Transcript
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You've studied private equity your entire
career.
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If you had to choose 1, what's more important,
IQ or EQ?
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EQ.
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I always tell the students, if you think in
finance or private equity, you don't need
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communication or ability to do relationship.
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Think again.
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You can have the best strategy.
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If you can't raise the capital to implement
that strategy you're, nothing.
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And so the ability to inspire people, the
ability to have a vision, the ability to get
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people, your team behind you, I think that is
really where the alpha comes.
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In the oftentimes cutthroat business world,
isn't being cooperative?
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Can't that be as much of a disadvantage as an
advantage?
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So I think it's exactly the opposite.
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Because you see you think there's a lot of
people you have to compete against, right?
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So isn't it good to have a group of friends who
excel in different areas and can support you?
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It's exactly because it's cutthroat.
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Don't you want to have people who have your
back?
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Francesca, I've been excited to chat since our
friend Ron Diamond made the connection.
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Welcome to 10X Capital podcast.
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Thank you for inviting me.
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I'm very excited to be here.
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How did you become the dean of the Kellogg
School of Business, one of the top business
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schools in the world?
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Well, I I like to say it's actually by pure
accident.
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I was, in London as an academic, but also being
interested in the value of business education,
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thinking of doing new things in my areas.
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And, headhunter called me and said, would you
be interested in interviewing for the dean of
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Kellogg?
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I'm like, I didn't really think about things
like that.
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But then he also added, you will never get it
because we are looking for someone who's
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already a dean with experience.
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Just come for the experience.
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So I thought, why not?
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And I knew, of course, of Kellogg very well,
but more as an academic and with my colleagues
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in finance, my colleagues in other areas I
worked on and I knew was a top business school.
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But coming over, I discovered more and more
about the culture of Kellogg.
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And I really loved it.
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What defines the Kellogg culture?
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So the Kellogg culture is one of innovation.
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I like actually to use the word creativity,
because a lot of people think, oh, creativity a
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bit more like outside of the box and empathy.
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I should mention that it's also rigor because
sometimes, because we stress a creativity and
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empathy, people says, well, what about the
analytical rigor?
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Of course, analytical rigor.
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Of course, that is at the basis of all, because
people need to be prepared and know.
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We have courses, which is like leading with
empathy, but it's not enough to have a course.
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It's, it's, it's the entire, culture.
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We always talk about the fact that our students
help each other in preparing for the interview,
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even where they are interviewing for the same
job.
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In the oftentimes cutthroat business world,
isn't being cooperative?
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Can't that be as much of a disadvantage as an
advantage?
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So, I think it's exactly the opposite.
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Because, you see, you think there's a lot of
people you have to compete against.
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Right?
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So, isn't it good to have a group of friends
who excel in different areas and can support
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you?
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Right?
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It's exactly because it's cutthroat.
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Don't you want to have people who have your
back and who are in different areas?
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Business problem are so complex.
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Nobody, doesn't matter how clever you are,
nobody has the ability to know everything, to
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solve everything.
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So I think, yes, the world is catthroat, but
it's also complex.
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You need people with you, you know, it will
work with them.
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And also, I feel, you know, sometimes it's the
cat throat because the other side thinks you'll
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be cat throat.
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Sometimes you just need to extend a hand.
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You need to show empathy and who knows, you
will join an Alliance.
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We recently created the Center For Enlightened
Disagreement, which is exactly to talk about
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how you build bridges in a polarized world.
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It doesn't mean people have to agree.
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It doesn't mean you can't be passionate about
your point of view that you are right and the
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other is wrong.
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But instead of undermining each other, can we
have a dialogue and can can we both move
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forward with other, with our conviction?
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What's a practical tip that someone could
implement today in order to become able to be
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an enlighteningly disagree with someone?
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The first thing you need to build a connection
because that will help to create empathy.
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So try to reach out, try to first have a
communication at the human level.
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It can be a brief a brief part, but look at
that and never assume that the other side is
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evil.
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Never assume that the other part doesn't have
the same values.
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They've been doing experiments in which, for
example, they would ask people to answer
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questions and then they would show them,
actually, you have way more overlapping.
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And the people said, we never would have
imagined.
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Right?
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So it's, it's really trying to think at the
human level, we have way more common values
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that people think these days.
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Commonality is a form of information that
that's useful.
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When I advise people in negotiation, I say
always try to get more information.
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There's never only one factor to consider in a
discussion or negotiation.
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So on my podcast is regardless of how little
time I have, if I have 30 minutes, it's always
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important to spend the first 5, 10 minutes
building rapport even if it ends up having a
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smaller, shorter interview because that
interview is just gonna be that much better.
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It's something in the human nature, that leads
us to want to perform for for people that we
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have a connection with.
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You were the director of private equity at
London Business School prior to Kellogg.
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What did that position entail?
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My role as a dean here is clearly con a
continuation to why I thought about it there.
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There was really to build a bridge between
private equity, the business world and
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faculties.
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I strongly believe is to put people in the same
room and talk.
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Because maybe to write that paper, sometimes
talking to people in the business world, they
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say, oh, the academics don't, don't research
the right question.
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And my answer is always, well, did you go and
try to talk to them?
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And that's what I'm trying to create here.
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We created this concept of Kellogg Circle,
which is really, we have an impact on people
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outside, but we want to listen to their
feedback.
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We, you know, I always tell the alumni, you
know, my ears and eyes out in the world that
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tell me, what you used to teach me doesn't
work.
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Here is what happening.
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What an interesting problem.
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Let me think about it.
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And and that, institute is really where I
start, thinking about it.
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The other part that I, learned every time
private equity is covered, let's say, in the
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media, either everybody's evil or everybody is
saviors of companies.
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And I always said, I have never seen an
industry where everybody's evil or everybody's
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a saint.
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You know, there's a and there's much more to
discuss and to say what works, what doesn't.
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Let's not have a prejudgment and that's what I
take to every area we look.
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What are the main takeaways and the cutting
edge research that's coming out on private
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equity and best practices?
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LPs are now very sophisticated in measuring
returns, right, benchmarking returns of private
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equity fund.
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Let's not forget that that came out of very,
technical research of some amazing faculty who
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did it and they continued.
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So I just want to ask you, because sometimes
people forget, right?
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And maybe then in the real world, they evolved
on it, but that was to me a huge impact on
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private equity.
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These days, there's more, also focus on, you
know, what makes a fund to be more successful
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versus not successful?
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How do I identify also a fund which does deals
where there's an actual operational change?
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What is the source of values?
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The studies have to be quite narrow and like a
specific industry.
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Because the only way to really see are you
creating value or not is to benchmark to a case
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where the private equity was not involved.
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Right?
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The old question of the chicken and egg, right?
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Did a company improve because the private
equity invested in it?
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Or did the private equity invest because they
saw the company and they were the first to
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actually see that the company was going to
grow.
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And both cases might be true, right?
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But it takes a lot of methodology to actually
see that.
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If I can shameless shamelessly talk for one
moment about some of the research, I've done
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one one paper.
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I'm still working on it, in in the little time
I have is I've been looking at this is, I've
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been looking at how whether turnover of
partners in a GP is good or bad.
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Because the typical thing is LPs tend to do see
turnover as something which is actually, not,
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not good news and react negatively.
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And actually, what we show is there's a lot of
reverse causality, exactly like people leave
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actually because the deals are not doing well.
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You just discover it much later when you exit
the deal.
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In the meantime, the person is gone.
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But actually turnover, especially in times of
recession or in times of when the industries
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are going fundamental change, is it a predictor
of success in the future fund?
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Not the same fund.
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That fund is probably invested, whatever it is.
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But there's way more of prediction in the
turnover.
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What's the intuitive explanation for that?
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There's 2 things.
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1 is that there is too much lack of
transparencies, correctly.
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So it's not a criticism, but it's very
difficult for an LP to really identify whether
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the partner is really performing or not.
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They think they know, but there's such a delay
sometimes.
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And so many other confusing factors in a
success of a deal that is difficult for them.
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But the second part, you need new people who
bring a new point of view.
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And it's almost like the, where the lighter
disagreement is more for acrimonious.
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But in this you need someone who disagrees.
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There's so much of, like, because otherwise,
the same team will have the same experience of
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the same deals.
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Right?
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And their their knowledge, right, the
information, as you mentioned, comes from the
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same deal histories.
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So all of a sudden, they'll all agree because,
of course, they have the same information set.
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You need someone who has a different history of
deals or a different point of view.
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Congratulations, 10X Capital podcast listeners.
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Thank you for your support.
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Have you seen any case studies or examples of
an Elon Musk type, firing of 90% of x
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employees?
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I have another paper which is about CEOs, and
it shows that actually, contrary to what people
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outside of the private equity believes, private
equity are less likely to change CEOs than a
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normal, like a public company board.
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They might do at the beginning, but it might
be, you know, because also that CEO.
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But once they hire the CEO or the previous CEO
has decided to stay, has been announced as
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staying, You can see that they are the turnover
of a CEO is lower in private equity and is less
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sensitive to actual financial information.
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The way I see it is because and it shows
sometimes that's that's led the good of the
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private equity.
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Right?
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The private equity have the knowledge.
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They don't need to react to the financial,
numbers to say, oh, we have to fire the CEO.
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The financial numbers are no good.
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They're going through a transformation.
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So it's more about is this CEO really the right
one or not?
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And there is literature in public boards that
shows that sometimes the boards just react to
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industry shocks in the decision to terminate
their CEO.
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I had a really interesting conversation on this
podcast with Justin Pollock of Pine Bridge.
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Pine Bridge is a $168,000,000,000, as a
manager.
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And what he said is that private equity returns
are essentially undifferentiated from levered
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public returns with one very important caveat,
and that caveat is when you have a correction.
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What happens in the public market if you were
to lever your returns, you get called.
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So you lose all your returns.
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It could be disastrous.
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In private equity, it's not mark to market.
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So not only is it not marked on a daily basis,
and secondly, and perhaps most importantly, LPs
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or banks don't wanna take over your widget
factory.
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So his thesis was that private equity was
mostly a result of financial engineering.
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However, that financial engineering was a
source of true competitive and sustainable
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competitive advantage.
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What do you think about that?
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In one sense, more research is needed because
we are not completely sure, because there's so
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much variance.
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There's so much noise in what is happening.
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I mean, there's no doubt that this is part of
what is happening, right?
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It is definitely true.
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I, I would say if it were only that, I would
actually be even more skeptical, because then,
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I'm not sure to what extent is a source of
advantage.
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Maybe you should correct for that in measuring
the returns.
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For example, there is research that shows that
if you do it correctly and look really at
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capital capital calls or capital distributions,
actually, the cyclicality of private equity is
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much higher than it would look, because a lot
of people just look at the beginning or the end
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of the fund.
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It's very hard to keep track of all the capital
calls and distribution.
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So I feel if that was only I wouldn't call it
as an advantage.
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I would call it as something that I, as an LP,
wants to invest, would like to disentangle and
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and keep in mind that because, like, really, in
the reality, I am exposed to all these things.
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When we last chatted, we were talking about the
relationship between industry and academia.
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How should private equity practitioners partner
with business schools like Northwestern in
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order to collaborate?
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What are some use cases?
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So there's 2 things, right, also because until
now we talked about research, but there's also
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the teaching.
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Right?
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If I can talk for one moment about the
teaching, I would say I think it's fundamental
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and that's what we are trying to do with
Kellogg to get actual practitioners in private
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equity to come, mentor the students, work with
them, and even giving us idea about things to
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teach.
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Like, we have an entire course, for example, in
which each week is a different alum successful
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in private equity, who comes and teaches
something like fundraising, which happens to be
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very important, but nobody teaches it.
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Or how do you do do due diligence?
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Or how do you really decide your focus?
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Really hands on things and have a discussion.
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I feel that is extremely important because
ultimately, the way we see private equity is,
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it's not, yes, there's a lot of finance, but
the finance is more to get your job.
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And then, you know, after 3, 4 years, the more
you become senior, there's so much more than
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finance.
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And that's how we approach.
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So, we have various courses beyond the finance,
but we also want the people who have done it to
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come and discuss with the students.
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So, first of all, I do think that's extremely
important, especially in area with private
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equity, where there's not enough transparencies
on the operation of the firm.
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What I find is having alumni coming back and
teach and help with the students means you also
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have a faculty who talk regularly with the
alumni, have a conversation, the faculty become
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better and they have a great idea for research
and they, they, they know more about what's
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going on.
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I think, I think there's a lot to learn, right?
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You've studied private equity your entire
career.
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If you had to choose 1, what's more important,
IQ or EQ?
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EQ.
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Because the IQ, there's a lot of people and you
can hire a lot of people to give you the IQ.
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You can't be very, very low IQ.
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Yes.
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Hopefully, I don't think.
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But but but you can outsource a lot.
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You can use other people and think the EQ is
the vision, the ability to do relationships,
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the ability to convince someone.
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I mean, I always tell the students, if you
think in finance or private equity, you don't
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need communication or ability to do
relationship.
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Think again, right?
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You can have the best strategy.
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But if you can't raise the capital to implement
that strategy, you're, you're, you're nothing.
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And so, the ability to inspire people, the
ability to have a vision, the ability to get
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people, your team behind you.
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Right?
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I think that is really where the alpha comes.
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I think it's EQ for private equity, IQ for
hedge funds.
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Okay.
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What would you like our audience to know about
you, about Northwestern?
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I would like people to know that we are very
ambitious.
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So our plan for the next 10 years is to
reinvent the business education.
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I believe you need business school more than
ever because in all the changes, in all the
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uncertainty, in all the disruption that is
happening, you need leadership, you need EQ,
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but you also need the ability to innovate and
change.
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Thank you, Francesca.
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Thank you.
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Thank you so much.
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