Rich Friedman on the Rise of Private Markets and AI Investing

0:00I never imagined the PE industry would evolve into what it is. This is industrialized. There are hundreds and hundreds of them. Thousands. Thousands. You know, the crisis today in the PE industry is exits. It's not operating performance. Everything's slowed. Let's put it that way. But it's an incredible business to be able to go search, find, and then manage and create. And the question is, is that still doable in the world? And my answer would be, yeah. Welcome to Goldman Sachs Exchange's Great Investors. Today, I sit down with Rich Friedman, the chairman of Goldman Sachs Asset Management and one of the foremost leaders in alternative investing.

0:39Welcome to Great Investors, Rich. It's so great to have you here. Thanks, Alison. This is really a treat for me. So today I'm interviewing you for Great Investors podcast. But before we begin that and talk about the investment environment, I want to go back to your start at Goldman Sachs, which is 45 years ago. Tell us about your first day. What was that like? Do you remember? You know, I do remember. I remember we were at 55 Broad Street. Most people think we were at 85 Broad Street, but, you know, I'm dating myself, but I would think I was on the eighth floor. And it was a small area, and there were about 25 to 30 people in the group.

1:18And the funny thing is, one of the people I saw as I was walking in was this guy named Joel Beckman. He was someone I grew up with in Riverdale. It was a very low key, very welcoming place. And I didn't feel, you know, so anxious walking in there because I knew someone and it seemed like a, you know, a place you could sort of like assimilate into. So what was it like to work at the firm in the 80s? What was that first, you know, 10 years like? Well, it varied a lot over 10 years, but certainly the early years. But first of all, the day I joined the firm, Salmon Brothers was sold to Fibro. Wow.

1:52Now, I didn't say wow, because I didn't really know that much about Goldman Sachs or Salmon Brothers, but it was a little bit of a wow that literally, you know, you're joining Goldman Sachs and then you hear that one of its principal competitors were sold. And I think it was sold for like$800 million. It sounded like a lot of money back then, but obviously not so much, you know, today. But, you know, I'd say that we, I got going relatively quickly. The group I joined was a group that did private financings, credit debt financings, lease financings. And so they were projects. It wasn't advisory.

2:26So what was happening was I was being assigned, you know, to work on different things. Early on in my career, though, I was starting to get assigned to work on some of these early stage buyouts where we were like financial advisor to help raise the debt. I had a little experience because in between my years at business school, I worked for Citibank in their asset-based lending area. So I learned about asset-based financings for receivables, for inventory, and the earliest of days of bootstrap LBO people. So I was one of the only ones who had that kind of experience. So when we started to get a few assignments in this, I was chosen to get involved with it, which to me was very interesting.

3:06I would say that I got assigned very quickly to... We were progressing fast into the LBO world, back then. It wasn't called private equity. I ended up being assigned to getting involved with a fair amount of media transactions. And it wasn't because I knew anything about it other than I watched TV and read the newspapers. But I became an expert, having worked on some of the early recaps in the media industry in the early 80s, multimedia's recapitalization that Jack Kent Cook came after, A Hard Hang. So there were companies that I was involved with early on that were media related, but were transactional, which really fit, you know, sort of my skill base at the time.

3:44And you eventually got your battlefield promotion, as you call it. Tell us about that story. So the battlefield promotion was something because this was in the middle of the first recession that we were living through, which was in 1989, 1990. And it felt pretty severe at the time. And this is from the SNL crisis that really caused this. And I had become partner in 1990. And I was like slated to raise a new buyout fund. And then I met this individual named Hank Paulson, who became my new mentor, who they said, this is who you're going to report to. Because at that point, we were all in investment banking.

4:24There was no concept of a merchant bank. And it was the beginning pathway onto the creation of what we refer to as the principal investment area when we raised our first G.S. Capital Partners fund in 1992. too. Yeah. And the rest is history. And I'm still alive to tell the story. That's fascinating. What a great experience. I'll tell you a funny thing about it is that, you know, again, it was just like 20 of us, maybe even less at the time, think about what's going on. So we sat there. We said, well, what should we call ourselves? And we had some pretty creative people there in terms of promotion.

4:52Like we call ourselves, we should be the principal investment area. We can't be principal investment group. That's not going to be a good acronym.

5:02And then And so I took that up to Steve Friedman. He basically says, yeah, I don't really think you're ready to become a division of Goldman Sachs. But we had a lot of fun. And we actually, you know, we created the business. So we created the principal investment area, which today still has what I'll call brand value in the marketplace. That is extraordinary. So you've talked about mentorship. It was a big part of why you decided to take the initial risk and build up a team at the firm in media and communications. How did you lean on your mentors throughout your career? And in what ways did they help guide you?

5:33It's a good question because I never thought of them as mentors, but they were. And so it was a smaller place back then. And if you distinguish yourselves in ways, you could get identified. So early on, I was identified by one individual. And he was the one who asked me to build and create the media and communications banking business in 1987. And I was really reticent about that because this was a client service business. You know, at that point, I'm 33, 34 years old, not even. And I'm like, wait a minute. My clients are these CFOs and CEOs of these big companies like ABC, Cap Cities. These people are in their 50s or 60s.

6:16I don't think I could be successful, you know, covering them. And this isn't what my strength is. And, you know, he convinced me that ultimately this would be a stretch assignment and that, you know, wasn't going to last forever. But I would learn a lot of things. And so he said, you know, do it. So I came back and got excited and did it. At each of these sort of stages in my career, it was a little bit of fate. I wasn't looking for anyone. And our mentoring program and support programs at the firm now, we didn't have them back then. And what I learned, Allison, early on in the creation of the Merchant Bank was it was a fragile business model for the firm.

6:56It wasn't central to the firm's advisory and trading businesses. and there was some long history of, I'll use the word mistakes, and that for this to be successful, I really did need a big brother. You know, watching what we were doing, advising what we're doing, and protecting. And that was critical in the early days to create this. So it was important to me at every next stage, even as a very, let's call it, rising senior partner at the firm, I needed support from the executive office. So it did take four or five decades to really build the Merchant Bank into what we know it as today. And you did it in a very deliberate way.

7:40So what were some of the milestones along the way as you built the Merchant Bank? So the first milestone, I obviously was raising G.S.C.P. 1. That was a billion-dollar fund in 1992. And at that point, there were only five firms that had billion-dollar funds. So that was a signature thing at that point. And then we had some signature deals, like buying in a 28.5 % stake in Polo Ralph Lauren. And some other deals that we did became, you know, branded deals for us. And then we built a private equity business through the, you know, mid-90s. Just, you know, basically getting bigger, raising a bigger fund, nothing too special.

8:17And in the late 90s, I came up with the idea that we should raise a subordinated debt fund. And it was really, the first thought was, it's really for European deals, because Europe didn't have the ability to raise subordinated debt for their buyouts. That was sort of what the initial idea was. And there just was no private subordinated debt industry at that point in time. So we raised the fund and we actually ended up having both U.S. and European deals because we were just, if you will, competing with the U.S. public markets for deals. But that was a step forward in the creation of a credit business inside, you know, the private equity business.

8:56And that was the business that Munir Satter led for you. Correct. And then, you know, you'll laugh at this because you can see it. As we got into the tech, you know, growth bubble, if you want to call it, in the 2000 era, I won't say who, but a message came from the EEO that, Rich, we want to see more opportunities in all of these, you know, tech opportunities, and you have to build a team to do it. And they could tell that we were resisting it because a big part of, you know, my thinking and my team's thinking is let's stick to what we're good at. And tech is a little bit of, you know, for us, we didn't have the people.

9:33It just seemed like it was, you know, roll of the dice. You know, we said, OK, if that's what they want. So we started to focus on, you know, tech deals. And a lot of the initial funding was really done on balance sheet and with employee funds. So, you know, we were dabbling in it. And we had like a matrix. We could put$3 million in something,$6 million in something,$9 million in something. And it was just like these were bets. Now, we didn't know that looking back in time that we could at one point own 13 percent of Alibaba when it was being formed. Wow. And if you went back a decade earlier, we owned 10 percent of Qualcomm.

10:09So the firm was pretty phenomenal in bringing opportunities, you know, to us. But that was our entry into tech and growth. And that has had its ups and downs and ups and downs. But nonetheless, you know, we're a big growth investor today. But that was sort of a seminal thing moving into that. Then I'd say we took a big leap in 2005 by raising a$5 billion fund. And that's when, you know, the whole PE industry was sort of, that was like the Renaissance period where we were doing deals, as you know, every other week. You know, I think we did$200 billion of buyouts in an 18-month period. It was a crazy period.

10:47And it challenged our discipline, if you will, because, you know, it was the first time in history where the public markets were saying, we want you, private equity, to buy us. And the valuations were not that crazy. So, you know, basically, you know, this went on until obviously, you know, the bubble burst. But that was a crazy period. Now, coming out of that period was a big thing, which was we raised a senior debt fund and we raised a real estate debt fund. And these were distressed funds to take over the opportunities that were presenting themselves. I never imagined in my career, Allison, that I'd be running a senior debt fund in the merchant bank.

11:28It's like, really? Libra plus two and a half and plus fees? And, you know, but that sort of like filled in that matrix of the portfolio of what businesses are you going to win. You know, Tom Connolly was running it. We made equity-like returns in that senior debt vehicle for that first phase. And then it was like pieces to the puzzle. Then we raised our first infrastructure fund, you know, right around the same time. So, you know, it happened over time. It wasn't like it happened all at once. And this was sort of like the PE business kept growing while these new businesses were being added. But we did it at a pace that made sense.

12:04And then we did them, let's call it opportunistically in relation to what the market was then presenting ourselves with. I always felt we needed the quality people to run them. And we needed to be able to invest them. It wasn't a matter of could we raise the money, it's could we responsibly invest the money. And that's sort of probably why we did it on a slower fashion. Maybe we otherwise could. But in these businesses that I've referenced, we were first. So I feel really good about that, the fact that, you know, others have gone past us in the credit side. But, you know, we're still, you know, top five, let's say, you know, in the credit business.

12:40But we were alone. We were top. You know, we were top. Speaking of being first, we were also the first in Asia. Yes. And overseas investing became a cornerstone, right, of merchant banking business. What initially prompted you and your team to start looking at Asia, at China, at other overseas investments? When I got my responsibilities in 92, we immediately built out a few niche funds in Europe. And we had a banking business in Europe. So we had some semblance of a business in Europe to be able to do some deals. The Asia part was, you know, that was different. And I remember that, you know, I took a small, you know, Green Beret group.

13:25We jumped on planes and we went over to, you know, to China. And it was like, where are we? What are we doing here? And none of us had ever been there before. So these were the first trips. But these were some of the smarter investors we had in my group to try to scope out, is there stuff that we can do? So, of course, we're there coming up with ad hoc ideas about all these bicycles. Hey, I don't see anyone with a bicycle helmet. Maybe we should invest in bicycle helmet. So we in the in the earliest of days, I'd say we had a skeletal crew of people on the ground and banking was sort of just getting going.

13:59But we did feel as if we had an edge because, as you said, there was nobody else there. And what I found over time is the Chinese welcomed Golden Saks and we built a Chinese team. You know, we built a team. It was mostly based in Hong Kong, but eventually we had some based in Shanghai. But we had nationals who were Western trained, and we also had the DNA of a Goldman Sachs person, which is not an easy thing to do. And Stephanie Hoy, who now runs the business, I remember the first day she joined, and that was 25, 26 years ago. And she understood what the mission was. But we built a dedicated team, and we had sort of a targeted focus.

14:46And it took a while before we got ourselves to doing a fair amount of investing there. And it built over time. So the China strategy built over time. And we developed more and more relationships. You know, eventually, you know, we had that seminal deal. And that was the investment in ICBC. And that was something that no other, you know, U.S. bank or investment bank had the opportunity to do. It was a strategic investment. But the firm made an investment. Our funds made an investment. There was a commercial relationship that was established between Goldman Sachs and ICBC. It was a very big investment in the privatization, if you will, of the Chinese banks.

15:27I think that was probably a seminal moment in us establishing ourselves as constructive investors in China that helped establish ourselves there. The deal industry has always been like one deal leads to three others. And I think that's sort of what happened. But the key thing for me was why I always needed the person at the helm there that I could trust. So at first I had Henry Cornell and then I had Andrew Wolfe and then Stephanie Hoy. So I had three great investors who I could have a lot of confidence in because when you go to sleep at night, you know, you're in New York and they're in Hong Kong and they're there.

16:07And, you know, they're the ones really sort of doing the on the ground, you know, stuff. So we had great leadership there and it's continued. So getting back to your career history, you built the principal investing business into a juggernaut. And was there a guiding philosophy as you built up the book and your team? Was there a guiding philosophy? Yes, I'll say there were a number of guiding, you know, sort of tenets that we had to have. The first is this business had to work inside Goldman Sachs and that it wasn't a subsidiary of Goldman Sachs. It was a division of Goldman Sachs and that we needed to have what I'll call is the excellence, the success and the connectivity no different than the other parts of the firm.

16:56We needed to be in that patchwork of being part of the firm. So I made sure that along the way we had a lot of connections there. We had good relationships with banking. Also learned to partner with our most important client. Totally. So we needed to have a strategy with our client base. and partnering and not competing on a regular basis, because certainly we competed in the marketplace, but not to be in every auction ever created. So we needed to have a business strategy that was consistent with the firm strategy, consistent with the PEs, clients that we had, and other clients we had. So there's a little bit of, it's not just the PE firms that could be upset, it could be the other corporates.

17:34In terms of the team and the business, Allison, I always believe we need it to be meaningful. The team that I, you know, that we built was first class people. And, you know, there would be jokes that, you know, these are really above average astronauts or whatever that, you know, and these are really smart people, successful people. A number came from banking and other areas. They wanted to be in a firm where, you know, they felt like they were part of the firm. So this had to be meaningful scale wise. And it had to be one in which we made a difference. that if we were doing well in our funds, but nobody in the firm knew what's going on, that wasn't going to do it for, I think, the large majority of our people.

18:14So we kept our people for, I think, pretty long periods of time. We had good retention. So that was important. Most important was we had to have good returns. You don't have good returns, forget it. Nothing else matters. Nothing else matters. So the investment process needed to be as high quality as we could make it. It couldn't be Rich's investment portfolio. I made all the calls and that was it. It needed to have the integrity and the real essence of realizing that we're dead. If we don't have good investment results, we don't have nothing. None of that other stuff will matter if we don't have good investment results.

18:54So the investment process was always the lifeblood of what we did. And we also made this so that it was, you know, we had so much of the employees capital invested. So there's a little bit of, you know, it's like the employees cared. We're all rooting for you. Exactly. We're rooting for us. We're supportive. You know, we want to see good returns and it's we're part of the essence. We needed to have this as part of the, you know, the tripod. And there were other things we needed to do, but we needed to be part of the essence of Goldman Sachs, especially as we got bigger. You run a lot of investment committee meetings in your career.

19:27And you once told me that it's okay to disagree, but you can't be disagreeable. Right. So what does that mean? So it means a lot to me. I'll say it this way. We run a very, and we still do, a very what I'll call honest investment committee process, which means people speak up. And I don't care how young of a partner you are or whatever. people. It's a forum to come in and give you reviews and give you ideas. We have to have decorum, but I don't want to silence the input because we have so many smart people here. So it seemed to me that we want debate. We want people to say, this doesn't make any sense to me.

20:08Explain to me why. How does this really work? And do it in an open fashion. That's where I adopted this phrase and, you know, it was, I'll copyright it, is it's okay to disagree. You can disagree and you can disagree with force, but you can't be disagreeable. You can't be in there acting like a jerk and creating that kind of negative, you know, vibes in the room because that's going to then spiral because then others will do the same. And I think the people get it. I never thought it was smart to create investment committees where the chairman of the investment committee made all the calls without all the relevant input.

20:47And we'd never approve deals if it was like 60-40 or 55-45, if you counted heads. We wanted a strong consensus of support for any investment that we made. And I just believe that we had really smart people and that as smart as we are, this is predicting the future. It's like, we're not so good at this. And so it's like, Let's get enough support and reasons why, and then we can make the call. And today, we've taken it to the next level. We have an incredible group helping us think this through. So I think it's – I was never afraid of opinions. I wanted the opinions. But I didn't want antagonism in that room.

21:29And I think everyone got it. And it was a small enough committee that everyone understood it. And there was enough experience in there that – and people believed. They said, okay, we like this model. It makes sense. No, that's smart. How have you balanced consistent performance and staying true to your principles? And was there ever a time that those two things were at odds? Oh, yeah. I mean, there are odds now. I mean, whenever you go through these momentum periods, you know, everyone's like wondering, you know. I mean, it goes back to the late 90s. Like, you know, how come you're not in AOL or how come you're not in Netscape?

22:09And why aren't we in those deals? is that the same thing will go on now, which is if you're not active in AI right now, you're useless. So it's sort of like you have to sort of balance that, which is how aggressive do we want to be during momentum periods? Consistency and staying within what we're good at has proven to be true. And that means you're going to miss some things. But we really haven't historically been that successful by jumping on the momentum thing and being at the top. Because those things, they crash. But sometimes what we would do is we would temper them. So I remember, you know, with the tech of the 2000 period, you know, there was all this pressure to do tech and tech telecom at the time.

22:48And we were like, so about five or six hundred million of that fund sort of got invested in tech and telecom. And then that was 10 percent. And then it sort of like faded, went away and it didn't kill the fund. But we at least were playing it. And there are times we've had to say no. We decided there were places that were off limits. We didn't have to go to every part of the world. We had plenty of opportunity in our home territories that we defined as home territories. So we stayed within our geographic places of U.S., Europe, Asia, which is plenty. And then we struggled through those periods of momentum.

23:25They're really hard because if you're not active in them, you look like you're just out of place. You talked earlier about starting the first subordinated debt fund. Private markets have obviously grown massively over the past decades. So has that made it harder or easier for you to find opportunities? I've always felt that competition on the private equity side where we play has always been intense because it really only takes one other party to create a very competitive circumstance. I never imagined the PE industry would evolve into what it is. Being a pioneer is like looking at this and saying, oh, my God, this is industrialized.

24:12There are hundreds and hundreds of them. Thousands. Thousands, thousands of them. What's happening in our sweet spots is when there are businesses for sale, there seems to be only like two to three or four that really pay attention and get involved. And that's because there's so much activity that you can't look at everything. Right. So I think at least right now, yeah, we just bought, you know, signed a couple of deals in the last week or so. These were midsize companies, which is which is our sweet spot. And there really one or two other competitors. There weren't 10 or 20 because no one wants to be in something where you have to pay for due diligence and spend two million dollars against 10 other people.

24:52So it's sort of a strange world in that sense. I think it's always been competitive. It's a lousy industry from a standpoint of looking at how many players, how much money, how much opportunity. But it's an incredible business to be able to go search, find, and then manage and create. And the question is, is that still doable in the world? And my answer would be, yeah, it's a much bigger world. But I never imagined we'd have an industry with thousands of competitors, three to five trillion of assets in inventory, the needing to find a home. I would have never imagined. What I'd say is, and this goes back to 2005, when I'll say what I'm going to say, or six or seven, something like that.