E191: Randal Quarles: From Fed Vice Chair to Private Equity Trailblazer

Randal Quarles has been at the helm of some of the most influential institutions in finance and government. From his tenure as Vice Chair of the Federal Reserve and Under Secretary of the Treasury, to his leadership role at The Carlyle Group, Randal brings a rare blend of private market acumen and public sector insight. Today, he's the Chairman and Co-Founder of The Cynosure Group—an investment firm anchored by the Eccles family and built to solve the very structural misalignments that plague private equity for families and foundations. In this conversation, we explore the evolution of private equity, the mismatch between GP incentives and family office needs, the importance of long-duration compounding, and how Cynosure is creating a modern investment firm inspired by the early days of Lazard and Rothschild.

Episode Transcript

(00:00):
Randall, I've been very excited to chat.

(00:01):
Welcome to the How Invest podcast.
Thanks for having me.
Glad to be here.
Tell me about why private equity funds are abetter fit for pension funds or endowments
versus family offices.
If you're even a pretty large family office,you don't own everything that Carlyle and
Blackstone and KKR and Apollo own.

(00:22):
And so when something is sold after a fewyears, you know, you do pay taxes.
You have to think about how to redeploy thatreturn because it hasn't been automatically
moved into another pocket.
It's disruptive for the business as well.
That's not so much a family office issue, butit is, has become, from the point of view of

(00:43):
the portfolio company, you know, something of anegative of private equity investment that if
you are still expecting a lot of growth in yourcompany, it becomes, you know, disruptive to
have accepted private equity capital that'sgonna roll out in a few years to another
private equity holder that's gonna roll out ina few years.
So from a family office standpoint where youhave you know, you're willing to take a longer

(01:08):
perspective with respect to hold periods, youhave an incentive to do so because of tax
effect.
You have an incentive to do so because it'smore complicated for you to redeploy returned,
returned invested capital.
All of those argue not so much that privateequity is wrong for family offices, really.
In fact, I think the opposite.
The private equity asset is important, but thatthere needs to be a different delivery

(01:30):
mechanism.
On taxes, I think people over index on the taxpaid and under index on when you pay it or how
often you pay it.
If I put in $10,000,000 and now I have torecycle it in two years, I'm essentially
redeploying if I'm in a high tax state, even atlong term capital gains, I'm redeploying $0.67

(01:51):
on the dollar.
So now I have I'm redeploying $0.67 versus ifit continues to compound, I'm essentially
redeploying 10,000,000.
I'm just holding it in a essentially taxdeferred.
I know that's not the way that most people useit, but if you think about compounding, you're
essentially deferring the tax until liquidity,and that could really add up.
No.
It abs it it absolutely does.

(02:12):
And, you know, the the private equity industryas a whole and particularly the larger firms
because they have the capacity and the scale tohave different funds that are doing different
things, They've tried to address that, butstill as a whole, the template for the industry
as it has evolved, it really evolved inresponse to the incentives that were created

(02:33):
from what had been the principal source ofinvestment, which were pension funds, sovereign
wealth funds, large institutional investorsthat had a different set of incentives from
family offices.
Said another way, there was product market fit.
It just wasn't with family offices.
It's with a different type of customer set.
And now you have these family offices that havecontinued to grow.

(02:54):
Some of them are larger even than some pensionfunds and some endowments.
If I was a single family office, I had$1,000,000,000 $5.10000000000 dollars If I
could get similar to a private equity styleinvestment ten, twenty years ago.
At a 5 or $10,000,000,000 family office, youhave the ability to invest in any of the large
pension fund I mean, any of the large privateequity funds and get that exposure.

(03:18):
Increasingly, there are generally smaller fundsfrom smaller firms or some specialty funds that
are being offered by the larger firms, promiselonger hold periods, and, you know, intend to
deliver on them that are more sensitive to taxstructuring.
One of the things we've tried to do in our owninvesting, for example, we have focused on at

(03:40):
Cynosure, we focused on investing in cashflowing businesses, which gives us an
opportunity to allow the investment to continueto compound if it's going to compound at our
desired rates of return we can allow it tocompound for a long time.
But if it's cash flowing it also gives usbecause that's a it's a challenge for the
private equity provider to say if I'm going toyou know, I have to pay my people, and if I'm

(04:06):
going to provide them competitive compensation,and you have the other model where things are
turning over and carry is crystallizing faster,in order to pay the professionals.
It's like, well, what do I say to myprofessionals if we're going to you know, if
we're gonna try to structure these investmentsto hold them longer?
And, obviously, that's easier if you have acash flowing investment because you can have a

(04:27):
structure that allows you to take a portion ofyour carry out of current cash flow but allow
the value of the investment to be continuing tocompound over a longer period of time, and
that's usually in everybody's interest.
One of the things that I've learned over thelast month or so is that some pension funds are
starting to invest in private equity throughevergreen structures, Structures, which kind of
really blew my mind because I saw EvergreenStructures as this, product for family offices

(04:53):
that wanted to kind of delay their theirtaxable income or their taxable gains and also
wanted to have access to more liquidity.
But the reason that pension funds are doing itis because in their traditional private equity
investments, they're only deploying on average67% of that capital is called at any given
time, meaning that 33% drag that is sitting intreasuries.

(05:14):
So that obviously dramatically hurts theirreturns.
So they're actually investing into theseevergreen structures.
As an entity that has mostly taxable investors,how do you look at structures like evergreen
funds?
We pay a lot of attention to structure of ourinvestments to for tax efficiency.
We don't have any evergreen well, we actuallydo have an evergreen private credit fund.

(05:35):
But evergreen funds have not been a theme ofours, although we we are certainly open to
them.
We have tended to address that though throughthe structure of individual investments to
ensure that we're maximizing tax efficiency forour investors.
Tell me about Sinostar Group, and what isSinostar Group?
We're, we're a diversified boutique investmentfirm.

(05:58):
We're anchored by a family, the Echols family.
We're not a family office per se.
We like to think of ourselves as kind of theearly years of a Lazard or Rothschilds or
Lehman Brothers, know, an investment firm withmany clients and and many different investing
strategies, but that has been anchored and weintend to continue to be anchored by the Echols

(06:20):
family.
The genesis really was, you know, the Echolsfamily built its position over the nineteenth
and twentieth centuries with a number ofinvestments in private companies in the
Intermountain West, some of which grew to bequite large.
By the end of the twentieth century, all ofthose investments in private companies had been

(06:40):
sold to large public companies, and thatcreated a set of investment challenges for the
family.
You know, we now had a lot of liquidsecurities.
They'd all been private companies before.
We had a number of foundations privatefoundations from the previous generation of the
family that were now funded with assets that,would benefit from active management.

(07:05):
We had a lot of family members with taxablefamily members, individuals that had individual
wealth advisory needs.
We wanted our liquid positions to be managed,know, a little bit more more sophisticated
fashion, you know, than typical passiveinvestment.
And I was a partner at the Carlyle Group at thetime, had been for a while.

(07:25):
And we were at the same time investing in a lotof investment advisory asset management firms.
We formed that thesis before it became theflavor of the month.
There are a lot of private equity firms thatinvest in investment management now.
There weren't a lot fifteen, twenty years ago.
And I thought that I'd kill two birds with onestone.
I'd find some great investments for Carlyle,and I'd find some great firms that would help

(07:49):
us solve these new problems that we had.
I found some very good investments for Carlylein that thesis, which really had been formed by
a young colleague who was working for me atCarlyle named Keith Taylor, whom I brought with
me to, Cynosure.
It's proved to be a great investment thesis.
Was good for us at Carlyle.
It's been great for at Cynosure.
But I didn't find any firms that actually, Iwas happy, being a client of for our particular

(08:13):
needs.
And so we concluded that if we wanted thoseproblems solved, we would have to build it
ourselves.
We'd have to build a private investing capacitythat addressed some of these issues that we had
talked about, about the structure of theprivate equity industry.
For families we lot of foundation andendowment, comprehensive portfolio management

(08:35):
is pretty kind of plain vanilla in CYA, notreally aimed at maximizing the impact of a
foundation over time by growing and by reallygrowing its assets.
You know, a lot of individual wealth advice,again, is expensive and poor, you know, and
hedge funds are all over the map.
And we thought that if we could build somethingthat solved our issues in each of those areas,

(09:01):
it would solve a lot of other people's issuesas well and that would be a commercializable
business as opposed to just a family office andthat would have a couple of benefits of which
the principle one is that you'd be creatingequity value that would allow you, it would be
part of what you could use to recruit reallythe very top investment professionals into

(09:22):
helping you grow this business.
We looked at it a little bit like the PhippsPhipps Family Start Investment Trust, except
that we were, you know, we had a kind of adifferent set of specific investment challenges
that we were trying to solve.
But just as they grew what had been theirfamily office into, you know, a a diversified
business with, you know, most of the clientsoutside the family.

(09:44):
That was our objective and what we've beengrowing over the course of the last twelve
years.
So that's why sometimes people think of us, youknow, or put us in the bucket of are you a a
family office?
And the answer is no.
We're an investment firm that's anchored by afamily.
The bulk of the capital that we manage now isnot the families.
We have clients from Alaska to Australia, allaround the world.

(10:06):
But the the the genesis of the business issolving these specific issues for other
families, and the thesis that we started outwith appears to have been borne out.
There are a lot of other people who say, yes,that's what we've been looking for.
When you look at what drives returns for eithertaxable or nontaxable investors, all the
research points to one thing, which isportfolio construction, not even manager

(10:30):
selection, but which assets are you in.
But implicit in that is somebody is making thatportfolio construction decision.
And in order to recruit those type of highcaliber people making those decisions, you had
to give them more than just a typical singlefamily office construct.
One of the things that a lot of people don'tsay in the industry is that family offices

(10:52):
don't always have the highest caliber of talentbecause they're typically picked off by higher
paying opportunities like endowments.
But you solved around that by expanding theplatform and being able to give people equity
that that joined, Cynosure.
That's that that was the thought.
And I I don't wanna diss, you know, the familyoffice folks at all because we work with some

(11:14):
single some large single family offices thathave fabulous people.
But but a lot of that comes with scale, and youcan be can have what is a pretty large family
office and still have trouble with the scalethat's required to compete in the investment
industry with, you know, with with, what youhave to hear.
We do think that thesis has has been born outof creating a business that has equity value,

(11:39):
that does business well beyond the family eventhough we continue to anchor it and run it.
That has you know, we're very, very proud ofour team, and that's been a big part of it.
I will say, by the way, it has nothing to dowith the structure.
It has to do with practices.
In other words, there's nothing that keeps asingle family office.
You mentioned scale, maybe a smaller familyoffice, but a larger family office, there's

(12:01):
nothing that keeps them from compensating theirtalent in the same way that a Blackstone or a
Carlyle might do.
It's just an industry practice.
And we have seen people buck that trend,obviously, with Gates, with with Yeah.
With the Gates family office, with MichaelDell, with MSD Capital.
Yeah.
So you do see some very sophisticated Patriots,Pritzker's as well.

(12:23):
It's not to scold all all family offices.
It's more to be it's more about the there itjust happens to be kind of this bug in the
industry.
So you alluded to the Cynosure structure.
So tell me about how Cynosure is structuredexactly.
So we're we're structured with a holdingcompany that has, you know, at the moment, six.

(12:44):
Two are relatively new, but six kind ofoperating business lines that we run the
economics through a set of six subsidiaries.
One is private assets, private equity, privatecredit.
Our private equity, I think we would call againto address some of the issues that we were
talking about at the very outset of thepodcast.
I I call it more growth equity for unlovedbusinesses.

(13:05):
So one of the things we wanted to do as afamily in organizing our own private investing
now that we had all of these liquid securitiesconcentrated in a handful of public companies
needed to redeploy and wanted to redeploy it inprivate assets using twenty first century
financial technology as was being built up inthe private equity industry.

(13:25):
But along the principles that we'd operated onin the nineteenth and twentieth centuries was,
you know, that the Echols family had investedoften as minority investors in a range of
companies that in our part of the world here inthe Intermountain West were thought of as
Eccles companies in sugar beets and lumber andbanking and construction and mining, railroads,

(13:50):
hotels, but but very frequently we were notmajority investors.
We're very active investors but we would backmanagement teams provide them with the
expertise that was gained from our involvementin a range of these industries and hold those

(14:14):
investments for a long period of time.
We're willing to hold them for a long period oftime.
Similar practices now.
But most growth capital in the country, as youknow, as your listeners know, is focused on
tech, health care.
If you have a, you know, if you have a techcompany that's growing rapidly, there's a lot

(14:36):
of growth capital that'll be available for you.
If you have an industrial company that's small,growing rapidly, there are, you know, a 100
middle market LBO companies, private equitycompanies that will buy your company.
But there are just relatively few that willmake a growth investment in your company.
Say, look, we're willing to provide you growthcapital.

(14:59):
We're even willing to take a minority positionif that's what makes sense here.
You know, you'll grow it over the next severalyears.
We're backing you as the manager.
We don't we're not coming in intending toreplace you.
We're not we want you to roll as much aspossible of your position into the company.
And to do that for among the things we'veinvested in are HVAC distributors and porta

(15:26):
potty companies, which have been fabulousinvestments.
For which there's just not a lot of growthcapital.
I don't fully understand why that is.
It is much harder to do that to come in as ayou know to be willing to come in as a minority
investor.
We spend a lot of time with potential portfoliocompanies because it's like a, you know, it's a

(15:50):
it's a partnership.
It's not like a partnership.
It is a partnership together.
We all have to be comfortable with each other.
We protect ourselves obviously with a minorityinvestor protections when we do take a minority
position, which isn't always, but frequent.
And but we've never really had to deploy them.
We've never had to deploy them because we spenda lot of time upfront.
So that's how we've organized our privateequity investing.

(16:12):
We have a subsidiary that does essentially anoutsourced chief investment officer for
foundations and endowments.
We started off with the family foundations, butwe now have university endowments, other family
foundations.
Their ranking in the NASDAQ sort ofcomprehensive return rankings is at the very

(16:34):
tippy top, much more than the tenth percentile.
Net about 15%, not quite 15% over the course ofthe last, you know, five years, whereas, you
know, Stanford and Harvard to take examples ofextremely well managed endowments are at eight
or nine.
So we've been very pleased with how that hasdone, brought we have a subsidiary that does

(16:54):
ultra high net worth, a wealth advice, an RIA.
It's a team we brought on from Silicon ValleyBank, a lot of tech entrepreneurs as well as
the family anchor.
And then we're seeding a quantitative longshort hedge fund for the sort of more
sophisticated management of our liquidpositions that I also talked about earlier.
We have just partnered with David Checkettswho's a storied person in the sports world who

(17:22):
to have a sports investing private equitycapacity, that's off to a great start, and
we're partnering with a with a real estategroup to develop a real estate investing
capacity as well.
If I made you guess as to why there's a dearthof growth equity versus private equity buyout
for 5 to a $150,000,000 companies, why wouldyou say that is?

(17:47):
It's mostly what I said before.
It is harder to do.
To provide growth equity, not every one of ourinvestment we do have majority positions in
some of our private equity companies that aregrowing very rapidly.
But on average, we take a minority position,and we're generally very happy with that
because it means that the founder and themanagement of the company are keeping a big

(18:10):
stake.
They believe in the runway that's left fortheir company enough that they're leaving a lot
on the table.
Most frequently, the founders aren't taking anymoney off the table when we invest in them.
So occasionally, we'll buy out a kind of asenior founder who's aged out, but then often
the younger management will invest even more inthe company at the time that we come in.

(18:34):
But if you're in that way, and particularly ifyou're a minority investor, that's harder.
If there are steps that the company needs totake, we need to make a case, and we can
protect ourselves against catastrophe.
We can require certain events to happen underthe minority protections that we negotiate, but
we don't control the company.

(18:55):
You know, we can't decide, look.
We didn't anticipate this.
Things have just taken an entirely differentturn, and so we're going to take an entirely
different turn, and we can because we controlit.
That is an uncomfortable position for a lot ofprivate equity firms.
It was something that, you know, when I was atCarlisle, we made an effort to do this kind of
investing in a new fund that was being created.

(19:17):
It was very hard to do in financial services.
The financial services fund that I helped runat Carlisle was, you know, a lot of financial
services investing for regulatory reasons.
You take a minority position.
It was just very uncomfortable.
It's very uncomfortable for private equityinvestors.
For smaller private equity firms, it's justhard.
Why do the hard thing when there are plenty ofopportunities to do the easy thing?

(19:40):
Our answer is because over what's now a longishperiod of time closing in on fifteen years, you
know, our returns have been, you know, at thetop end of the scale, but that comes as a
result of a lot of work.
I interviewed the CIO of CalSTRS, Scott Chan,and one of the things, they have this kind of
$350,000,000,000 pool of capital that they haveto deploy, which I don't envy them.

(20:02):
It sounds very sexy, but it's a very difficultjob.
But they have to look within each asset classsupply and demand dynamics because they are
literally moving the market.
I would actually argue that everybody, whetherthey're aware of not or not, is subject to
these supply and demand dynamics and should belooking at it from that perspective.
Because if something's definitely a good ideaand everybody sees the same things and everyone

(20:25):
sees that has the same set of skills, it willbe commoditized away.
Whether you're the one commoditizing it or not,the industry has a steady state, I think people
fail to see that they're an actor within anecosystem with supply and demand dynamics
across every asset class.
I completely agree with that.
I think, you know, I think some of thestructural obstacles there are to more

(20:47):
competition in what it is is that we do is thatit is, you know, it's more of a challenge for
running your business, you know, not theinvesting side of the business, but the
management of the investing business.
We talked a little bit about the challenge ofpaying people if you've got longer hold
periods.
And so how do you, you know, how do youcrystallize carry?

(21:09):
How do you create compensation structures thatthat allow for that while allowing you to
achieve your investing objective?
You know, there is a increasing demand as, youknow, growth companies outside of these hot
areas like tech and and health care becomeaware that it's a possibility to get growth

(21:29):
equity.
There's increasing demand for it.
But as one scales a firm that's based on thisthesis, you're can't start increasing the
profitability of your firm by by increasing AUMper investment professional beyond a certain
point because now that's a different business.
Now you're, you you're at companies that are atsuch a scale.
But again, unless it's tech or health care,certain types of industries, you're unlikely to

(21:54):
be hitting the growth rates that we want forthe returns that we've been able to achieve.
So what that essentially means is that you needa bigger team to deploy a large amount of
capital.
There's definitely increasing demand out therefor this type of investment.
So one can deploy a larger and larger amount ofcapital, but you can't do that by increasing
AUM per investment professional.

(22:15):
So that's just more expensive.
We think that on balance, in part because we'reanchored by our family, we can kind of cover
the costs of investing in that structure.
And that as the firm grows, you know,eventually the higher returns that will be
generated from that investment strategy willsupport being able to pay a larger team in a

(22:40):
way that is equally profitable to the typicalprivate equity model.
But that takes a while to get there, and ittakes kind of a source of strength like that
while you're building the firm in thatdirection.
And, again, it's just a dive of a higher degreeof difficulty that is, you know, that is
daunting for folks who would think of makingthat the strategy of their firm.

(23:01):
You're chairman of Cynosure, and you went fromCarlyle to helping manage the firm.
You're part of leadership.
You've built these kind of six subsidiariesduring your time there.
Has that come from, like, leadership sitting ina room and coming up with great ideas?
Has it come from recruiting the best peoplethat went out and had those ideas?

(23:23):
Did it come from customers talking toleadership?
Tell me about the product development.
How do you see your role as leadership?
Do you see your role as thinking about thestrategy of the firm or just being very good at
recruiting?
The answer is all of the above, actually.
So, you know, our private equity strategy, wecame to building the firm with that.

(23:44):
It was this is how the family operated for ahundred and fifty years.
The world we're operating in uses slightlydifferent terminology, has slightly different
technology, but those principles we think willbe the same.
We'll implement them.
We we implement them through a private equityfund strategy.
And so that was, you know, kind of built fromthe ground up.

(24:05):
That was part of what we came with.
Similarly with the OCIO business, but I wouldsay that the OCIO team has developed the asset
allocation framework and very particularly thedetailed and very mathematical liquidity
analysis that is necessary to support a heavilyalternative asset focused portfolio

(24:27):
construction that has allowed those returns tobe very high.
As a family said, we want a structure that isyou know, we're comfortable with a large amount
of illiquidity in these foundation portfolios,but they have distribution needs and so forth.
And the team has been very critical indeveloping, you know, in developing framework.

(24:50):
It was always part of the strategy to have theultra high net worth wealth advisory team, but
that was a little bit opportunistic.
Silicon Valley Bank was falling apart, and wehad a connection with some folks there.
And they said and we said, look.
We've has been something that we believe thefirm has was part of the fundamental reason of
being of the firm, so come with us, and theybrought an existing business.

(25:12):
The the sports investing was brought to us byDavid Checketts, our partner in that
enterprise.
He's somebody that the family had arelationship with for forty years going back to
the early days of the Utah Jazz here in SaltLake.
But he said, look.
I I I have this capacity.
I've got this idea.
I wanna do it with some folks who really knowprivate equity investing, but he brought that

(25:37):
to us.
So it's the sources have varied.
All of it, whatever the strategy, all of itdepends on execution.
And so, you know, the the really excellentinvesting teams that we have across the firm in
the private equity investing, private creditinvesting, again, my colleague Keith Taylor,
who came with me from Carlyle, is the chiefinvestment officer of that and co head of that

(26:02):
group has been critical in the results that wehave obtained there in executing on that
strategy that we had.
And if you were to ask me to get to the end ofyour question, what's the single most
consequential thing that you've done?
I say this to the team and to our investors allthe time.
I'm proud of the strategy of the firm.
I I'm proud that it is sort of operating in theway that I had thought that it would operate.

(26:29):
And even some of the people who, were joiningwith us in this process, one of my close
partners is Bud Scruggs, cofounder of the firm,you know, who's about my age and was very
willing to join with me in starting this, butdidn't really believe it would grow to what it
is growing to become.
So I'm very proud that that strategy has workedas planned, but it's utterly impossible without

(26:52):
the really stellar execution of all of theinvestment professionals.
And so I'd say the single most consequentialthing that I've done is recruit those
investment professionals.
You've recruited the professionals.
You basically created almost the skeleton ofthe house, and then the team has come in and
both obviously, you can't have a house withouta skeleton.

(27:15):
Both have been instrumental.
The reason I'm I've been thinkingphilosophically in another domain in tech,
there's the best way that I could define thisis two different frames of thinking.
One is the kind of the Elon Musk way, which heconceptualized, I wanna go to to Mars.
I wanna start SpaceX.
I wanna start the Tesla.
And the other one, most recently and probablyin the most first principles way is the way

(27:38):
Mark Zuckerberg is building Meta's AI.
He's just coming out and hiring the very top AIresearchers and amalgamating all this talent,
having them figure it out for lack of a betterterm.
Both models could work, but it's just aninteresting paradox.
Back in the Calvin Coolidge administration whenI was a young lawyer, the first review I got as
a first year associate, was from a partner whosaid something that has stayed with me for the

(28:02):
rest of my career, which is there are manydifferent ways to be good at what you I think
his reason in saying that in my review wasyou're not the typical first year associate,
but you're good at what you do.
But I've always believed that.
Again, I'm very happy, with how things aredeveloping at Sinus Herb, but there are a lot
of different ways to be good at what you do.
There would be a lot of different ways to dowhat we're doing that would also be successful.

(28:25):
Tell me about the story about how DavidRubenstein recruited you to Carlyle in 02/2007.
I was undersecretary of the treasury kind of inlate two thousand and six.
I had announced that I would be, you know, thatI was leaving the treasury.
I've been there for six years, you know, forsome of your listeners may not know that's

(28:45):
actually a long time to serve in one of thosesenate confirmed posts, and I'd had a few
different ones.
But a year and a half is sort of that average,and for a variety of reasons, have been
different challenges and differentopportunities.
But I'd stayed for six years.
It was time to be leaving.
So I'd announced that I would be leaving.
I'd formed the view, however, that I wouldn'treally talk to anyone about what I would be

(29:06):
doing next until I left, and, you know, I got acall from a government relations guy there in
Washington, represented Carlyle and others whosaid David Rubenstein would like to talk to you
and I said well I'm not really talking toanybody until I formally leave the treasury
which will be in a few months.
And a couple weeks passed and he called againand said you know David Rubenstein would really

(29:27):
like to talk to you and I said yeah I'll bedelighted to do that but, you know, when once I
leave the treasury, that will be in a while.
Finally, a week later, he called and said, youknow, I don't think you understand if David
Rubenstein wants to talk to you.
You really need to talk to David Rubenstein.
So, I said okay and spoke to him and Davidlikes to collect people.

(29:49):
He'd formed a thesis that he needed a financialservices fund among Carlyle's offerings that
was my area expertise, had been my area ofexpertise as a lawyer and in my public policy
positions and he was also recruiting one of myformer law partners for that team and it all

(30:13):
seemed very sensible that we would worktogether.
And so that's how it came about.
This was 02/2007.
I think Carl Iwell's roughly at a100,000,000,000.
So not a small amount, but still much smallerthan today.
What struck you about David Rubenstein when youfirst met him in person?

(30:37):
Yeah.
What struck me was his candor.
He was very straightforward in the discussion.
He was candid about what he thought were thepros and cons of the various things that I
might do leaving the treasury.
What were the pros and cons of coming to dowhat he was suggesting at Carlisle.
He didn't either oversell or undersell that.

(30:58):
It was it all, you know, resonated with me, andthat style resonated with me directly.
And over the years, you know, I think thatreally has been a hallmark of of all of my
interaction with David over the years is thathe's very candid and intelligent and and that
can be quite persuasive and disarming.

(31:18):
And what did he say about the leadership atCarlisle and their vision?
This was in 02/2007.
It's late two thousand six that we're actuallyhaving these discussions.
He's, you know, Carlisle had, you know, settledinto its current framework.
At the time it was the largest, private equityfirm.
Blackstone was a larger firm, but its privateequity operation was smaller than Carlyle's.

(31:43):
You know, and and everyone had their role.
And, again, that was part of David's candor.
He said Bill Conway of the three cofounders,Bill Conway, you know, is the chief investment
officer.
He's really responsible for the superlativeinvestment track record that you know that we
put together.
Dan D'Angelo, the other co founder you know isresponsible for institutionalizing the firm and

(32:09):
the infrastructure that has allowed us toachieve what we would achieve.
And David was the strategist who, as well asthe face of the firm because he was willing to
do that.
And Bill really didn't want to do that at all.
That was instructive to me as well.
It was instructive to me in thinking about whenthe time came, you know, close to a decade
later of starting Cynosure you know puttingtogether a team that had those different

(32:34):
capacities.
But he was again just very straightforward andcandid in who did what, why they did what, what
people's strengths and weaknesses were whichagain is very compelling.
Today it seems obvious but Carla reallyrevolutionized this Model T model in private

(32:55):
equity.
Tell me about that.
In the early days of the, private equityindustry, you know, the advice from law firms
to, you know, the early private equity firms,funds, was you can operate one fund at a time
because the conflicts of interest that would beinherent in how to allocate investment

(33:16):
opportunities if you're operating more than onefund, which will inevitably have different
different investors.
Even if they have the same investors, they willhave different, you know, different percentages
in particular funds.
And so they're operating at the same time.
There would be just no way to square thatcircle, and that's how the industry operated.
David had the insight in the middle of thenineties of why does that have to be the case

(33:41):
if I describe the investing mandate of anotherfund in a way that is quite different than the
investing mandate of this fund.
So I've got a US buyout fund, you know, thatthat that was was and always has been the
flagship of Carlyle's investing funds, youknow, and most of the large private equity

(34:05):
firms investing.
Apollo has now evolved into somethingdifferent.
But the if I have a Japan fund that's investingin Japan, it's like, well, there there aren't
gonna be conflicts between those two.
I'll just be very clear in what that's doing.
If I have, in my case, a financial servicesfund that I'm going to create, it's like the
this these will be financial servicesopportunities that reserved for it.

(34:27):
I can have a Europe fund.
The segmentation of the investor base allowedthe firm to raise significantly more capital
because people would say, okay.
I I I like that strategy.
I can devote capital to that.
I can devote capital to this.
I have a range of of choices.
It actually allows me to diversify my privateasset exposure in a way that allows me to

(34:50):
deploy more capital into it.
It allows you to recruit, you know, a broaderrange of investment teams.
So you're now seeing, you know, a greater scopeof investment opportunity, And that really
supercharged the growth of Carlyle.
It was in slightly different legal or technicalfashions, but conceptually adopted by the rest

(35:13):
of the industry.
That was kind of as I say that was kind of theHenry Mote Ford moment for Carlyle.
I believe David Rubenstein started his careeras a lawyer so he had that kind of lawyer know
how to understand that something wasn't right.
Why couldn't you do this?
It didn't defy legal frameworks or the laws ofphysics.
So kind of came up with a de novo solutionaround it that became industry practice.

(35:36):
Precisely.
Precisely.
We'll get right back to interview, but first,we're looking for the next great guest.
If you or someone you know is a capitalallocator and would make for a great guest,
please reach out to me directly [e-mail].
You had a very interesting experience, probablynot at the time, but in retrospect of deploying
a financial services fund in the GreatRecession.

(35:59):
What was that like, and what were some of yourlessons learned?
And when David was recruiting for the financialservices fund, it was not in the expectation
that we would be a financial crisis, which didcreate a lot of investing opportunity, although
a lot of investing challenges.
It was it really was that financial services asa percentage of overall economic activity,

(36:20):
particularly in The United States, butglobally, had grown very significantly over the
previous twenty years.
And if you were, again, on his theory, hisstrategy of having different funds cover the
waterfront, leaving out financial services, andit was a was an increasingly large omission
even though required a very specialized teambecause of highly regulated nature of the area.

(36:43):
So that was the original thesis.
It evolved pretty quickly once you had thegreat financial crisis.
There had been in the aftermath of the savingsand loan crisis in the late eighties, a lot of
capital that that came from sources thatweren't traditional investors and depository
institutions, but that served to recapitalizeboth that sector and the small banking sector

(37:05):
in general, the the large banking sector.
In the aftermath of that time, there was a lotof capital need for the industry.
And then as soon as that recapitalization wasdone, monetary policy, you know, kind of the
followed a path that steepened the yield curvesignificantly in the early you know, throughout
the nineties, which is a very profitableenvironment for depository institutions.

(37:26):
So those were some world historical investmentsthat were made.
And so we moved to we moved to the thesis of weshould have the same opportunity.
And we made some excellent investments on thatthesis recapitalizing troubled institutions,
but monetary policy did not follow the nineteennineties path of a sort of promptly and

(37:47):
significantly steepening yield curve.
So these were excellent investments, but theyweren't world historical investments.
You know?
And there are a lot of rakes that you can stepon, or a lot of land mines that you can step on
when they're being planted everywhere during afinancial crisis as there were.
We managed to avoid all of those, but, itwasn't always easy.

(38:13):
So it was a lesson in sometimes doing nothingcan be very good, and sometimes it's rewarding
long term.
I would say one of the main things that I'velearned in my transition from lawyer and public
policy wonk to investor has been the importanceof recognizing that given the complexity of the

(38:40):
issues, you know, of the of the ecosystems inwhich you're operating, you're gonna be wrong a
lot.
As a lawyer, you're paid to be right, andyou're interpreting, you know, a system of
codes and precedents that allows you to beright.
It's, you know, it's complicated and it'schallenging, but you can be right.

(39:02):
And where there are where's there where thereis uncertainty, you can flag it and say, I
can't express a view because that's uncertain.
In investing, the system you're operating in isso much more complex even than the, you know,
our increasingly complex legal system thatyou're just gonna be wrong a lot.

(39:24):
And a lot of what separates a good investorfrom a great investor is the willingness to
acknowledge that, to be very uncompromising inthe self assessment as to why you were wrong as
opposed to justifying justifying why you werewrong and protecting your downside, recognizing

(39:44):
that however compelling your thesis might havebeen, you could be wrong and therefore not
riding your losers for too long, ensuring thatyou structured investments.
We pay a lot of attention to structure atCynosure to protect against the downside,
because you can give up a lot if you make toomany mistakes no matter how many winners you

(40:04):
picked.
There's this evolutionary predisposition toupdate beliefs.
So if you don't actually write down yourthesis, your brain automatically updates belief
to believe that you did believe that from thebeginning.
And the problem with that, of course, is youdon't learn your lesson.
Exactly.
So and I have seen a lot of top firms actuallyinstitutionalize that and make people put in

(40:28):
investment memos, take stances on certainthings so that both the individual and the
institution can learn from their mistakes.
Yes.
Absolutely.
Because unlike when you're writing a legalopinion and you can take a caveat where
something is unclear, if you're investing, youhave to make a decision.
Even deciding not to invest is a decision.
You have to take an action.

(40:49):
You can't just bracket it.
And and you have to accept that a lot of thosedecisions are going to be wrong no matter how
smart you are.
I've been fortunate in my life that, you know,my decisions have been right more often than
they've been wrong, but they've been wrong alot.
So you you have to acknowledge that, and youhave to be uncompromising in understanding why.
One of the practices that I like to do in in mypersonal portfolio is instead of putting my

(41:13):
money in a checking account or treasury, I putin S and P 500 as a default.
And the reason for that is it forces me to onlygo after really good opportunities.
I know a lot of asset allocators will scold meand say I'm over concentrated, but having kind
of that opportunity cost of your capital behigher leads to more scarcity in capital, leads
to kind of making higher quality.

(41:34):
It's, like, forces you into better decisionmaking.
I I like that approach.
Yeah.
Two stints in government, both at treasury aswell as the Federal Reserve.
How does that influence how you invest today?
The the time I spent at the Federal Reserve hasgiven me a lot of insight into the likely
evolution of monetary policy, particularly overthe course of the last few years.

(41:55):
That's been important in understanding how theinvesting environment is, you know, is likely
to evolve.
I mean, in the category of things I've calledright and things I've called wrong, however,
you know, I've called the evolution of monetarypolicy right.
You know, I've been almost spot on for threeyears.
The conclusion I drew from that is that at somepoint when the equity markets realize that

(42:17):
their expectations for the path of monetarypolicy are excessively optimistic, there will
be sort of a reset of prices, and that hasnever happened.
So why that is, I still don't fully understandwhy that is, but, you know, but that has
certainly that's that's a sort of verytechnical and granular place.

(42:39):
And that's due to the federal deficit?
Due principally to interest rates, stayinghigher for longer.
Getting to a higher point than people areexpecting, staying at a higher point.
You know, the markets have been predicting sortof a significant decline in interest rates for
the last three years.
You know, it's happened even as the declinebegan.

(43:00):
It's happened much more slowly than the marketsmarkets were expecting.
The market doesn't seem to have revised, youknow, its sort of overall valuation of, of the
equity universe in light of those expectationsyet.
The challenge of senior policy positions in thegovernment is one of the most professionally

(43:24):
demanding that there is out there.
I think that's one of the reasons why mostpeople who have as you know, in the Bush forty
one administration, I was in the treasury.
In the Bush forty three administration, I wasin the treasury.
In the Trump administration, I went into theFed.
Most people who have served in those sorts ofsenior, kind of senate confirmed policy
positions, If asked to do it again, we'll do itagain.

(43:45):
Even though it's extremely expensive to do,it's a huge pain in the neck because the
professional challenge is you know, theinterest of the issues that you're dealing with
and the professional challenge is so great.
Because you're dealing with a whole range ofissues.
At the Fed, I had to deal with, you know, thestructure of the financial system, not just in
The United States.

(44:06):
I was chair of something called the financialstability board, which is a global body under
the g twenty that coordinated the globalresponse to the COVID event, kind of preventing
the financial system around the world fromcollapsing when, you know, what it seemed for,
you know, a month or two as if economicactivity would be significantly constrained for
an indefinite period of time.

(44:27):
We had to deal with sort of changing theregulatory structure before we hit the COVID
event, kind of the steady state regulatorystructure.
A lot of political activity there.
You were criticized constantly by people fromthe left and right for the choices that you had
to make and spent a lot of time thinking abouthow do we get this legislation that's necessary

(44:48):
passed through the hill, working with theleadership on the hill.
It's a fascinating thing to do professionally.
It's very demanding.
And you then you take with that that experienceto to everything you do after that of, you
know, just sort of the the people skills thatare necessary, the analytical skills that are

(45:09):
necessary, the organizational management skillsthat are necessary, and there's almost nowhere
else that has similarly complex challenges.
If you could go back to 1984 when you graduatedlaw school, you just graduated Yale, and you
could kind of give one or two principles tothat Randall that was graduating, whether

(45:31):
business or investing, what would thoseprinciples be that would, you know, improve
your odds or improve your ability to besuccessful over the next forty years?
It's less of an issue now, I think, for youngpeople than it was when, when I was graduating
from law school, which is closing in on half acentury ago.
When I was graduating from law school,particularly if you, you know, came out of you

(45:54):
came out of law you went into law schoolbecause you've been at the top of your college.
You got into your college because you were atthe top of your high school.
You'd kinda followed you you started at a lawfirm, and there was a path towards partner.
There's kind of a there was always a next brassring, to grab that was laid out for you, and
you were the sort of person that, could reallyjust, was easily trapped by chasing the next

(46:25):
brass ring.
And for me, it was a big change in the lateeighties, maybe it was 1990, that, you know, I
was a six year associate and I and thetreasury, the Bush forty one treasury was

(46:45):
starting a project in looking at changing thefundamental structure of the financial system.
And they'd recruited an academic from Harvard.
They'd recruited a young investment bankernamed Jerome Powell from Wall Street.
They had somebody from The Hill, and they werelooking for about a sixth year associate from
New York who was expert in these issues.

(47:06):
I had to come down and join that team for acouple of years.
Now as a six year associate, I was you know,the next year I was going to become a partner.
And that was the you know, if I was going tobecome a partner, that was the path in those
days.
I think it's gotten a little longer and alittle there were more varied routes then.
But then it was kind of and, you know, I choseto go down and join that team, and people
thought that it was close to insane that at theduring the year that you would be selected to

(47:34):
be a partner and grab that next and ultimatebrass ring, that you would jump off of that
track and go down to Washington and dosomething that was quite different.
That turned out to be very eye opening for me.
I met a whole different I was in a wholedifferent environment.
I met a whole different range of people.
It turns out that down there, you know, inWashington, in the treasury, the goals that I

(47:58):
had thought were, you know, were absolutely thetop goals that any human being could form for
himself were hardly known to them.
They had a whole lot of different objectivesand talents, and and that was very eye opening.
And so, you know, then there were the eightyears of the Clinton administration.
I went back to Davis Polk.
I was a partner.

(48:18):
And when the new treasury was formed in theBush forty three administration and they asked
me to come back and join it, you know, I left,and it had been probably forty years since
anyone who was actually a partner at one of thelarge New York law firms had gone to Washington
for, you know, for one of these senateconfirmed positions.
They came out of the Washington law firms.
And, so all of that's, you know, morebackground than you probably needed to.

(48:44):
The advice that I would give to that young lawschool graduate would be to have but all of
those were difficult and unusual decisions.
They were I was I had a lot of trepidationaround it because it was not normal at the
time.
And but it was very it's been very expandingfor my career.
It's been very expanding for, you know, myprofessional success.

(49:07):
I would never have you know, I wouldn't havegone to Carlisle.
I wouldn't have started Cynosure.
I wouldn't have solved the issues we have forour family.
If I hadn't made those choices to be willing topull myself off what I thought was the track
and to say, you know, I'm not gonna grab thatnext brass ring.
There is more, you know, there's more in theworld than this one thing that I've been aiming

(49:30):
at.
And I think if I had known that earlier, youknow, I would have been better off for it.
What would you like our listeners to know aboutyou, about Sinosure, or anything else you'd
like to share?
I I do encourage young people who are thinkingabout their careers to be willing to do a lot
of different things.
I have, over the course of my career, done alot of different things.

(49:54):
You might say I haven't been able to hold a jobbecause everything I've done, I've done for a
few years at a time, but it has been know, it'sbeen very, professionally satisfying, and it
really is possible for most people if theysimply allow themselves to see that it's
possible.
Do you think that move from law to FederalReserve to private equity and retrograde, was

(50:18):
that a risky move that paid out, or was thatjust perceived risky move move based on kind of
your peers at the time?
It's the latter.
I mean, there's obviously risk when you, youknow, when you undertake something that you
haven't necessarily undertaken before, and youmight turn out to be quite unsuited for it.
But, but I think it's mostly that it wasperceived as risky because people often just

(50:45):
don't have the strength of imagination to say,of course, I can do this.
Key lessons I think I learned from DavidRubenstein, who became a good friend during my
time at Carlisle, you know, was senior officialin the White House in the Carter
administration.
He was a lawyer in town.
He was representing some private equityinvestors.
And his view was, I'm as smart as these people.

(51:06):
I can certainly do this.
And a lot of people aren't willing to have thatdegree of imagination of, I can do this.
And that was, I would say, one of the biglessons I learned from David was to not sell
yourself short, to have the imagination to say,this is what could be, and then you can work to
make it happen.
There's a famous saying, don't meet your idols.

(51:29):
I like to say, don't meet your idols, but meetyour peers.
So see how normal your competition is.
It could be, especially your aspirationalpeers.
It could be very encouraging.
Well, my partner Curtis, who's from Utah, hesaid that the Eccles family saved the Jazz in
the '80s, so I'm inviting myself to Jazz Game,and would love to continue the conversation

(51:49):
there.
Super.
Yes.
We're I'll look forward to that.
We we are very proud of the role that myfather-in-law played in, in that and keeping
the jazz here.
And when it looked as though the Rockies weregoing to take them away and no one was gonna
provide the funds to, to keep the team in SaltLake, and he was willing to do that at some

(52:11):
personal risk, and the result has been terrificfor Salt Lake.
As I said, Dave Checketts was the generalmanager of the Jazz at that time and was
instrumental in bringing Larry Miller, whobecame the owner of the Jazz, with the Eccles
family financing and then turned it into agreat franchise and and turned his business.
It's one of the great business stories inAmerica.

(52:31):
But at the time, he came for the funding, ownedtwo used car lots and, you know, was seeking to
borrow much more than his net worth in order tobuy a failing basketball team.
So that took a certain amount of imaginationand vision to provide the funding to do that.
I'm very happy that we did.
It's an amazing story and I look forward tositting down soon.
Super.
Great.

(52:51):
Thanks, Randall.
Thank you.
Thanks so much.
Thanks for listening to my conversation.
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