First Time Founders with Ed Elson – The Billionaire Who Built His Fortune on Infrastructure

30:47Yeah. But I'll sure as hell let them go out and find a transaction and do all the execution around that transaction. And, you know, I'll let them do an awful lot. I want to talk about launching Stone Peak itself. So, you go to Blackstone and then you spin it out into its own firm called Stone Peak. We had the lunch with Steve. We've, um, ultimately we got, uh, four different offers. Like everyone we spoke to gave us an offer, including what's called a private placement agent. Private placement agent is a firm that helps you raise the money yourself. So that was a do it yourself option. That was my preference.

31:24Um, I gotta say it was, you know, quite flattering to meet with Steve and he's a unbelievable, uh, and I mean this in a very positive by salesperson. And so, uh, Trent had a preference for Blackstone. It was easy to talk me into doing that. And so we ended up taking this offer at Blackstone. So I remember this really well. We got paid our bonuses. I went and the head of Macquarie, who's based in Australia, very intimidating guy, really the founder of infrastructure, a guy called Nicholas Moore, one of the smartest people you'll meet, one of the most intimidating people you'll meet. He happened to be in New York the day that we were leaving.

32:01So I went and resigned in person to Nicholas. I thought it was the manly thing to do. Probably regretted it halfway through. Got marched out. Traitor. And then we had four months of gardening leave. It's the only break I've had in my whole career, which we took advantage of. And then I started at Blackstone on November 1 of 08. and to put that in perspective for folks. So when I left Macquarie, Blackstone paid us for the Macquarie shares we had to give up. Because what happens is you get, you know, shares in your comp and they don't invest unless you stay. And so we lose the unvested shares. So I had$3 million of Macquarie shares.

32:57It was all the money in the world to me at that time that I had to leave behind. So Blackstone covered it. And Blackstone covered it with$3 million of Blackstone shares. And the way that Blackstone calculated how many shares to give me, and Trent was the same, is they said, look, we'll look at the average Blackstone share price for the month before I start, which was October of 2008, and we'll give you enough shares to give you a$3 million worth of shares. So the average Blackstone share price in October of 2008 was just over$16. The average share price of Blackstone shares in November of 2008 was$3.

33:37Okay? So this might be a bit before your time, but we got there. I've heard of this thing, the financial crisis. Yeah. So we sat there, we thought, oh, you know, thank God, thank God we went the Blackstone route and not the do-it-yourself route, because we would have been sitting there for three years, like twiddling our thumbs if we'd done it ourselves. So we went the Blackstone route, and I had the best experience there. So anyway, we did that for two and a bit years there. But the other thing we learned, which is incredibly important for what ultimately we did, is we learn how to fundraise.

34:17So, you know, no one's got a better network of investment clients than Blackstone. And so we were able to go and see really every pension fund, every sovereign wealth fund, every insurance company around the world. This is the part that I think is the most remarkable. Because when you describe the, how Macquarie got into the infrastructure game, they had to go out and raise a SPAC because the problem with infrastructure is it's so capital intensive. That's kind of the big barrier to investing in these assets is you got to raise billions of dollars. If you can't just go out and invest in a data center, you need to raise a ton of money.

34:59They're so capital intensive. And so the idea that you looked at that as a young guy who's kind of done a little bit of investing and then said, okay, I could probably go out and raise this on my own. And now you're at$73 billion in AUM. You've got like 300 employees. That's the part that I think we need to hear is the fundraising. How do you go out and raise that amount of money? How do you walk into a room and convince someone that, yes, me, the young Australian lad who just showed up here, I'm going to be a good steward of your capital? It's reps. Anything in life is reps. You know, so, um, first couple of times you go into it, I'd say the first 50 times you go into a meeting, you're finding your footing.

35:50Yeah. You know, you're getting your, uh, pitch down. Um, you're feeling comfortable. You're getting your comfort level up, et cetera, et cetera. So, you know, when I was at Blackstone, I did, I bet I did close to a thousand pitches at Blackstone, something like that. And so through that process, you – and look, I knew the asset class cold. I felt confident we would be good at this. It's something I had a lot of experience in. I feel more at home with the folks who run these pension funds who are often teachers or come from some background other than Wall Street. That's, you know, I've been on Wall Street a long time now, so maybe it's equal, but I feel certainly as home there as I do with any Wall Street person.

36:48It took me a long time to get comfortable being on Wall Street. My approach to it, and look, there's plenty of approaches to it, but my approach to it is obviously learn your material, of course, but just go to these meetings, be yourself and be very transparent about what you have to offer. And if it's something they want, they'll grab it. If it's something they don't want, they'll politely decline and ask you to come back next year and maybe things will be different next year. But there's no substitute for reps. And we've got a bunch of different platforms now at Stone Peak. So I'm certainly not the only uh, fundraising.

37:34And, um, for those who lead these other products who are out there fundraising now as well, um, my advice to all of them is simply been, all you can do is get out there and do it. Okay. Come to a couple of meetings with me and you can hear how I do it to get a little bit of an idea for, um, what's involved, but then just get out there and do it. and you'll have 20 meetings that suck. Yes. You know? Like I had one colleague, Haj, who used to stay, he'll laugh at this because I rib him about it, but he used to start his meetings when he first started fundraising with a story about how his old boss had died.

38:16I said, mate, like, I don't think you want to start your pitch. It's a somber note. It's a story of death, okay? Come at it a different way. and uh we laugh about it now because he's um and he's one of the most lovely personable people you could ever want to meet very bright so he's become a fantastic fundraiser but his first 50 meetings were awful yeah and it comes a little bit to what you said earlier on that you've got to go through some humiliation yeah okay and if if you can't like you've got to lose your sensitivity like i couldn't, you know, like all through my career, I've had people roll their eyes at me or, or, you know, like I've been in plenty of, um, you know, I remember early in my career, I was in a, um, we had a, we had a Monday morning meeting at Macquarie and where the, the, the, uh, team, where the whole team would sit around the bosses and, you know, um, probably 30, 40 people in that meeting room.

39:12And, um, I remember I got tongue tied in there, uh, one time, you know, they asked me to talk about a deal and I tried to talk and it just didn't come out. And I've had plenty of experiences similarly, like where I completely screwed up or haven't performed the way I wanted to, or have embarrassed myself. So what? Dust yourself off. Is that what you think about when you come out of that meeting? I mean, we've all been there. We've all been in that situation where you're on the spot, you have to perform and you just can't do it. You lose your cool, you lose your nerves um what did you say to yourself coming out of that meeting was it an immediate whatever keep moving no okay in retrospect i dust myself off keep it going no i was oh i was so upset with myself but but you dust yourself off and you and you uh turn back up yeah and you keep working hard and and what i what i know myself now is that now i i am the the boss at the firm you know when the young folks talk in the Monday morning meeting or in investment committee or whatnot, they're often pretty nervous the first few times they do it.

40:22And I'm sure they're thinking to themselves, oh my goodness, like I'm coming across nervous and I really hate this. And so a lot of people won't talk because they don't want to come across nervous. They'll hold back until they feel that they're confident. And I always have a really soft spot and an understanding for those who do speak up and are nervous the first time. 100%. And because I know that by time 10, they're going to build up their confidence over time. And so, sure, they may have had a couple of times where they felt a little bit embarrassed or humiliated or whatnot. But guess what?

41:02They're the ones in a year's time who are going to be that much better because they took the leap. I respect it when someone's talking and their voice is shaking and you know they're kind of, they feel the anxiety. I look at that person when I'm in meetings, if ever I see that, I think, good on you. That's exactly what you should be doing. I couldn't agree more. I couldn't agree more. They're putting themselves out there and they're going to be better for it. And guess what? You've got to go through that. You have to. Go through it early in your career because you're going to go through it at some point.

41:36And it just advances you so much quicker than if you don't. And I can tell you now that, you know, what do I care about from my analysts? I care that they're doing their, you know, analysis correctly. They're serious about the job. That's what I – they're working hard. That's what I care about. But they speak in a Monday morning meeting or an investment committee meeting, and I can tell they've just spoken in order to try and get themselves used to speaking. And maybe it's not the greatest point, or maybe it's a bit nervously said. I'm exactly like you. I'm like, good for you. Yes. Good for you.

42:12We'll be right back.

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43:10we're back with first-time founders let's quickly go over how you turn switch out from blackstone and you create stone peak because sure so this is the founder's show so so um we've been at blackstone two years yeah haven't raised a dime you know it's been it's been directly corresponding with the global financial crisis but every investor under the sun yeah so um uh we turn up the first day of 2011, first day at work of 2011. Those of you in New York might remember that was a hell of a snowstorm year, that time of year. And Tony James, who's running Blackstone at that time, says to me, Mike, and by the way, I was quite close, I still am.

44:00I was close to Tony. He'd be a mentor of mine. He'd been amazing. He said to me, Mike, we're not doing this. you know, we've been out too long. We're about to go out and raise some other funds that are going to be hitting the same investors. We don't want to be marketing into those investors with multiple products. It's all over. Tell me what you want to do. So, you know, that was the only time in that whole journey where I thought, hang on, maybe this is not going to happen. And I spoke to Trent and we came back the next day and said, you know, screw this, let's do it ourself. We said, rather than just repeat what we did and go and see a whole bunch of investors, let's find a partner.

44:38So we went and found a pension fund partner to be our anchor, and we gave them some special economics in the firm as part of that. So we had an anchor, which is TIA Cref, which is a well-known insurance company pension fund. They committed$400 million to us. They gave us a couple of million dollars of working capital. Trent and I put in a couple of million dollars of working capital. For that, TIA-CREF got a profit share in the business for the first couple of years, not a permanent equity, but a profit share in the business. And then we just went and visited investors again. And the difference was, versus our time at Blackstone, firstly, the economy had picked up.

45:25We were now two and a half, three years out of the global financial crisis. So people started to have money to invest again, firstly. Secondly, we met all these investors before. And one thing that struck me is that it's interesting. You can go and meet someone once. And if you then see them again, two years later, even though you've only met them once before, it's such a difference compared to if you haven't met them before. They remember you and there's something, there's some sense of consistency about it. And so between those two things, we were just able to be successful that second time around.

46:03But the big thing for me was, I've still got this, my first paycheck. The first time I ever got paid from Stone Peak, I've got it framed on my wall. It felt amazing to me to have this business we started that was now paying us. It felt absolutely amazing. 100%. So our first product was a$1.6 billion US-focused infrastructure product. Yeah. And then over time, we grew that product to now, it must be around$25 billion is in that particular product or platform. We've now turned it into a global firm. We've talked a lot, and I think we've learned a lot about how to excel in your career. And, you know, we talked about putting yourself out there, taking risks, going in the deep end, how to succeed as a, I think this is a lot of very useful advice for anyone who's just trying to be successful in their career.

47:07But we haven't talked much about the fact that you are a prolific investor. From my understanding, you never lost money on an investment ever with Stone Peak. What does it take to be a great investor? Um, how, what is your investment strategy and how, what can we learn about investing from you? So firstly, I'm very fortunate that we invest in a asset class that is, um, so predictable. Okay. And not, not look, not to, not to underestimate or understate the risks. You know, we, we're, we're investing in equity. There's risks there. Things can go wrong for sure. but investing in a electric utility or an airport or a cell phone tower business um it is so much more predictable and therefore easy to understand relative to um if you asked me to go into one of these tech businesses like you if you said to me go and value open ai to take you know something on the frontier of tech i wouldn't know where to start yeah i wouldn't know where to start and i And I don't think anyone knows, right?

48:20I mean, these are completely speculative and people look, I mean, I think opening up is probably big enough and predictable, maybe enough where you can make some informed predictions. But in early VC, I mean. The spread of outcomes is enormous, maybe is what we're saying. Whereas for one of these infrastructure businesses, the spread of outcomes is much narrower. And so as a consequence of that, when I sit down and I say I'm in Stone Peak, when we sit down and we project out the cash flows of one of these businesses, we can do a pretty good job of saying, what's a realistic worst case? And we might be wrong.

49:03It might be a P95. I'm making that up a little bit, meaning that 95 % of the time we'll do better, but maybe there's a 5 % outcome that's worse. But you're doing a pretty good job of what's my worst case cash flow projection here. And then you can roll that back and say, well, given that, what can we pay for this business and still get our money back if we get this worst case outcome? And so that I think is somewhat unique within equity investing. It's somewhat unique to the infrastructure your asset class i also think that it is unique for young people who a lot of people think that if you want to be a billionaire mega successful investor you've got to be taking these crazy risky bets you've got to be going into crypto and you've got to be going into tech and And I think what I would like to understand is like, where is the alpha in your investing strategy?

50:09If you're looking at businesses where you can kind of just predict, okay, these are the cash flows, then how do you outperform? Where is the upside risk that allows you to get these crazy good returns? It's the power of compounding is what it is. And, you know, I'll give you a great example. So Warren Buffett, I think undoubtedly the greatest investor of all time. I was going to ask if you are a value, you seem very much like a value investor and a Buffett fan. I'm a huge Buffett fan. I'm glad to hear it. Okay. He's amazing. He keeps saying you don't need a high IQ to be a great investor, but I'm telling you, his IQ must be off the charts, in my opinion.

50:57but take, so Coca-Cola is maybe his most famous investment of all time, arguably. Okay. Maybe in terms of a long time thing he's owned. Now that's not infrastructure, but it's got the, um, moat that we talk about. That's so important. Uh, it's a brand moat in the case of Coca-Cola different from say, you know, the moats I'm talking about around an airport or a toll road, but same, same concept. So Coca-Cola, which was so successful for him. So he put something like $1.3 billion into Coca-Cola back in 1989, 1990. And so far, if you include the value of all the dividends and the shares today, he's got about$35 billion out of that investment.

51:41So that's obviously spectacular. But if you talk about that from a return standpoint, it's about a 13 % return since 1989. And that's the power of compounding. Like 13 doesn't sound all that exciting. I might have that number slightly wrong, but it's 12, 13, 14, something in that range. But when you compound at 13 % for whatever that is, like 35 years, pretty remarkable things happen. And so when you look at Buffett's portfolio today, his two biggest exposures are, his biggest exposure is the BNSF railroad, which is the biggest railroad in the US, classic infrastructure asset, something we tried to buy when I was at Macquarie.

52:36um and his second biggest exposure is berkshire energy which is a whole bunch of different mostly electric utilities but electric and gas utilities around the u.s so buffett's two biggest exposures are infrastructure assets because you know i don't know exactly what he expects to get return wise out of those but if i had to sort of make an educated guess at it i bet he thinks he's getting a 13, 14, 15, but he's getting that 13, 14, 15 over 20, 30, 40 years because he knows that BNSF, like regardless of what happens with AI or whatnot, BNSF, the railroad, is going to be around in 20 years, 30 years time.

53:23Yeah. All these electric utilities, like they're only getting more important over time. So Buffett's choosing assets where he's got this great saying, something like he wants to know that he can go away for 10 years and come back and this business is still going to be there. He's going to feel good about his investment. That's the magic of this infrastructure asset class. And so, you know, how do you outperform? Well, candidly, the best way to invest is just to find something at a price you like that's going to compound. That's the best way, I think, to invest, which is what infrastructure offers to you.

54:06Now, the other nice thing about these infrastructure assets is that because they do have natural moats around them, they can be poorly managed, but they'll still survive. So in a normal business, you manage it poorly, the better management teams, the better businesses will drive you out of business. Yes. But you've been to JFK Airport. I mean, it's a disaster. It's a mess. You know? But it's still there, you know? I still use it. I still use it. Okay. And so one of the beauties then is that often when you buy these businesses, you find that they are under managed because you'll survive even if you manage it poorly.

54:46So not always. Like there's a lot of businesses we've bought where we just love the management and, you know, you sit on the board and you offer your two cents worth along the way, but you don't have much to add. There are other businesses where, in fact, we can see that there's all sorts of levers we can pull to improve the operations of those businesses. So it really lends itself in certain instances to a lot of operational outperformance as well. It's very rooted in first principles, I think, because, you know, there's, I think, Y Combinator's slogan is make stuff people want. And I think that's true of investing too.

55:26You want to invest in stuff that people actually want. And it's a very simple concept. And then there's also, there's a layer beneath that, which is you want to invest in stuff that people actually need. And it's just indisputable. And I feel like that's sort of what you've done here. And it's a very simple concept, but I feel like with investing, it becomes so convoluted to the point where we're trying to make up reasons why this investment is going to be needed in the lives of everyday people. You need this strange derivative financial product here because there's this strange loophole in this regulatory system, whatever it is.

56:08And often I just think about it, do people really need that? Is that really going to last for 10, 20, 30 years? People are always going to need that. And you look at an airport, People need to fly. It's just, it's not a question. And if you can figure out a way to get into that investment and to get in, as you say, at a good price and let that compound for 20, 30 years, I mean, I guess the proof is in the pudding. You're right here. You've had massive success doing that. I want to start to wrap up, but I wanted to ask you about negotiation because, you know, We've covered the kinds of investments you want to get into, the power of compounding.

56:51But then the other piece of it is that can you get it for a good price? And that is all a game of negotiation. And I would imagine that you have sort of mastered the art of negotiation over the years. I think it's more a game of strategy. Okay. In the sense that, look, you could be the best negotiator on the planet, but if five different people want that same asset that you want, who cares? Right. You know, probably the worst negotiator will win the asset in that sense. You know, the highest person who will pay the highest price will win the asset. So, look, it's a, we're not the only ones who know this is a really interesting asset class.

57:33And so you've got to be strategically clever about where you find these assets because if you're turning up on the same asset at the same time as three other folks are turning up, all of us have money, it doesn't matter what your negotiation talent is like. And so it's all about finding situations where there's an owner of an asset who has ideally some sort of pressure on them. It might be a balance sheet pressure, a liquidity pressure. um maybe um it's a business that wants to buy something else and so it needs to dispose of something in a certain time period in a quick time period and so you can take advantage of your ability to move quickly um it might be a partnership where a partnership is usually so bespoke you can't go and run an auction process around a partnership you've got to bring someone in and negotiate this bespoke partnership.

58:34It may be a type of asset that has all these infrastructure characteristics, but it hasn't really been identified before. So a great example of that is we own the largest cold storage network in the US. So 30 % of food in the US goes through our cold storage network. we were probably, I think, the first infrastructure business to go and identify cold storage as one of these categories of essential underlying infrastructure assets. So it's finding circumstances where the balance of power is with the person with the money as opposed to the person with the asset. asset. Now, when interest rates are 1%, it's pretty hard because money's almost free.

59:30When interest rates are higher, like they are today, much more interesting because money's expensive. And so the person with the money has more negotiating leverage, perhaps, than they certainly do in a lower interest rate environment. Yeah, we often talk about you want to look for forced sellers, people who they need to sell as for any of the various reasons that you just highlight there, that's when you're going to get a great price. Is there any advice that you would give to young people who want to get into investing right now? Possibly someone who maybe wants to start their own fund. I feel like it's not as much of a thing anymore.

1:00:16Young people going out and selling their own funds, probably because of competition. You know, the people who are starting companies these days, they're selling tech companies. They're not selling investment firms or asset management firms. So what would be your advice to a young person starting on their career, wants to get into investing, and also maybe they want to start their own investment firm? so my younger brother who's now in the u.s came over from australia he grew up in advertising okay he was in radio uh he's like a smart ass and he writes jingles for advertising and he got to the u.s wanted to change careers and so he teamed up with a guy uh in austin texas two young guys like my brother is 40 uh his partner is 30 something like that and they saw an opportunity to go and um buy pool cleaning businesses literally the folks you go and scoop the leaves out of your pool and the reason that was interesting is that you can buy those businesses for low cash flow multiples and there's a huge network effect like if you own a lot of those businesses the trip time between one customer to the next is some much shorter than if you're a one man band sort of, you know, going all across town to, from one pool to the other.

1:01:41And so, um, what they did is they literally went around Austin to golf clubs and other places in Houston and family offices and whatnot. So again, my brother's got zero business experience at all. His business partner had been a CFO or something like that in a private equity startup portfolio. Companies had a little bit of business experience, but a little bit to our earlier conversation about just jumping in, they went around and they had a business plan and they started to line up businesses to buy. Now, these pool businesses are pretty small, um you know five million bucks here two million bucks there ten million bucks there they lined up these acquisitions and they went around and said to just high net worth individuals hey this is what we're doing would you invest with us and they managed to uh pull together 30 million dollars of high net worth money and they went and bought 30 million dollars worth of pool cleaning businesses They then marked that up to$100 million, and they went and raised another round at$100 million.

1:02:58Then they went and did the same thing for HVAC services businesses. So the person who comes and fixes your air conditioning or fixes your heater, they did the same thing for that. And now they're going out and raising a private equity fund. So I've seen it in action. And I think that, you know, if I had to summarize that, it's identifying a little business niche that you think is interesting to go and buy and lining up some deals and then going and lining up some money. People love to see deals. If people see deals, they tend to be willing to turn up with money. um so there's a real life example of uh a person who really from a standing start is now sitting on a couple hundred million dollars of capital under management and uh i think is well positioned to start an investment firm yeah from that final question for me um who are your role models is there anyone in business or in life who you really look up to and who you've tried to sort emulate we mentioned it earlier i think buffett is far and away the best investor i've ever seen i can't recommend highly enough for folks just to go and read his letters you know go and buy a book uh i mean there's a great book out there with it literally just has all these annual letters it's so interesting to read from i forget his first annual letter might have been in the late 60s um i've read every one of those letters from the late 60s through to today it's the best business investing learning you will ever get.

1:04:37So in that sense, he's probably the investor that I've tried to learn the most from. Now, I think he's so special, you can never emulate him, but I've tried to learn the most from him. I learned a lot from Steve at Blackstone. I learned a lot from Tony James at Blackstone. I had a boss at Macquarie, Murray Bleach, who was the person who just threw me into the deep end. I learned a lot from him. Nicholas Moore, who ran Macquarie and really established infrastructure as an asset class. I mean, he trained a whole generation, several generations of infrastructure investors and entrepreneurs. So I've been very fortunate to be at really two of the greatest, I think, financial institutions on the planet between Macquarie and Blackstone.

1:05:27And there's just so many folks within those firms that I've taken a lot away from. Well, we've learned a lot in this episode. I'd love to keep going, but we should probably wrap it up. Thank you so much for joining. Mike Dorrell is the founder and CEO of Stonepeak. Mike, thank you so much. Thank you. It was great. I appreciate it. Appreciate it.

1:05:57This episode was produced by Claire Miller and Alison Weiss and engineered by Benjamin Spencer. Our research associate is Dan Chalon. Thank you for listening to first-time founders from the Vox Media Podcast Network. We'll see you next month for another founder story.

1:06:44Thank you.