← Capital Allocators – Inside the Institutional Investment Industry
Capital Allocators – Inside the Institutional Investment Industry
CIO Greatest Hits: Single Family Offices – Steve Rattner (Willett Advisors)
00:54:19
This week’s Summer Series is another twofer, Dawn Fitzpatrick from Soros and Steve Rattner from Willett Advisors, Michael Bloomberg’s family office. We packaged these two leading single-family offices together to hear their different approaches to...
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- [00:02]
Ted Seides
Capital Allocators is brought to you by my friends at WCM Investment Management. To outperform the markets, you have to do something differently from others. In my 30 something years investing in managers, there may be no one I've come across who does that as clearly and as well as wcm. I've seen it up close. As an investor in their international growth strategy for the last five years, WCM is a global equity investment manager majority owned by its employees. They believe that being based on the west coast, away from the influence of Wall street groupthink provides them with the freedom to live out their investment team's core values, think different and get better as advocates of integrating culture research into the investment process and advancing wide moat investing. With the concept of moat trajectory, WCM has delivered differentiated returns while building concentrated portfolios designed to stand out from the crowd. 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The result is differentiated perspectives and decision making confidence delivered faster than ever. See it in action at alpha alpha sense.com capital that's alpha-sense.com capital 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@capitalallocators.com All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast. With eight years and over 500 podcasts podcasts under my belt, I'm often asked to recommend my favorite episode. But I can't really answer that question. I feel like I have 500 children and don't think I've disowned a single one. So when asked, I usually offer up a great recent episode to get a listener started. Finding the best episodes in a big library of content isn't easy, so we thought we'd help. Each summer going forward, we're going to share our best. Over seven weeks, we'll replay conversations curated from our favorites and yours, excluding those from the last 12 months. Our 2025 Summer Series focuses on CIOs. We're blessed to have an incredible library of long shelf life content, and we just couldn't pick seven. Instead, we'll share a dozen gems, canvassing every type of institutional asset owner. This week's summer series is another two Dawn Fitzpatrick from Soros and Steve Ratner from Willett Advisors, Michael Bloomberg's Family office. We packaged these two leading single family offices together to hear their different approaches to a similar investment challenge, with Soros leaning heavily on internal teams and Willett primarily on external. Before we get going, it's about that time of year when the summer breeds leisure activities. So whether you're an active participant or a fan, you've likely noticed a few memes spreading recently. First, there was Bill Ackman making his professional tennis debut. Now Bill's a solid player, right around the same level as me, but tennis has different levels. My level of play puts me squarely at the bottom of the A team at my club. My club's A team is fairly even with the C team at another local club, and that club has players like Peter Brozens at Jordan park and John Pastel at Alliance Bernstein who destroy everyone else at their John and Pete probably can't take a game off of Elliot Spazziri, a local kid who's now 132 in the world. And you don't see Elliott making it that far at the tennis majors. That's another level. I've often described Jen Prosek as a major league communications entrepreneur competing with little leaguers. It's kind of the same with tennis, so no ill will towards Bill, but jumping levels is tough to watch. And then there was the infamous Kiss Cam at the Coldplay concert. One moment in time, one poor reaction, and hundreds of thousands of replays already. If there's a moral to these stories, it's sometimes you have to stay in your lane. You might see me hit some balls at a pro am, but I'm not going to compete against pros, let alone head to head against Brosens or Pastel. And to the extent you see me on a Kiss Cam, that'll definitely be with my wife, Vanessa. As for staying in your lane with content, what better way than sticking with the leading voices of institutional investing right here at Capital Allocators? Thanks so much for spreading the word. Please enjoy my conversations with Dawn Fitzpatrick and Steve Ratner, both from 2019. Steve, great to see you.
- [07:31]
Steve Ratner
Thanks for having me.
- [07:32]
Dawn Fitzpatrick
Well, most of the time we go through someone's career. It strikes me you've had five different careers, so why don't we just start at the beginning in journalism and maybe touch on all of them and some of the lessons you learned along the way?
- [07:44]
Steve Ratner
Sure. So I was a college journalist as a hobby. Thought I was going to end up in business or law or something like that, some profession, at the urging of my father in particular. But suffice it to say, I was a college journalist. And then I was offered a dream job for a journalist which was working at the New York Times in 1974. So I went there and spent eight and a half mostly happy years there.
- [08:08]
Dawn Fitzpatrick
Mostly happy?
- [08:09]
Steve Ratner
Well, only to the extent that by the end of it, I didn't think I wanted to be a journalist for the rest of my life. And so I was starting to think about and explore other things to do.
- [08:17]
Dawn Fitzpatrick
So to last there over eight years, what were the things that you felt you developed like an expertise in?
- [08:23]
Steve Ratner
I ended up as a economics correspondent, which May not be entirely surprising given both my background and what I've done since then. That was sort of a bit of a backwater in journalism at the time. And so it wasn't the toughest place to succeed as it might have been if I had decided I want to be a political commentator or cover foreign policy or something like that. And it was 1974, as you'll recall, was a time of a fair amount of economic turbulence in the world, in the United States. And so there was lots for me to do and a lot of demand for people who had an interest in doing what I was doing.
- [08:56]
Dawn Fitzpatrick
And as that evolved, the next step was investment banking. So how do you go from writing to banking?
- [09:02]
Steve Ratner
Well, when people ask me that, I always say how or why? Which question do you want me to to answer? But as I said, I kind of fell into this job at the Times. It was a great job. I saw things and did things at the age of 22, 24, 26, that most people don't get to do probably ever, let alone at that age. Met a lot of very interesting people, learned a lot from them. But I realized somewhere along the way that I at least wanted to try something else. And particularly I was tempted by the idea of doing rather than writing about it. And I don't want to disparage in any way many of my friends who are still journalists, but I thought I wanted the old Teddy Roosevelt quote, you want to be in the arena or the man who holds the coat of the man in the arena. And so I started thinking about it and I ruled out stuff that either I wasn't suited for, wouldn't be good at medicine, realized I didn't want to be a lawyer, whatever. I had a lot of friends who had gone into investment banking and it sounded interesting. And so I started trying to figure out if I could get a job in investment banking.
- [09:59]
Dawn Fitzpatrick
And what was that like when you first got in the seat?
- [10:02]
Steve Ratner
I had absolutely no idea what I was doing. I was 30 years old. I was assigned to work for a 24 year old young woman analyst who had to show me how to turn on my calculator. I barely knew the difference between an income statement and a balance sheet. There was no training program, so to speak, at Lehman Brothers back then. And so it was a trial by fire.
- [10:21]
Dawn Fitzpatrick
And what was your progression through the investment banking ranks?
- [10:25]
Steve Ratner
So I was a young associate at Lehman Brothers, working on a whole variety of things. And then somewhere along the way, there was a deal that came in to sell a newspaper in Houston. And they looked at me and said, well, you were a journalist, so you should know how to do this. And I said, well, I don't know anything about the business of it. But in any event, they put me on that deal and then I started working on other things in media. And then in 1983 or 4, Lehman Brothers was sold to American Express. A lot of people left, including some of my mentors. One went to Morgan Stanley. He said, you should come here and start doing what is now called tmt, then called media. And so I went there and started a media and communications group for them. Morgan Stanley went public, got very big. I like this idea of a smaller partnership environment. I went to Lazard, I spent 11 interesting years there. It's an interesting place. And then I decided to go into private equity with some of my partners.
- [11:16]
Dawn Fitzpatrick
And before we make that transition, were there key lessons that you took away from your experience in investment banking?
- [11:24]
Steve Ratner
Well, investment banking people ask me whether it was a complete change in my life from being a journalist. And certainly there were many aspects of it that were a complete change, but there are actually some that were not a complete change. For example, journalism is to some degree, as is investment banking, a business of relationships. If you're a journalist, you want your sources, so to speak, to trust you, to tell you things, to cooperate, to sit for interviews and so forth. And working with clients as an investment banker is not that different. When you're a journalist, you're trained to ask a lot of questions, to get information. They call that due diligence in investment banking. So I kind of knew how to do that. I learned as a journalist how to write, which is not an essential skill for a banker, but it doesn't hurt to be able to write. So there were some things that were transferable. I had also seen, frankly, more of the world, not literally, although some degree literally, but people and experiences than most investment bankers certainly at the age of 30 had seen. And that was was a benefit. So I brought a few things to the party, so to speak, but I had a lot to learn.
- [12:27]
Dawn Fitzpatrick
And the progression when you decided to leave into private equity, now that feels like a well worn path. What was it like at the time?
- [12:35]
Steve Ratner
It was even then somewhat well worn. KKR had been born in the 80s. Forestman Little, which was one of the other original firms in the 80s, Carlyle Group, Apollo, they all came into fruition in the 80s sometime for various reasons. And so by 2000 it was actually a fairly obvious path that if you basically said, what's the next step from investment banking, if you want to get even closer to the action, in a way, it was private equity.
- [13:01]
Dawn Fitzpatrick
And so you started Quadrangle, started off, I guess. Was it also TMT focused at the time?
- [13:06]
Steve Ratner
Yeah, there's an old joke about the difference between an expert and a dilettante. And we'll get to some of this probably later in the conversation. But an expert is somebody who knows everything about nothing, and a dilettante is someone who knows nothing about everything. And so I had spent my whole career as an expert, and I thought it was the easier way to do it, that if you could focus on one industry, know it pretty well, it was a lot easier to get clients or make investments or do whatever it is you were trying to do than if one day you were working on an industrials deal and the next day you're working on a financial services deal and the day after that something else. So, yes, we started with that focus.
- [13:40]
Dawn Fitzpatrick
And then somewhere along the way we get to the financial crisis. What was going on for you at that time, both in the private equity and then into what you ended up doing for the government?
- [13:51]
Steve Ratner
I was happily going about my business, working in a private equity firm. And we were investing. We raised a second fund. We were thinking about a third fund because I think my journalistic experience in Washington, where I spent five of my eight and a half years in the business, I had an interest in public policy, I had an interest in public service. And I had begun to work in the mid-90s in that world a bit, mostly raising money for candidates or giving money, a little bit of policy stuff, a little bit of writing. And so I had always had it in the back of my head that there might be a time to go into public service. The stars never lined up. Not the right administration, not the right time in my life, children, all that kind of stuff. But then the financial crisis came, and it wasn't perfect because we were building this firm, but my kids were mostly grown. We were looking at the greatest financial crisis of my lifetime since the Depression. And as one of my friends said to me, if you're not going to serve now, when are you going to serve? I was open for that.
- [14:54]
Dawn Fitzpatrick
You became known as the Karsar, I guess, or the Auto Restructuring Group in the government. Had you been involved in restructurings in your time in investment banking?
- [15:02]
Steve Ratner
In a minimal way, we had added a distressed debt investing business at Quadrangle. I had done some of it as a banker. We of course had one or two private equity investments that had to be restructured. So I knew a little bit about it. And you may ask, what did I know about autos? And the answer was, absolutely nothing. You then may ask, so why did they give you this job? And at the time, I really didn't know, to tell you the truth. I figured it out later, which was they did not view. And there was a lot of blowback after my appointment was announced about why me, but they. By which I mean Tim Geithner, the Secretary of the Treasury, Larry Summers, the head of the National Economic Council, they did not view it as a job of managing the auto companies or even of restructuring their operations. They viewed it as a financial restructuring job. And they thought I knew enough about that to do it, because they also wanted someone who had some idea about the sensibility of Washington and how things work differently in the government than they do in the private sector. There are a thousand people they could have picked who knew more about restructurings, who knew more about autos than I did, but they wanted someone who had these different pieces of the puzzle.
- [16:10]
Dawn Fitzpatrick
How does that process work? So you're sitting running quadrangle. Does a phone call come in? Do you place a phone call?
- [16:17]
Steve Ratner
I think my interest in serving was fairly well known at this point, and I knew both Tim and Larry very well, Larry especially. And so after the two of them were appointed, I think it was literally the day Before Thanksgiving in 2008, Larry called and said, are you interested in serving? And I said, sure. And then I don't remember the exact timing, but then Tim called his office called, said, come on down. And I went down, and he said, look, I got a lot of jobs to fill. I've got a housing issue. I've got banks issues. I've got autos. What do you want to do? And I said, look, you have enough problems without my being a prima donna about it. So you tell me what you want me to do. And all things being remotely equal, I will do it. And so a few weeks later, he called back and said, autos. And I said, autos. And he said, autos. And I said, okay. And that's how it happened.
- [17:06]
Dawn Fitzpatrick
And I know you wrote a book about this, but talk a bit about how you approached it with the sort of team and just a quick summary of what happened for those who aren't as familiar.
- [17:19]
Steve Ratner
Sure. Look, the two most important things were that Tim and Larry, I'm sure, with the approval of the President, said to me, we want you to do this in a way that is commercial, sensible. We're not here to put lipstick on a pig. We're not here to paper over the problem. We're not here to do a lot of giveaways. We want to fix this. So you should assume you're operating in a commercial environment. And the second thing that made this all work was that we had access to the so called TARP money, the $700 billion that Congress had voted in the middle of the panic and then immediately regretted because it gave the administration more authority than they usually get to actually disperse money. So I had a checkbook and I had the support of my bosses, and that's what allowed this all to work. And so we went out and hired 15 people, almost all from the private sector who wanted to serve, and some Republicans, some Democrats, some Independents. And we approached this as a business problem, not as a political problem.
- [18:14]
Dawn Fitzpatrick
What was the biggest challenge in getting it done?
- [18:16]
Steve Ratner
Oddly enough, the biggest challenge was something I didn't even know I was responsible for when I took the job, which were the auto finance companies. So what I learned on the job was that 80% of car purchases are financed in one way or another. And a significant portion, not a majority, but a significant portion by what is now called ally, used to be called General Motors Acceptance or by Chrysler Financial, which is now gone. And there were a whole series of regulatory problems, as well as the fact that this was almost the one place where we had to deal with other agencies of the government, particularly the fdic, which was run by Sheila Baer, who was particularly difficult. And this caper, as my deputy Ron Bloom used to call it, almost fell apart over that problem.
- [18:58]
Dawn Fitzpatrick
So somewhere along the way, before you took the seat in government, through your relationship with Mike Bloomberg, you started effectively what became his family office within Quadrangle, and then you finished the job. Auto restructuring. You step into this. So why don't we start with Willett and how you think about this challenge of there's a whole lot of money to be managed, how are you going to go do it?
- [19:25]
Steve Ratner
I'm not in the business of false modesty. So, as most of my friends know, but let me just say this was another assignment that I was asked to take on that I really didn't know a heck of a lot about. People assume, and maybe Mike assumed this, that because I'd been a banker and a private equity guy, I could run an investment management firm. But it's like asking a cardiologist to look at your elbow that you think you might have broken. That really belongs to an orthopedist. These are different subspecialties within the world. So I didn't know much. And that was a disadvantage. It was also maybe an advantage because we set out, and I was at Quadrangle when we designed this with my colleagues and really tried to evaluate all the different ways that people handled this kind of money. And we have a mix of both philanthropic money as well as personal money. So that is a level of complication. And try to really figure out what were best practices, who was successful, why were they successful, how do you manage risk, how do you build a team? And out of that, we came up with a plan.
- [20:23]
Dawn Fitzpatrick
And so what was that initial plan?
- [20:25]
Steve Ratner
I had actually, oddly enough, been a colleague of David Swenson's at Lehman Brothers. We were both young associates at Lehman Brothers. And while we hadn't really stayed in touch, I had certainly followed his career and knew what he had done for the whole business of endowment management. And again, the charitable part of what we do is the biggest part of we do. And so I thought that if it ain't broke, don't fix it. And that he had a model that made a lot of sense to me. And as we'll I'm sure talk about, we, like everybody does, ended up tweaking it a bit. But we started with the basic idea that we would follow an endowment model. It's also fair to say that Mike Bloomberg was mayor. The money was in a quasi kind of blind trust. He could know some things, like performance, without knowing details. And so it was, for all the obvious reasons, critically important that we not fail. And therefore, the idea of going way out on the risk spectrum and coming up with some whole new way of doing this was not in my DNA. And so we wanted to start with a pretty straightforward approach to this.
- [21:26]
Dawn Fitzpatrick
So what year was it when you started doing this?
- [21:29]
Steve Ratner
Mike started talking to me probably in 2006, plus or minus. We actually opened our doors for business, his business, on January 1st of 2008, which I mentioned, because you know, what happened in 2008. And so we went right down the water slide with everybody else. Fortunately, most of our money was in cash in 2008. But that which wasn't certainly suffered, and then we went from there.
- [21:54]
Dawn Fitzpatrick
So you start in 2008, and you're thinking about a model that Yale and others probably started in the mid to late 80s. How did you approach the thought process? Whether it's competition or accessing what you'd want to access, when there's a big time gap in between some of those existing relationships and where you're starting out.
- [22:17]
Steve Ratner
There are pluses and minuses to that the plus for them, or the minus for us, if you will, is that they had had 15 or 20 years to build a portfolio, to establish relationships, build a team, and so on, and we were starting fresh. That certainly put us at a disadvantage, particular in things like venture capital. On the other hand, we also didn't have a legacy portfolio. What a lot of these firms or institutions have is a lot of illiquid stuff. Harvard is still trying to untangle some of it that they probably shouldn't have done. So we had a clean piece of paper, a clean balance sheet. So there are puts and takes. But Mike knew and I knew that it would take several years to build a team and a portfolio that really would be competitive with people who'd been around for a long time.
- [23:04]
Dawn Fitzpatrick
And so what did the structure of that team look like?
- [23:07]
Steve Ratner
It's interesting because the philosophy of how to structure these teams has evolved over the years, and now there's a debate within the profession between, again, oddly enough, the generalist versus the specialist model. And given my background, it won't surprise you to know that I believed in the specialist model. The idea that you have five or six smart senior people and they all go off and do whatever they feel like doing, and often they're doing different things from one investment to another. It didn't make perfect sense to me. Other institutions have done fabulously with it, so I don't want to be critical. So we followed a pretty conventional approach of having five or six senior people address each of the obvious asset classes. Public equities, hedge funds, private equity, real assets, and so forth.
- [23:48]
Dawn Fitzpatrick
And has that evolved much? Are you mostly looking at external managers?
- [23:51]
Steve Ratner
The answer is generally yes. But we do have what we think is a little bit of special sauce here. But. But it has evolved a little bit in that when we started, we did have these different asset classes pretty heavily siloed. And what we've learned over the years is that there is much more of a relationship among them than you might think, and particularly between public equities and hedge funds, especially if you're talking about long short equity hedge funds. Why is one group of people doing long short equity hedge funds, another group of people doing long equities? There's even crossover between private asset classes and publics, because more and more firms do both and things like that. And so we still have people whose job it is to manage a certain asset class, but there's much more collaboration and integration than there was when we started.
- [24:37]
Dawn Fitzpatrick
You can't mention the word secret sauce without trying to go right at that.
- [24:41]
Steve Ratner
I said special sauce. Special sauce. If it was secret sauce, I wouldn't tell you.
- [24:44]
Dawn Fitzpatrick
That's a good point. So what's the special sauce?
- [24:47]
Steve Ratner
What we have done, and it does differ from what some other institutions do, we had also the benefit of Microsoft having very wisely said, I want you to run a commercial operation, I want you to hire the best people and pay commercial wages. And I'm not going to tell you how big the team has to be. Public institutions like a university are under enormous pressure about how much they pay people, how many people there are, and so on and so forth. So we had that advantage. I had this background in private equity and so we began to do, and we hired a team to do it, some direct private equity investing in both corporate stuff and then also with a different team in real assets, oil and gas and real estate. That now comprises a reasonably meaningful part of our portfolio. I don't want to say exactly how much and we think there's some advantages to doing that.
- [25:37]
Dawn Fitzpatrick
How do you think about those trade offs between the internal team and the external managers?
- [25:41]
Steve Ratner
Most of our money is and always will be managed externally because we do believe in diversification. We do believe in being exposed or open to every kind of asset in every part of the world. And obviously, even with a team of 22 or 23 professionals, you can't manage Brazilian equities internally. And so we always have and always will use managers for that. And particularly we're very drawn towards specialist managers for a lot of my background reasons and people who really have a niche, either it's geographic or an industry or a strategy or something. So most of the money will be always external. The advantages of doing it internally are that quite frankly, the fee drag of private equity is the biggest of any asset class. And I sort of knew what it was when I was on the other side, but as a limited partner, I really knew what it was. It's enormous. No disrespect to my friends who do that. And my attitude was pretty simple, that we don't have to do as well as they do on a gross basis to do better than they do or as well on a net basis. Secondly, it allows us to control our capital flows better. One of the problems in 08, as you well know, was the unfunded liability problem that many institutions had with these commitments to funds that were not going to be drawn for who knows when or could be drawn the next day. And so our unfunded liability ratio is very. Which again, I don't want to get into specifics is very low compared to what the typical endowment or foundation has. So that was another advantage. And the Bloomberg name and relationship, we felt would give us special access to deals. And that has worked out. We operate completely separately from the company or the people who give the money away, and even to a large degree from Mike himself. But there are many people out there who would like to have Mike Bloomberg's money, and if they're the right people, we're happy to give it to them.
- [27:33]
Dawn Fitzpatrick
What are your thoughts on private equity, the area in general today?
- [27:38]
Steve Ratner
It's hard for me to have worked in an area for a decade, plus or minus, and not believe it has some reason for existence. I do think the return premium, which, while it's smaller now probably certainly than it was, is still there. I think the way that private equity guys and ladies think about driving performance, not getting caught up in being a public company, being very commercial, very disciplined, is good for corporate America in general. I think private equity does add value. Are there too many companies that pass from one private equity firm to another private equity firm to another private equity firm? Are there too many cases where it's all financial engineering and a lot of dividend recaps? Yeah. Is there too much money in the industry, in the sector at the moment? Very possibly. Probably. The amount of dry powder is vast. But the thing that often happens to people in my current business is you tend to be performance chasers. And so you look at what did well lately and you say, I'm going to go over there. Private equity has done well lately, ventures done even better. And so there's a lot of money going over there. If private equity hits a pothole, the money will then go somewhere else. It's not the best part of how this all works, but it's unfortunately part of life.
- [28:53]
Dawn Fitzpatrick
Having been on the inside and call it inside as a general partner and whether you call it outside as a limited partner, how do you think about the manager selection process in private equity?
- [29:04]
Steve Ratner
No, not that differently from any other area that we invest in, which is while we're certainly happy to be opportunistic, we also try to be methodical. So if somebody comes along with a private equity fund that's going to focus on industrials, that looks interesting, we would landscape the whole area. We find out who else does something like this, whether the firm that has shown up or that we have found is really a top performer, whether other people who do it better, whether it's the right strategy. So we're always opportunistic. But we also try to be very, very methodical. And fortunately for people on my side of the table, the performance benchmarking, which didn't really exist when private equity for the first, probably 10 or 20 years almost of private equity's lifetime, has now gotten pretty methodical. And so the whole top quartile, second quartile, vintage year process does give you a fair amount of data to analyze. Now, the problem is that just like in other parts of money management, performance persistence is not that great. So a firm that was top quartile on its last fund could well end up being second, third or fourth quartile in its next one, and then back to first again. And so ultimately, as David Swensen has taught us all, it does come down a lot to the people. And whether you just have that feeling that these people in the long run are going to turn out to be great investors and not get caught up in the returns of the last fund.
- [30:24]
Dawn Fitzpatrick
Are there things that you've seen from being on the general partner side that you have a particularly keen eye towards that someone who maybe just spent their career looking at private equity funds might not pay as much attention to?
- [30:36]
Steve Ratner
Yeah, I think I do. Having been in private equity and having done some things I'm happy about and some things that probably I regret in terms of investments and strategies and things like that, and managing a firm and hiring people and raising capital and dealing with investors, I think it does give you a benefit being on the other side of the table. It's a little bit like having been a journalist. And if some journalist calls me and wants to talk about a story, I have a better idea of how to deal with that person or what they're really after than the average person might, and so forth.
- [31:09]
Dawn Fitzpatrick
How about hedge funds, which has been this area that a lot of people have thrown stones at for a while now. How do you think about the area and how has that changed?
- [31:19]
Steve Ratner
First, for better or worse, rightly, wrongly, I had views about hedge funds before I was in the business I'm in now. I think I wrote a piece for BusinessWeek years ago in which I said that hedge funds are not an investment strategy, they're a fee structure. Because everything that falls under 2 and 20 is not a hedge fund. And there are many different flavors of it. But I think the hedge fund model is, if you want to talk about long, short equity to start with, which is the core of it, as you well know, it is certainly under a lot of pressure at the moment. It's a bit like private equity, the Excess returns have diminished. Some people say, well, the short selling opportunities, rebates, they've got lots of reasons. I think markets are certainly more efficient than they were when Julian Robertson got into business or some of the George Soros, some of the early pioneers. And also, if you believe that going forward, all this has not been true lately, we're in a lower return environment. If you've got a management fee of one and a half or two and gross performance of, I don't know, four and a 20% carry, you can do the math. And there's not a lot left for the limited partner. I believe that it's a little bit of reverse engineering that I'm willing to pay almost any level of fees if I believe the net performance is going to be superior. So we have people that we pay very high fees to because I really believe they're exceptional performers. And we have other people who would offer lower fees that we just won't invest with. But I do think there'll be a shakeout in hedge funds. I do think that it's going to be a tougher business going forward. I think a lot of folks in my side of the table are thinking hard about their hedge fund strategy and what really is additive versus simply money churning around but not adding any return.
- [33:00]
Dawn Fitzpatrick
How do you think about approaching the traditional public markets?
- [33:03]
Steve Ratner
We have a very robust allocation to long equities, I believe. And Mike Bloomberg actually has pointed this out to me and he believes that no matter how good you are at picking managers, no matter how good your managers are in a normal world, the bulk of your return is going to come from Beta. That Alpha is always going to be a much smaller number than Beta, that over a long period of time, markets go up. We started investing, as I said earlier, January 1, 2008. I think from that point to today, even if you invested all your money on that date, I think the S and P has compounded at 7% plus or minus. So the point is that even with the worst financial crisis, as we talked about since the Depression, if you had just put your money under the mattress in the S and P, you would have done fine over these last 11 or 12 years. And that's how I think about it. Fortunately, we have very long term capital. We have more capital that arrives than departs. We have a very understanding and tolerant client who gets the idea of long term performance. And so we want to take equity risk. The challenge is that in the US particularly, the market is highly, highly efficient. And even with lower fees than you pay to Hedge funds when the dust settles. Really, creating alpha in the US is hard. We have done it over time. I would say there have been times when we haven't done it, but it is hard. Europe is just generally a mess. And we can talk about Europe, the emerging markets, it's easier because they're a bit probably like the US was 40 or 50 years ago. They're much less efficient. People who know the way around them can add value, even net of fees. So we still are believers in active management. We still have virtually all of our equity exposure actively managed. But I can't tell you we don't think about it a lot and wonder whether that is the right way to go, especially in the U.S. yeah.
- [34:51]
Dawn Fitzpatrick
So let's go around the world with that. Have you in the U.S. do you think about just simplifying and saying, look, this is really hard, we should either just index it or maybe index it with some factor overlays rather than picking active managers?
- [35:05]
Steve Ratner
Well, first, with respect to factor overlays, I'll make a broader point, which is that we're not good. I frankly don't think anybody is at market timing or even factor overlays that I think we're good at picking managers. I think we're good at making individual investments in private equity. But if you said to me, is the stock market going to be higher or lower a year from now than it is today, I think my view would be a coin flip. I mean, I don't know. And there's a 50, 50 chance I'd be right or wrong in whatever I said. And so we don't make a lot of those kind of bets. Do we think about just indexing it? Yeah, we think about it. But. But we were born and bred to manage money. And so for the moment, we're going to keep trying to manage money. At some point, maybe we'll give up. But as I said, over the fullness of our existence, we have added alpha.
- [35:48]
Dawn Fitzpatrick
Even in the US how about emerging markets in particular? Emerging markets encompass a big part of the world. How have you approached picking managers in that part of the world?
- [35:58]
Steve Ratner
Yeah, the challenge in emerging markets for us is that putting aside China, India, we don't invest in Russia, I can't imagine we ever would. And maybe Brazil. They're relatively small markets, and so accessing them in a way that's consistent with our philosophy of finding people who really know the space is very hard. So we have tried with not great success, picking an emerging markets manager sitting in New York or sitting in London or Anywhere else in the world, it's been okay, but it hasn't been great. And so the consequence of that is that our emerging market exposure has been narrowed to the couple markets where we are both excited and where we feel there is investing talent.
- [36:39]
Dawn Fitzpatrick
And so do you tend to find managers on the ground in those countries or parts of the world?
- [36:43]
Steve Ratner
Absolutely. That is our philosophy. Just the way I don't know how, as a TMT guy, I could have invested in financial services. I don't know how a guy sitting in New York can be as effective in China as people who are on the ground there.
- [36:56]
Dawn Fitzpatrick
And you mentioned Europe's a mess. We know that. How are you approaching investing there, or are you investing there?
- [37:02]
Steve Ratner
We have a modest exposure to Europe. We're way underweight, Europe. There are many days when I wake up and think we should just leave altogether. There's nothing attractive about the fundamentals. The only thing that gives us pause is that the valuations are more reasonable on a pure kind of PE basis. And so you worry that you might leave Europe just at the time where there's some kind of rebound in the fullness of history. Europe has performed reasonably well. Maybe it will again. And so we're hesitant to just leave, but we're way underweighted, as I said. And every time I go there, I come back thinking, why are we invested here?
- [37:38]
Dawn Fitzpatrick
When you roll up these exposures, how do you think about the total amount of equity market risk that might inform your asset allocation decisions?
- [37:44]
Steve Ratner
We do keep pretty close track of our beta, and we want to have a lot of beta because, as I said, I believe that beta is going to be the principal component of your return. But we obviously don't want to have a crazy amount of beta. And so, again, without getting too deeply into the specifics, we are well aware of the amount of beta that other endowments and foundations, to the extent they report publicly, have. So we manage our beta across the firm. And that means obviously keeping track of your beta in the public markets as well as in the private markets.
- [38:14]
Dawn Fitzpatrick
And given the close nature of the relationship between you and the capital. And Mike, does that allow you to take, say, more beta than some of those kind of endowment peers?
- [38:26]
Steve Ratner
I think so. I think Mike is the greatest boss, employer, client, whatever you want to call him, friend I've ever had. Once he believes you know what you're doing. And after 10 years, I think he finally. I think he was suspicious at the beginning, but I think he thinks now I kind of do. You get a lot of rope and a Lot of leeway and a lot of tolerance. And so I feel comfortable taking a fair amount of risk because we do have this unusual capital position and an unusual relationship with him. And we don't have to report publicly to anybody. There is an investment committee at Bloomberg Philanthropies that we do report to, but they're also very professional and understand our business very well. And so it's about as good a situation as you could want.
- [39:10]
Dawn Fitzpatrick
What's your manager level turnover been roughly on kind of an annual basis.
- [39:15]
Steve Ratner
Too high? I don't know the number, but one of the things that I force the team to do once a year is go back and look at our terminated managers, because it's easy to fire a manager. And in most firms, you fire a manager, nobody's ever going to ask you again, well, how did that manager do? Did you make the right decision or not? And I believe we have to live with those kinds of decisions. And so we very methodically go back and look at our terminated managers. And I would say it hasn't probably cost us a lot of money to terminate managers, but it hasn't made us a lot of money. In other words, if we had simply stuck with the group because it gets back to this performance persistence thing. And there is a huge temptation that I try to resist, but I come to it like everybody else who's human, to fire a manager when you really feel like the bottom is falling out. But that may be the absolute worst moment to fire a manager. And so I think we are trying now to give our managers more rope, just the way we have a fair amount of rope when we believe that fundamentally they are pointed in the right direction.
- [40:12]
Dawn Fitzpatrick
And what is the decision process within Willett to hire a manager or fire a manager?
- [40:18]
Steve Ratner
We have a methodical process. I'm a great process guy, and Alice Ruth, who was our first cio, who did a great job, is a very process person as well. So we have a methodical process. We have Monday meetings. We have a process by which managers are introduced to the broader investment group, discussed sometimes discussed a few times. Then there's an approval process that. That comes up from the bottom. The idea generation can happen anywhere. It can happen at the bottom of the totem pole. It can happen from me. But everything goes through the same machine to see whether it measures up to our standards.
- [40:49]
Dawn Fitzpatrick
And you mentioned your own behavioral bias, and we all have them. How have you tried to kind of improve the quality of the decision making over time?
- [40:59]
Steve Ratner
I think a little bit to be less quick to fire A manager a little bit to be less quick to hire a manager, which we haven't implemented as successfully as I would like to because it's contrary to human nature. Also, I would like us to be more concentrated and again, without getting too deeply into our private business. There's a great temptation when you go to the supermarket. This is an analogy I use all the time with my colleagues. And you see eight kinds of peas on the shelf and you don't really know which is the best, so you pick one of each. But I think we're getting paid to pick one or two of those kinds of Ps, not all eight of them. And so I would like to see us over time become more concentrated. Because if you do the math right, a firm has, let's just say, 100 managers. So each manager has 1% of your capital on average. And each of Those managers has 20 top positions. What is that? 5 basis points of your capital is in some given position. Now, obviously some managers duplicate, but all you're going to do is mean reverse if that's your investment philosophy. And you might as well just buy index funds and go home and not work so hard. So I do believe you should be making bets. I do believe that you should concentrate with people who you think are really top performers. And as I said, we are trying to do more of that. It runs a bit against the grain of all of us, including me, but that is something I'm focused on.
- [42:15]
Dawn Fitzpatrick
Without going into the specifics of the name, I want you to think in your head of either a recent decision of a manager or an example where you were looking at a space and there were eight different types of peas on the shelf. What were the things that differentiated the one or two in reaching out to those to make those allocations rather than buying one of each of the eight peas?
- [42:36]
Steve Ratner
Sure. Well, obviously we look closely at track record and investment process and quality of thought, construction of the team, things like that. But at the end of the day, we like owner operators. We want to firms that are owned by the people who are actually managing the money, not part of some colossus. We want the lead person or lead couple people, if that's what it is, to just be so driven that you can feel that they taste this and they want this. And our most successful managers have had those attributes. And so you do all the math, you do all the diligence, you do all the landscaping, but at the end of the day, you look at the person and just say to yourself, do I think this person has the drive, the determination to be great. I think while that doesn't lead us to every right decision, I think many of our best decisions have come out of that conviction.
- [43:30]
Dawn Fitzpatrick
So now that you've been running this for a dozen years or so and you've built up the portfolio, as you look at your portfolio today, what are the areas that you're most excited about and what are the areas that you feel like still need the most work?
- [43:43]
Steve Ratner
The thing that we're probably, I'm probably anyway my colleagues may differ. Most excited about is still probably China, which is highly controversial and we can talk about it. But I think as I look around the world, I think China is still the most exciting major market probably in the abstract, let alone on a ratio to value or pricing. I think that the thing that has been probably most challenging for us, and it would be for any firm starting, is to build a quality venture portfolio because. And again this goes all the way back to the research we did back at Quadrangle. When you look at performance dispersion as you go from fixed income on one end, the place you get to on the other end is venture. The median returns from venture are not. Probably the last few years has been better, but when we were looking at this, they were not that great. They were not even as good as private equity. But the performance dispersion is vast. And so one of the early decisions that Alice and I made was that if we couldn't be in what we thought was a top quartile manager, we just wouldn't do it. And so the result was it has taken us 11 to 12 years now and we still do not have as big of a venture portfolio as we'd like to have. And it also takes a long time for that to come to fruition. So that is a. When you ask like when I started, what were my disadvantages relative to Yale? That is one of them. Yale has a huge and a wonderful venture portfolio which they treasure, I'm sure.
- [45:08]
Dawn Fitzpatrick
Let's dive into China a little bit. High level thoughts to start.
- [45:12]
Steve Ratner
High level thoughts are one. If you simply looked at the numbers, as I said, it is the cheapest major market in the world, especially relative to growth.
- [45:19]
Dawn Fitzpatrick
Is that true in public and private markets?
- [45:21]
Steve Ratner
Yeah, I think so. It is certainly true in public markets where there's more data. There isn't really a true private equity market in China yet. It's more of a growth equity and venture market. It and probably also cheaper than the US if you simply sat in New York and read the newspapers, I'm not talking about Hong Kong specifically. Generally, you'd probably be terrified about China, and you'd probably think, this just seems like the Wild west and why would I go there or invest there? If you actually go to China, as I do a couple times a year, every time I go there, I come away unbelievably excited because I don't think everything about investing can be done on a spreadsheet. And when you go to China and you feel the energy, you feel the drive to succeed, you meet the entrepreneurs, you meet the CEOs, you meet the investors, they have a lot of challenges that are not economic. They have political challenges. But I do believe that their drive to succeed is enormous. I wrote a piece for the Times a few years ago after I'd been to India and China, basically saying that my view was in the great debate over whether India or China would do better. My money was on China, and I got a huge amount of blowback because people want to root for democracy and they want to think a democracy would be the winner, not a totalitarian state. But it is what it is. And we like India, we have money in India, we may put more there, but it's not China. And I also think, while I wouldn't say this as strongly as I would have said it a year or two ago, I am for democracy and I'm a capitalist. But the Chinese model has some advantages over our model. And if you remember, a lot of this trade stuff started when China published something called made in China 2025, which was their blueprint for world domination in the next six, seven years. And then you realize when they focus, what they can actually do, it's pretty scary. But as an investor, it's pretty exciting.
- [47:11]
Dawn Fitzpatrick
How has it been trying to find the right managers to partner with in China?
- [47:15]
Steve Ratner
It's hard. I wouldn't tell you that. Transparency, rule of law, integrity is what it is here. So we've been very careful. We have now two. We had one, probably. Guess who? But I'm not going to say public equity manager in China for most of our time. We found more managers. Again, not really PE managers, but growth and venture managers that we're comfortable with. And those partnerships have worked out well. I'll make one observation you didn't ask about, but it does. I found it fascinating, which is that we have more investment managers in China on the private side with a senior partner or the CEO of the firm is a woman than we have here, because here we have zero, approximately zero. It's interesting how well women have done in China in the investing world relative to here, and we need to do better.
- [48:02]
Dawn Fitzpatrick
Why do you think that's the case?
- [48:03]
Steve Ratner
I have no idea. It may be that they simply didn't have a real investing business until fairly recently and so women could ascend more rapidly. There wasn't a lot of men clogging it ahead of them. I don't know. But I just do know that we have a number of really impressive women managing money for us in China. On the private side, I want to.
- [48:22]
Dawn Fitzpatrick
Talk about a couple other things that come to mind. I know you're on TV every now and then and have political views, particularly when you start talking about China and the trade war. How do you filter your own beliefs on the political side into kind of the investment decisions?
- [48:39]
Steve Ratner
I try not to, and I hope I succeed in not factoring in my political beliefs into the investment decision. But I think my political views, or my insights, if you will, are really valuable to the investing. I think anybody's are. I don't think you can be an investor. I really enjoy my meetings with our managers because a lot of them have really interesting views on the political side, on the macroeconomic side, on things other than whether a stock is going to go up or down. I think you have to have a view on all that stuff to be an investor. And I do think it's something that I bring a bit of to the party.
- [49:12]
Dawn Fitzpatrick
How does the journalist side that you still retained fit into kind of how you think about your day to day?
- [49:20]
Steve Ratner
It's my hobby. I do play a little bit of golf, but I'm not a passionate golfer. And this is my version of golf, which is to write for the Times once a month or so and to do my Morning Joe appearances once a week or so and still be able to be involved in the public policy discussion, which I enjoy. And also frankly to try to have some like really minimal impact on how people think about these issues because there's a lot of crazy stuff going on out there and I think anyone who's got a balanced approach to it should be involved in discussing it.
- [49:51]
Dawn Fitzpatrick
The other topic that's increasingly changing, at least in this country, when you talk about sort of the difference in China and the centralized state is this notion of corporate stewardship. After having gone through your career in private equity, how so much was tied to shareholder value and now people are talking about broader constituents being important. Can you share some of your views on that?
- [50:13]
Steve Ratner
Yeah, I have strong views on this, which are not going to be popular, but I'm really scared about it quite frankly, I think what's going on to start at 30,000ft and we can go down. What's going on really, is that government has kind of ceased to be a problem solver. The gridlock in Washington, the lack of any real fiscal space on the state and local side. Government isn't building roads and infrastructure. Government isn't training workers. Government isn't solving the problem of people who have fallen behind. And so everybody's turning around and saying, okay, well, who's going to solve these problems? And more and more they're pointing at companies and saying, you should solve these problems. And I'm almost with Milton Friedman, who wrote that famous New York Times magazine piece in 1970 which said that the job of a company is to go out and make money ethically, legally, responsibly, but ultimately to serve the shareholders and all these people who say that companies should be responsive to a whole set of other constituents. I'm not sure I understand what that even means. If I own a private business, I own a company. It's my company. I should be able to use it to benefit myself again, legally, responsibly and all that. Being a public company, I'm not sure why that changes anything. You still have a bunch of shareholders. I think you have a fiduciary duty to them. Now, if your customers say, I'm only going to buy products from a company that pays $15 an hour, or I'm only going to buy products from a company that sources it in an environmentally responsible way, absolutely, the public should vote with their feet and not buy products from companies that they don't think behave the way they want to behave. And that will drive some different behavior. But to say that a company should be forced to do X or Y or Z simply because we want to solve problems that government should be solving but isn't, I don't think is the right way to move ahead.
- [51:57]
Dawn Fitzpatrick
So if you look in your perfect crystal ball 20 years out, do you think there is a road where the government can change to get back to solving some of the problems that, as you're saying, they're not getting solved today?
- [52:09]
Steve Ratner
Well, I hope so, but I can't say I'm optimistic about it because we're kind of going in the wrong direction. That just when you think it can't get worse in terms of the gridlock and the lack of action, it gets worse. If you look at a simple metric, which is crude but I think useful, the number of bills that Congress passes has dropped steadily every year. And it's now at an all time low. They just do nothing. And that is because we are more and more polarized. The idea, which is not that far away, that the Senate in particular could come together and agree on stuff on a bipartisan basis now doesn't exist. And so we are in a polarized country. The extreme from a Donald Trump to an Elizabeth Warren or Bernie Sanders is wider than we've had in my lifetime. And I think at the moment it's getting wider, not narrower. And I think that's terrible.
- [53:01]
Dawn Fitzpatrick
Is there anything that we can do about it?
- [53:03]
Steve Ratner
I don't have great ideas. I mean, everybody always asks me this. And there have been various efforts along the way of people who are centrist moderates, which is what I think of myself as being, to kind of come together. But the structure of our political parties, the way our Constitution works, the existence of an electoral college, the Senate, the filibuster rules, there's so many things that are structural that I almost think that what has to happen is it has to get worse before it gets better. It has to get so bad that the public says, to hell with all these people who are from the extremes of both parties, let's have a sensible solution. And somehow that happens. We've had these problems before. This polarization existed in the late 19th century. It's existed at other times.
- [53:48]
Dawn Fitzpatrick
Yeah. All right. From your lips. So we'll see what happens. Steve, I want to turn to a couple of closing questions. What's your favorite hobby or activity outside of work and family?
- [53:56]
Steve Ratner
Well, this was going to sound odd for a Jewish kid from suburban New York, but I ride horses on my weekends.
- [54:03]
Dawn Fitzpatrick
What's your biggest pet peeve?
- [54:05]
Steve Ratner
Being left handed in a right handed.
- [54:07]
Dawn Fitzpatrick
World that literally kind of.
- [54:09]
Steve Ratner
I grew up thinking to myself, I don't understand who designed scissors and why they are so awkward. And then some years later, if somebody invented left handed. I don't know if this is my biggest peeve, but it's one of my peeves anyway.
- [54:20]
Dawn Fitzpatrick
I share that one with you.
- [54:21]
Steve Ratner
Okay, well you also know then it's kind of special to be left handed.
- [54:24]
Dawn Fitzpatrick
What's your biggest investment pet peeve?
- [54:27]
Steve Ratner
Probably managers who come in and just want to tell us how great they are, how great everything is, and they've never made a mistake and all that kind of stuff. And this gets back to what we were talking about before. I've been on both sides of that table and it's really not pleasant for us and probably not for them either, actually.
- [54:42]
Dawn Fitzpatrick
And to what extent from when you were on the GP side. Do you think there's this sort of game theoretic exercise where people are purposely saying what's good because by and large that's what helps them raise assets and grow?
- [54:54]
Steve Ratner
I think there's some of that. I think the interesting conundrum for a GP is when things aren't going perfectly, whether to basically own up to the fact that they're not going perfectly, say I own this, or to say, no, no, it's really better than it looks, and here's why. And we had one manager who we don't have anymore, who in the public side who we used to go visit when their performance was really not good and they would always tell us it's all fine. And you kind of want them to say, look, I get it, you know, I think I'm good in the long. But anyway, so that we all are in the business of sales to some degree. We all want to present a positive story, but I think having a high degree of honesty in that is probably well recommended on both sides.
- [55:37]
Dawn Fitzpatrick
What reading do you almost never miss?
- [55:39]
Steve Ratner
Five newspapers a day.
- [55:40]
Dawn Fitzpatrick
Do you read them all?
- [55:41]
Steve Ratner
I do read them all, and my wife makes fun of me because I don't necessarily read them all the day they're published. I often carry them around for a week if I don't have time. But I just believe that if you read five newspapers a day thoroughly, eventually you'll know, most especially in the business I'm in now, you'll know most of what you need to know to operate.
- [56:01]
Dawn Fitzpatrick
And what are the five papers?
- [56:03]
Steve Ratner
Well, I start with the Wall Street Journal, then the New York Times, then the Financial Times, then the Washington Post. And somewhere along the way, just for fun, I read the New York Post.
- [56:15]
Dawn Fitzpatrick
What teaching from your parents has most stayed with you?
- [56:18]
Steve Ratner
From my mother, probably self confidence, some would probably say to a fault, but there you are. And from my father had a great ability to get to the core of an issue, to kind of peel away the onion, not get distracted by irrelevant details, but focus on whatever the decision or issue was of the moment and decide it and move on.
- [56:39]
Dawn Fitzpatrick
Great. All right, last one. What life lesson have you learned that you wish you knew a lot earlier in your life?
- [56:44]
Steve Ratner
I think probably that your career and your life will be much better if you work for the best people you can work for, if you have partners or colleagues who are the best people, and I mean both skills, integrity, human qualities that you can find, and if you have the best people working for you. And. And I've made a few mistakes like that along the way and I've learned from them.
- [57:10]
Dawn Fitzpatrick
Great. Steve, thanks so much for taking the time.
- [57:12]
Steve Ratner
Thanks Ted.
- [57:14]
Dawn Fitzpatrick
Thanks for listening to this episode. I hope you found a nugget or.
- [57:17]
Ted Seides
Two to take away and apply in your investing and your life. If you'd like what you heard, please tell a friend and maybe even write.
- [57:24]
Dawn Fitzpatrick
A review on itunes. You'll help others discover the show and I thank you for it. Have a good one and see you next time you.