to be, but you're particularly actually appreciated once you're not in it because of all the things that you didn't know you were learning, but you were in fact learning. I think we brought a drive for excellence. I find it implausible to just sit still, to take something and say this is good enough, why should we do this? This involves risk. It's just this motor that I think people that come and have been reasonably successful in other organizations that it's inherent to them that they are always pushing forward even though another person may look at that and say why do you bother? [00:59:20] S0: What is it about excellence that's fun or enjoyable or rewarding?
00:59:24 · Vlad Barbalat
[00:59:24] S2: I think about this a lot. First of all, I clearly don't know the answer to it. But I think as I've gotten older, I think about this in a very existential way. When you have a family, when you think about the incredibly important lens that provides, particularly through the lens of your kids, you could split your identity in so many different ways. And if you over swing to one or the other, something suffers. Everybody's got their own equilibrium. But I've continued to find that I get an incredible amount of personal satisfaction from building and being part of an organization that is making progress, that is making things better. By things I mean that can mean product, I can mean customer experiences, I can mean the careers of the people that are in my vicinity. My god, it's one the most satisfying things in the world to have you help other people progress through their careers. You don't think about that when you're younger, but it is truly satisfying. I've gotten more comfortable through time with spending more of myself at work than I have before. Before I would be very wary of that because I didn't want to have somehow my kids see less of me because I am a workaholic. But my whole frame around that has evolved. I don't think I'm a workaholic, but I am obsessed with making things better and being part of this organization and team. It's not about you, it's about the organization as a whole, and how it can continue to get better. Gives me real satisfaction. I have three boys, so inevitably I want to set an example for them best I can through my experience of what it means to be a productive human being, what it means to be a good father, unbelievably important, what it means to show them love in support and care, try to do that best I can every single day. I think they would find that they get a healthy balance, And that balance moves through time. My 17 year old, my first born, literally needs a lot less of me today than he did 10 ago. I think that's less of something he thinks about because it's so natural. It's something that I think about and I grapple with, is it okay that we interacted for ten fifteen minutes? It was maybe a high quality interaction but it's all was ten to fifteen minutes. I go to bed thinking about that sometimes but I also think about this is a forever thing.
01:01:51 · Vlad Barbalat, Patrick O'Shaughnessy
You think about your parents a lot less than they think about you. That will forever be true. It's true of your kids. It's true of the way you probably interact with your parents, but your parents probably think about you much more than you think about them as just reality. [01:02:08] S0: I'd to close asking about two concepts that I think are so powerful. You've alluded to a bunch. One is just permanent capital, like what it's actually like. Everyone talks about this as like a nice thing to have, but what it's actually like managing it, you're not permanent. Nobody's permanent. Ideally, if you do a great job, this thing will go far beyond you. So careers are not permanent. They're transitory. And then the second thing is this notion kind of related to the question on where you came from and where you grew up of pragmatic optimism. These two concepts are interesting to me in combination and I thought it'd a fun place to have you riff as we wind up.
01:02:42 · Vlad Barbalat
[01:02:42] S2: The downside of permanence is people change. Even though the capital may be permanent, people come through the organization ultimately and you're always dealing with some version of, but another team made that investment or there was a decision made in the past and you can dwell a lot on that. Usually, the ones you're discussing are the difficult ones and not the good ones that people are happy to absorb into their window of time. What I have found about managing your own balance sheet as opposed to managing third party capital, which is inherently not permanent, it completely changes what you think about. Because when you're in a fund cycle, when you have to deliver returns to a fund and to your investors, and then think about the next one, you are consumed by the business that you're running. Investment outcomes are kind of a product that you sell, but you are ultimately running a business. And so your business strategy is gonna always dwarf your investment process. No matter how many times you can talk about your long term horizon or whatever else, Ultimately, the time comes when new funds need to be raised. If you're a public alternative asset manager, you care about how the market will give you the highest multiple, which will then drive a certain way you will structure your business. The craft of investing is inherently diluted one way or the other. It just is. It doesn't mean that there aren't excellent investors, but they have to think about other things. In some case, that really does take the business away from the bespoke nature. In some cases, people stay small and many examples of that and ultimately try to just deliver truly outsized returns because of how they approach that problem. When you don't have to think about any of that, and all you're thinking about is how do I take my capital, deploy it into the world, get the right rate of return on it, and see the fruit of what that capital does, it's just inherently different. You are able to sustain what I describe as much better investment hygiene, you don't have to react, you don't have to worry about doing an investor update where some of your investors may have circumstances or priorities that differ from other investors in your fund, and therefore creating tension, polluting your investment process with the nature of the business, we just don't have that.
01:05:02 · Vlad Barbalat, Patrick O'Shaughnessy
We are singularly focused on being in the service of our policyholders, in the service of our balance sheet, and doing the best we can to deploy capital for the right opportunity, for the right rate of return, and seeing the fruit of that come to the organization. The other part that you mentioned is very real. There's a downside to having that permanence because you can make the argument that it makes people a little bit more complacent about this notion of the long term, and I mentioned that before, I always am careful with saying we can make long term decisions that others can't. I think when people say that for the most part, what you end up with, I do mean the most part, is some form of excuses as to why, sure, this is not great, but it will be if you wait long enough. [01:05:49] S0: Especially like you said before, the volatility, the rising uncertainty.
01:05:52 · Vlad Barbalat
[01:05:52] S2: I've always almost had like this strange fixed income version of my thinking around long term versus short term, it's like the ten year rate is just a series of shorter rates that build up to it. Yes, you can talk about the long term, but the long term is constructed of a bunch of short terms, and so you have to actually hold both truths. The ability to make long term decisions and focus on the long term is really valuable. But if it becomes a crutch and an explanatory variable as to why you're either inconsistent or things are not going the way that you'd like them to go, then it's not very useful. In fact, that's an impediment. I think all businesses have a constraint of an annual calendar. That's just the way we've structured ourselves. Some have it very acutely, have quarterly constraints. The annual one is important for everybody. Everybody has some notion of a financial plan or objectives they try to hit on an annual basis. But very few businesses actually have those horizons. This is another one where you have to hold both truths, when you're responsible for the organization. Your business is not a one year business, we know this. Anything can happen in a one year window. And yet you know that that one year result has importance to your stakeholders. The way I therefore try to navigate that is to one, be cognizant of the one year, of the calendar year, but try to establish some three, five year targets. And do put yourself on the hook for those in a much more meaningful way than the one year, or at least say, more people in this organization really are on the hook for the three to five year and be explicit about what that is, it is for the one year. The other part is, all businesses that have this dynamic, they require a great degree of transparency from all your stakeholders in order for you to ride those waves. Because if your business is opaque, not understood, and volatile, that's a recipe for ultimately not being supported through difficult times. I try to always remind myself and my leadership team that transparency is what allows you to have autonomy. No transparency, no autonomy. Critically important, difficult to deliver, and people don't always focus on it.