Capital Allocators – Inside the Institutional Investment Industry

Episode 471: David Lyon – Hybrid Capital Solutions for Private Assets

Date: November 17, 2025
Host: Ted Seides
Guest: David Lyon, Managing Director and Head of Capital Solutions at Neuberger Berman

Main Theme / Purpose

This episode features a wide-ranging conversation between Ted Seides and David Lyon about the evolution, challenges, and future of “hybrid capital solutions” within private markets. David Lyon’s career spans investment banking, hedge funds, private equity, and now hybrid capital — providing a 360-degree view into how the cycles and incentive structures of private investing have changed. The conversation covers the need for flexible capital within today’s liquidity-starved private equity environment, the nuances of different credit and equity asset classes, the competitive landscape, how to source and structure hybrid deals, risk management, and the critical importance of team dynamics and culture.

Key Discussion Points & Insights

1. Early Life and Career Foundation

• David’s beginnings: Grew up in New Jersey in a middle-class family; discovered finance through a sibling’s accidental path into investment banking.
  • “No one in my family had any idea what that was… I was a liberal arts major...I had to figure it out for myself.” — David (06:43)
• Analyst days at Goldman Sachs: Emphasized hands-on exposure and common sense over technical learning. The boom in M&A in the 90s gave young analysts a "courtside seat" to big deals.
• Transition to hedge funds (Risk Arb/Special Situations): A ‘baptism by fire’—shifting from process-oriented to outcome-oriented thinking, and learning to look past sunk cost fallacies.
  • “Who cares what we paid for it? It's only what it's worth right now. That doesn't matter.” — David (09:18)

2. Lessons from Private Equity and Distressed Investing

• 1990s-2007 Private Equity: More reliant on LBO “math” (heavy leverage, modest multiples), less on real value creation or deep expertise. Dysfunctional team incentives and politics were major pitfalls.
  • “Having a bunch of fiefdoms and people that have different incentives leads to bad outcomes.” — David (12:38)
  • “When your thesis in private equity is a person...that’s very dangerous.” — David (12:38)
• Hedge fund shift pre-GFC: Major learning was precision in up/down scenarios, the limitations of conservative modeling, and understanding the incentives behind distressed investing strategies.

3. The Alternative Asset Landscape Today

• Private credit explosion: Direct lending arose post-GFC as banks retreated; became a commoditized, scaled, and now very competitive, tighter-spread asset class.
  • “It was a beta strategy from the start. I’m getting paid a spread…The industry exploded because institutions needed yield.” — David (18:14)
• Private equity’s current conundrum: High entry multiples, large deal sizes, limited exit options, and misalignment between paper valuations and actual market bids.
  • “It's very difficult to pay 16 times for something and then assume multiple contraction in your buyout model three, four, five years into it, the implied growth is huge.” — David (22:36)

4. Hybrid Capital Solutions: Rationale and Strategy

• Definition: Non-traditional capital—instruments like preferreds, convertible prefs, and junior capital—often deployed in illiquid or complex private equity situations.
• Distressed as a subset: True distressed opportunities are brief and rare; most “distressed” players are now pitching hybrid/capital solutions due to structural market shifts.
  • “People love pitching themes...I hate that investment theme...I don't believe it's possible for any single person to assemble a reasonably diversified portfolio of 20 broken things.” — David (28:36)
• Neuberger Berman’s value proposition: Scale, breadth, strong industry relationships, neutrality (not a traditional buyout competitor), and a reputation for fairness and execution speed.
• Scaling up: Focus is on larger, high-quality companies (e.g. $200–$300M EBITDA), enabling more meaningful and less risky junior capital deployment.

5. Sourcing, Structuring, and Managing Risk in Hybrid Deals

• Sourcing: Relationships matter—deal flow comes from platforms, LP positions, industry focus, and outreach to PE deal partners rather than capital markets teams.
  • “If you give them enough time, you will lose. Every time you will lose, they will take your face and drag you through the mud and make you eat the mud.” — David (40:49)
• Deal Structure: M&A support or DPI (distributions) solutions are the two primary use cases. Key for both is situational relevance and clarity on value protection.
• Portfolio construction: 25–30 names, no leverage, careful sizing: “If you look at a PE fund, sometimes we'll have seven names, have a seven bagger… We're playing between one and a half and two and a half times your money...” — David (50:44)
• Diligence: Top-line growth conviction and true management alignment are non-negotiable; cost-cutting or “value trap” theses rarely work.

6. Managing Downside, Exits, and Team Culture

• Downside situations: Early recognition, pragmatism, and keeping incentives aligned is essential; forcing pain on management or sponsors backfires.
  • “You can't take the majority owner of a company and say you're a zero. I have all the value at Holdco. Have a nice day…Are you going to manage the business?” — David (58:51)
• Exit planning: Always challenge previous sale failures. “You've got to do a lot of soul searching as to what's going to be different.” — David (56:18)
• Risk management: Thoughtful portfolio sizing and factor analysis are more important than ongoing risk oversight post-investment.
• Culture: Sourcing and neutral, non-antagonistic process culture is a competitive edge; having a candid, humble, and risk-aware team is critical.
  • “I want people to think that I'm an idiot at my team. I want them to think they can do my job and they don't have it for now.” — David (61:35)

7. Market Outlook and Flexibility

• Macro view: Direct lending is structurally sound, but return expectations should be realistic as spreads compress. Private equity returns will be challenged by current high valuations and future market cycles.
• Flexibility: Hybrid capital is best when there’s dislocation and liquidity needs—less attractive in frenzied bull markets with tight cost of capital.
  • “The worst environment for us is 2021. Awful, awful, awful, awful. No one cares about money.” — David (68:33)

8. Personal Reflections, Lessons, and Pet Peeves

• First paid job: Caddy—learned about work ethic, observation, and the importance of mastering fundamentals and dealing with people.
• Biggest pet peeve: Overreliance on IRR and yield as performance metrics. Emphasizes compound return and cash-on-cash multiples instead.
  • “Assuming that capital I give back... is going to earn the same rate of return…drives me up a tree.” — David (71:59)
• Biggest life lesson: The power of team over individual achievement, and the transformative nature of positivity.
  • “Twenty years ago...I was much more of a loner…Having people with different skill sets, having people with different strengths and having them trust each other. I never would have said those words 25 years ago.” — David (73:17)

Notable Quotes & Memorable Moments

• On distressed investing hype:
  • “People that show you the same decks that say wall of maturities. It's never happened in the history of finance.” —David Lyon (00:00, 28:36)
• On relationships and trust in sourcing:
  • “If you give them enough time, you will lose...they will take your face and drag you through the mud and make you eat the mud.” —David Lyon (40:49)
• On risk management:
  • “The skill in investing is to want to take risks and to understand how to quantify those risks and to say, am I getting paid appropriately for them.” —David Lyon (61:35)
• On team and culture:
  • “I want people to think that I’m an idiot at my team. I want them to think they can do my job and they don’t have it for now. That’s important to me. I don’t want people to think, oh, whatever David says, that’s terrific. I want them to challenge me.” (61:35)
• On IRR obsession:
  • “Assuming capital I give back to someone's going to earn the same rate of return that's still being invested drives me up a tree.” —David Lyon (71:59)
• On life lessons:
  • “Having people with different skill sets… and having them trust each other...I never would have said those words 25 years ago...It's something I wish I really understood a long time ago because it is the single most important thing you do.” —David Lyon (73:17)

Timestamps for Key Segments

• 06:43 – David’s unconventional path to finance and early career lessons
• 09:18 – Hedge fund initiation and why basis doesn’t matter
• 12:38 – Lessons from private equity and team dysfunction
• 18:14 – Modern private credit and the origins of direct lending
• 22:36 – Private equity’s high multiple/low flexibility dilemma
• 28:36 – The rise and reality of hybrid capital solutions
• 38:36 – The Neuberger Berman platform and leveraging scale
• 40:49 – Relationship-based sourcing and winning hybrid deals
• 44:29 – Structuring deals: M&A and DPI (return of capital) processes
• 50:44 – Portfolio construction, diversification, risk
• 53:13 – Investment selection: Top-line growth and management matter
• 55:02 – Assessing management and teasing out true motivations
• 56:18 – Exit challenges, alignment, and why some assets don’t sell
• 58:51 – Handling downside and misalignment in struggling deals
• 61:35 – Sourcing funnel and team philosophy as competitive advantage
• 64:54 – Risks in lending/private equity and market cycle perspectives
• 68:33 – Flexibility and environment for hybrid capital
• 70:34 – First paid job and lessons from caddying
• 71:59 – IRR as a pet peeve; importance of compounding
• 73:17 – Life lessons: power of team and outlook

Conclusion

In this episode, David Lyon offers a direct, highly pragmatic perspective on how the private market ecosystem has evolved and why hybrid capital solutions are uniquely positioned for today’s liquidity and structural challenges in private equity. His candid assessments of market cycles, risk management, relationships, and the human dimensions of investing make for a session rich in both tactics and wisdom for institutional allocators and anyone interested in the real mechanics of capital formation.