Episode 22: Tully Friedman - Co-Founder of Hellman & Friedman

0:00This week on the podcast, I dionner being joined by none other than Tully Friedman, an iconic figure in the world of private equity and someone whose impact on the industry spans the world of private. decades. Tully co-founded Hellman and Friedman, one of the largest private equity firms in the world with over$115 billion in assets under management, and later co-founded Friedman, Fleischer, and Lowe, where he's led investments in a range of middle market companies with a strategic long-term approach. Before his time in private equity, Tully was a key player at Salomon Brothers during its heyday in the 1970s, a formative period that gave him a front row seat to the evolution of modern Wall Street.

0:35He earned his JD from Harvard Law School and has brought a sharp legal mind and thoughtful leadership style to everything he's built. In his first ever podcast appearance and one of his rare public speaking appearances, we talk about the building blocks of his career from his early days on Wall Street to founding two firms, his thoughts on dealmaking, leadership, and talent, and the legacy of his longtime partner, Warren Hellman. Tully also shares timeless lessons from decades in finance, his views on the future of the industry, and the advice you'd give to a 15-year-old today. I really enjoyed making this rare interview, and I hope you guys enjoy this too.

1:10If you haven't already, please follow our Spotify or subscribe to our YouTube. I'm really trying to get this viewership up as much as possible. And if you've enjoyed this episode, I urge you to share it to your friends, family, or anyone who you think might be interested. Thank you, and I hope you enjoy. Thank you, Tully, for joining me. I really appreciate it. Welcome to the podcast. Thank you for inviting me. It's a distinguished company. you've kind of herded together somehow. Thank you. I appreciate it. Yeah, somehow. Impressive feat, I have to say. Thank you. So I'd like to start where I usually do, going all the way back to your upbringing, your childhood.

1:44Can you kind of describe your background for me, your childhood and your upbringing? And also tell me about the steps that eventually led to you going to Stanford. Sure. So I consider myself very lucky and our family very lucky. It's a classic American immigration story where my father came here in 1918 from what was known as the Pale of Settlement in Russia. Anyone who stayed behind was slaughtered, either by the Germans, the Poles, or the Russians. And his mother dragged him and his siblings across Europe after the World War I. I can't even imagine what that was like. got them to the United States.

2:22And they had a very, very hard life. He spoke no English when he got here. And I actually realized much later in life when I listened to an oral history he did that his English was too perfect. So it's like those novels where the Russian sleepers are dropped into America after they've been trained in an American village in the Gulag and they get cut out because they don't speak colloquial English. That was his English. And the family got here, they all went to work immediately. He somehow got himself through college and law school, became an adult just in time for the depression. And at one point he said to me, the depression was the happiest day of his life because then everybody was poor.

3:06He worked hard. He met my mother who has similar background. They got married. They raised a family that brought us to Los Angeles. And I was raised by very loving parents who sort of sacrificed everything for their children in very good public schools, educated in very good public schools in Los Angeles, and a very lucky guy. It's an incredible story. I haven't heard a lot of those on the podcast. It's pretty typical. I mean, it's a typical American immigration story. And in the millions, maybe more people have the same story. So in one sense, it's not unique and not special. On the other, in another sense, it's, it's all about American and American opportunity.

3:48So I was raised as a patriot, I have to say. You got your Juris Doctor at Harvard, went to law school at Harvard, if I'm correct. Yeah. How did your time at law school impact the way you think today? And how has it applied itself throughout your career? Yeah. So just to go back a little, I went to Stanford. My father, who after his experiences coming here and growing up was really very risk averse and really pretty scared his whole life, was terrified that I didn't just go down the road to UCLA. But I went off to Stanford. It worked. I went to law school. And I think what I really got out of law school mainly was learning how to think because I sort of got along on rote memory in college and I wasn't bad at it.

4:36But they beat you into really thinking about problems in law school. I left law school, I think, with some ability to think and analyze. And that served me well in my whole life, I think. And how have you seen the differences between your kind of father's attitude? You said he was who's much more conservative and risk-averse in years now. Do you think you're more like him, or do you think you've kind of taken an opposite view in terms of risk? No, I think it's that classic case where the kid reacts to the parents' culture, if you will, and goes the other way. I have a trope for risk. It's not crazy risk, but there have been important junctures in my life where I've taken risks that would have been unimaginable to him.

5:21I went from law school. I worked in a senatorial campaign. I worked for Sidley and Austin, which was one of the great law firms in Chicago, and decided after three years, I would rather do something else. And I left Sidley. He said nothing. I can't imagine what he was thinking, because it was beyond his ken that he or someone in his family would work for a firm like that. In fact, it wasn't possible when he was growing up. And I left that all behind. And so I would say I have a streak of risk tolerance that has followed me through my career. After that, you ended up at Salmon Brothers during the 70s.

6:03How was the firm special at that time in terms of both talent and culture? And what did you take away from that experience? Well, so basically I practiced law for three years and we were doing public offerings and bond indentures and we'd go to the printer and we'd print up the stuff for the SEC. And then the group would have a steak dinner and then the investment bankers, the underwriters, go home and the lawyers would stay there all night and package up the filing package and get it off to the SEC. And finally it occurred to me that maybe I should figure out what those guys did. and in those days it was guys there weren't any women in the profession and decided I wanted to go into the investment banking business and someone suggested I talk to someone at Solomon because they were sort of a nothing third-tier bond firm where there was a guy there named John Goodfriend who had this vision that they could integrate backwards and because they were so good at selling bonds maybe underwrite them effectively and create a much more fundamental business and And just as has been the case, pretty much every time I've made one of these bets, I like John.

7:10The firm was not particularly enticing. I was talking to some other more established firms, but I made a bet on John. And John is the person that dragged the firm into prominence in the next 10 years and turned it into the major firm it was. And it was a good bet. So that was what I saw there. And it was a zoo. It was a bunch of people, mostly traders and salesmen, that if they hadn't come to Wall Street would have been bookmakers or bakers or things like that. They'd never seen anyone like me and didn't know what to do with me. And I was terrified the whole time the first few months. But, you know, it worked out.

7:49And what was it like being there during the time where it just got bigger and bigger? What did you what did you learn from? Well, I had a deal with John that if they ever wanted to start a bank on the West Coast, I could do it. And by God, two years later, he sent me out there in my late 20s. I had a little metal desk in the corner of a sales office with a directory of California companies. And I started at the A's. And we slogged it out and added some people. And I had a wonderful guy named Bob Matchlaw who went on to run the investment bank at Morgan Stanley. He was one of the real giants of the business.

8:23But he was a kid that I fortunately was able to lure into our little corner of the world. and the firm was on a real trajectory and we worked hard and we did a fair amount of business we ultimately built a big west coast business i became a partner uh but that sort of trading sales sharp elbowed culture never really left it and um you learn to tolerate it wasn't it was not a natural arena for me and i think what saved me was i was 3 000 miles away from the trading floor in New York. I think if I'd been there, they would have cut me to pieces. So you meet Warren Hellman, and in 1984, you start Hellman and Friedman.

9:08Can you just take me through, give me a bit of background on how you meet Warren? What led to you guys? What was the kind of founding ideas? Sure. So I met him first, maybe 10 years before we started the firm, when I was trying to get into the business, maybe 12 years. And I was talking to one of his young partners at Lehman and going through the place. And he said, well, you got to meet Warren. Warren was a man, a 37, 38-year-old president of the firm and a wunderkind on Wall Street. And he said, oh, here he comes. He's coming down the hall. Warren, I'd like you to meet Tully Friedman. Warren comes zipping past.

9:42His nickname in those days was the Hurricane. He says, hi, bye. And that's when I met Warren. And that was the sum total of our interaction. Twelve years later, I get a call from the CEO of Crown Zellerbach Company, which is a, maybe 10 years later, which is a client of ours, big forest products company. Warren Hellman's moved back to California and Lehman has lent him to them as their interim CFO. What do I think? I said, how's that going to work? They're competitors. And his answer was, why don't you go ask Warren? So I went up to see Warren and we had this conversation. He basically said, try me.

10:23And Crown Zellerbach was in financial trouble. They had issued too much debt to build greenfield paper mills and got in a lot of trouble. and he and I spent the next two years fixing it and working as partners and kind of holding off our respective partners in the two firms to do exactly what we thought they should do and regardless of who got to do it and at the end of that time we'd gotten pretty friendly and we were having lunch and he said to me you know um I can always tell when guys are going to leave the business you're going to leave the business aren't you and I said yeah I've got I've got a client that wants to start a little deal for him.

10:59And I like him and I think it's time for me to do something like that. And he said, well, I'd like to do that. I'd like to leave Lehman again. Can I office with you? And I said, yeah, sure. I'd love that. And let me talk to Toby. So three months later, I was still talking to my partner. And I went back to Warren. I said, you know, Warren, I don't think this is going to happen, but I'd kind of rather do this with you. And he said, great. so if I bring a deal in that's great so he said we'll call the firm Friedman and Hellman and I said Orrin look you're 10 years older than I am you've been president of Lehman Brothers you're kind of famous and I'm not stupid let's call it Hellman and Friedman so that was the start of the firm and from what I've listened to so far I can already tell you're an incredible storyteller So I'd like to pose this question to hopefully get maybe some stories or some anecdotes out of it.

12:01But what were the early deals or transactions during your time at Hellman & Friedman that helped shape the firm's approach? And how would you describe the firm's original approach? Well, of course, we didn't have one. And we didn't theorize about it a whole lot. I would say that someone on the outside who looked at it would say these are two people that, while they're stylistically very different, He was a sort of wild extrovert, and I was pretty introverted and pretty quiet. But we really had the same value system. We cared about people. We wanted to be good partners and good advisors. We were willing to take long-term views.

12:40And we ultimately really saw the world the same way. And he had a lot of capital. I had a little because they had sold Solomon. And what we found is no one cared about our capital, but everyone cared about getting our advice. So we established a little advisory business, and we ended up with a handful of clients we would have killed for in either of our prior firms. Levi Strauss, American President Lines. We turned down Chevron because we were afraid that we couldn't just deal with the top two people, their treasury department with Nibala's to death, and so on. And we really couldn't get anyone to let us invest money.

13:18That changed over time. and I was involved with Stanford and helping them on our South African investments, got to know the treasurer. And there were some firms, KKR had just gotten going and a few other firms. And one day I said to him, you know, we might raise a fund. Would you ever be interested? And I said, yeah, yeah, I would do that. So he offered to lead a$100 million fundraise for us. And I said, it's not going to be venture deals. It's not going to be a startup. It's just going to be plain old good deals. He said, fine, we don't have anything like that. And we ended up raising$300 million.

13:57And we were off to the races. And we were really trying to find good businesses led by people we wanted to really be partners with. Unusually, we didn't care if we had control or not with the right people. That was very differentiated. I don't think anyone else was doing that at that point in this sort of narrow, small cottage industry, if you will. And we got going. We raised that fund. We raised two more. And we ultimately raised and deployed something over$2 billion in capital while I was there, which in those days was a lot of money.

14:37And after Hellman and Friedman, you founded Friedman, Fleischer and Lowe in 1997. to focus on what has been described as smaller, more middle market businesses with an increased focus on small subsectors within industries. What motivated the shift to investing in smaller, more kind of niche businesses? That's sort of the way the current leadership sees the firm and describes it. I would say that it was pretty clear to me that as more and more capital came into the business, I mean, let's go back a little. This whole sector was part of something called alternative assets. So you had venture, you had what was called buyouts in those days, now called private equity.

15:23You had hedge funds coming along. Everyone was trying to find these little niches of value that weren't very exploited. And the real avatar of that was David Swenson at Yale, who started backing firms like that. He was among our first investors. And pretty much by the time I started FFL, a lot of that had been competed away. And what was pretty clear was you had to really make an operating improvement in the companies to get full value out of the deals. You no longer could find, if you will, cheap investments, buy them, leverage them, and sell them on. So that was really the main motivation. because we were again back raising a smaller fund,$300 million, we weren't going to do really large deals.

16:11We had done some major deals, including Levi Strauss in the prior firm, which was the largest buyout ever done to that day. And so of necessity, we were doing smaller, call it middle market deals. There's always been this kind of fantasy that if you do these deals, they're less competitive. I never found that to be the case. There's just no refuge. There's just too much money, too many smart people trying to do stuff. So you simply have to survive in a tough world. And there aren't any neighborhoods you can go that aren't like that in my view. There haven't been ever since the earliest days. I find that to be an interesting point because I've spoken to some people that have said that, well, if you're going into a – if you're investing as a large private equity shop, like a KKR, like a Blackstone, there's a lot of these smaller deals that can't move the needle.

17:07And a lot of people have shifted towards it. But I find that point very interesting. It's contrary to a lot of what I've heard. And I'd love to explore a little bit later. Well, let me just say, I think that's just wrong. And it's something the consultants deal in. I see that in some nonprofits I've involved in. I just think that's wrong. I just think it's a highly developed, highly competitive,

17:32set of asset classes, if you will, or asset class where a tremendous amount of equity capital and leverage has gone into it. And it's just not as interesting as it used to be. Yeah. And size doesn't get there. It just doesn't do it for you. I'd love to touch a little bit on culture because you touched on the culture at Salman Brothers. So what cultural traits at both Hellman and Friedman and Friedman, Fleischer and Lowe are non-negotiable for you, even if they come into the expense of short-term returns? Because I've spoken to a lot of people that have talked on not getting maybe a star trader who might be toxic and get you a lot of money, but focus on more long-term delay the gratification.

18:14So I'd love to hear your kind of thoughts on that. Yeah, I'm not sure I operate on that, Victor. I would say that in terms of my life, I really believe that there's a sort of a karma and everything. And I don't believe you can create monuments during your life. So I have a lot of friends that have done pretty well that donate buildings to things and put their names on. And I don't think that really gets you anything. And I think your real monuments are in the hearts and minds of the people you interact with. And that extends to how you behave in business. That doesn't mean, you know, you're businesslike.

18:51I mean, you're commercial, but you don't sacrifice character. You don't sacrifice principles. And that includes the people within the firm. So we always tried to hire the best people we could get. We wanted people of high character. We wanted people who didn't cut corners. The two leaders of Hellman and Friedman today are people that I helped hire. And I was interested in what they had to say from the first day they were in the firm. So it had nothing to do with rank, but the fact that these were Very high quality people, very smart, great judgment and people you wanted to spend time with. So that's sort of the basis for everything for me.

19:29And it certainly extended into our business activities. You know, we were commercial, we were competitive, we wanted to make money. We kept ramping the size of the firm and the funds, but we weren't about to sacrifice principle and behave in a way that we thought was wrong. in every person i've talked to that's a lot of business that has some kind of enterprise value i've heard that common theme and i found it and i found it very important but what i'd love to do right now is kind of get a little bit deeper into the kind of deal making investment side of it so i got asked this question i mentioned to someone i'm interviewing you and you haven't done a lot of public appearances and he asked me um he told me that i can ask he'd love to hear this question and I would also love to hear this question.

20:17Well, I'm going to blame you for it, but go ahead. Is deal-making talent innate or learned? Okay.

20:25I'm not sure I know what deal-making means because Donald Trump was a deal-maker. I'm not sure his deal-making and talent belong in the same sentence. So I prefer to think about investment talent. Just making deals in these firms doesn't get you very far. And people can make their own conclusions about the current president. But so I think about investment talent. So let's talk about in terms of investment talent. I have met very few really good investors in my life. Probably you can count them on two or three hands. And it's an innate talent. It can be developed. It can be enhanced. it must be enhanced through experience, but it's a gift.

21:19And what you can do in these firms and these institutions is train a whole bunch of people in process. So let's think about how a deal happens in one of these firms, almost regardless of size. You come across it somehow, ideally it's proprietary, but that's pretty rare these days. It's a competitive process, You look at X company. You have bright young people that are tremendous analysts that run models. They do diligence. My partner, Spencer Fleischer at FFL, used to say to our people, look, let's not forget that we buy companies, not models. That's pretty profound, if you think about it. And I was always the worst analyst in our firms because I was trained as a lawyer.

22:05I wasn't trained as a financial professional. I kind of learned how to read the stuff. I'm not sure I could ever create a model to save my life. But what would happen is they would bring results of all that work and analysis to senior partners. And we'd look at it. And that's where our work began. And the questions we were asking ourselves was, are they right? Are these the kinds of businesses we think we want to be in? Do they have differentiated advantages? You know, the kind of stuff Buffett talks about and is right about in a lot of ways. But then do we want to be in business with these people?

22:41And that is both a personal and a business question. And that's where I got very, very active. And even during COVID, I would ask them either to have the management come out or at least we do a very lengthy Zoom call. And that's kind of where I earned my living. So to me, that is the most important part of the equation. And I just think it's innate. It's an art. And you make a lot of mistakes, but I don't think you can teach them. And as someone who focuses on management, what does a quality management team look like and how common is a quality management team? Well, pretty uncommon. In our business, I'm told that almost 60 % of the CEOs of companies that people buy are changed out in the first two or three years.

23:28Our record is much better because it was only 50%. percent. And we kind of knew half of those were going to go. So as we did the deal, we would say to ourselves, well, you know, Amir is okay, but maybe he's the guy we don't want to keep around very long. Is there someone else in management or someone else we know we could put on the board to fill that spot if we're right about this? But half of them we didn't know we're going to change job. So that's really important. And by the way, one of the prices people have paid during the last few years when there's been this frenzy of dealmaking and people have less and less time to study the prospects and their preemptive processes, people are spending less and less time with management.

24:19And I think that's a real shortfall. I think that's a real problem. that may correct itself with a lot of other things now. So you're really looking for very special people, at least in the senior management, people that are straight, people that will be good partners. And that's a very hard thing to tickle out. And as I said, we got it wrong half the time. Over the course of your career, what do you see as the greatest investment you've ever made? It doesn't have to be a business investment, but it could be something else. Oh, well, the arc of my career, and I've had basically five so-called careers since I got out of school, always has been tied to a person.

25:05So I described my going to Solomon because I was very taken with John Goodfrey. I made a bet on John. There's been one of those in every one. Warren would be another. Spencer Fleischer would be another in FFL. fell. I was very lucky to meet my wife, Elise, 30 years ago. And we were engaged in three weeks. That's a really crazy thing to do, particularly as careful as I am. But it's not unlike the way I've done deals in the past, where I'm very careful. And one day there's a switch flips and you say, yeah, we're going to do this. So she is just the light of my life. And I don't know if that's an investment with a small I or a big I, but it's been very important to me.

25:49So I can name deals. And certainly the Levi deal was important because it put us on the map. It was a great deal financially. The Haas's had faith in us. The older families were, I'm not sure they should have because we didn't have any real experience in doing buyouts. in the first fund at FFL, we did Tempur-Pedic. That was a$300 million fund that we returned a billion dollars of profit on. And Tempur-Pedic was a meaningful part of that. And it was very risky, very hard to decide to do it. So these have occurred along the way. But I think it's more the people. Yeah. And the question I just asked you was about...

26:31We had a few really terrible ones, too. So really bad ones where we essentially did dumb things. But I'd rather not dwell on that unless you really want me to. No. No need to dwell on it. So I asked you the last question about the greatest investments you've ever made. But my next question is, how do you personally define a good investment other than the obvious, like IRR? And has that definition changed for you over the course of your career? what you're trying to line up well let me take that last and it's more a question of how the firms function so when we started we were generalists we kind of did everything so the first big thing we did was an apparel business which is you know not where you choose to start out happened to be a fantastic brand we did mattresses we did health care things we did shipping, which we kind of came out all right on, but in hindsight, maybe you shouldn't do shipping deals with capital intensive.

27:32And then as the business evolved and got more competitive, and as essentially I got into the second firm, and I think Helman and Friedman had to do this too, you had to specialize more and more. That was one of the ways you dealt with the competition. So you knew more and more about narrower and narrower things. And that's just where the business went. I like being a generalist. Walking into the office every week and dealing with something new, maybe learning about a new business was wonderful. But the unifying things I would say are, number one, the people you're in business with, competence, character, willingness to partner, take criticism, give criticism.