#387 - Ken Hersh - Co-Founder NGP Energy Capital Management - The Godfather of Energy Private Equity

Summary

POWERS Podcast #387 – Ken Hersh: The Godfather of Energy Private Equity

Date: June 3, 2025
Host: Chris Powers
Guest: Ken Hersh, Co-Founder of NGP Energy Capital Management

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Overview

In this richly insightful episode, Chris Powers sits down with Ken Hersh, the co-founder of NGP Energy Capital Management—often called “the godfather of energy private equity.” The conversation traces Ken’s unplanned journey from a politics student at Princeton to one of the most influential figures in the energy investment landscape. The discussion weaves through founding Natural Gas Partners, the bet on people over assets, the evolution of the U.S. energy industry, partnership lessons, and the realities and future of global energy markets.

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Key Topics and Insights

1. Ken’s Path to Investing and the Formation of NGP

• From Politics to Private Equity ([04:03] – [11:09])

  • Ken discusses his non-linear trajectory: intending to be a lawyer, “falling into” business through student leadership, and learning about investment banking by accident.

  • A chance acceptance letter to Stanford’s MBA program changed his path, leading to a role in Morgan Stanley’s energy group simply because he was from Texas.

    “I didn’t know the difference between natural gas and gasoline, but they said, here, you’re from Texas, you go sit there.”
    — Ken Hersh [08:33]

• First Steps with Richard Rainwater ([11:11] – [24:58])

  • Ken cold-called Rainwater for a summer project, proposing an analysis of natural gas markets that ultimately became the seed for NGP. Rainwater’s unconventional hiring approach and trust in Ken marked the start of an extraordinary business relationship.

  • Anecdotes about early meetings, the “blue binder,” and how a $5,000 check with no note began a lasting partnership.

    “There’s a check for $5,000. There’s no note... I guess I have my first client.”
    — Ken Hersh [24:58]

• Forming NGP and The Early Thesis ([25:26] – [33:19])

  • The original thesis: bet on rising natural gas prices. For seven years, prices declined, so the model pivoted.

  • Key insight: success came from backing talented, adaptable management teams—not just asset bets.

    “Let’s not do any more... let’s focus on the people who can do well in any environment.”
    — Ken Hersh [33:02]

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2. The Bet on People, Not Assets: How NGP Changed the Industry

• Pivoting the Investment Model ([33:25] – [36:00])

  • Ken explains how NGP moved from asset-centric investments to giving “walking around money” to talented operators—soon emulated by the industry.

  • This approach led to the shale revolution and fundamentally changed U.S. energy geopolitics.

    “Our model that we did was poo-pooed... one by one, every single firm pivoted to our model.”
    — Ken Hersh [34:21]

• Unlocking ‘Other People’s Trash’ ([36:21] – [43:35])

  • Persuasive breakdown of oilfield economics: how old fields and overlooked wells, in the hands of entrepreneurial managers, became valuable via operational ingenuity.

  • The importance of networking in the industry, identifying unfulfilled talent ready to “make lemonade out of lemons,” and recognizing when large companies overlook valuable assets.

    “In oil and gas there were diseconomies of scale as you got bigger, and that’s why they could divest these old tired fields without really much, you know, second guessing themselves.”
    — Ken Hersh [50:04]

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3. The Barnett Shale & the Shale Revolution

• Fast Followers and Industry Change ([47:47] – [51:21])

  • George Mitchell’s pioneering use of horizontal drilling and hydraulic fracturing in the Barnett Shale was the catalyst.

  • NGP and its portfolio companies amplified this by rapidly adopting and spreading these methods.

    “The unconventional shale revolution was not brought to you by Chevron and Exxon and Conoco. It was brought to you by the independent oil and gas entrepreneurs...”
    — Ken Hersh [00:00, 35:11]

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4. Building True Partnerships

• Backing People and Culture ([43:35] – [46:43])

  • Empathy, passion, and hunger distinguished winning entrepreneurs.

  • NGP’s culture: let operators operate, don’t micromanage technical work—focus on partnership and accountability.

    “Whether you own 99% or 1% of the company, don’t forget you work for them.”
    — Richard Rainwater, described by Ken Hersh [43:22]

• What Makes a 30-Year Partnership Work? ([52:56] – [55:11])

  • Ken reflects on 30 years with David Albin: mutual trust, different but complementary skills, willingness to support each other through personal and professional crises.

    “There’s no substitute for trust. David and I had each other’s back.”
    — Ken Hersh [53:14]

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5. Lessons in Failure: The Sonoma Story

• Managing Through a Major Loss ([59:45] – [67:15])

  • The failed Sonoma deal: success for three deals led to complacency and too much concentration in a fourth, which coincided with external shocks and a credit pull-back.

  • Radical transparency: waiving fees, telling LPs they could withdraw from the fund post-loss, and maintaining trust.

  • Takeaways: Don’t turn your brain off after a few successes; always have a Plan B; partnership and integrity matter more in the long view.

    “We didn’t lose confidence in ourselves, and we didn’t lose confidence in our business plan... There were some blessings in there too.”
    — Ken Hersh [66:34]

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6. The State and Future of Energy

• Drill, Baby, Drill—Is it Feasible Today? ([67:16] – [69:31])

  • Trump-era slogans vs. reality: regulatory and physical bottlenecks, energy’s declining share of U.S. disposable income, and the real math around energy and tariffs.

    “So much of the drilling bottlenecks are at the state level, local level, infrastructure... it’s not as easy as just three words, unfortunately.”
    — Ken Hersh [69:11]

• The “All of the Above” World and Adaptation ([69:54] – [76:26])

  • The persistence of fossil fuels: despite trillions invested in renewables, global energy consumption is still over 80% fossil-fueled; demand for energy is inexorably driven by population and rising living standards.

  • Renewables have not achieved scale sufficient to truly substitute for hydrocarbons; adaptation and technological innovation should be equal priorities alongside renewables.

    “The world has spent about $14 trillion on renewable energy in the last 15 years... and congratulations, fossil fuels has gone from 84% market share to 82%.”
    — Ken Hersh [70:24]

    “The platform that I’ve been on is we need to appreciate that fossil fuels are not going anywhere unless we want to impoverish ourselves...”
    — Ken Hersh [73:11]

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Notable Quotes

• On Energy Entrepreneurship:

  “The unconventional shale revolution was not brought to you by Chevron and Exxon... It was brought to you by the independent oil and gas entrepreneurs…”
  — Ken Hersh [00:00, echoed throughout]

• On the People Bet:

  “Why do we even need the assets? Why don’t we find great people and just give them walking around money?”
  — Ken Hersh [33:15]

• On Partnership:

  “There’s no substitute for trust. David and I had each other’s back. You know, I call it the foxhole…”
  — Ken Hersh [53:14]

• On Transparency and Recovery from Failure:

  “Take the high road, play the long game. This was not something to get all emotional about… I'm proud of the way that we carried ourselves, and I'm proud of our partners who stuck with us.”
  — Ken Hersh [66:53]

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Timestamps for Major Segments

• 00:00 – The independent shale revolution and personal pride in impact
• 04:03 – Ken’s winding career start, from politics at Princeton to Morgan Stanley
• 11:11 – Reaching out to Richard Rainwater, the pivotal summer project
• 25:26 – Founding of NGP and forming partnerships
• 33:02 – The NGP pivot: betting on people over assets
• 43:22 – How to recognize great teams and passion in entrepreneurs
• 47:47 – The Barnett Shale and the unconventional revolution
• 52:56 – 30-year partnership lessons
• 59:45 – Navigating failure with integrity: the Sonoma story
• 67:16 – Drill baby drill, energy policy and the realities of U.S. energy production
• 69:54 – The energy future: renewables, adaptation, and hard truths

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Memorable Moments

• Ken’s accidental foray into investment banking (attending a Morgan Stanley dinner thinking it was a law firm) [06:12]
• Richard Rainwater’s style: spinning the blue McKinsey binder, writing a $5k check for a summer’s work, and assembling people serendipitously [18:28, 24:58]
• The 20-bankers’-box misadventure: being unprepared for high-level meetings, and the Equitable’s old-school process of wiring $100 million “on day one” [28:34, 30:01]
• The unconventional thinking that led majors to divest “trash fields”—which became gold in entrepreneurial hands [41:00–43:00]
• Doing the right thing in a crisis, waiving fees, and maintaining relationships through loss [62:45–66:53]
• Straight talk on the math behind energy markets, policy, and the difference between wishful thinking and physical reality [69:54–76:26]

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Closing Thoughts

Ken Hersh’s clarity, candor, and storytelling offer a rare retrospective and primer for anyone building organizations, investing, or operating in complex, cyclical industries. The emphasis on people, the long game, adaptation, and trust over technical or theoretical advantage stands out as the true ‘edge’—timeless for business and life.

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For more on Ken Hersh’s philosophies and stories, see his book The Fastest Tortoise.

Transcript

[Ken Hirsch]

The unconventional shale revolution was not brought to you by Chevron and Exxon and Conoco. It was brought to you by the independent oil and gas entrepreneurs who, through the school of hard knocks and trial and error and equity capital from the private funders that gave them that capital to try new things in old tired fields, in formations that they used to just drill through and get stuck in the shale. Now they were drilling horizontally in the shale and it changed the economy, it changed geopolitics, it changed the US from being a massive importer going out of business to an exporter. I mean, you couldn't believe the world changed. And if you ask me, when I look back on what I'm most proud of, I am immensely proud of the NGP franchise. I'm immensely proud of the people who've worked there and the businesses they've built and the. All the entrepreneurs we've backed and all those great people that I learned from. But I'm, I'm. I'm equally as proud, or maybe more proud that we were one of the catalysts that changed the world.

[Fort Podcast Host]

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[Ken Hirsch]

Thank you for being here. Chris.

[Fort Podcast Host]

I wanted to just start going back before Rainwater. What was the period of time where you thought I'm going to become an investor or I'm going to get into investing?

[Ken Hirsch]

There was never really a light bulb moment. I was a politics major, I was pre law, I was going to be the next great litigator when I was in college, I guess fortunately or unfortunately, Princeton didn't have a pre law program and I got involved with a business organization and then I really enjoyed that. But I was still going to be incorporating law somewhere because I liked the politics and the political theory and the arguing and all that aspect of it. And so I was kind of hell bent on law school. And because I was doing well leading this business organization called Business Today magazine in Princeton, I decided I would get a joint degree because I'm doing three years for law school. And I looked it up and a JD MBA was only one more year. So going from three to four didn't sound like a big deal. So I decided to apply straight out of undergrad to both business schools and law schools. And it was my first lesson in how the market works. I got rejected or waitlisted at most of the law schools. I got into a couple and I got in or waitlisted at most of the business schools. So I went, huh, now the market's telling me something, maybe I ought to pay attention. And one letter came in the mail. That changed my life, frankly, and that was Stanford. And Stanford had a program where they admitted a few. I didn't know it at the time, but they had a few people that they admitted straight out of undergrad, I guess to bring the average age of their class down. They, they normally wanted you to go work for two or three or four years before you come back to business school. But there were a select number of people that they gave them the option. So I get my envelope in the mail and it had a little card in it and it had two boxes. I will come next year or I will defer for fill in the blank. I thought everybody got this. I didn't know. And, and so at that point I said, well, I might as well see if I can better deal them and I'll go interview on campus and see if I can get one of these two year analyst jobs that everybody was talking about. Again, I was a politics major with no business undergrad. Princeton doesn't have an undergraduate business program. And so I went to interview and of course before I was interviewing, the comment for a politics major was why business? And I was like, well, because I run this organization on campus and I kind of like it. And they'd say, well, do you know much about the buyout business? And I'm like the what? And they said, because it was just starting at the time. This was in 1984, 85. Do you know much about investment banking? I said what are you talking about? And I ended up going saw an ad in the Daily Princetonian for a shrimp dinner hosted by Morgan Stanley. I thought it was a law firm and I didn't have a, a dining contract my senior year. And so I thought this is great. I get to learn about a law firm and I get dinner. So I go there and they say we're an investment bank. I'm like what, what does this mean? And so I talked to the person there and they said, well, we have clients. And we. And I said a bank? You mean like a checking account? And they said no, we don't do that. We, we are a brokerage business, we're an advisory business and we're an investment bank. So they kind of explained it to me and I didn't really understand what it was, but they did say they have a two year program. And I remember I said, aha, this is what I've been hearing about. So I started interviewing on campus and I was having almost no luck with the investment banks until I got that Stanford letter and my next interview was with Morgan Stanley. And the, the guy said, you know, why do you want, you know, why do you want to work here? And I figured I'm getting dinged by all these other investment banks, I might as well just do the completely wrong thing that you're supposed to do in an interview. And so I said, well, I hear you guys have a really cool two year program. And I just led the witness. And he says, well, yeah, we do. And I said, well, because I am looking for something to do for a couple years. He said, oh really, why? I said, well, because I'm going to go to business school afterwards. He said, oh, you are? He said, yeah, I think I'm going to go to Stanford. And of course the first round interviews were done by second year analysts. So these people were applying to business school at the time. And I said, yeah, I'm going to go to Stanford. And he said, you are? And I said, yeah, I got this thing in the mail that says I could go next year but I can defer it for a couple years if I find something cool to do. So I heard you guys are really good. And you could just see kind of the blood rush out of his face, like, oh my God, this guy could be one of my classmates. And I got whisked to the next round and then whisked to the next round. And my hit rate at places, at interviews after that envelope appeared was very high. And Morgan Stanley had a wonderful program. And I ended up going there to learn investment banking, which was very transactional. It was not really investments. I was thrown in the energy group because I was from Texas. My parents, my mom was an economics professor, my dad was a podiatrist. I didn't know the difference between natural gas and gasoline, but they said, here, you're from Texas, you go sit there. And so that's where I went. And that happened to be where all the action was. In the 80s, Chevron had just purchased Golf, Boone Pickens was going after Phillips Petroleum. Texaco and Pennzoil were at each other's throats. I mean all this stuff was happening and the Morgan Stanley Energy group was involved in some of it. And so I sort of, in the trial by fire theory, I learned it and I learned the industry, I learned about investment banking, I learned about M and A and learned about how Wall street works, some of which was good and some of which wasn't so good.

[Fort Podcast Host]

Okay, so you do that two year analyst program, then you end up going to Stanford.

[Ken Hirsch]

Right.

[Fort Podcast Host]

I am pumped that we are hiring for a Vice president of acquisitions at Fort we are looking to grow again in 2025 and take advantage of some of the opportunities in this market. But we're looking for someone with a lot of experience. You have to have 10 years of experience. You have to be great at business development, understanding the real estate industry and how deals work and relationship management. We want to build the best relationships in the real estate industry, mostly throughout Texas. It's a huge plus if you have experience in our target markets, which are all the major cities across Texas and Florida. Dfw, Houston, San Antonio, Austin, El Paso, down in South Texas, along with Orlando, Tampa, South Florida, Miami and markets like that. For more information or to apply, you can find the job posting on the Fork company's website. That's f o r t-companies.com f o r T-C-O-M p A-N-I-E-S.com we look forward to working with you. When you went to Stanford, did you like energy at that point and that was going to be the career or. That's just what I did for two years until I got to Stanford.

[Ken Hirsch]

It was really kind of what I did because that's where they stuck me. I go to Stanford. Stanford again, doesn't have that much concentrations. So you.

[Fort Podcast Host]

Not a big oil and gas, not.

[Ken Hirsch]

A big oil and gas school, but it was really more of a general management and a heck of a lot of fun. And I knew I didn't want to go back to investment banking. I didn't like the transactional nature of it. I remember working on a deal and when the deal closed, there was a bottle of champagne. I walked in my office and there's a bottle of champagne on my desk with a little ribbon on it, like, what's that for? And I look at it and said, oh, congratulations on the closing of project whatever. And then I looked around and everybody who was on that project team got this bottle of champagne and we had, we had advised a company written a fairness opinion or something on it on a deal. And I remember thinking to myself, why are they celebrating? This may be a. They won't know for five years whether it's a good deal or bad deal. But the investment bankers got paid and so they got their fee and they planned the closing dinner and they put the little loose sites together and, and the deal toys and next thing you know everybody's getting champagne. And I just remember, you know, that doesn't feel right to me in many ways because we were also working on deals that were divesting of deals that were five years ago and ten years ago somehow advertised as great transactions that people got champagne for. And now there's a whole class of people saying they were terrible, lousy deals that almost, you know, trash this company. We got to help them sell this division. And I'm thinking, why, you know, why celebrate the day it closed? And not, it's not a knock on the, on the, the Morgan Stanley's of the world. They are in a transaction advisory business and they can't predict the future. And if the clients want to buy a business, they will help you buy a business. And they may find you a good business to buy, given your parameters. But at the end of the day, the client is the one who has to live with it and their shareholders. So I, I just didn't like that. It just didn't sit with me. So while I was at Stanford for my summer job, I decided to do an independent job search, which meant I'm not going to interview on campus. And there was just a thing emerging at the time called principal investing. There was no such thing. The terms private equity did not exist. And I called back to Morgan Stanley to a buddy and said, look, I'm thinking about doing an independent job search for people who are looking for investment professionals. Do you have any leads for me? And he said, well, you're from Texas. I had heard of the Bass brothers. And he said, oh, the Bass brothers, yeah, in Fort Worth. But you ought to call the guy who left them recently. There's this guy named Richard Rainwater and he left the Basses a few years ago, just two years ago, and maybe he's looking for somebody. I said, perfect. I had this vision of a guy sitting in his office by himself waiting for me to call him. And so I, hi, I'm, you know, out in California. I dialed 41 1-INFORCEMENT and I got the number. I asked for the number for Richard Rainwater's office and I got a phone number. I called that number. Nice woman answers the phone. Hi, this is Ken Hirsch. I'd like to send a letter to Mr. Rainwater. Could you please give me your address? She gave me the address to on Main Street, Fort Worth, Texas. So I write, I write a letter to Richard Rainwater. Cold call. Letter mentioned that I was at Stanford because I knew he was at Stanford. I mentioned that I'd worked at Morgan Stanley because that was a big fancy name enclosed. My resume referenced the guy that I talked to back in New York and I would love to come talk to him about a summer job that was the letter. And I sent it off in the mail. Then I'm kind of waiting. You know, I used to. You know, when you do job searches, you put things in the mail. You kind of don't want to be a nudge, so you wait. Let's see, it takes three or four days for him to get it. I don't want to call till he receives it. You know, give him a day to have him with it. And so I'll wait about a week. That was kind of what you did back then. And. But, like, four days later, I got a phone call, and I happened to be in my. In my. The house we're renting. I was. Happened to be in my room. The phone rings. Ken Hirsch. Yes, hold the line for Mr. Rainwater. And I'm like, oh, crap. One of my friends is messing with me because I had told a couple of people what I was doing, and I really thought it was a practical joke. And it was Richard. And he said, you want the quote? That was his first. First thing he ever said to me. Do you want the quote? And I'm thinking, did the market crash? We're out here in California. It's two hours earlier. You know, what's happened? You know, and. Because In October of 87, a couple of months earlier, the market had crashed. We woke up in California. The market was already down.

[Chris]

Yeah.

[Ken Hirsch]

And all the. You know, all of the business school was panicked because their bonuses. Their bonuses were invested in the market, and it crashed. So, Richard, I said, do you want the quote? I said, sure, give me the quote. And he said, I called Tom. Morgan Stanley invented the analyst program. We've had more analysts than anyone, and Ken Hirsch is the best analyst we've ever had.

[Chris]

Let's go.

[Ken Hirsch]

I said, wow. And he said, sounds like I need to meet you. And I said, okay. And I'm thinking, well, like every other recruit, fly me down. He said, when can you get here? And I kind of looked around, went, let me get back to you. So I hung up. And I had been signed up, you know, back in the day when you could just sign up. I had signed up for interviews. My next interview was at McKinsey. So I go to the McKinsey interview, and I remember this like it was yesterday. And I said to him, I might be interested in working for McKinsey for the summer in your Texas office, in your Dallas office. And they went, really? And As a sidebar, McKinsey, you know, always had trouble recruiting at Stanford because everybody wanted to go to their San Francisco office. And they had offices all over the country and all these primadonna Stanford students, you know, said, I'll, you know, I'll work with you, but I want to work in that office. So when I said, I'd like to work in your Dallas office, the guy went like, really? All day he's listening to my classmates saying, I will only consider an offer from you. This is for summer jobs, you know, if I'm in the Bay Area. And so I said, but I'd like to see it first. It didn't, it didn't dawn on him that I was from Dallas. Yeah, you know, so I'd like to see it first. Do you think you, you could fly me down? And he said, absolutely. I said, when? I said, as soon as you want to go. So I called Richard's office back. I said, I got my ticket and I interviewed with Richard. I interviewed with McKinsey during the day, and I went over to Fort Worth in the afternoon.

[Fort Podcast Host]

And what happened in that interview? Because as the story goes, he sent you home with a stack of papers and said, well, he said, here's the latest report and you made a pitch. And you said, give me 90 days and I will tell you what the business idea is. But what, what happened in that hour you were with him.

[Ken Hirsch]

So.

[Fort Podcast Host]

And one more question. What was the setup at that point? Was it just him in an office? Because I still haven't gotten a firm grasp on, like, what his business plan was. Was it just, I've got money and I'm just going to back the next generation of superstars, or did he even have an actual plan? That's two questions. What was his business plan? And what y' all talk about for that hour?

[Ken Hirsch]

Well, and what's the setting?

[Fort Podcast Host]

And what's the setting?

[Ken Hirsch]

Right, so Richard's office. This would have been in the. In 1988. Richard's office looked like a laboratory.

[Chris]

Okay.

[Ken Hirsch]

Institutional gray low rise carpet like you'd find in a workout room. White secretarial admin bays, an open floor plan with offices around the edge with white, with, with white marker boards, floor to ceiling marker boards on three sides of the office, and glass looking out into the center. And the offices were run as you walked around the room, around the floor, you could see the people at the offices. And Richard's office was. Had a. He had a white desk, a white horseshoe desk and two desk chairs right in front of him. And nothing on his desk except for two phones and a picture of his family and the. In the office at that time. His. He his, his next door office mate was Peter Joost, who was kind of his right hand. And then there were at the time various other deal guys around the floor whom I had not yet met. I get shown into the, this laboratory and I'm sitting there across from Richard Rainwater and we talk and I could tell there were other people in the office, a handful of other people. And I look on the marker boards and there was debits and credits kind of writing on the board. Revenues, expenses, values plus debt minus our enterprise value. I mean, I didn't know what I was looking at anyway. And we talked for a few minutes and he said, I really wanted to meet you, but I really don't have any employees. But I just wanted to meet you because back in New York your former colleague sang your praises so much. And of course I was really dejected at that moment because I came for looking for a job. And then he tells me he has no real employees. He said, I have people around here who just office here and we're all trying to put deals together, but I don't really have anybody who works for me other than Nancy, my assistant, so I'm not really going to hire anybody for summer. And then we chatted a little bit more. And in the completely serendipitous world of coincidence, his desk was not perfectly clean that day. He had a blue binder that was given to him by McKinsey. And I had been, I had been interviewing at McKinsey that morning and I knew what their binders looked like because I could see them all over their office. And unbeknownst to me, that morning a young associate at McKinsey named Jeff Skilling. Yes, the Jeff Skilling from Enron interest. And John Sawhill, who was Jimmy Carter's undersecretary of Energy, the Department of Energy who was leading the energy group at McKinsey had been in Richard's office that morning to deliver to him a study that he paid money for, which was their thesis about the coming popping of what they would call the natural gas bubble. That supply was declining and demand was rising because prices were low, that the market within two years was going to get caught short and prices were going to go from low to super high. And so he basically spun that book around and put it on my lap and said, you were in the energy group, weren't you? And I said, yeah. He goes, what do you think of this? And I knew enough to be dangerous. I mean, I remember this is a year out and I start flipping through it and I'm 25 years old, and I mean, I had this out of body experience. I'm flipping through it, I close it, and I say, tell you what, Richard. May I call him Richard? Tell you what, Richard. How about for my summer job, I will take this McKinsey view of the world that you paid for and design a study on who will win and who will lose from an investment perspective, given the McKinsey scenarios. And I can do this because McKinsey had given me an offer so I can work at McKinsey during my over in Dallas during the day, and I can work on this project. So he said, write me a proposal. So I went home that night on the airplane back to California, and I wrote it out and I typed it up and I sent it to him. But. Well, I wrote it out, but before I typed it up, I got back, told my buddies that I was, that I was talking to about this trip because I was kind of excited. I'm going to get to meet Richard Rainwater. I read an article about him, you know, and, and, and I said, he wants. He told me, write him a proposal for this study. So I said, this is what I'm going to do. I'm gonna. I can work April and May, and then I can work at McKinsey June, July and half of August. And then because Stanford starts so late from mid July to mid August to mid September, I can finish up the study so I can get three months of working on it. And I said, that sounds. Everyone said, that's great. I said, should I charge him for it? What do you think? And one of my friends said, no, don't charge them. You got this job at McKinsey, they pay you fine. What if he says no? And just to have that on your resume is really cool. My other friend said, you should absolutely charge him because you're giving him something of value. If you give him something of value, you should get paid for it. So I said, you guys are no help. And so I went back and started typing it up on my little macintosh dot matrix printer. And, and I, I got to the end about, you know, the logistics, and I don't know what came over me, but I said, I think I might have said it was a stipend for this work. I'd like to get paid $5,000 and I'd appreciate it getting paid in advance because I'll have some expenses. And I faxed the letter off. The next day, there's a knock on my door. I don't know why I was home I was rarely home, especially in the mornings. It was FedEx. I opened the envelope. There's a check for $5,000.

[Chris]

Wow.

[Ken Hirsch]

There's no note that says, hey, Ken, got it. Let's get going. It was a check for $5,000. I'm tearing the envelope upside down. Nothing in there. I said, I guess I have my first client. Off we go. So I ended up working at McKinsey and moonlit for Richard and put this study together, which ultimately became Natural Gas Partners. And that closed the deal. Closed. I presented it to the office in late August of 88. I was 25 years old.

[Chris]

25.

[Ken Hirsch]

And the. Richard said, I got a guy to do this with you who was working in our. In his. Richard's Connecticut office, which was David Albin. Said, y' all need to meet. That was my introduction to my business partner, partner for 30 years, who I never had a disagreement with in 30 years and never had a stitch of paper between us on how we would govern.

[Fort Podcast Host]

Unbelievable.

[Ken Hirsch]

And that's how y'. All. Y' all need to get together. That was our. That was okay. That was it. I mean, the second best thing that ever happened to me. David Albin is the best business partner any guy could ever have. I had this study that I did and not to go on too long, but the side story, the image of it is just kind of humorous that when I came to present it to Richard the first time, I had gone to Alpha Graphics and produced three notebooks, three copies of my book. And it was about inch and a half thick. I was pretty proud of it. I didn't go out for. I went out three times the whole frickin summer putting this thing together. And, and I show up and Richard says, goes up around his office, he says, y' all get in here, y' all get in here. And in walks Richard Squires, Rick Scott, now Governor, Senator Rick Scott, John Goff, Tad Kelly, Peter Juice. There's like seven and Richard, there's like seven or eight people in the, in the room now. And I got three books and we're sharing, like, you know, it's very awkward. I'm like flipping next to Richard and trying to share books across the table. And they had some comments on it. So I said, look, why don't I go back and fix this up? They said, yeah, go back, fix this up and, and we'll call you about coming back to the office. Okay. It was a good constructive conversation, but it was very awkward. I tell you that three books thing for a reason. So I called back to the office. And I said, when do you want me to come? They said, come a week from whatever. I said, that's perfect. That's the day I'm driving back to California so you can present the final. Unbeknownst to me, Richard had called Dick Genret at the Equitable Insurance Company of the United States. And he said, we got this new deal. I want you to come look at it. And so Dick Genrett sent his senior investment team from the Equitable Insurance Company to Fort Worth to talk about, unbeknownst to me, to talk about an investment thesis around natural gas. I was not going to get caught short with books this time. So I went and printed up 20 of these suckers and I had a big banker's box full of these notebooks. I walk in to the room, they said, go to the conference room in the back. Big long table, really long table, longer than the one we have here. And I situated down at the end, I'm the junior guy, and I put my books out in two stacks. And in walks three or four guys in suits. This guy, David Albin, Richard. And they have, they have a stack of them. They copied the McKinsey report on the table, put in the middle of the table. Richard stands at that end of the table. I'm at this end of the table. He puts two lines up there. Supply is doing this, demand is doing this. Prices are going to go from here to here. This is easy. We're going to invest your money. It'll be a three year deal. Prices are going to go from here to here. And if it doesn't work, we'll give you your money back. And we've done this big study. And then everybody looks at me, I look like I'm 12. And I'm sitting there buried behind these two stacks of books. You can't even see me. And Richard says, we have this McKinsey study and we have this huge study we spent all summer doing. Okay, Remember, Richard saw it in my lap practically a week before. And again, unbeknownst to me, Dick Genret sent down a very senior team. Those notebooks could have been the white pages from the Dallas phone book. They never cracked the book ever, but they, they treated it like it had. And that was in September of 88. And they said, thank you very much. I said hi to David and I go back to school. I ran into Richard. He happened to be on campus for his 25th reunion in October of 88, or his 20th reunion. He was a class of 68. I go up to Him I got, I wormed my way into his talk that he gave. I went up to him afterwards. Hey Richard, how you doing? How's our deal working? He said, oh, you ought to call David because the doct documents are going. That was in October of 88, November 16, 1988. Natural gas partners was formed. The Equitable Insurance company put up 97 and a half million dollars. We all put up two and a half million dollars. I had a job, we had a fund, we were off to the races and that's how it started. And I actually went on the payroll while I was still in school.

[Fort Podcast Host]

So you started it while you were, you were working there at Stanford?

[Ken Hirsch]

Yes, and David Albin had gone. He was Stanford Business school, class of 85. So he was out in Greenwich, Connecticut and he was our partner. And then Gamble Baldwin and John Foster joined from Credit Suisse and we had our four person team and we were off to the races and we had $100 million to spend and, and back in the day, it wasn't just in time funding like private equity is now, they wired us that much money on day one with an 11% hurdle rate. So we were running a bond fund to keep income going to, to maintain that hurdle rate. So it was, it was, we were making it up as we went along.

[Fort Podcast Host]

What was the thesis? So what was the original thesis that you put together?

[Ken Hirsch]

Well, the original thesis was what kind of companies would win if commodity prices went up.

[Fort Podcast Host]

Okay.

[Ken Hirsch]

Because that's what McKinsey.

[Fort Podcast Host]

The whole bet was on a nat gas going up.

[Ken Hirsch]

Correct.

[Fort Podcast Host]

How are you going to play that bet?

[Ken Hirsch]

We were just going to get long the asset. Okay, okay. And because McKinsey said the price is going to go up, guess what? McKinsey was dead wrong. The price went down for seven straight years. Seven, okay. Every year was worse than the one before it.

[Chris]

Okay.

[Ken Hirsch]

Okay. We were in sitting in year three going, this is terrible, this is terrible. And so we said, wait a minute. We had done four transactions which were.

[Fort Podcast Host]

Like, what was the, was it betting backing teams at that point?

[Ken Hirsch]

We completely pivoted at that moment. And I said, wait a minute, we've done like four transactions and one of them's done really, really well. One of them's done really pretty poorly. And to have done okay. Actually two have done well, one poorly and one okay. Why did the two do well? And why did the one do poorly? The one that did poorly had weak management. Okay. Assets but prices went down.

[Chris]

Yeah.

[Ken Hirsch]

Okay. So the asset value went down and the management was too mediocre to turn it around. The other ones, we had people who learned how to make lemonade if the world gave them lemons. And they were good, and they, they found better assets and they were able to withstand lower prices. Now, I'm not that smart for a liberal arts guy with no technical background. I looked at these models and said, wait a minute. This is not hard. It's revenue. It's revenue is volume times price minus costs. That's your operating income. Okay. Volume times price minus costs. If price goes down every year, let's focus on increasing volumes and decreasing costs.

[Chris]

Yeah.

[Ken Hirsch]

Okay, let's find. And then that's reversing, engineering, reverse engineering the deals that worked. We said, that's exactly what they did. They bought other people's trash and made it their treasure. And we said, you know what? Why don't we just change our business model? And instead of focusing on the assets that would do well if prices went up, let's focus on the people who can do well in any environment. And we completely pivoted our model in the early 90s and said, let's not do any more. And in fact, if there's assets in front of us, those assets can be distracting because we could get seduced by them and say, those are great assets and we're missing the real bet, which is on the people. Because what we realized is that the assets that were in front of us in seven to 10 years when we go to sell, the assets we're staring at will be largely depleted. So what's going to be there when we go to sell? It's going to be what the management team did with our cash. Plus the cash flow off of those assets.

[Chris]

Yeah.

[Ken Hirsch]

So you have to be plus or minus close on the cash flow of the assets, because that's your reinvestment dollars.

[Chris]

Yeah.

[Ken Hirsch]

But if you're 10% off on your reinvestment dollars, but management is great, you'll make it up in year 10. Okay. If you've absolutely perfected the valuation of the assets, but management is mediocre on the reinvestment model, in year 10, you're not going to have very much three to sell. So we said, why don't we do people? Why don't we back people before they have assets? If the assets are less relevant, then why do we even need the assets? Why don't we find great people and just give them walking around money? And that pivot has turned into the single way that capital flows into the oil and gas sector today. Our model that we did was poo Pooed by the couple firms that were out in the market that showed up in the marketplace a year or two after we did. They said, oh, you got to have assets. You can't do anything. NGP doesn't have any engineers. They don't know what they're doing. One by one by one, every single firm pivoted to our model. And then another 30 firms showed up. And guess what brought you the unconventional shale revolution 15 years later, backing great entrepreneurs. The unconventional shale revolution was not brought to you by Chevron and Exxon and Conoco. It was brought to you by the independent oil and gas entrepreneurs who, through the school of hard knocks and trial and error and equity capital from the private funders that gave them that capital to try new things in old tired fields, in formations that they used to just drill through and get stuck in the shale. Now they were drilling horizontally in the shale. And it changed the economy, it changed geopolitics, it changed the US from being a massive importer going out of business to an exporter. I mean, you couldn't believe the world change. And if you ask me, when I look back on what I'm most proud of, I am immensely proud of the NGP franchise. I'm immensely proud of the people who've worked there and the businesses they've built and all the entrepreneurs we backed and all those great people that I learned from. But I'm equally as proud, or maybe more proud, that we were one of the catalysts that changed the world. I mean, if you think about the United States and the natural resources picture, going from scarcity to abundance and what that ripple effect did for our economy, for politics and for geopolitics, I mean, it's world changing. And it started about 30 miles from here in the Barnett Shale.

[Chris]

Yep.

[Fort Podcast Host]

2000, early 2000s.

[Ken Hirsch]

Yes.

[Fort Podcast Host]

Okay, we're going to get to that in a second. So you have this idea, and again today everybody's. There's private equity everywhere. You got an idea, you go get private equity. You're a team. How did you get the message out to the world that, hey, we're this group that we don't care if you have an asset, we just care if you're a great team. Come find us.

[Ken Hirsch]

I spoke. Well, the good news in the energy business, Houston, Midland, Denver, Shreveport, Tulsa, Oklahoma City, Calgary. You just did it. You just said, I just did it. We could have two teams of people going out to those cities and start calling on people, and that's what we did.

[Fort Podcast Host]

We would just call big companies and say, hey, if there's anybody here that's got an idea and wants to go do it.

[Ken Hirsch]

Oh, no, no, no. We didn't want to do that because those were their people. Okay. We spoke at every conference. We networked around as best we could, played in every golf outing. I'm not a hunter, but I went on a couple hunts. We knew enough people. And then you meet people and you could ask for other people. And I used to go to companies and I would look in their M and A department and I'd kind of look for my peers, the young deal team people who were out there working. And you'd see them at business development functions. And it wasn't the CEO, but it was. It was people who were closer to my age. And then you say, what do you do? What do you do? Well, this is what I do. And, you know, and I say, well, if you're ever interested. And what we found was in the oil and gas business, there's this phenomenon that, that, that again, when we reverse engineered the model, we said this. This is a real. There's a real opening to do exactly what we're doing and to scale it. And the opening was driven by two things. Number one was that all oil and gas wells deplete.

[Chris]

Yep.

[Ken Hirsch]

Every one of them. Yet a company wants to grow. Okay. So as a company grows by drilling new wells or acquiring new wells, they push the old wells that are getting older and older and more depleted. They push them, you know, kind of farther and farther back in the filing cabinet.

[Chris]

Yeah.

[Ken Hirsch]

Okay. And most oil and gas companies have 80% of their value in the top 20% of their well count because as they age, these wells become marginal and they just become little cash cows. And then when they get really old, they become nuisances.

[Chris]

Yeah.

[Ken Hirsch]

So that's fact number one, all oil and gas wells deplete. Okay? Fact number two, people want to move up the ladder. If you're a bright young engineer, you graduated, number one, your class from Colorado School of Mines. Congratulations, you're going to go to Andrews County, Texas, and you're going to ride a pickup truck with some other dude, and you're going to learn how to pump an oil and gas well. Okay? And you're going to sit there and go, wait a minute, I have my models, I have my fancy degree. And he's going to say, listen, son, this is how you pump an oil and gas well.

[Chris]

Yeah.

[Ken Hirsch]

Okay. And if that guy doesn't beat you up, okay, in a couple years, guess what? They moved to Midland. And now you have 20 of those dudes reporting to you. Okay. And then five years later, they move you to Houston. Okay. And then 10 years later, they move you up. Okay. So guess what's happening. As you get older, you're moving farther and farther from the asset.

[Chris]

Yep.

[Ken Hirsch]

Okay. Then when you get really experienced, when you're in that, when you're a 20 year engineer and you're in the height of your career and you're really a money maker, where does that company put you? Do they put you back in Andrews county, Texas on 100 wells doing five barrels a day? No, they want you offshore, Gulf of Mexico, deep water, where you can work on this billion dollar development that's going to produce 100,000 barrels a day. The needle movers. Right. Or they're going to have you in management talking to strategy and budgets. And so what we found is there's a quality of person who misses those days where they were just working in the field. Not everybody, but there's that quality of the person that we saw where they would talk longingly about those days and they would say things like, gosh, if I had my hands on that old field, get knowing what I know now, those hundred wells that were doing five barrels a day, I could get them going to 10 barrels a day. Now my light bulb went off because as a middle manager at Chevron, if you walked into your boss and says, excuse me, sir, I got an idea on how to take that field from five barrels a day to ten barrels a day. And I've been working on it, moonlighting it, you know, for three weeks or for three months. And here's my idea. He'd look at you and say, what are you doing? I need you working on the thousand barrel a day stuff, the 10,000 barrel a day stuff. What are you messing around with that stuff for? In fact, you might get fired. Right? Why are you using company resources on that stuff? That's our, that's our junk drawer. But I looked at it and go, wait a minute, 5 to 10, that's 100% move. Why don't we go bid Chevron for that old field? And they'll think we're crazy bidding them for it. And why don't you go run that field? And that's what we did. That's just a story, but we did that over and over and over again and said we can take other people's trash in the hands of real money makers who then go shopping with our dollars and acquire and acquire and acquire and then enhance the value of those assets. Some of them were junk. And they would be pumped, they would be plugged and abandoned. But they would say, I can cull this portfolio and really make it. I can go and improve production. I can find infill wells to drill. I can find ways that by lowering costs, we can increase the longevity of the field. Lots of different ways you can enhance an old field. And oh, by the way, the best place to find oil and gas is in old oil and gas fields. And guess where the unconventional share revolution happened in old oil and gas fields. And it's still happening. And so there were all these embedded options that we found by doing it this way. And we didn't have to pay that much of a premium over those five barrel a day values. And so those two facts were powerful because when we went to go bid the big company for that asset, they would say, thank you.

[Fort Podcast Host]

Yeah, you're helping them, you're helping them.

[Ken Hirsch]

Clean up their portfolio, their efficiency numbers improve. The day they would say, we've bought some deals where they said, I'll sell you that field only if you take that one with it.

[Fort Podcast Host]

We say, okay, yeah, we'll give it to you.

[Ken Hirsch]

And we open up boxes. We opened up boxes from a Chevron acquisition that said Gulf Oil on them and were taped up the Gulf. The Gulf merger was in 1984. I mean, so, you know, I mean, it was just that serendipitous time where we found a real opening in the field. We had no idea about unconventional shale. We, I mean, the shales, you drilled through them, your, your drill bit got stuck and you, it was, you cursed because your well cost just got went up because it would chew up your drill, your drill bit. So it was not, this was not all planned. But what we were able to do was zero in on the real driver of value. And that was people. And, and we were able to create a business model that was really attractive to what we coined the phrase owner managers. People who said, can I put my own money in this? And we said, sure. And that's where Richard would say, ken, whether you own 99% of the company or 1% of the company, don't forget you work for them, okay? They're the ones up all night. If there's a problem, you get to sleep and they call you in the morning saying, I was up all night, I took care of it. And that's why you want to be the best financial partner you can be. You want to give them all the rope that they can handle. You want to give them all the responsibility they can handle. Just be a great financial partner and then get out of their way. And that's what we did. We zeroed in on the people bet, and then everything changed.

[Fort Podcast Host]

If you had to say right now, in a nutshell, it's probably industry agnostic, obviously, oil and gas. You had to be a good engineer, a good geologist. You have to have the skill set. But maybe some of the soft skills. How do you know you're looking at a plus versus a minus?

[Ken Hirsch]

That's the magic. And we don't always get that. Right, right. I mean, in the early days, you could tell because you could see the gleam in their eye or how dull they were. I'm working at wherever, and this is what I do, you know, but they remember that field and, oh, if I had that field today, this is what I would do with it. You could tell the passion. I mean, I look for passion. What do people love to do? If you're going to be an entrepreneur, you better be all in. You better have a passion for what you're doing. You ought to be competitive, you ought to be resourceful. You ought to want to win, not lose. Because if we're putting up the money, I want you to not lose it. That's a good rule, you know, and. And so just the people who. The people who understand that, yeah, you can tell there's a big difference between somebody who says, I would cash out my ira, take my kids out of private school and buy this field, I just don't have enough money. Yep, okay. I scraped together a half a million dollars, But I need 20 million, you know, can you put up 19? 5?

[Chris]

Yep.

[Ken Hirsch]

That's very different than, can you put up $20 million? I'd love a 10% interest for free. And. And then I say, would you put up 500,000? Well, if I have to, you know, yeah. I'm not sure. And yeah, I mean, you can just tell when you ask people about the way they. They view their investment dollars, the way they view their time, and would you.

[Fort Podcast Host]

Want them to come with a team already in place or as long as the founder was passionate, you'd say, we'll back you, go build your team.

[Ken Hirsch]

Both. We did both. I mean, if, if it was just a single person, we had to pass judgment on whether they were good recruiters and retainers. Could they build. Could they build a culture? Better yet, I mean, it's a lonely business. You're better yet to have a partner. We were blessed by having partners. And so, you know, if you had somebody with you, you know, you're going off to dusty oil fields, you better, you know, you better be with somebody you like.

[Fort Podcast Host]

Well, it, it's in NGP's culture, it was in rainwater's culture is like, let the entrepreneurs be entrepreneurs. Don't get in their way. So the question is, like, what is maybe something that other firms would micromanage or be involved in that you knew, like, we don't have to do that. Is. Well, is there certain things engineering feel?

[Ken Hirsch]

You know, some of our competitors had teams of engineers and drilling engineers and geologists on, on staff and they would, they would look at what the drilling plans were for their portfolio companies and they would look at their well designs and they would look at their geologic work and their seismic work and say, you know, do we agree or not? And they were effectively running an oil and gas company.

[Chris]

Right.

[Ken Hirsch]

We had no capability to do that.

[Chris]

Right.

[Ken Hirsch]

So, you know, my job was to write down, what do you think this well is going to do if we drill this well, then tell me what success looks like. We drill one well. Is this one and done? Oh, no, no. If we drill this well, we got four more welders to drill and then it's going to. In the, the field could expand. Or, or this is just an infill well. So you drill here. We have one here and one here. So we're drilling one in between. It ought to get an average of these two. Great. And I write that down and then they drill it. And I could say, well, this is what you told me. You know, how come it happened? Or you beat it, you know. Yep, let's go do that again. I mean, I, it, you know.

[Fort Podcast Host]

So you guys never had geologists or engineers on staff?

[Ken Hirsch]

No. In fact, that was, that was.

[Fort Podcast Host]

People probably tried getting you to do it.

[Ken Hirsch]

Yeah. And, and we would hear people who would say, you know, well, I understand you don't have any engineers. How can you possibly, you know, make this kind of return? And I, I had a chart at one point in time where, because our returns were as good as anybody's in the business and some are better. And I had value per dot per engineer, and we had zero engineers. And so I, you know, I was, it was making fun of our competitors, but it's not a big deal. I mean, our, We've. There been some really quality competitors that engineers. But we did hear stories from their portfolio companies who were frustrated by the fact that they had to be micromanaged. We micromanaged in other ways. We might have micromanaged on people. You've Lost three people this year. What's going on, culture wise? Listen, on your finances, if they continue to drill wells and they're underperforming their projections, I can look at that, you know, and say, what's going on? You know, what, what's happened? And so we weren't disinterested.

[Chris]

Right.

[Ken Hirsch]

Owners and partners. But there's a way. There's a way to do it.

[Fort Podcast Host]

I want to go back to the Barnett for a second. What is your recollection of how the shale revolution came about and how did y' all participate at that time?

[Ken Hirsch]

Well, the, I mean, the, we, the, the original light bulb moment was George Mitchell in Mitchell Energy.

[Fort Podcast Host]

Were you in that?

[Ken Hirsch]

No. Okay. No. And he. We were drilling horizontal wells. The industry was drilling directional wells at the time. And then they started to drill little horizontal wells. Nothing like today. But it was not just drilling the horizontal wells. It was a combination of horizontal drilling and hydraulic fracturing. We've been fracturing wells in this country for 70 years. We were fracturing vertical wells. Every one of the wells gets fractured. But when you go horizontally and you fracture along the horizontal leg, you expose more of the rock. So that was the theory. And George Mitchell did it in the Barnett Shale. And the Barnett Shale economics previously on Vertical Wells was terrible. And it turned out you can get more reservoir when you go horizontal. And all of a sudden, Mitchell Energy became a thing. But we were fast followers. Our portfolio companies were fast followers. And then the private equity firms that copied us were fast followers. And the next thing you know, we're horizontal drilling all over the state and hydraulic factoring and, and doing more acquisitions and reentry is in old fields and refracs and. And so it was really the follow on. But the, but the first guy was really George Mitchell.

[Chris]

Yep.

[Fort Podcast Host]

When was the first time y' all participated then? Was it watching him drill those wells and then all the teams that started coming to you started becoming these.

[Ken Hirsch]

Yeah. Then it became pretty commonplace, pretty quick. Yeah.

[Chris]

Yeah.

[Ken Hirsch]

But the major oil companies all panned it. They said, this is terrible. These are. All you're doing is acceleration drilling. The present value is terrible. You'll just deplete it that much quicker. Instead of these Wells lasting for 30 years, they're going to last three years and be done work. And then all the major oil companies were still selling their assets in the United States and going to Gabon and going to Kazakhstan and going to the Sockline Islands, you know, and going in the deepwater Gulf of Mexico, because that's where you could get big Chunky production. Right. And remember you're a big oil company and your assets are depleting.

[Chris]

Right.

[Ken Hirsch]

So if you're ExxonMobil and you're $100 billion of assets and you deplete at 10% a year, that's $10 billion of value. So if you want to grow by 10%, you got to offset the 10% of decline and add 10.

[Chris]

Yeah.

[Ken Hirsch]

So it's really a 20 billion wedge you have to fill. You can't do that drilling little wells. So they have to go for bigger, chunkier things. So in oil and gas there were dis. Economies of scale as you got bigger and that's why they could divest of these old tired fields without really much, you know, second guessing themselves. So there was a, there was a decade before the majors came back and said I guess you guys are right. And now the majors are all back.

[Fort Podcast Host]

Into the unconventional shales is the market. So when you started in the late 80s are those derelict fields, those tired fields, is that still the game today in 2025? And how's the game change?

[Ken Hirsch]

Well now it's all horizontal drilling into and maximizing production because we know now know where the reservoirs all are.

[Chris]

Yep.

[Ken Hirsch]

But, but that the unconventional shale revolution didn't really take off till about 2009. 10.

[Chris]

Yep.

[Ken Hirsch]

And that's when it all started to change. So you go from 1990 to 2010. 20 years.

[Chris]

Yep.

[Ken Hirsch]

Right. And so you probably had a, you probably had. And then, and then the majors didn't come back to the, to the lower 48 in force until about five years ago. Five to seven years ago.

[Chris]

Yep.

[Ken Hirsch]

Right. So you, you really had these big chunks of time. But when, but the independent oil and gas companies had it for themselves. The majors were selling and they, and they were, there were books written on how these unconventional shales are flashing the pan and they're uneconomic.

[Fort Podcast Host]

Now that everybody's focused on that is there opportunity and back in the old fields again now that nobody's paying attention to them anymore?

[Ken Hirsch]

There could be. Yeah, there could be.

[Fort Podcast Host]

But they're not sexy enough or they're not big enough.

[Ken Hirsch]

No, you know, there could be. I mean there's, there's always, there's always the 8020 rules alive and well that these wells deplete. Even the unconventional shales wells, Those wells are 10 years old. They're still, they're still small little producers but they're more complicated because of the, because the, the, the stacked pay nature of these fields that you have you in the old days you drill a vertical well, you go through all the formations.

[Chris]

Yep.

[Ken Hirsch]

Okay. When you drill a horizontal well, you just go into one formation.

[Chris]

Yeah.

[Ken Hirsch]

You can go right next to it and go down another into another formation. So you would never sell that first well because it holds the acreage that allows you to go underneath it or above it. Usually, usually go down and go above it. But you might see on the surface, you see two wells next to each other and you go, what do they have? Two straws in the same glass. But they could have depths that are thousands of feet difference. That is like 100 million years in geologic time difference. Right. So they're drilling in completely different eras, even though on the surface it looks like they've got two straws in the same glass. It's a fascinating business.

[Fort Podcast Host]

A lot of people that listen are entrepreneurs. Why was David a great partner for 30 years and what was it about Yalls partnership? And maybe the question is like, what if you were going to look for another partner today, knowing what you know about David? What matters in a partner, a day to day partner?

[Ken Hirsch]

Well, trust.

[Chris]

Yeah.

[Ken Hirsch]

You know, there's no substitute for trust. And David and I had each other's back. You know, I call it the foxhole. You know, you're in that foxhole together. We never once, we had some near death experiences in the firm's history and never once did we talk about the divorce word. You know, we were partners and we were in it together and we trusted each other. And if I needed something, he'd be the first one I called. It could have been very personal. When my then wife was suffering from mental illness and I had to be away for a while, the first call I made was to my business partner. I said, you gotta, you know, cover for me and I'll do the best I can, but cover for me. And that's what partners do. And David was absolutely phenomenal that way. We complimented each other. We had different kinds of skills, different kinds of personalities. We loved going back and forth and sparring with each other on ideas and challenging each other. And that trust and that bond was really super strong. And that to me is the essence. And then people saw that in our firm and that became the behavior that got modeled. And so as we added partners and added employees, they saw that and that became the firm culture. We didn't study, like what kind of culture do we want to build? It's just, you just do it. We're decent people acting decently and you know, let's just do things the right way, you know, And Richard, you know, in the early days, Richard, we were in Richard's office and Richard would say things like, you know, whether you own 1% or 99%, you know, you work for them and stay as far away from the foul line as possible. Don't go near the gray area. Life's too short. You know, those were great things to pick up from Richard at the time.

[Chris]

Yeah.

[Ken Hirsch]

And. And David was just, you know, a fantastic kind of alter ego.

[Chris]

I love it.

[Fort Podcast Host]

You helped think about the let's Back teams initiative in the 80s. I guess the question is, is that model still good today or is there a new model that's emerging with the abundance of capital? And energy industries are a lot more efficient now. Capital aggregation is different than it used to be.

[Ken Hirsch]

I think it's the same.

[Fort Podcast Host]

Still the same.

[Ken Hirsch]

I think it's even more important because things are more efficient. So you need people who can hang in there because they're not going to win every deal. Not everything's going to be rosy.

[Chris]

Yeah.

[Ken Hirsch]

You better find great people who know how to make lemonade out of lemons. You better have people who know how to treat their partners well. And to be honest, being intellectually honest is so important. You know, how many times we look at a deal and we like it, we like it, and we learn something, we don't like it. But how many people get dug in and say, I love it, I love it. Who this information. No, no, no, that's not true. I still love it.

[Chris]

Yeah.

[Ken Hirsch]

You know, being intellectually honest is so important. And that, you know, that's the investment business.

[Fort Podcast Host]

Y' all have raised over 20 billion of capital. What's the, you know, you raised your first fund. We talked about that with Richard. What is the key to success in raising. I would imagine a lot of that was institutional, a lot of pension.

[Ken Hirsch]

Well, we had one fund, one partner originally, which was the Equitable.

[Fort Podcast Host]

The Equitable.

[Ken Hirsch]

Right.

[Fort Podcast Host]

But over time, did you build a fundraising arm and ngp, what's your secrets for raising lots of money besides a good track record?

[Ken Hirsch]

Have a good track record and be honest and. And be communicative with your partners.

[Chris]

Yeah.

[Ken Hirsch]

And. And, you know, we. Along the way, very quickly. The Equitable went bankrupt in the early 90s. And so they didn't invest in fund two. We had to find another investor. And then we found another investor in fund three. And funds one, two and three invested side by side. And. And then in 1996, we were ready to raise another fund because we had invest. We had invested all the equitables Money. And then the little Fund two and Little Fund three we'd raised. So we went out to raise money. Now Equitable was back in business in 19. They had been bought by AXA, the French company, and they were back in business. And they came back and said, well, we can invest again. So the returns from fund one were decent. So they were back into fund four. And then investors from fund two and three invested in fund four. So we said, okay, well, let's go get some new investors. And the university endowments were the ones who were in the market. So we called a few and, and a few people said, call so and so. And it was just that same networking that we used to build our profile in Houston, Texas, in Midland, Texas and in Calgary, Alberta. You know, we used it on the, in the endowment and foundation world and we built a, built a following.

[Fort Podcast Host]

Do you think there's a modern day Richard Rainwater or there are lots of Richards now?

[Ken Hirsch]

I don't know. I mean, that's hard to say. Richard, you know, Richard was so far ahead of his time. I, you know, Richard had an electric personality.

[Chris]

Okay.

[Ken Hirsch]

He was charismatic as nobody could imagine. He didn't produce anything. He didn't have a stitch of paper on his desk other than his yellow legal pad that he scribbled on. But he could get people excited and he could put two people together and he could see something and say, what if we did it this way? And people would come to Fort Worth, Texas to see him and they would leave feeling like they got something. And I always tried to emulate that and he never did. He might not have ever done a deal with them, but they walked out feeling like they had a new best friend, that he was so present in the room and, and that was human to human. It wasn't email, it wasn't text. You know, it was the day when you got on an airplane to go see somebody. Yeah, and that's really changed.

[Chris]

Yeah.

[Ken Hirsch]

Are there modern day Richard Rainwaters out there? There probably are, but, you know, but he, but he was so far really, as, you know, he's really one of the godfathers of the whole deal business. If you think about the Bass organization that he helped form and all the people that emulated from that. And then when he was on his own and the people that kind of sprung out of that, I mean, it's a real, it's a real family tree of capitalism that he had something to do with. And we've all taken these, you know, best of Richards and put it with our own chemistry and, and try to do the best we can. But it was a, it was an interesting time. Could, you know, if he were here today, would he be as successful? You know, we're with the information asymmetry not as great and with more being done on email and it's more, you know, the fact you don't need to see people and people are willing to write a check without ever meeting somebody and just having a zoom with them. You know, maybe Richard wouldn't have been as successful today. You know, I bet he would have though.

[Fort Podcast Host]

My guess, we talked about the good deals. We talked about this earlier. I wanted to talk about just one that didn't go well. Is it Sonoma? Sonoma. So now basically the question is how, what have you learned and how to handle like a deal that's not going right.

[Ken Hirsch]

Yeah, well, I wrote about it extensively in my book the Fastest Tortoise Gratuitous Plug there the, you know, drop it.

[Fort Podcast Host]

We'll drop a link in the show.

[Ken Hirsch]

There you go, there you go. To borrow a line from Anthony Scaramucci, I've written a best selling book and I have the boxes in my basement to prove it. The, the deal that Sonoma was a good deal until it wasn't. And it, and we learned something along the way, but it was a serious, it was just like every other deal. It was an owner, manager, good track record. We gave him, we gave him capital to marry up with his money and he started buying things. The first deal that we bought worked well, we put in more money. The second deal we bought worked well, we put in more money. The third deal we bought worked well, we put in more money. We're rocking and rolling. Fourth deal comes along, he says it's a good deal. We look at it and go, okay, right? Well, not everybody bats a thousand. And that fourth deal was so much larger than 1, 2 and 3 combined that the whole company went toes up with a little help from Chase bank at the time because they didn't fund on half the loan that they were committed to fund. Why? Because the global financial crisis, the first global financial crisis of 1998 when long term Capital Management hedge fund blew up and the Asian tiger currencies collapsed and Moscow defaulted on their debt, all happened over the course of about two weeks at a time when Chase decided they were going to renege on a commitment. So we were under capitalized while we were putting in our making our biggest deal. Okay, we could have sued Chase. We would have been toes up anyway and then we would've had a Lawsuit, fighting a lawsuit. Or we could have done the right thing by the company. So this gets to what you should, you should always do, do the right thing by the company. Nobody stole, nobody cheated, okay? Nobody lied. Okay? The market went away from us. And a big market participant called Chase Manhattan decided to look out for their own interests and decided not to fund half the loan. Okay? That's what happened. And so what did we do? We turned off the management fee and while we redoubled our effort of managing the cup, managing the investment. So we did right by our LPs to say, look, this deal's not going well. We're not going to continue to charge you. However, we're going to still scratch and claw to try to get back to, even if we can or get something back. We brought in new management, we presented new, better business plans, you know, while the market was teetering. Meanwhile, we were still over leveraged from the prior deal because we never got the refinancing capital. And at the end of the day, Chase's workout team, who has not the bankers, but the workout team, has one role. Work it out. They don't have a role of being nice to their client and sticking with it. Their role is to get back as many pennies on the dollar as they can. If they have to shoot everybody, they will. Which is exactly what happened. Had they listened to us, they would have gotten more than their money back. And instead they got about 30 cents on the dollar back. We got wiped out. The lessons, number one is don't turn your brain off. Just because someone's Bet has gone 3 for 3 doesn't mean they can't go 3 for 4. Be mindful about investment concentration. Be mindful about commitments from third parties. If it was a smaller deal, if that fourth deal was smaller, we would have been fine. The fact that it was so much larger than 1, 2 and 3 combined was a problem, but it didn't kill our franchise. The goodwill that we had built up along the way. When we said we're doing this, we were transparent with our partners. We didn't hide the ball. And in fact, not only did we not hide the ball, we reopened the next fund that we were raising that we had raised $450 million for. Fund 5. And we told people in Fund 5, if you don't like it because of Sonoma, you can withdraw your money. Wow. We gave them an option that they didn't have available to them because we had legally closed the fund. So fund five went from 450 to 370 that fund became a seven and a half times your money fund. So the. Think about the $80 million that was pulled out was almost $600 million of, of opportunity cost for them. Oh, well, but. But we did the right thing. We did the right thing. And so I look at. And then the other thing that on a micro level, the CEO of Sonoma, about 18 months later, I get a call from somebody. He's talking to somebody else about a new deal. I was on his reference list. So here is a guy that. They lost the biggest goose egg we've ever had as a firm, almost tanked our firm. And I'm on his reference list. Why? Because we didn't fall out of friendship. Okay? He was in there with his dollars because he had invested. He was an owner, manager. He'd invested $3 million of his life savings in that deal. He was scratching and clawing right alongside us again. Nobody lied, nobody cheated, nobody stole. So why get. Why turn it personal? And we didn't. He was a solid guy. So this didn't work out for. For a whole host of reasons, most of which were out of our control. And so, you know, take the high road, play the long game. This is. This was not something to get all emotional about. And I look at it as really a success that was embedded in a massive failure. Doesn't mean it was easy. Oh, my God, those couple years were terrible. But while we were working out Sonoma, we didn't lose confidence in ourselves and we didn't lose confidence in our business plan. And we kept going and we said, you know what? Why did this happen? Did it happen? Did we lose that money because our business plan is flawed? Or did we make too big a bet right at the wrong time? Had we made the same bet, but financed it all, equity would have been okay because it was a combination of factors out of our control. So we stayed at it. And the same summer that we were writing off Sonoma, we had done three other transactions that same summer. Those three transactions became huge winners. And that next fund became one of our best funds ever because of that.

[Chris]

I love that.

[Ken Hirsch]

So anyway, there's a whole lot of lessons embedded in failure today. You'd call it a pivot, which is a common term for failure. But we didn't really pivot our business plan. We just said, we're not going to rely upon third parties anymore. We're going to really treat people's word with a grain of salt and make sure we always have a plan B. But the tried and true elements of that deal Backing an owner manager who puts up their own money alongside ours, who has that real partner mentality, turned out to be hugely valuable because he was in there scratching and clawing. We could have been, in today's world, probably lawsuits would happen between the CEO and the private equity backers as they pointed fingers, or they would have bailed on you and said, my money's worthless and my options are worthless. I'm out of here. Here, you take the car keys. You drive the damn car. Yeah, right. There's a whole host of things that would happen, but they didn't happen. And so, you know, I'm proud of the way that we carried ourselves, and I'm proud of our partners who stuck with us. And, and, you know, there was a. There was, there was a lot of lessons there, but in the, with the passage of time, you know, it turned. There were some blessings in there, too.

[Chris]

Yep.

[Fort Podcast Host]

I want to finish our last few minutes just talking about the state of energy today, more globally, not necessarily the business of it. Trump came in on kind of this drill baby drill attitude. Is that even feasible right now, given the current environment, tariffs, inflation going up? It's expensive to drill a well. People are more capital disciplined now than they used to be. Is drill baby drill even an option?

[Ken Hirsch]

Well, I think his feeling was that it's good to increase oil and gas production in the United States because he's a nationalist at heart and wants the industry here. He also sees that as a strategic asset. If we're producing, he also sees that if we had lots, this is where there's a disconnect. You bring on lots of supply, the price is going to drop. So intuitively, I think they understand that tariffs are inflationary. So if they can bring oil prices down and gasoline prices down, then somehow they can offset the inflationary aspect of the tariffs. And from a macro perspective, they can keep the economy right. Unfortunately, the math doesn't work. So the average American, just. The numbers are pretty simple. The average American, if you divide total usage by number of persons, it's 500 gallons a year. So if you reduce the cost of gasoline by a dollar a gallon, it'll be a $500 per person per head. Okay? If you increase, increase tariffs 20 or 30%, if the cost of the goods at Walmart and your grocery store go up 20 or 30%, it dwarfs that number. So energy is just not as big a percentage of disposable income as it used to be. So the math doesn't work. But he doesn't really appreciate that disconnect and then he loves the fact that Saudi Arabia is increasing production to bring the price down.

[Chris]

Yeah.

[Ken Hirsch]

So drill baby, drill is kind of his mantra for reducing regulation and trying to remove the red tape. But so much of the, so much of the drilling bottlenecks are at the state level, local level, infrastructure level. It's not as easy as just three words, unfortunately. Yeah, if it was, then it'd be a different world we live in.

[Fort Podcast Host]

Do you think we are rebalancing? If we had done this podcast maybe three years ago, it was, we're getting rid of oil and gas, we're going straight to solar and renewables. Do you feel like that narrative is shifting to where fossil fuels are becoming a more palatable, not four letter word anymore and people are getting a little more rational to the idea that they're here to stay.

[Ken Hirsch]

Yeah, because I think they can't deny the math. I mean I've been talking about this for a long time that no amount of solar and wind is going to really dent the market share of oil and gas. You can have coal and natural gas substitute and they have. Coal has gone from 50% of our of the United States production or generate electric generation to about 15 to 20% and natural gas has gone from about 30% to 45%. Renewables have gone up a little bit, but oil consumption is up because oil and natural gas are not substitutes.

[Chris]

Right.

[Ken Hirsch]

And, and solar and wind produce electricity and oil is used for transportation fuels. And the electric cars are cute, but they don't make a dent in the numbers. And then globally coal consumption has gone up. So you know, the world has spent about $14 trillion on renewable energy in the last 15 years. And congratulations, fossil fuels has gone from 84% market share to 82%. Now it would have been higher because demand has grown. Right. So the fact that it's gone roughly stayed the same means that that demand growth was fueled, was served by renewables. But you know, we've gone from 6 billion people on this planet to 7 to 8, to 9. We're on our way to 10 and we have more gadgets and we have 2 billion more people who are living middle class lifestyles with middle class consumption habits, eating beef, turning on gadgets, it just energy is on an upward usage curve, period. So you need things that scale and scale easily. So renewables work, they work especially in distant markets. But we have not built an economy, an industrial economy around the world on five nines of reliability for no reason. So the intermittency of renewables makes it almost impractical to run sophisticated and sophisticated electric grid much with much more renewable. So people understand we need nuclear, we need natural gas. And if you want to get rid of CO2 pollution, the easiest way to do it is with coal. Displace coal. Unfortunately, there's plentiful cheap coal around the world. And the world's emerging markets are going to say, you had your century, we want ours, and we don't have the populations you had, and we're going to burn coal and China especially.

[Fort Podcast Host]

And do you see capital flows following that trend?

[Ken Hirsch]

Capital flows are different because there's so many politics, geopolitics and taxation and now tariffs that can impinge the free flow of capital. So that's a different equation. You saw, you saw China massively subsidize their renewable technologies while they were building a coal plant every week, right? Because they're doing it all right, and they're exporting their cheap solar to the rest of the world, keeping the solar industry for them while they're building more coal plants. So, you know, and now we're exporting cheap coal to China or the world is, you know, because we've displaced their coal with natural gas and the cheap renewables that they subsidize to send us anyway. It's just the markets are not efficiently managed as a planet. They're efficiently managed by each individual actor doing what they think is right. But it's a very complicated equation. Right now, though, we are in all of the above world. And the platform that I've been on is we need to appreciate that fossil fuels are not going anywhere. And as unless we want to impoverish ourselves, unless we want to roll our economy back to the 1950s or worse. And we aren't going to do that. The American consumers aren't going to do it. The developed world's going to do it. And the developing world is not going to say, well, you want to hold us down, you had your turn and why you're holding us down, right? So they're increasing their consumption, period, full stop. So as a planet, we need to do what we do best and that's adapt. We know how to adapt.

[Chris]

Yep.

[Ken Hirsch]

Right. Adaptation should be where we're focused, okay? Otherwise you're going to have populations, migration, migrate. That's when machetes come out because land is no longer arable or there's massive drought in places or coastal populations can't live that close to the waterfront. Guess where they move. They move. And what's going to happen? There's going to be massive displacement well, we can adapt. And that it only takes time and money. And in my mind, we've wasted so much time and trillions of dollars on things that make almost no difference. Almost no difference. Solar power today is a couple points of our electric grid. A couple points. And the United States isn't even that important anymore to global electricity consumption. And yet we spent all this time and money on it. Maybe in 30 years it could, you know, we should be focusing on leapfrog technologies and adaptation and when that solar is ready to scale hugely because there's massive battery technology advancements that can back it up. Now you're talking. But doing the little, little tiny stuff we've done has been, has really kept our taking our eye off the ball where we should be adapting coastal protection, water resiliency, you know, making sure that populations are protected. It's all on government websites. They show you, if the 100 year storm has become the 20 year storm, we got a problem, right? And that's what's happened. And you've seen the amount of damage that comes from the storms today. And that to me is the platform we should be on. And we should be diverting at least half our money of renewables towards global adaptation, because you have something like a third of global GDP is located within 25 miles of a coastline. Those are staggering numbers. And yet we need to protect those populations. And guess what? We have the capability. It's just technology. We can do it. I mean, the Netherlands is built underwater. New Orleans is underwater. It's under sea level, below sea level. We know how to adapt massive populations to live in places that are in harm's way. We can do that. Anyway, that's my, that's my soapbox. But I've written a lot about that. You can look that up.

[Fort Podcast Host]

We will look at that. I think that's a good place to end. You've been gracious with your time today, Ken. Thank you for having me up here today.

[Ken Hirsch]

Well, good luck. I love talking about this stuff and I appreciate you having me on.

[Fort Podcast Host]

I appreciate it. I hope you've enjoyed this episode of the Fort Podcasts. Be sure to follow us on your favorite podcast platform or hop on over to YouTube to watch full video episodes, if that's what you prefer. For more information, you can check out thefortpod.com.