Harnessing Insecurity: Harvey Schwartz on Leadership & Markets

0:00The greatest economic elixer is confidence. And if people have confidence, they will spend. If they feel good about the political framework, they'll feel confident about their jobs. I don't think it's surprising we have a recession. And just because we haven't had one doesn't mean we should have one immediately. You have to look through all that noise and ask yourself, is the economy pretty good or not? And the answer is pretty good. And if earnings hold up, the markets will hold up. Humility to me allows for the opportunity of only good things. Learning, teamwork, a willingness to ask questions, like the best investors in the world have many defeats and have many investments that don't go well.

0:48But if you're humble about it, you're willing to learn from it. If you can learn from it, you become a better investor. So I think being humble in all regards allows for learning and growth and opens up all sorts of opportunities. I think arrogance shuts all those doors. Welcome to the Master Investor Podcast with me, Wilfred Frost, where we celebrate and learn from the success of the greatest investors, business leaders and politicians in the world, giving you, our listeners, the edge. The Master Investor Podcast is sponsored by Interactive Brokers. Please do remember the views expressed in this podcast are for general informational purposes only.

1:30Nothing in the podcast constitutes a financial promotion, investment advice or a personal recommendation. More on that in the show notes. My guest today runs one of the most important private equity companies in the world. Harvey Schwartz took the reins of Carlisle Group nearly three years ago and now oversees over$450 billion in assets across private equity, credit, property and infrastructure. And that came after two decades at Goldman Sachs, where he rose to be co-president and co-CEO, having previously been CFO. Harvey, it is a treat to have you with us here on the Master Investor Podcast.

2:09Welcome. Yeah, well, great to see you again and great to be here in London. Great always to catch up, particularly in person. And we first met when I just moved to the US. I was leading the coverage of the banks for CNBC. You were CFO at Goldman Sachs. And I had an off the record with you, which took me... Which apparently is going on the record now. It's going on the record now, exactly. And it took me up to the 40th floor. What was the executive floor? Probably 40, 41, 41 maybe, back then. Which is quite a daunting kind of place to go. Goldman Sachs executive floor. off the record with the CFO.

2:45And I remember it very clearly because I had quite a few off the records with big bank executives at that time. And I remember you immediately put me at ease. Your CFO, I could tell straight away, like fiercely, fiercely intelligent, but not necessarily imposing in the same way as many others. And as I prepared for this interview, I didn't know this back then. I've learned that actually growing up, you were very insecure. This is something you've started to talk about much more recently. And that really surprised me. Yeah. So, well, again, great to see you. I remember catching up with you then.

3:22Then we had some more heated exchanges on the record in the months that followed. But there we go. Well, that's the nature of things. But yeah, I've often said my core competency is insecurity. And part of this is, I don't know what language people usually say. They'll say, well, I had a bit of an unconventional path. I don't think much of stereotypes, but there are stereotypes for people in my industry. And generally, it's a sort of very stable childhood followed by an experience at an Ivy League school followed by a traditional analyst program. And then the next, you know, you're sitting here with Wolf.

3:56Mine was different. I have spoken about it a lot. I really started in 2017, but both my parents suffered quite severe mental illness. My father suffered from schizophrenia. My mother suffered from what we now call bipolar disorder, but you didn't even call it that back then. And it led to a whole bunch of challenges for my sister and myself, who's six years older than me. My mother passed away when I was 14. And I think the quick summary is, by the time I was, I don't know, 17, a senior in high school in the States, I would say I was a bit of a feral kid. I barely got out of high school. I did not immediately go to college.

4:33I then applied to college when I was 18. The year after, I could only go to one school. I went to Rutgers State University in New Jersey. It was the only place I could afford. It's an extraordinary institution. Does a lot of great things for kids that come from, you know, challenged backgrounds or first time ever to go to school, you know, university and their family. And I didn't get in. And then a friend intervened, communicated with the university and said, listen, I think you made a mistake with this young person. And they asked me to write an essay, which really I interpreted at the time of why we were such a failure in high school, because I felt that way.

5:06And yeah, they interviewed me and they changed their mind. They let me in. And it was a long path where along the way, you know, until I was really in university, But really many, many years later, probably in my 30s, I grew up sort of feeling like underperforming and failure with the expected outcome. And that's difficult for any young person. You know, if you don't have evidence of success by the time you're 18 or 19, it can really stick with you a fair bit. I think it stuck with me for quite a long time. And so, yeah, now I think I ultimately figured out how to harness that insecurity and it played to my advantage.

5:48But I think mostly I was super fortunate that people intervened in my life, friends, family, co-workers, colleagues, mentors, which gave me the opportunity to excel when I probably had no expectation of that starting out. There are so many things that I could pick up on that. And I think the thing that jumps out to me is that, again, City, Goldman Sachs, Carlisle Group, you know, CEO, you wouldn't expect Mr. Wall Street to be open about those sorts of challenges. And I guess not only are you open about it yourself, which I'm sure resonates with lots of people who struggle in the same way, but you've particularly in those years as well between Goldman and Carlisle, which we'll come to, you know, you've thrown a lot at it in your philanthropy.

6:33and my question on this is not only was it hard to get over that initial very understandable insecurity was it hard to talk about it and to be up front about it a decade or so before other people have done so in that wall street environment did that take extra courage i guess to say to your fellow kind of very overconfident wall street cohort actually guys we have to look we're leaders now and we have to look out for this in our firm? So it was sort of an accidental evolution. When I was a young boy, I can't remember how young, and my sister's fine with me talking about this, my sister suffered very intense anorexia.

7:18And the compensating, and this happens in families with eating disorders, the compensating factor for that is I ended up being very obese as a young person. That was part of the feeling of failure and the teasing was brutal. I can only be thankful there was in social media back then and things like Snap and an ability for kids to use technology as a way of teasing people because I felt like I was teased most of my young adolescents. But there was a rule in my family, and the stigma around mental health is still quite significant. But back then, you know, we're talking the early 70s. There was no acceptance of a willingness to talk about mental health issues.

7:59And again, the stigma exists today. No one should think it's improved or gone away. But the stigma was very intense. So there was a rule in my family that you were not to talk about the illness in the family. Family rule. My mother was very severe about this. So I sort of grew up that way. So I grew up not talking about it. I just carried on not talking about it. Now to get to the heart of your question, I know you had Ray Dalio on the show. And I interviewed Ray Dalio, I think in 2017. And we were catching up in advance and we started talking about brain health. And I said, oh, I know a lot about this stuff.

8:35And I told him about my upbringing. And he said, do you ever talk about it publicly? And I said, no. He said, no, you should. I said, okay, but you're talking about it today. So it was about, I don't know, 3 ,000 people out there. And I do this interview with Ray and it comes up and I must've talked about it for 60 seconds. I think I made a comment that my parents had attempted to take their own lives and die by suicide. And after the interview with Ray, a bunch of people came up to me, Wilf, and it was a real learning moment for me. A bunch of people come to me and they said, thank you for talking about the mental health issues.

9:13And I sort of thought, why are you whispering. I myself didn't really understand somehow just by talking about it. There was no mobilization of resources or trying to convene people around the topic. Literally, the topic was still so stigmatized that just by talking about it, somehow some air came into the room that I didn't even know the room needed. And so it really impacted me. And subsequent to that, I made it a point to talk about it more. I did it at a whole bunch of different venues. Then after leaving Goldman Sachs, I investigated it from a philanthropic perspective, got attached to some organizations, and there's some amazing work being done.

9:56But that was sort of, I hate to say it, a little bit accidental, but I didn't know that there was any benefit that I was offering by talking about it. But I'm completely comfortable talking about it. It's life. It's the way we grew up. It was complicated, but a lot of people have it way worse. And I've just been the fortunate beneficiary of a lot of people. I mean, I could give you story after story of people intervening in my lives when they didn't have to, to enable me to have an opportunity that otherwise wouldn't have been afforded to me. So I have huge gratitude for all those. You know, there's mentors in life, and I think I've had angels.

10:32If you're lucky enough to have an angel in your life, I've had many. You're pretty fortunate. Well, it's a testament to you that you give back in that regard. You said there was lots of amazing organizations and you've done a lot for them. And I'm very fortunate. I haven't experienced some of the stuff, but nonetheless, thank you on behalf of all those that do need that help. And thanks for asking about it. Well, no, it's fascinating. The rest of this won't be as interesting as that, but it's still going to be pretty interesting.

11:02Now, I mentioned some of the background of the career. You left Rutgers, you joined JB Hanauer. It's a bond trading company. I actually didn't know you started in bond trading. Obviously, a period at Citi, nearly a decade, and then two decades at Goldman. And in particular, Goldman started in the commodities business, Jay Aaron, which I was fully aware of, rose to be CFO, then president and COO, and obviously now CEO of Carlisle. What I think, you know, the first thing comes to mind for me that you're uniquely placed with amazing experience of both public markets and private markets. And private markets have grown unbelievably fast.

11:39I think more, every two years, I think it's going to top out, it's going to top out, and it hasn't. And it's been a really, really steady growth over the last sort of 15 years since I graduated in 2008. And I guess my big question to start this off is, why has that growth been so consistent relative to public markets. I guess the first people assume, oh, there's so much regulation post 2008, that hit the banks more than the private markets. Is it as simple as that, or is it more nuanced? I think it's more nuanced. There's a component of that, but it's a small component. I think you really have to go back and look through it through a longer lens of history.

12:18So when David Rubenstein, Bill Conway, and Dan Daniel formed Carlyle, private equity didn't even exist. There was basically leveraged buyout, that's what they called it, and there was venture capital. And that was the available pool of private capital. So let's think about it. They were pioneers of the industry, formed in DC. It was 1987. So we're talking about an exceptionally young industry. Now, if you, well, let's take, for example, the Wilshire 5000. The Wilshire 5000 was put together in the 70s. Actually, the number of companies in the Wilshire 5000 peaked in the late 90s at about 7 ,500.

12:56From that period to today, there's something like 3 ,300, 3 ,400, companies in the Wilshire of 5 ,000. This is publicly listed U.S. companies. Publicly listed U.S. companies. So what you saw from 2000 is this systematic decline. So why does that systematic decline exist? It's not regulation in the 2000 that starts this. Regulation really picks up 2010, 2011, 2012. what really drove this decline systematically is the availability of private capital. So as that industry matures, all that's happening, because from my perspective, and as you pointed out, I spent most of my life, you know, managing trading floors, being the CFO of Goldman Sachs, running a$1.1,$1.2 trillion balance sheet.

13:41That is, to me, it's just capital. and what CFOs, CEOs, treasurers all around the world every day do is they're just looking for the most efficient form of capital. So as private capital grows and matures as an industry, they just have different opportunities to select from the menu of capital choices. So private credit comes along, direct lending comes along, CLOs really grow in size, which helps facilitate capital transformation. And so asset-backed finance vehicles, which have now, Now, some of these things are regulatory choices. Some of these things are direct output of the financial crisis of 2008 because the liability structures we work with are much longer term.

14:24And so an ability to provide that capital on a duration-needed basis we can do versus bank capital. And so I just view it as capital and the natural maturation of this industry. Now, there's a whole bunch of factors that would lead companies to stay private longer. But the length that a company stays private has doubled from five or six years up to seven, eight, nine, 10, 12 years often and will likely continue to extend. I personally think, and I'm kind of hoping, we're at the bottom of losing public companies because I don't think losing that many public companies is good. But there's a lot of factors in here.

14:59ETFs versus fund managers making idiosyncratic selections around which companies to take public and what do they want to buy. ETFs don't buy public companies. So there's a lot of forces that converged all the same time, but it's just capital. And people running companies make the choice. And so if the best choice of capital is bank capital, they'll pick it. If the best choice of option going public is the best choice of monetizing an asset, they'll go public. We did some of the largest IPOs out of private company space last year. We did the largest ever owned private company in Japan. We did the largest ever owned private company in India.

15:34We did one of the largest IPOs in the United States. and these are in very different industries. So the public markets are available, but the trend and the breadth of capital selection is really what's driving this. What I think is so striking to me is America has whatever option to fund your business that you want with great depth, which I didn't, coming from London to the US in 2016, I didn't quite fully appreciate that. And obviously you have a big business here in Europe as well, across all of Europe, including London. Is that a key differentiator? I mean, even though you guys can bring capital from all around the world to a business if you want to buy one here, is the US capital market something that just puts it on a different keel to any other economy around the world?

16:20Or is it other factors? No, I think there's two questions in there. One is the way you described the capital choices. I do think that it has been for a very long time the deepest, most efficient capital markets in the world, the United States capital markets. Just like the United States has been a leader in technology out of Silicon Valley, really been a leader out of finance in terms of finance evolution, being the largest economy in the world, and having sort of that entrepreneurial spirit. Now, having said that, London has for a very long period of time been the center of finance globally for people who want to trade 24 hours a day.

17:04And these things shift and move in time. But I think there's a reason that is historically embedded in the depth of the US capital markets that allows for creative evolution of finance. We are making decisions very often on committing capital that may go on for three, five, seven years. And so we don't seek to avoid risk. In public markets, very often you might say, oh, this market doesn't feel bad, or there's something in the marketplace that triggers noise and you pull away from risk. We seek to price risk correctly at the margin. So on any given day, people that are deploying credit might be saying to themselves, geez, the risk return looks better in Europe than it does in the United States because it's crowded.

17:47Or our industrial team may say, wow, there's really a need for industrialization of Europe, and the capital demand will be higher there than the United States. And so we have this concept of a one-carlo transaction, and we're like 2 ,500 people at Carlo. So it's a very tight-knit group of very high performing, high caring people. But around the globe, we have companies that employ over 700 ,000 people. So the responsibility is great, but it's about that micro deployment of capital where we make a difference on behalf of our investors and how we generate returns. I want to get to the insights that you can draw from that huge global footprint, particularly in the US in a second, but just one further follow-up specifically on the UK.

18:31I guess, and through your decades in banking as well, as you alluded to, you know London as a financial center, you know the UK well. Do you think the long-term outlook is as good as it's always been? Or in the short term, is it depressed? I mean, we've got the budget coming up in 10 days. A year ago, the chancellor put up taxes. It's inevitable they're going up again next week. Does that start to be a problem? Or are these small cyclical changes?

19:01So I think this is not a UK phenomenon necessarily. Why do I say that? You know, I'm a fair bit older than you. I'm 61. I think in my lifetime, there have been some very, very powerful trends which have driven global growth. Billions of people came out of poverty, and they include declining interest rates, really very little inflation. the end of the Cold War, where the world came down, globalization, and then a rise, incredible impact on the efficiencies driven by technology. I think if you just step back and you think of those, just those trends, they're all either slowing or reversing other than technology, which is accelerating.

19:47And so we've now moved into an environment globally where there's more nationalism or on-shoring, if you want to think of it that way. inflation has been more persistent. There's been more changes in velocity and political leadership. I don't want to say instability, but the patience that citizens have in their politicians to fix things is slow because prices are high and affordability and the cost of living is high in many locations. And they're not seeing the world as being particularly fair. Whereas when things were sort of straight lining for many, many years, I think it was easier. And of course, Obviously, we have the big impact of Russia going into the Ukraine, which is a global phenomenon, but very locally here has impacted priorities of how to think about energy security and sources of energy and impacting local economies quite severely.

20:44So there's a lot of things under the hood. I'm always a pretty cautious optimist, but I think I fall pretty much into the optimist camp generally. and I'm pretty optimistic for Europe and I'm pretty optimistic for the UK. And it's not about next week's event or two weeks events after that. I think that there's a, when I talk to officials, prime ministers, ambassadors, and as you can imagine, there's a lot of that in this role, particularly given that we're based in DC, there is a desire for economic growth. And economic growth heals all issues. Stagnant economic growth leads to much more difficult outcomes.

21:34And so the desire to create economic growth, wealth accumulation across all bands of society is uniformly desired everywhere in the world. And so I do think there'll be competition for capital. I think the demands for private capital, getting back to your earlier point, is secular. because countries have the fiscal burden of the deficits being too high. Banks can only provide so much capital, but they're an incredibly important part of economic growth. The rest of it will come from private capital and the demands are enormous, whether it's infrastructure, revitalizing industries, focusing on energy, real estate, all the things that will require massive investment.

22:14And I think countries will compete on different grounds. But, you know, this notion of nationalism and onshoring and deglobalization is really about a competition for economic growth. Simplified. It's much more than that, but overly simplified. It's a competition for economic growth. Capital is the blood flow of economic growth. And so I'm pretty optimistic, notwithstanding the day-to-day noise. Well, good to hear. And I agree. Long term, always a bull on the UK, even if it's challenging in the short term.

22:48This podcast is sponsored by Interactive Brokers. Building wealth starts with the right broker. Interactive Brokers helps you reach your goals with powerful tools, global market access, low costs, and unmatched financial strength. That's why the best informed investors choose IBKR. Learn more at ibkr.com forward slash master investor. Let's talk about the US and a quick sort of economic outlook, if you will, from your unique position, as you alluded to, of all the companies you're gathering data from. Any expectation of a recession in the next couple of years or not? I would say that if you look across our portfolio, EBITDA cash flow as a proxy has been growing 8%, 9%, 10 % across the board.

23:40Companies are doing very well. Inflation is definitively sticking. employment growth at the margin has been slowing but not degrading notwithstanding some of the headlines of big layoffs in the united states and so i would say overall the economy feels quite resilient the consumer feels quite resilient i would say broadly around the globe there are pockets obviously of economies that are struggling but that is a general reflection of what's happening across the globe now growth is slower here inflation might be a little higher here But I would say that is generally certainly the backdrop in the United States.

24:18It feels pretty good. What about markets? A couple of your peers, various big bank CEOs, have expressed caution of late that things look overvalued. You used to run the trading desk at Goldman. Do you think that's a legitimate concern? Or is it impossible to call the top in these things? Well, you made it easy because you gave me an answer that I could embrace. But I won't say yes. It's impossible. But I would say the following. Anytime you have eight companies that represent 40 % of the S &P 500 market cap, and those eight companies represent roughly 26%, I think, of the MSCI Global 5000. So you're talking about such a dominant leadership in market cap and such an acceleration of market cap growth that it would almost be unreasonable not to question the sustained momentum and capability of that cohort to drive markets higher.

25:16Okay. So that's a technical question, I think, about a particular cohort that could drive the markets higher. I would go back to fundamentals. fundamentals. And the fundamentals, at least as far as we can see them. And so those KPIs that I went through that we look at, they're a pretty good forecaster of sort of three, six months. They don't guarantee, but that gives you a pretty good visual into the U.S. economy for the next three or six months. And so we have a resilient consumer, decent economic activity. We have a Fed that's leaning towards being more relaxed and has already cut twice. So I would say, is it natural to expect some pullback when you have a market that feels somewhat naturally extended?

25:56The real fundamental question is, is that just about risk and profit-taking, or is there some weakness in the economy, which would lead to something much more sustained or fragility in the economy? Right now, that does not appear to be on the horizon. That's not in the expectation of how companies are performing, employment's at a good level. Sure, there's lots of political debate back and forth and lots of discourse in the United States, but you have to look through all that noise and ask yourself, is the economy pretty good or not? And the answer is pretty good. And if earnings hold up, the markets will hold up.

26:31What about if you step back and answer that question as a sort of student of financial history, which I know you are as someone who is literally in the room alongside your then CEO, Lloyd Blankfein, at the Fed the weekend that Lehman Brothers went bust? You could argue, I mean, yes, we've had COVID, but we haven't really had a proper recession since 2008. And if they have, it's been short. We've papered over the cracks quite quickly with monetary policy or fiscal policy responses. Is that sustainable? Is it possible that we get to the end of this decade and that hasn't happened again? So I think what's the statistic?