Letter #146: Marc Rowan (2009)
Apollo CEO & Cofounder | Jewish Enrichment Center Speech and Q&A
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Today’s letter is the transcript of a 2009 speech and Q&A session with Marc Rowan hosted by the Jewish Enrichment Center. This is a particularly interesting speech not only because it was in 2009 during a very uncertain time on Wall Street, but because while Marc cofounded Apollo, he has been relatively media-shy until 2021, when he became CEO. And even then, he has focused on the business rather than himself.
In this speech, Marc shares his journey from Wharton grad to Apollo cofounder. He also answers questions on Apollo’s focus, raising capital, defining the long-term, views on the future of debt markets, financial structuring vs underlying performance, the then-current market cycle and how it might work out, Las Vegas, general day-to-day investment decision processes, getting to yes on an investment, frameworks for analysts, the impact of government in investment decision-making, dealing with less than perfect information, getting dealflow, separating work life from personal life, general life advice, and more.
Marc Rowan cofounded Apollo Global Management in 1990 and became its CEO in 2021. Since taking over as CEO, Marc has focused on four core areas: strategy, culture, communication, and dealing with problems. Prior to taking on the role of CEO, he was best known for building up Apollo’s credit business, which today makes up $450bn of Apollo’s total $630bn of AUM. Marc started his career at Drexel Burnham Lambert, where he met and worked with his fellow Apollo cofounders.
(Transcript and any errors are mine.)
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Transcript
Good, well, we'll just do a quick soundcheck. How's that doing for you? Good.
So first, thank you all for coming. Clearly, there was free food. Because I can't believe I got as many of you to come listen to me speak.
So I thought what I would do is perhaps start with a bit of history, bring it to present day and try to engage with you as much as possible. Happy to talk about business, happy to talk about personal life, whatever you'd really like to chat about. Doing okay? Okay, we'll work it out.
So 25 years ago, I left the Wharton School and got to choose between going to work at Goldman Sachs and going to work at Drexel Burnham. I think I was the only one in my year in that time that went to work at Drexel. Six years later, Valentine's Day 1990, I found myself unemployed with a box walking out the front door very much like the pictures people have seen from Bear Stearns or Lehman Brothers. Spring of 1990 was not a great time to be unemployed. Financial markets were in chaos, stock market, complete collapse, foundation of the RTC, truly just not a great time to be looking for a job.
A group of us were sharing office space completing work for some clients that was in progress, and out of the blue, gentleman from the Credit Lyonnais bank named Thierry de la Villehuchet called us with a great suggestion. How would the six of you like to go and start an M&A boutique within a big French bank? We of course didn't call him back for a few weeks. And when we did call him back, we said, That's a terrible idea. There's no M&A, there's no nothing. CEOs are not confident. This is not a great time to invest. But it really would be a great time to become an investor. And Thierry said to us, Well, there's this guy in Paris, and he thinks contrarian in the way you do, why don't you go see him? And about eight weeks later, we had $800mn.
So happenstance works in many ways. $800mn dollars in the spring of 1990 was a tremendous amount of money. And over the next five years, we became the largest profit center of the Credit Lyonnais bank. They gave us some $6bn. We earned them, for those five years, $3bn a year. And all that money went from New York to Paris, in the front door, and out the back door of the bank. And by the spring, late summer of '95, the Credit Lyonnais bank, owned by the government of France, was in complete collapse.
Fortunately, we had built enough of a reputation as Apollo. And we went on and have since parlayed that into relationships with investors around the world, and really built a business based on contrarian thought, on distressed investing, on trying to take advantage of cyclicality.
And really, I have only worked with the same group of partners for 25 years. I was remarking to Rebecca it's a little bit like a dysfunctional family. And with all that that implies, with everyone's family being somewhat dysfunctional, but we have built the business into some $40bn. We are in the private equity business, we are in the credit business, we're in the real estate business, we're in the commodities business. And we still have a pretty small team. Our business, private equity, total, 60 people. Our credit businesses, real estate, 60 people more. And then back office, about twice that number.
And we truthfully have had a lot of fun. We haven't had as much fun in the past two years as we had in the prior two years, but I think it's important to put everything in perspective. And sometimes when I--not only when I talk to investors, when I speak to groups, I tell them the story of Rare Medium.
I don't know how many of you were working during the internet boom--quick show of hands? Okay.
So here we were, value-oriented contrarian investors, '98-99, and everyone around us is making billions overnight. Pets.com, dentalproducts.com... people were collecting eyeballs, and we were multiplying by eyeballs. And we just sat around and said, What are we missing?
Toward the end of '99, we found our first Apollo-related internet investment. We put $70mn into a company called Rare Medium, which was an internet consultancy company. And the company really didn't need our money. What they needed was a balance sheet. They were doing business with Compaq and IBM and HP and Dell. And those companies really didn't want to work with a company that didn't have any cash on the balance sheet.
So the deal was, we put $70mn and it sat on the balance sheet in a special account, the money could not leave that account with our approval, and they gave us half the company's equity. That's how sounded like an Apollo deal. We couldn't lose our money, and we could actually make some money.
And over the next few weeks, our stock, which we invested at $7, and our $70mn went up and was worth $3.6bn. All work at Apollo ground to a complete halt. No one did anything other than look at the Bloomberg day in and day out. And I was bombarded by emails of how we could merge it into this, merge it into that… and otherwise, capture value. We were not allowed to sell the stock, we had a lock up for a year.
Long and the short of it is, things came crashing down. We had built the business up to about 10,000-12,000 people, we quickly cut back. And when the dust settled, we had 10 employees, we had about $125mn of cash and some other businesses, and the stock was 2.5x what we invested. Was anyone at Apollo happy? Everyone had seen $3.6bn. And now everyone was completely devastated. Somehow we had lost $3.45bn, or $3.4bn. Had I told them two years before that we were going to invest $70mn and make 2.5x our money, everyone would have been ecstatic.
It's a little bit a question of expectations. And I find that expectations play a lot into what I do. No doubt, I think they'll play a lot into all of your careers, and how you manage your lives, and whether people have the ability to put things in perspective. Perspective being 2.5x your money was great. The fact that touched, briefly, $3.6bn, was itself an anomaly.
So I look at the business that we're in today--and I don't know what the future of our business is. On the one hand, we're watching a tremendous need for rate of return. Your average pension fund has a 40 year liability that they've been discounting at 8%. And they have no place to go invest their money to earn 8%. Stocks aren't providing 8%, bonds are certainly not providing 8%. They are ultimately forced to come back to higher rates rate of return investments to provide benefits to the pensioners.
And make no mistake--retirement funds support almost everything we do, and hedge funds do, and others in one way or another. On the other hand, we have a group of investors who have historically been very long term who have had a near death experience. And they're not likely to repeat that near death experience in the same size. And so when I say I don't know if our industry will grow, survive, it's again one of perspective.
I think over the past few years, firms like ours have raised $10bn, $15bn, $20bn funds. And maybe the next fund will be $5bn, or $10bn. I actually remember life being pretty good when we managed $3.6bn. That was a lot of money. And we produced a tremendous rate of return And so I do think that expectations, expectations for all of you, expectations for investors, expectations, quite frankly, for the leaders of our businesses, play a very important role. And no doubt the last few years have been very humbling, to many, but so long as one keeps their expectations in check, and appreciates all the good things that happen along the way, I think that's terrific.
I, for one, I'm not discouraged at all. I'm, by nature, an optimist. And I remember getting out of business school in '84 and thinking, God, I'm just too late. All the money's already been made, all the opportunities already been taken. It's all over. I went to Drexel, and I missed the boat. And then in 1990, I was thinking, God, I should have gone to Goldman Sachs. And then, I've now hired 20 years of people who work for me, and every one of them comes in thinking, Ugh, five years ago, that's when I should have gotten here.
You want, at the point in your careers, when most of you are at, you want chaos, you want everything shaken up, you want the system to be brought down and rebuilt again. This is a time of incredible opportunity. I come in, and the last few years have been somewhat boring. You have not had to distinguish yourself by doing anything spectacular. If you buy something and it goes up, that does not mean you're smart. It just means you happened to buy something and it went up.
I find what's going on right now incredibly challenging, incredibly intellectually stimulating, and an incredible opportunity for wealth creation. And that certainly has been the history of financial investing. It's certainly been the history of our firm, that just when we think the world is coming to an end, financial markets are a complete collapse, it's never gonna get any better, that is the time to pick through the ruins and build the next career, build the next company, build the next great fortune. And I have found that personally very rewarding. The people who work with me have found that very rewarding. And we've really had a good time. Because this is actually a lot of fun, when you're being pressed each day, in the face of uncertainty, to make decisions.
Somewhere along the way, perspective and business, being forced to make decisions amidst chaos, one of the things that I always counsel young people on is: Find a balance in their life. When you start your career, it is really easy to be committed 100%, to be 24/7. And ultimately, to be--everything, and to be there all the time. And what I find is that just gets harder and harder as years go by. You become intertwined in relationships, you have children, you have other interests, you have other outside things. And if it's not balanced, people self-destruct.
I think, for me, certainly, one of the secrets to my success and my ability to do this for 25 years and to still be pumped each day about doing it, is a great marriage. I come home every day and I smile. I married my trophy wife, the second go-around, I have three boys--I should say the first go-around--first go-around. I have three boys. I have a 10 year old, a 13 year old and a 14 year old, and now an eight week old. And I joke that this is the recession version--two families, one wife. But it's really been terrific.
The other thing is, I found, all along the way, time to do other things. So I sat in the bullpen at Drexel at 55 Broad and at 60 Broad with a group of very talented people. And amidst all this chaos, we sat around and said, What is it we're doing to give back? Yes, we wrote checks, yes, we occasionally did the good deed. But what we were missing was that connection that we could do something hands on.
And out of that came a business plan, for a charity, which basically was predicated on hands on involvement, cost cutting to the bone, efficiency, pyramiding the money by using other people's money. And this was the initial business plan for what became Youth Renewal Fund. This is not an advertisement for Youth Tomorrow Fund, it's just--by background, supports educational projects in Israel. It is hands on. You had a good idea--you research it, you sell the other members, you get on a plane, you go to Israel, you work it out. Now of course, we have an executive director in Israel who helps you work it out. But the reward of doing something hands on, the reward of building it, the reward of touching it, and the camaraderie that comes with actually building something, that is outside your career, that is giving back, is truly satisfying.
Every time I have touched some form of charitable endeavor, I have been amazed at how much I enjoy it, how relaxing it is, how peaceful it is, and how much it restores perspective to your life. So with that as an opener, I invite you to ask what you'd like to ask. And I'd be happy to answer any questions. And have at it.
Guest: Hi. Can you tell--were the five other gentlemen that you worked with, that you started Apollo, were they all former Drexel?
Marc Rowan: They were all former Drexel. We were all crammed into one little office in some backroom of Ben [Labeau's] office.
Guest: Recently, how do you feel Apollo's morphed to take advantage of the opportunities, because cookie cutter LBOs are out? Are you guys looking at PIPEs, or distressed debt--where are you focusing?
Marc Rowan: So, we were fortunate, as I said, to start our business in 1990. When you start your business amidst chaos, this is the negative perspective, has actually stayed with us for the entirety of our professional lives. We are negatively biased from an investment point of view. And most of the money we have made over the past 20 years, 19 years at this point, has come in periods of distress.
So if I were to just give you a couple of buckets, 90-93, 50% rates of return. Middle period of time until 2001, first quartile returns, but nothing great. 18-20%. Our best fund ever, 2001. Raised just before 9/11. We actually spent almost 2.5 years on the road,trying to raise $4bn dollars, and we failed. We got to $3.8bn. That fund has now returned 67%, 4x capital--includes write offs of things like Linens & Things and otherwise. And Fund VI is our 2006 fund, it's still in progress. And we were fortunate in that we raised close to $15bn last October. And it is 99% invested in debt. Most of it, distress for control. The big visible positions that were involved in are Lyondell, and Charter Communications, would be two of them.
But in this market, it's very difficult for me to see value in equity, given where debt has traded. Now, that's changed in a few weeks. But one of the things that--comes back in balance in life--you never get the opportunity without some risk and some chaos. And so usually periods of opportunity like this follow up periods of financial excess. Well, it's hard to run a business where you are perfect. You do nothing for five years, you wait for your two years of distress, you invest for two years, you go to sleep for five years, you come back in two years. That's actually not a business.
And so what you try to do, is if you're negatively biased, you try in the boom times to expect the worst and to structure things to anticipate the downside. And you deal with problems right now, but at the same time, you have to deal with opportunity. Problems and opportunity comes hand in hand. I come in each day, my morning is dedicated to defense, my afternoon to offense. And we play both very well.
Guest: How do you figure out what a good charity is?
Marc Rowan: It's very hard. Part of it is the chemistry that you have for the people. Because at the end of the day, you have to like who you're doing it with, if it is more than a check.
I think you have to be able to articulate the cause to others, because it's a little bit of proselytizing. If you are not sold on it yourself, or you can't articulate why you're here, or why you're involved, it's very difficult. So I think that's a good way of measuring commitment.
And then, I think at some point, you have to go and visit the work that they do, and see whether it's actually working. One of the reasons I've gotten involved with the charity I got involved in, was feedback. We started measuring test results. The basic mantra was to get kids through the Bagrut, to get them into college, to get them into university. And we took pilot schools, and we tested them, and more and more kids got through the Bagrut. And we can measure success, and we altered the programs, we changed them, and just evolved and evolved and evolved. And so this constant cycle of feedback to know that it's working, which is really fundamentally what I'm saying. Does it work?
So I like the people, I feel good about it, I can articulate why I'm involved, and it works. That's what has me hooked, and that's what's kept me doing it for 20 years.
Guest: I'm sure you're asked to sit on a lot of boards or to give to a lot of charities. How do you graciously say I'm really passionate about these three things...
Marc Rowan: Always a hard question. The answer is there are very few boards that I sit on. Because that is a commitment of time, which if you take seriously, is a real commitment of time. And so I will say no to anything more than one or two things at a time. It's impossible to be so spread, unless that is your primary passion in life, and that's all that you do. I have a day job still, at this point.
In terms of contributions of money, the fundraising cycle is a very interesting thing. And I raise money not just for Jewish charities, and for school charities, I raise money for Wharton and everywhere else. And people are very shy about asking others for money, most people are. There are some who just have no compunction whatsoever, and we like those people because they're salesmen, and we like those people.
But what I find, and this is gonna be more than you asked, is, not many people really know what's expected of them. And so for most of your young adult life, you'll get informal solicitations, mail, letter, casual phone call. And it won't be until 10 years into your career, or 15 years in your career, that someone will personally come and sit with you and say, This is what I'm doing, this is what I'd like you to get involved in, and this is actually what I'd like you to give. And usually that number has you going home and just saying, What did I get into? How did I accept this meeting? But eventually, people settle into a zone that they understand that being charitable is part of giving back to what they've received.
There are some people who that never clicks for. And it's shocking. There are some really successful people--people I work with--who just don't have a charitable bone in their body. And there are others who just understand that that's what's expected of them.
So the direct answer to your question is if someone I know and respect and like asked me for money, I will give them money. And generally, I'll give them a small but reasonable amount. And I assume they'll do the same for me, so it's not really giving to them, it's actually giving to what I like. It's just a different form of reciprocation--which, but--don't underestimate that. Being the honoree of event is the most expensive thing you could ever do. Because once you agree to be honored, and everyone shows up and gives money on your cause, you are immediately put down for that number for their cause. So unless you're prepared to reciprocate, do not sign up to be the honoree. But that is--that is how it works. And in terms of a significant gift, again, I think you can't be spread too thin. I think you have to feel passionate about it. Otherwise, it's just writing a check.
Guest: You had mentioned that Apollo was on it's seventh fund, and you just were able to raise money this past October, is that what you had said?
Marc Rowan: It's kind of a shocking thing, and this is...
Guest: I was curious, I mean, not to cut you off--but I was curious to know this--I know you obviously can't give names, but I'd be curious to know the sources of the capital, just on a general level, in this environment?
Marc Rowan: The answer is traditional sources of capital: state pension funds, sovereign wealth funds, high net worth individuals.
Guest: Did you find that the breakdown was any different than...
Marc Rowan: No, no. There's a very kind of interesting cycle to investing, and I teach this class at Penn sometimes, and I always ask the students, what is the secret to success in investing? And I get all these really great answers about relationships and this and that, and it boils down to one thing: low price.
Low price has the highest correlation to successful investing versus anything else I've seen. And then I ask the follow up question, which is: Given how smart we are, and how smart all our brethren are, when do we invest most of the money? When prices are high. Because that's when people feel good. That's when things are for sale. That's when there's lots of leverage. That's when people are swinging the bat.
And so the history of investing, particularly if you look at private equity, most money is invested when prices are high, despite the fact that everyone knows the best time to invest is when prices are low. Look at what's happening this year. If you are a limited partner in a number of funds, you have had virtually no capital calls this year. Shocking. 2006, 2007, $1bn/week was going out the door.
And so what you need to do is you need to have a strategy that allows you to invest when the capital markets are completely shut down. Our strategy is distressed. And that has always been how we have managed to produce good returns in a very bad environment, which is, you don't need financing, you don't even need a counterparty. You just need the work, the knowledge base, and the ability to withstand pain. And this is--both a personal quality and an investment quality I'll come back to--which is, and I say to investors all the time: How much are you prepared to suffer in the short-term for long-term reward?
I look at every distressed investment we make. The only way we get control is if price goes down. If we buy something at $50, because that's where we think value is, and it goes to $40, we logically buy more. And if it goes to $30, we buy more. And if it gets to $20, we're really excited. But if it goes to $60, we sell it. So we only get control if it goes badly.
Well, that was an interesting thing. Very misunderstood in our business. We basically had the luxury of non-accounting. We held everything at cost for a very long period of time. All of a sudden, we have what's called FAS 157, we mark to market. And so while we're doing all this really good work for investors and buying it at $50 and $40 and $30 and $20, they're suffering incredible losses. Apollo, down 40%, down 50%. How much capital did we invest? In the past six months, $5bn of capital. Just shockingly high numbers. And we've bought down all the way.
So I come back to my investors and I say, Aren't we doing a good job for you? We've only lost $3bn so far this year. And it's very interesting to see, because they know it intellectually--they know they have to invest now, they know this is the best time to invest, and they know that doing what we're doing through distress for control is exactly what they need to be doing to produce long term returns.
But the question is, Can they stand the short-term pain? My new definition for contrarian is: It doesn't feel good while it's happening. I think we'll be right in the long-run, but we'll wait and see.
Guest: How long would you say is long-term, right now?
Marc Rowan: Well, long-term has become much shorter. We--I have--we have our longest investor, and I spent an hour with them two, three weeks ago. And they've been with us for 19 years, and took them through the portfolio, they said, That's great. 10 days later, they call again, they say, What's happened? I said, What do you mean, what's happened? Nothing's happened.
For us, long-term can be 12, 13, 14 years. We bought Vail Resorts in 1990, we sold it in 2002. We never had any money in it. Rode profit the whole way. Rode it up, rode it down, rode it up, rode it down, rode it back up, doesn't matter. For us, we don't measure what we're doing in terms of time, we measure it in terms of objective. What is it we're trying to invest in and what do we think--what is our thesis? And when will our thesis play out? When our thesis plays out, or we've already achieved that value, we sell it.
Guest: What is your view of the future of the debt markets? What are you telling your investors about what type of leverage to expect and the components of the, or the causes, for the returns? Financial structuring versus underlying performance?
So the answer is, It's a mixed bag. And this gets back to my Rare Medium story, which is a question of expectations. What should the size of the debt markets be? Does it have to keep expanding for us to make money and to be profitable? I don't think so. I think for the past four years, it has been very easy to accept the debt that the street has been offering, contribute the equity, add two teaspoons of water, and stir. I think it's been a very easy business. And I think lots of firms have simply plugged the equity hole into a capital account, and signed the contract and moved on. And I think that has been bad for our business.
But it gets back to a more fundamental question about what our business is, what the alternatives business is. And so we sometimes forget the business is not about us. The business is about them, them being our investors. So you sit with a guy who runs the state of Illinois pension fund, and his problem is not our problem. He has a group of retirees over the next 40 years who deserve pensions, and are promised pensions. And he has an obligation on his balance sheet that's been discounted at 8%. And so the question that he's asking, and we ask him sometimes: Are we better off being really smart with your money and investing only a little bit of money at very high rates of return? Or are we better off investing a lot of your money at middle rates of return? I don't know. I know what's better for us. We want... we say, Well, we have a 40% IRR, we have a 3x multiple of capital. But that may not be what's right for the state of Illinois pension fund.
So what was happening before this crisis was our industry was bifurcating. We had a group of investors who were essentially becoming state of Illinois money managers. They were a proxy for the public equity markets with leverage, with active management. And if they produce net returns of 12-15%, that was twice the bogey of state of Illinois. And so long as they could do it in size, that was terrific. And they were actually serving his needs, and therefore, I would say, they were successful. There was another group of firms that had perhaps a different group of investors, where they were telling their investors they were going to hold out for higher returns, and they were maybe not going to invest as fast, and they were gonna get 2.5-3x their money, 25% rates of return, but not deploy as much capital. And everyone was going in a different direction.
What's happened now is, there's complete chaos. I think a number of the large firms will disappear. I think when you look at their portfolios, people who have not raised capital already, who do not have a chance to show returns in this market, who will only have the results of their 2006 and 2007 vintage funds--and if they are as bad as I think they will be--just like we lost Forstmann Little and a number of others in the last cycle, I think we'll lose a number of the big firms in this cycle.
So what are we telling investors? We're telling investors we're going to do what we told you we're going to do, and we're going to play it contrarian. And if you don't like the short-term pain, don't you remember that's what we do?
Guest: How do you see the current cycle working itself out? Do you see it as a two year horizon, or maybe a one year horizon, or being really conservative, three years or longer?
Marc Rowan: I lectured yesterday at Penn, I had a group of CEOs and CFOs from around the world. And they have this really cool piece of technology, they ask a series of questions, and then you have a little clicker, and you can actually register in the audience. And so the assembled wisdom was that we would see a return to growth in 2010 and that we would never see a return, never, next five years, to 2007 levels, that securitization markets would not reform at even half the size that they were at, and that the US dollar would be down, inflation would be more than 5%, and I think that was all of substance. So is that positive or negative? I don't know what that means.
So I say, What is the right baseline of expectations? And I'm going to come back to my Rare Medium story. What's normal? We had a pretty good business in 2002 and 2003. I remember being really happy and making lots of money in 2002 and 2003. Boy, did it get silly in 2006 and 2007. So what's normal? And that's the thing I think we're all coping with, is what's normal? I personally, and this is only my personal view, I think we will have growth in 2010. Not because we have recovery—I think 2009 is going to be so bad that 2010 is going to lap it. And we're seeing that already across our businesses. And we have a great view into lots of little businesses.
So I sit on the board of Harrah's. Las Vegas is packed, it is booming. You may not like the rate, but you're north of 90% occupancy. So what does that say? That says that price has adjusted, volume has come back. And so long as volume stays, you will eventually lead price over time. And we will lead price back. Now, does that mean we're gonna get back to 2007? It may not. But I think we're gonna see recovery. I just don't know where we're going to settle from a trajectory point of view.
The guy who runs our retail franchise has kind of an interesting chart, and it goes back 50-60 years. And he looks at growth in wages and retail sales. Because he's asking himself the same question, which is, When the dust settles, what's the right level? And you basically see that retail sales and income were perfectly correlated for 45 years. And then you had five years it went like that [splits apart]. Retail sales went this way [up] income kind of went like this [stagnant]. And now it's actually gone under the line. And so do we get back to the line? Maybe. But that never—that line does not correlate back to 2007. That line correlates back to 2003. 2003 and a half, 2004. So, I think it's anyone's guess.
Guest: I think that your… is very interesting. I come from a finance, consumer goods background... over time that once you start cutting prices and promotion, becoming promotion-heavy which is what Las Vegas is doing, essentially, it's very difficult, maybe not in the long run, 20-30 year timeline, but very difficult to get customers to pay more, or get off the promotional cycle? How do you see that in terms of Vegas or consumer goods?
Marc Rowan: It's essentially two different customer bases. What's happened in corporate travel generally, I'll just get away from Las Vegas, but corporate travel generally, is the weekend business, the leisure business is still there. Yet the corporate business, you had a 50% cancellation rate of conventions and business meetings in major markets for the past six months.
For those people who built their business model on businesses, they have only one tool to respond: price. Eventually, you will tighten capacity, and you will start dragging price back up. And I've seen this now--for me, I've now seen three different recessions--maybe not of this magnitude--and in every one of them, price has come down for four and five star product, and in every one of them. To the extent the market was not overbuilt, price went back up. Maybe in a packaged goods context, it's more difficult. I really just don't know. But certainly in travel and leisure, things that are not everyday purchases, it's much easier to lead price back up over time.
Guest: Could--this may be a little much, but could you maybe go through like what your general day-to-day like investment decision processes and when the point of analysis to giving the yes on an investment is?
Marc Rowan: So, I'll describe our business. Our business, like the real estate business and like some other business, is hours of boredom followed by moments of terror. We really only make 20 decisions a year. That's all we do. And so we have a little bit different philosophy than most. We have no investment committee. The whole firm meets, and the culture of the place is to have it out in front of everybody, which is sometimes unnerving for new people who joined the organization to find the two senior partners screaming at each other.
But what we try and do is we have what we call an iterative Socratic dialogue. You want to do something, we don't want to do it. You tell us why you want to do it, we ask questions. We send you back to do more work. We still don't want to do it. You tell us again why it's a good deal. And we just keep going back and forth. And over time, what we've seen over the 19 years we've been in business is, it's a pretty good process.
And the reason I say that is, you have to be passionate about what you're investing in. We've set up a culture so you can be oppositional without being offensive. And we've set up a culture also where you can be relatively young in your career, and so long as you have something intelligent to say, just stake out your position. And people actually get advanced in our firm for staking out their position and sticking to it, despite peer pressure to cave.
And there are very few situations--I can think of only one, in 20 years, where we have made a decision where more than one person hasn't wanted to do it. And the reason being, it's a long life, there's plenty to do. There's nothing we've seen that you have to do. And if two of your partners that you've been with for 15 or 20 years don't want to do something, you kind of have to ask what are you missing? Now, we've occasionally violated that rule, but it's at our peril.
But… I work--as a firm, we tend not to work with other firms. Of the last 20 things we've done, 19 of them have been by ourselves, and one has been with one other firm. And that's going fine, but it takes 3x as long to deal with a partner as to do it ourselves. And it's not that we're unfriendly, because at one point or another, we've worked with every firm one-on-one. It's just too difficult. And we're seeing that now in times of adversity. And I've also--we're also seeing analysis paralysis. We just don't know. Again, this is a business, similar to the way people run their life, of downside protection and mitigation. What can I win from doing it? What can I lose if I do it? How do I protect my downside?
Our entire investment philosophy, the way we live our business, comes out of Drexel. We actually don't have an investment committee. We approve credits. The mentality is such a credit mentality. What we want to try and do is if it doesn't go well, we want our money back. And if it does go well, we want to make normal rates of return. A lot of what we do is about downside protection. A lot of what we do is about financial engineering. A lot of it is protecting your downside. And what we find is, If you protect your downside, and you live long enough to survive, eventually you're presented with opportunity. And that's when managing the portfolio actively, and cutting costs, and being strategic, and all that great stuff. But it starts with--most of your outcome is determined the first day. So if you've made a bad investment, it's going to be hard to turn it into a good one.
Guest: Do you have a fixed framework that you train your analysts to use?
Marc Rowan: The answer is: we do. We don't let them--we look at multiple in, multiple out. We look at five years. We force them to model a downside. But how do you model a downside? And I'll give you my favorite one, because it's a deal I greenlighted.
We, in the UK, we own the largest real estate broker. So the 20-year average, actually 35-year average in the UK, there are 1.35mn home sales. In 35 years, the low is 1.1mn home sales. So are really smart associates said Haha, our downside case is going to be 900,000 home sales.
In 2008, there were 500,000 home sales in the UK. There were more home sales when the Germans were bombing London--which is a true statistic--than there were last year in the UK. How do you model that?
So what was your choice? You could sit in 2006 and 2007 and really do nothing. And you know what? I don't really know any investors who did nothing for two years. Or, what you did is you assumed things were going to be bad, maybe you assumed one standard deviation, and now you've been dealt a three standard deviation move. And now what do you do? And this is really, I think, where it gets to, when you look around, whatever you're doing, whether it's a charitable activity, whether it's a relationship, or it's a financial and business partnership, you have to look at who your partners are.
Clearly, every decision you made in 2006 and 2007 is now under stress. So the first question--first thing you have to do is you have to admit there's a problem. Private equity firms are notoriously bad at selling things at 2x and zero. Very few people actually sell something at 80% of cost. Why? Because the incentive system is all screwed up. They're afraid to admit they made a mistake. So we've created a culture that allows you to say, This thing is not going well, we better fix it quickly.
And the second is, if you're a good distressed investor, you're also really good on defense. In that one company--we actually just restructured it, it closed a week ago--we went to the creditors and we said, Look, we have a year's worth of cash. If we run through the cash and the market comes back, we win. But we are already worth nothing today. So that's a good trade for us. And if we run through the cash, and we don't, the market doesn't recover, you lose. And it's going to be worth nothing. What do you want to do? So we came to an accommodation. Rather than owning 50% of the business, we now own a quarter of the business, the creditors gave back $575mn of debt. If I had done an IPO, I could never get to the point I got to.
You just make lemonade out of lemons. And it's not like my partner said, Ah, you did a bad deal. You didn't predict that we'd hit 500,000 home sales. They just said, Great restructuring. Move on.
Guest: Can you talk a little bit about how the roles of influence and government may have changed your business or investments decision process?
Marc Rowan: It's changing. It's very fluid right now. The biggest change to our business so far has been this FAS 157. It's taken people who should have a 40-year investment horizon and should be the ideal investors, they should be the ones investing tons of money right now, and it's hamstrung them. Because the political ability to invest more when you've lost, if you're CalPERS, $30bn or $40bn, and it's retirees' money, there's just no political will to withstand that. So I do think we're going to be in a more regulated fishbowl.
I just got back from about two and a half years in London. And I will tell you that the environment toward private equity is as hostile as you could possibly believe. Almost everywhere else in the world, compared to the US. Doesn't mean it's not possible to make money, it doesn't mean it's not possible to make deals. But our CEOs in Germany, bulletproof cars, gates. Why? You fire workers, how could you do that? The understanding of efficiency, the things that we may take for granted in a western economy... in Germany, that doesn't exist, much less France. Even in the UK.
I tell this very funny story. My wife is a fashion designer, and she works in fur, sometimes. And we pull up at an event one night, and there are protesters with signs, and like a carnival on the sidewalk, and she says to me, Ugh, not fur again. I said No, you're safe tonight. They're protesting private equity. And this was the union protest against Permira, at the private equity gala, and it had all the carnival atmosphere of a PETA protest or something else. But that is--we have to accept that we may not like it, we may not think it's fair, but it's a reality.
We have more than a million employees in our underlying companies. Harrah's is 70,000 employees. To think that we're not going to have a government role in our business--just not true. It's incredibly unfair, it's incredibly distracting, it is not value creating at all. But we better get really good at it really fast. Because going to Washington and explaining yourself is very important.
Guest: Are you comfortable dealing with a less than perfect set of information, so you just have to make a decision with 80-90% of variables?
Marc Rowan: The question was about imperfect information. You never have perfect information. It is not possible to have perfect information. If anything has been shown for the past year, is you just don't know. Just don't know. So, the way you will learn is--there's been no fund where we have not lost a significant amount of money in one investment. The good news about us is we tend not to make the same mistake twice. So I'll give you a couple of my favorite stories.
In our first fund, we had a great idea. We were going to merge the two largest Mexican dinner house chains, Chi-Chi's and El Torito, to create one national company. The branding, the sourcing the advertising, the location selection, fabulous management team. And with months of research, we found out what the menu items were on both menus and we produced one combined menu behind a $25mn advertising campaign and rolled it out and alienated both customer bases at the same time. 60 Minutes followed the next week with a segment on how Mexican food makes you fat. We lost $190mn. Okay, what lesson do we take away from that? It was a low price, a great team, it was all studied.
My favorite though, and this is where--we had done a very good job in the mobile MRI imaging business. We had built up from scratch a group of mobile MRI imagers, and we had made a lot of money correctly guessing that this was going to serve rural hospitals, that this was going to be supported. We liked that the government wasn't paying us, the hospital was paying us. So the partner who had done that, now beating his chest with all the great success, went back in to do a roll up similar to what he had done of urology and gynecology products. And the number one product that they sold to the urologist was a vacuum erector pump to help with erectile dysfunction. And in the back of the memo, it said something about this little pill that they were developing, but that would never come to pass. $90 million lost, to Viagra. All gone. 18 months start to finish. What do you get--how do you predict that?
Each each fund has its own story--those are my two favorite. But you have to accept that what we're doing is imperfect, that it is not possible to make good returns without some risk.
In our best returning fund, 67%, 4x capital, Linens & Things, $300mn loss, written off. Okay. You could save it, for reputation--$300mn is a lot. Our reputation is made by making money for our investors. And it just didn't make sense. So I think you just have to accept that there's uncertainty and get all you can and make your decision. How do you know who you're gonna end up with in life? I struggled much more with who I was going to marry than any deal I've ever done. Fortunately, I made a good choice.
Guest: I'm just curious, in a kind of business like yours, where do you get most of your deal flow from? Especially when you're just starting out? I mean, was it--well, you could give me... whether it's ideas or contacts, people, relationships, etc?
Marc Rowan: The answer is, we don't do that many things. We do eight things. And I've done the same thing for 25 years. I do media and lodging and leisure. I'm now older than many of the CEOs who work for me. I've been through more cable cycles than many of the CEOs. And it's just time. There's nothing else I can say other than time. Anything that comes to you with a book, generally is too late. We are, as a strategy, contrarian, value sensitive. So we typically know that if there's a fully-aired process, we will not be the winner, so we tend not to play. So unless we have an edge, we tend not to do it.
So if you look at the deal flow, most of it comes from relationship or contact over a long period of time by one of my partners who have been in the industry forever. And I should say, one of the interesting things about our firm is there's no star. There is no Steve Schwarzman or Henry Kravis. Leon's there, but Leon is not active in the business in the same way that they are. We have eight 40-year old to 50-year olds, each of whom do their own thing, who do not get deals based on good looks. It's based on what you know, and just continued being at it over a long period of time. So I'd say about half our deal flow comes that way.
A big chunk of it comes from the capital markets. When you are in the distressed business, you just see a whole wealth of deal flow that no one else sees. And so I'd say about a quarter of our deal flow comes from that.
And then another quarter of our deal flow is things that we do that no one else will do. So this whole controversy over PIPEs. We went through this whole--this was a big 2002, 2003 debate. Investors lost their minds over why they were paying us fees to invest in public companies. And we have a long track record of buying 40% of a company, leaving it public, not paying a premium, and doing really well. So I would say to the investors, Well, let me get this straight. For the privilege of being private, you want me to pay a 30% premium? For what? I can exercise full control from where I am today. And so long as I'm in control, aren't I doing a better job for you? Yes, but. Their experience had been very negative with people who bought eight and nine, five percent interest, had no influence, and lost all their money.
So what we have done, I think well as a firm, is we have decided to take the political heat, the market, heat, the FAS 157 heat, and be willing to do those things that other firms do not--don't do, not for the right reasons, but just because they don't want to piss off their investors. And we have a good group of investors. It doesn't mean they love us every day, but they have been more tolerant of what we've done over time than most other people's investors. Because we've performed. Notwithstanding the fact that they may not like what we're doing strategy wise.
Guest: Hi, do you find it challenging separating your business life from your personal life?
Marc Rowan: Every day. That--I mean, literally, this is... I was waiting for someone to ask that. It actually is the hardest thing. And I started down this path when I was speaking. The first five years are actually really easy. Because most people your age are working night and day. It's okay to have a social life after midnight, it all works. But it is the ability to sustain that, over not 5 or 10 years, but 25 years, that ultimately puts you in a position where you actually know what you're doing, people respect what you have to say most of the time, and you have enough experience to make imperfect decisions with imperfect information.
But every day that's tested, because most people who are really successful don't work for money. They do work for money, but they don't really work for money. They work because they're passionate about art, they work and they're feeding that habit. They work because it's for charity. They work because they love it. This is a very hard job to do if you don't love it. It's easy to fake for five years. Because it's not that hard. But every day, you make a trade off. You want kids? You want a family? You want a normal home life? Everyday there's another pull to what you do. And it's very easy to just go through and ignore that side of it, ignore the charitable side of it, ignore the spiritual side of it, ignore the family side of it.
One of the interesting statistics at our firm is we have no divorces. It's a shocking thing. I use that when it helps with the continuity with the recruiters. There are just no divorces. I can't explain it.
Guest: Are there marriages?
Marc Rowan: It just seemed--it seems to have worked very well. I mean, there are very few places where you've had a group of partners for--three of us for 25 years, the next group for 19 years, another group at 16 years, another group at 14 years, where there are a lot of strong personalities and heated debates, and everyone has stormed out the door at least once in their career. But somehow, it's all worked. So it's about trade--It is about trade-off. Do you like what you do? Do you like who you're doing it with? And are you being compensated fairly for what you're doing? That's a big trade-off every day. And the more senior you are--I keep asking like... some days I'm like, Why am I doing this?
Guest: I just want to thank you for your time and your effort and being here. And just wanted to say, I mean, you may have addressed this in previous questions, but if you had one piece of advice to give us, like an aggregate advice, like what would that be? If you could just sum up the whole lecture.
Marc Rowan: Ah, 25 years of experience in one word... I don't know. It can't be a word. It's a really long life. And I have to say that one of the things--you will see the same people, again and again and again, in your career. And how you deal with them will ultimately determine how they deal with you, how their circle of friends perceives you. And it's easy to take shortcuts. And look, I started my career, I worked for--at Drexel, I worked directly for Dennis Levine, who went to jail... I then went to work for Marty Siegal, who also went to jail. I then moved out to California to work for Mike Milken, who also went to jail. And I was like… [exasperated shrug]... but... and each different people and different reasons.
But there are so many ethical dilemmas that you are presented with across your career. And there are so many personal ethical dilemmas that you are presented with, across your career, that the choices you make, just determine who you are, over time. And it is so easy to--and I read these stories, I read these little quips in the article about the Morgan Stanley analyst who did this, the Sullivan & Cromwell lawyer who did this, and I just say, Do they not understand they're just destroying their lives? And so I just... you got to think--I have this big sign on my computer that just says, Think before you email. If you get an email from me, generally, it will say, Call me. And I just encourage you, you just have to be vigilant at all times. Because you will be presented with these ethical challenges. We have tools of the trade that record every conversation. And you just have to think, at all times.
The other piece of advice I would give you, and this will be--I'll work it back into the birthright message and other things. I am privileged to do our firm's Middle East fundraising. So for those who don't know, we sold 10% of our firm to Abu Dhabi. And I go the Middle East, the non-Israel Middle East, probably six times a year. And it is evident to all that I am Jewish.
And I tell this story that there was, I think it was last year or the year before, where Yom Kippur, you're fasting all day, you have breakfast, I get on the plane late at night, 10 at night, and I arrive in Kuwait, and it's Ramadan, and I'm fasting again. I now of two days in a row fast. And then I'm at Iftar, the celebration of the end of their day with them. And I ended up in at ADIA the next day, and going around the room, and everyone's in a white robe. I can't really see anyone's face, everyone has a beard. And I'm-- literally, 20 people who are on this investment council, and I'm going around the room shaking hands, Abdullah Mohammed, Abdullah Mohammed, Abdullah Muhammad, this and that.
And the thing that I've always found... there's actually--I actually go on these trips and I actually am incredibly energized about what's possible. Because you go there, and they clearly know I'm Jewish. And my Palestinian friends clearly know I'm Jewish, and a supporter of the State of Israel. And Rebecca and I were talking about this, having lived in London where there's a much larger Arab contingent, you get out in the world, you get out in the Gulf, particularly... could do business here. And I don't just mean business there in a business sense. You could actually see common ground, with educated people.
Because you go to Abu Dhabi, and what is the number one issue, if you're a ruler of Abu Dhabi? Anyone want to take a guess? What is the number one threat, if you're the ruler? Extremism.
What do they want to do? What are they building? They're spending a ridiculous amount of money with the Louvre, the Guggenheim, universities, and why is this a good investment? And it's the best investment they're making. Because it's all a subtle way to combat extremism. They want to be thought of as the place for liberal thought--in the Middle East. And it's like, when you finally get that, and you actually get to know some of these people, and you hear what they have to say, there's a glimmer of hope in doing it.
One of the best trips I took, in all my time back and forth to the Middle East, I went to Syria I sat down, two of us, with Bashar Assad. I read--there's not that much in the way of writing on who he is, how he thinks. Ophthalmologist, grew up in London, Western-educated, disappointed everybody. And you also read, Father-Son, not that bright, very straightforward, very businesslike.
And I said to him, Okay, are you gonna make peace with Israel? And he said, it's not really possible to make peace with Israel without the US, without US troops ultimately stationed on the Golan. And I said, Why does the US want to help you? You're negative in Iraq, you're negative in Lebanon, you're negative with Hamas, and you're negative in the world.
And he said, Fundamentally, people understand that we're a state and we can keep the peace. Because there's not been a shot fired over the border, since the armistice, and you make a deal, you make a deal. And the Israelis know that, the US knows that, and otherwise. And I toured Damascus that day. No bodyguards, no, nothing, walking around in the marketplace. Secular. People want to get on with their lives. It looks like the 1950s. There's one modern--two modern buildings. There's the palace. And then there's a Four Seasons, for those who need to go.
But in all these trips, and all the places, you don't have to lose your identity, which is the message I'm coming back to, to be successful, even in the most extreme environments, whether it's the Middle East or elsewhere, or London or Germany--we own companies in Germany and Switzerland... had little incidents of antisemitism, but 99% of the people out there, the educated people at least, just want to get on with their lives. They don't really care about you, they care about themselves. And you don't need to conceal your identity, you don't need to con--whatever. But it's been very reassuring, I have to say, traveling through the Arab Middle East. So, thank you all.
Wrap-up
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