David Rubenstein - Ideas Lab Series - January 25th, 2023

00:00:07] David  

Being an investor is not a matter of just being a greedy person. Very often, investors are not people that have wonderful images. There’s no Nobel Prize for investing well. Why is that? Why didn’t Alfred Nobel think that was a noble profession? Well, he thought it probably wasn’t as important as some of the things he gave the Nobel Prize for. But I think investing is important because it allocates capital in ways that can help society: create jobs, preserve jobs, pay taxes, do other things like that.

[00:00:40] Intro  

Imagine spending an hour with the world’s greatest traders. Imagine learning from their experiences, their successes and their failures. Imagine no more. Welcome to Top Traders Unplugged, the place where you can learn from the best hedge fund managers in the world so you can take your manager due diligence or investment career to the next level. 

Before we begin today’s conversation, remember to keep two things in mind. All the discussion we will have about investment performance is about the past, and past performance does not guarantee or even infer anything about future performance. Also understand that there’s a significant risk of financial loss with all investment strategies, and you need to request and understand the specific risks from the investment manager about their product before you make investment decisions. 

Here’s your host, veteran hedge fund manager, Niels Kaastrup-Larsen.

[00:01:36] Niels

For me, the best part of my podcasting journey has been the opportunity to speak to a huge range of extraordinary people from all around the world. In this series, I have invited one of them, namely, Kevin Coldiron to host a series of in-depth conversations to help uncover and explain new ideas to make you a better investor. 

In this series, Kevin will be speaking to authors of new books and research papers to better understand the global economy and the dynamics that shape it so that we can all successfully navigate the challenges within it. With that, please welcome Kevin Coldiron.

[00:02:13] Kevin

All right. Thank you, Niels and welcome, everyone. A friend of mine who’s a very experienced journalist said the key to a good interview is to sell your source. Make sure the listener knows the person you’re talking to has the wisdom that they need. That should be pretty easy for me today because our guest today is David Rubenstein. He is the Co-Founder and Co-Chairman of the Carlyle Group, which manages $370 billion, making it one of the world’s largest investment managers. 

Many of you will have seen him on Bloomberg TV where he hosts two separate shows. He’s an exceptionally active philanthropist, one of the original signers of the Giving Pledge, which is a commitment among billionaires to give away a majority of their wealth. He’s here today to discuss with us his new book called How To Invest, which is a compilation of 23 interviews David had with the most senior and successful investors across the full spectrum of the investment industry. So not only is my source great today, but my source’s sources are great as well. 

David Rubenstein, Happy New Year. Welcome to the show and thanks so much for joining us today.

[00:03:31] David  

Thank you very much for having me. I’m delighted to be here.

[00:03:35] Kevin

I’ve had some well-known guests on the show but I think it’s safe to say you’re probably the most well-known so far. I’ll admit to being a little nervous before our talk and it made me think that you’ve done hundreds of interviews in your life. I was just wondering, who’s the person that you were most nervous or anxious to interview? How did you feel as you faced that down?

[00:04:03] David

Well, obviously, like anything in life, when you get more experience, you are less nervous about it. At this point, I’m not that nervous about doing an interview probably with anybody because I’ve done so many interviews at this point. But when you have a large audience, I find that it has to go well because you’ve got people watching you instantly, and if they either laugh or they applaud, then you know whether you’re doing well or not. If they boo, you know you’re not doing well. 

In front of a thousand people at a Carlyle event, I interviewed Barack Obama. That was interesting. In front of 2000 people, I interviewed Jeff Bezos and that went reasonably well. At this point, I have a way of doing it so I don’t really get that nervous about it. I think I know what I’m doing just like you know what you’re doing. Now you are a professor, you teach. So when you go in front of your students, you’re not nervous I assume, because by this point, you’ve done it more than a few years, I assume. 

So it’s like anything in life. When you know what you’re doing, you don’t feel that nervous. Maybe when I was starting out doing this, I might have been somewhat intimidated by some of the people I interviewed. But now at this point, I feel reasonably comfortable.

[00:05:16] Kevin  

Do you think of it as a second career or more just an avocation, something you enjoy doing?

[00:05:25] David  

Well, I came to it late in life so it’s really an avocation. I don’t make any money doing it, I don’t charge anybody anything. I don’t seek to get any compensation for it or anything. Bloomberg doesn’t really pay me. They make charitable contributions in my name to a scholarship fund that I have. But I’m not really doing this for money. I just do it because I find it an interesting way to get to meet people. 

You can always meet people in different ways, but this is a way where I can talk to people from different walks of life. I don’t have to be an expert in baseball, I don’t have to be an expert in science, I can just be an interviewer of people and learn a little bit about it through the interview and in the preparation for it. So it’s a way to get to learn a lot more about different things in life. 

Secondly, it’s a way to, I’d say, break the ice with people. If you want to get to know them better, this is probably a reasonably good way to do it. It also keeps your mind reasonably sharp because you have to prepare. You have to listen to what the person says. Oprah Winfrey said to me she’s not a great interviewer, she’s a great listener. And it reminded me that when you do interviews, you have to listen to what the person says and pivot off of it. 

When you get to be older in life, I’m now 73, you always worry about whether your brain is going to be working as well as it should and so you try to do various things that keep your brain active. Some people recommend crossword puzzles, some people recommend taking a foreign language, some people recommend learning a musical instrument. I would say I recommend doing interviews because you have to be sharp, listen to what they’re doing, what they’re saying, and also, you have to prepare and read a lot to get ready. 

[00:07:02] Kevin  

It’s interesting you say that because when you agreed to do the interview, I thought this is going to be an easy book for me to review and talk about, and it turned out to be just the opposite because most books I interviewed the authors of, there’s a theme, there’s a message, there’s an idea they want to get across. And here, I had to do the work to pull the themes from the various interviews. You do summarize what you came across early in the book, but it was kind of challenging on that dimension. 

Before we get to that, I did pull out three themes that I want to talk to you about. But before we get to that, I just wanted to ask you a personal question. You trained as a lawyer, you practiced law, and you said that you weren’t very good at it. You didn’t like it largely because you weren’t very good at it. I was curious why you think you weren’t good at it. Were some of the reasons that you maybe weren’t as good at law, did those characteristics make you a better investor?

[00:08:10] David  

Well, I’m probably not good at investing either, but let me describe. I practiced law for two years at Paul, Weiss, a very prestigious, well-known law firm in New York. But I was really interested in government politics, so I really saw it as a waystation to getting into the government. I can’t really say I was devoted to learning how to practice law because I really was focused on something else, which was going to Washington, work in the government and ultimately work in the White House. 

When I left the White House after we lost the election in 1980 to Ronald Reagan, I went back and practiced law. It was the only profession I had. But I had missed four or five years of learning how to be a young lawyer. When my classmates were learning that, I was in the White House having a good time but I wasn’t learning the skill set of being a lawyer. 

So when I went back into practicing law, I didn’t have a specialty and I didn’t really want to specialize in one thing and say this is what I’m going to do with my whole life is specialize in this area or that area. So I tried to avoid that. And generally, I don’t think I had an interest in practicing law and doing what Washington lawyers do, which is somewhat maybe like influence peddling (Some people might say not all Washington lawyers do that, but that’s probably having worked in the White House what people expected me to try to do.) So I really didn’t enjoy it. 

My view is, if you don’t enjoy something, you’ll never be great at it. I’ve often said nobody has won a Nobel Prize hating what they do. You have to love what you do so it’s a passion in life. As an investor, I started at Carlyle in 1987 but I didn’t have an MBA. Had I gone and gotten a JD/MBA, I would have been better off but I didn’t have that. So, I hired people that had MBAs. They knew how to invest and I made myself useful to the firm by being the fundraiser, the strategist, maybe the recruiter of people and the face of the firm. 

But I wouldn’t say I was a great investor. I would say I’ve been around a lot of great investors, but I probably wasn’t a great investor.

[00:08:47] Kevin  

You’re quite open about that in the book and you’ve said it now. You didn’t have a lot of investment experience. You started Carlyle and your role at the firm was on strategy and public relations, the face of the firm, etc. Do you think because of that, investment still holds a sort of mystique to you? Was that one of the motivations for doing this book?

[00:10:34] David  

I wanted to write a book that would appeal to three different audiences. One is students who are thinking about a career in business. I wanted to say a career in investments can be very exciting. It’s not boring. It’s very exciting. It can be quite rewarding as well. So I wanted to talk to that audience. I also wanted to talk to people who are mid-life people, people who are not professional investors but want to be investors. They want to take some of the money and invest it, go on the stock market, real estate, or whatever it might be, and give them my views on how they might do that. 

But also, I wanted to talk to people who are maybe in mid-life, as well, but they recognize they’re not going to be great investors. They don’t think they’re going to be great at picking stocks but they want to pick people who are going to manage their money well and really pick manage money managers. I went into how they might do that. So, I was trying to appeal to different audiences, but give some of my experiences, my ups and downs and hopefully make it interesting. 

The trick with any book is trying to make it work well for the reader. You want people to read your book. Nobody wants to write a book that nobody reads. So I try to make it appeal to the average person. You don’t have to be a superstar investor to enjoy this book, and probably, superstar investors don’t need to read this book.

[00:11:48] Kevin

I liked the way you described your intended audience at the beginning and I really felt that particularly for young people, students, thinking about going into investment, you really hit the mark on two dimensions. I’d like to ask you about both if I could. One was, I don’t know, mistakes. You start the book by saying, “Hey, here’s some bad decisions I’ve made.” 

And then throughout the book, the difficulties of these great investors come through. Ray Dalio, at one stage, says he was bankrupt, had to borrow 4000 bucks from his dad just to pay the bills. Were you aware of those individual stories when you set out or did they come through? In other words, was this an intentional thing in writing the book to say even the great investors make mistakes or did that just sort of fall out of the interviews?

[00:12:48] David  

Well, I had interviewed many of these people before and many of them are people I know reasonably well. So I’d heard some of these stories before. For those I didn’t know, I assumed that everybody made mistakes in life. If you’re an investor, you have to make mistakes. Nobody bats a thousand. Even Warren Buffett has made many mistakes. So I thought everybody would have some mistakes. 

What I find is that, as a general rule of thumb, I value humility over arrogance. One of the ways I think people can show their humility is by talking about their mistakes. And generally, the people I interviewed have a fair amount of humility to them so I thought they’d be willing to talk about it. If I find somebody that says, “I’ve never made a mistake, I’m perfect. I just don’t know how to say I did anything wrong,” that’s probably not somebody I would say is compatible with my own views on life. 

I think it’s a good thing to admit mistakes and to learn from them. What I was trying to say in the book to the reader is that even the great investors have made mistakes, they admit it, and they go on to the next thing. I also said in the book that I still linger over my mistakes 30 years later. I’m still saying, “Why did I do that wrong?” Whereas a lot of these great investors, they get over it the next day and they’re on to the next thing. 

That’s probably an important trait, getting over your bad mistakes, learning from them, but getting over them and starting fresh.

[00:14:05] Kevin  

Do you think that’s a defining characteristic for someone who’s thinking about going into investing? In other words, if you’re someone who lingers over your mistakes, is that telling you maybe being a professional investor isn’t for you?

[00:14:22] David  

Well, I think if you linger over your mistakes, you’re just not getting anything done. Because if you say, why did I do this wrong, how did I do this so poorly, and you just spend all your time on a psychiatrist’s couch saying how terrible you are, you’re probably not going to be a great investor. You probably have to get over it and say, “Look, people make mistakes. I got this wrong.” I do think it’s very good to look back on what you did wrong and not to ignore what you might learn from that mistake that you made. I think that’s an important trait as well. 

But I do think people who are really smart people learn that they’re going to make mistakes in life, particularly investors. What I was also trying to do in the book is to say that being an investor is not a matter of just being a greedy person. Very often, investors are not people that have wonderful images. There’s no Nobel Prize for investing well. Why is that? Why didn’t Alfred Nobel think that that was a noble profession? Well, he thought it probably wasn’t as important as some of the things he gave the Nobel Prize for. But I think investing is important because it allocates capital in ways that can help society: create jobs, preserve jobs, pay taxes, do other things like that. 

An example I gave in the book is that there was a venture fund in Boston that was a very good venture fund. For 10 years, they put money into a small company in Boston that didn’t have any products. It never got anything approved by any government agency yet they stayed with it and those investors gave them money to, in effect, create a vaccine, the vaccine that helped us with COVID-19. That company is Moderna. Moderna turned out to be a company where I think we’re all grateful that they were funded for 10 years without creating a product because it did something useful for society. 

So I try to say to people if you are a good investor, you’re allocating capital well, you are doing something useful for society. Yes, the people that work in government are doing something useful for society, professors are useful. But investors are useful too because not only are they going to preserve bad companies and make them better, they’re going to create new companies and ultimately, they’re going to make a fair amount of money and give that money to philanthropic purposes, I believe.

[00:16:33] Kevin  

Yeah, that’s a very important message I think for young people because I’ve got four kids that are sort of late teens, early 20s. It’s kind of shocking sometimes just to listen to some of their conversations about “capitalism” and how casually they’ll talk about all the downsides of capitalism, which I think they’ve heard a lot more about than when you and I grew up. So I think giving the message that the capitalist system for all its flaws is still the best system we have for producing wealth is an important one.

[00:17:10] David

Well, think about this. People are willing to say that capitalism is a good system, those people who are part of the capitalist system, but very few people are willing to say they’re a capitalist. In other words, you don’t find any members of Congress running up to their constituents and say I’m really a capitalist at heart because they don’t think that’s a word that’s going to endear them to their constituents. 

The word capitalism has taken on an aroma that’s not so great. As you point out, it’s created enormous amounts of wealth, created a lot of jobs for people, transformed the world, but very few people are willing to say they’re a capitalist. It’s an interesting phenomenon how words have these meanings now. For example, very few people in Washington, DC, where I am now, will use the word liberal. Nobody says they’re a liberal. They say they’re a progressive. Why is that? Well, progressive has taken on a better connotation. 

Nobody in Washington says they like pork barrel bridges or pork barrel roads. They say they want infrastructure. These words take on meanings that are unfortunate in some cases. The word capitalism has been, I think, denigrated by people and so I doubt that you could find very many people in Washington, DC, members of Congress, for example, who say yes, I’m an out-and-out red-blooded capitalist. You just don’t get many people saying that. So they have to beat around it and go around it and say I like business, or I like investments, or I want to create jobs. Nobody says I’m a capitalist. It’s unfortunate but that’s the reality.

[00:18:43] Kevin  

I wanted to just loop back to the target audience idea. One thing I think would appeal to young people thinking about going to investing is the notion that Ray Dalio has made mistakes, Jon Gray bought Hilton in 2007 and it went down 70%, he recovered. So you can make mistakes and survive. The other thing that I thought was quite interesting, and I wanted to ask if that was intentional on your part, is some of the people you interview come from backgrounds that are not conventional, they didn’t train in investing in the same way that you did. 

The thing that really stuck out to me was Paula Volent, the CIO of Rockefeller University. She has an art history major, and she’s got this great quote where she talks about that in art conservation you have to study and test, in very careful detail, before you do an invasive treatment on a piece of art because you need to know what could go wrong before you look at it. You have to understand all the details of the piece of art, and that has a direct parallel to investment due diligence. 

So my question for you was (Michael Moritz, also from Sequoia Capital was a journalist), there are a number of people who came at investing from different backgrounds. Was that, again, an intentional thing that you tried to put forward or did that just happen to fall out of the interviews?

[00:20:18] David  

I didn’t go into the interviews thinking that that necessarily would be the outcome. But it turns out that very, very few people who are great investors today intended to be that when they were young. Maybe you’d have to say to people, what 8 or 9 or 10-year-old who says they want to be an investor is a normal person? So obviously, there are a few people like that. 

Warren Buffett apparently was interested in business his whole life. But most people evolve and they get into businesses or life occupations that they did not anticipate. So I don’t know. When you were growing up, when let’s say you were in high school, what did you want to be? Did you want to be a business school professor?

[00:20:57] Kevin  

Actually, I did want to own my own investment firm, which I ended up doing for many years. So the professor is kind of a second gig for me. I’m a little unusual in that was pretty much what I wanted to do. I did have illusions of being a baseball player but I was disabused of that pretty quickly in college. So then it was like, okay, I really want to work on Wall Street and ultimately be an investor. So I kind of knew from the beginning.

[00:21:22] David  

When you were young, I guess you were a good baseball player. I thought I was a great baseball player when I was 7 and then when I turned 9, I realized I really wasn’t that good. So I learned earlier. But most people, if you look at what they’re doing now in their careers who are in their 50s or 60s, are not doing things that they thought they would do when they were in high school. In my case, I thought I’d be in politics and government my whole life and maybe practice law a little bit. Now, I’ve basically been in the investment business most of my career now. That’s the way that life evolves. 

I would say with the interviews I did, many people had these backgrounds that were quite different. As you point out, Paula Volent was an art conservator. Michael Moritz, at Sequoia, was a journalist. Stan Druckenmiller, a great investor, he actually wanted to be a forest ranger at one point in his career. So you just never know how life is going to turn out. It’s very rare that somebody decides at the age of 8, 9, 10 or 11 to do something and they actually do that the rest of their life. That rarely happens.

[00:22:27] Kevin  

If you were starting Carlyle now from the ground up, would you actively hunt for these people with different backgrounds? Because the typical pipeline in the firms like yours and mine were good schools, good business schools. There’s somewhat of a narrow pipeline. Do you guys actively try to get outside that?

[00:22:50] David  

Well, when I hired people at the beginning, I was looking for people who were compatible, could get along with other people because investing is a team sport really, in many ways, at least in private equity it is. I was looking for people that had their egos in check, people that were willing to work hard, people that were reasonably intelligent, but not geniuses. (Hiring geniuses and managing them is very, very difficult I’ve learned over the years.) So, you want people reasonably intelligent, not geniuses, pretty hard working, but not obsessive-compulsive to the point where nobody really wants to be around them. 

You want people that can share the credit and take the blame. You want people that have a sense of humor, people who are willing to give back to society if they’re successful. Those are the kinds of things I’m looking for. What I also look for in young people is people that actually can read and write. I find that very frequently, people go to very good schools but they can’t write very well. They can’t write memos clearly. They don’t tend to read unless they’re forced to read a book or something. 

So I’m looking for people that have a love of reading, a love of writing, and also, I like people that actually can communicate orally. I tell people to practice your oral communication skills. Because how do you get anybody to do what you want? You have to convince them. You convince them by writing or by talking. I think those are skills that often people don’t get in business schools or other graduate schools. 

Let me give you another example of a skill that I doubt that you have at your business school, but maybe you do. I don’t think they have this course at Harvard Business School or Stanford Business School and the University of Chicago Business School. Those are the three business schools I know the best. Most people in their adult professional life in the business world and in the philanthropic world will wind up asking people for money. They will say, “Can you invest in this or can you make a charitable contribution?” But there are no courses on fundraising. 

The art of how to ask people for money is one that’s lost. When the PhD was first developed by the University of Bologna, I think in 1060 or so, they said to them, to get a PhD, you have to have two foreign languages. I think they should have said you should learn how to take a fundraising course or learn how to fundraise. 

If you’re in the academic world, many academics spend half their time looking for government grants or other kinds of grants. So I wish that business schools would teach people how to ask people for money and treat fundraising as a more significant exercise than maybe they do. That’s just a tangent.

[00:25:11] Kevin

Yeah, that’s fascinating. That’s something that I did for 20 years but I had no training in, and I was quite uncomfortable doing it at the beginning and you just sort of learned on the job. If we go back to the themes I was trying to pull out of the books, I looked at the interviews and thought, “Are there themes that pop out consistently?” There were three that I thought, two of which I think there’s a tension, and one is more of a curiosity in my point. 

But the first one was this notion of diversification versus concentration. In the beginning of the book, you say one of the things you would recommend to most people is to diversify. Ray Dalio said that’s a lesson that he learned. Of course, that’s what we teach in business school. At the same time, Stan Druckenmiller is saying almost all great investors are great concentrators. Warren Buffett is known for making big bets. Jon Gray from Blackstone said that the best thing is to be a high-conviction investor. 

So we’ve got this tension between spread out your risk on the one hand, or put it all into a small number of bets on the other. How do you think about that? How do you reconcile those two views?

[00:26:32] David  

Well, as a general rule of thumb, the people that make great fortunes are people that take a bet and just put their foot on the accelerator and just go ahead and that’s it. Bill Gates started one company, Steve Jobs started another company. That was their life. In the investing world, George Soros famously said when you have a great idea, double down, triple down. That’s what he did. 

Most people in life don’t do that. Most people hedge their bets, a little bit here, a little bit there, don’t take too big a risk. The people that take the big risks often fail, but often, they succeed as well. So I guess in my own case, I’m probably more cautious and so I don’t put all my eggs in one basket. Had I done so, maybe my life would be different. 

But I think the great entrepreneurs and the great investors have really made big, big bets and they often worked out. The ones that didn’t, you don’t hear about them because they’re not great investors. But even the investment professionals, even if they make a big bet, they don’t usually bet so much money that if they fail, they’re out of business.

[00:27:40] Kevin  

Maybe if I push back a little bit on that because you’ve made a great fortune in almost any objective way so I’m assuming that you had a very, very concentrated bet just on your business that you founded.

[00:27:56] David  

It was a concentrated bet in that sense. Yes. What I did is I decided to go into private equity and basically tunnel vision myself for 20 years. I didn’t do any nonprofits, no philanthropy, no outside boards, nothing for 20 years. Basically, what I did is I came up with a business model that more or less is what the large private equity firms have pursued, which is to say, have multiple disciplines, not just buyouts, but have growth, capital, venture capital, real estate, debt, and so forth, and then globalize it. Have all these entities in different disciplines but also have it all over the world. That was the concept that I basically put my foot on the accelerator on and spent 20 years recruiting people, raising the money for that. So I did take a bet. 

Now, suppose private equity had scandals all over the place and people didn’t want to go into private equity 5 years ago, 10 years ago, I would have wasted 20-plus years building this model and people didn’t want to give us money, then it probably would have been a wasted bet. But I did, in effect, double and triple down on the model that I had in private equity and that was my career. 

When it became clear that I was going to be successful and I could ease up a bit, I then got more involved in philanthropy and all the nonprofit things I’m now involved with.

[00:29:11] Kevin  

But along the way, presumably, most of your net worth was in Carlyle. You didn’t actively try to diversify it. You’re like, “Hey, I’ve got a good thing, I believe in it, high conviction, and I’m going to stick with that.”

[00:29:25] David  

That’s correct. I had the advantage that I was on the investment committees, I’m hiring the people that are doing the deals. So I kind of knew what was going on. But economic circumstances could go against us. We had the Great Recession. We made a lot of mistakes in that area. So yeah, I can say I got lucky in many ways, and I’d certainly be the first to say I got lucky. 

When I was in high school, nobody thought I’d be a great investor. In college, nobody thought I’d be a great anything. I doubt if anybody in my college class even knew I was in the class probably. I became the chairman of the board of my alma mater and now the chairman of the board of my university where I went to law school. I doubt anybody either in my law school class or my college class if they could remember my name because I wasn’t all that great, but I got lucky.

[00:30:07] Kevin  

I think that’s probably an important aspect of being a good investor and that comes through a lot in your interviews is admitting that luck plays a role and acknowledging the combination of luck and skill. The other theme that I saw in the book, and it’s one that I’ve been interested in for a long time, is the notion of size in investment. I think you can make an argument that in investing, size is the enemy of returns. You get bigger, you’re managing more money, that limits the type of deals you can do, you have more market impact when you do a trade. 

On the other hand, investment firms obviously have an economic incentive to grow, they get more fees, they get more market power. Dawn Fitzpatrick, who is the CEO of Soros Fund Management, you interviewed her in the book and she said that taking an asset past a certain point erodes the quality of returns. On the other hand, you have Sandra Horbach from your own firm saying that in her view, the bigger buyout firms are going to continue to take market share. 

So you have this on the one hand acknowledgment that managing more money makes it more difficult. On the other hand, more money is flowing to the big managers. So, again, that seemed to me something that was, I don’t know, kind of a tension that ran through some of those interviews, and I was curious to hear how you think about that issue.

[00:31:44] David  

The way the business world (and you would know this from being a professor in a business school) measures success is growth. If I said to you, “My company has the same earnings every year. We don’t want to grow anymore. We just want to have the same earnings.” You’d say, “You’re not going to get anywhere. You’re not going to recruit people. You’re not going to be a big success.” We measure everything by growth. 

Now, when you’re managing a large sum of money, the larger the amount of money you manage, the harder it is to get a high internal rate of return just by the law of size. On the other hand, if you’re managing staggering sums of money, you don’t need to get 30% internal rates of return. You could get 10% or 12% and given the amount of money you’re managing, that’s spectacular in terms of the quantitative dollar amount. So it depends. 

Some people like to have large sums behind them and that gives them the flexibility to do bigger deals and get all the rewards from doing bigger deals. But some people just worry about their internal rates of return and they want to do that well by having a smaller amount of money under management. So each to his own. I don’t say there’s one that’s better than the other. 

In our case, we manage now close to $400 billion. It’s obviously hard to get a 30% rate of return on $400 billion every year but we do reasonably well and other private equity firms of our size have been able to hold on to their investor base quite well.

[00:33:02] Kevin  

It does make it tricky for investors who are, say, looking at the history of your firm or other firms where you’ve generated high rates of return over time. But in some sense, those were different firms. When Carlyle was small, it was managing small amounts of money. How would you advise investors to evaluate a firm like yours or another one of the very successful firms that you interviewed that have changed structurally over time?

[00:33:32] David  

Well, there’s no doubt that firms change and so forth. So I tell people in the book that if you’re looking at investing with Carlyle, Blackstone, KKR, any fund, these are the things you need to look at. Look at the internal rate of return from recent years, see what that rate of return is, who achieved that. Are those people still there? Is the area that they made that rate of return in still relevant? 

As a firm, is it one that has a reputation for integrity (people don’t sue them all the time for malfeasance or things like that)? Is it a place where the younger people are happy to stay (they’re the ones who are going to do the bulk of the work)? Is it a place where they’re doing things that you’re comfortable with ethically in terms of investing in certain areas that might be inappropriate to you? Also, make sure you understand what they’re doing, what the fees are. There’s a lot of due diligence you have to do in picking a manager. 

But I think right now, when you look at Blackstone, Carlyle, KKR, Apollo, these very large firms, what they’re selling to their investors, largely, is, “We’ve been around for a long time. We have a lot of stability. We don’t make big mistakes. We might make mistakes, but we know how to fix them if we do make mistakes, and you’re going to get a reasonable rate of return.” 

There was an old saying years ago (it turned out not to be, maybe, right), “You don’t get fired for buying IBM.” Because IBM at the time was the best computer company. Well, now you’re not likely to get fired if you’re on an investment committee and you went into a Blackstone fund and it didn’t do that well. Because you would say, “Well, look, they are the best real estate investor in the world and I went into a real estate fund that didn’t do well.” You’re not likely to get fired for that because you made a reasonable bet. 

There’s no doubt that some good firms and some good companies come and go. Think about this, universities don’t come and go so much. If you take a look at the best universities in the United States in 1900 or 1930, they’re roughly the same as they are today. If you take a look at the best companies in the United States in 1900 and 1930, there are no companies in 1900 or 1930 that are the best today. None. So the world changes in business much more rapidly than it does in the university world for sure.

[00:35:38] Kevin

So that would, in some sense, argue for I guess maybe being a little bit cautious about going into some of these more established firms given that the dynamism of capitalism and the competitive advantage of new entrants might erode some of that.

[00:35:55] David  

Well, there’s no doubt that you should be cautious. But think about this, it depends on your point of view. Let’s suppose you are an individual investor. Let’s suppose you’ve got $10 million to invest and you want to invest in buyouts. Well, you’re probably going to be better to go to a smaller fund that is specializing in one narrow area and where your money can get deployed more rapidly. If you go into a $30 billion buyout fund with $10 million, your money is going to get called down over many, many, many years and by the time it gets called down, the world may have changed a bit. 

But if you’re a sovereign wealth fund and you need to put out into each buyout fund you go into a billion dollars, you can’t go to the small fund because you overwhelm it. So your choices are more limited to going to the bigger funds. So it depends on how much money you have to invest. And also, what is your need? Is your need for rates of return that are well above the market averages or just getting market averages? Is that okay?

[00:36:51] Kevin  

Now, that’s a really nice way to put it. Because in some sense, what you’re saying is that the institutionalization of the investment management world reflects the concentration or institutionalization of the asset owner world, right? The sovereign wealth funds have grown up in the last 30 years and they have huge amounts of capital to deploy. They didn’t 20, 30 years ago, and so they need asset management firms who can handle that sort of volume. That makes a lot of sense to me. 

Philanthropy is something that you mentioned a couple of times just in our conversation. It’s a theme that runs throughout the book. You’re a signer of the Giving Pledge as are, I think, at least four other people in the book. I really appreciated how at the beginning of the book, you framed the motivation for philanthropy. You said, hey, look, part of it is just people get some social approval for being philanthropists. That’s not the entire motivation but you acknowledge that that’s part of it. I think that that’s absolutely right. 

I’m curious to hear from you your broader view on how much we as a society ought to be relying on philanthropy for a redistribution of wealth, do we need a redistribution of wealth, or how active the government should be in trying to do that.

[00:38:26] David  

Well, as you know, there is criticism of philanthropists these days because people are saying, well, why should Bill Gates decide what is an important priority for our society? Some people might say, why should David Rubenstein decide why it’s important? Who elected him or who elected Bill Gates? That’s a fair point, but you have to put it in context. The US government, for example, has a budget this year probably close to $7 trillion dollars. 

The amount of philanthropy given in the United States this year will probably be around $450 billion or so. So under 1 trillion, under half a billion. So it’s not as if the people who are giving away through philanthropy…and I should point out that 40% of that $450 billion to $500 billion is given to religious institutions, which are a little bit different but we count it as philanthropy. But if we were to take the things that are trying to change things non-religious wise, you’re talking about probably 1% of GDP, 2% of GDP, a very small percentage. So it’s hard to believe that the 1% or 2% of GDP going into philanthropy is really going to change society all that much. It’s what I call a kickstart. 

Let’s suppose you realize that we have a problem with let’s say illiteracy in our country, which we do. Maybe a foundation can create some more incentives for people to want to focus on that and the government doesn’t really quite do it that well. But it’s not like any big problem can be truly solved by philanthropists because the government has so much more money to devote to things and the government in the end is really going to be the 800-pound gorilla in solving any social problem or not solving it, but they have so much more money. 

So I understand the argument, I don’t think it’s completely fair and I do think it’s a good idea to let people decide what to do with their own money. So in my case, for example, if I was taxed at 90%, and as you know, the marginal tax rate in the 1960s in the United States was 90%. Now, nobody paid it, but it was theoretically 90%. Let’s suppose that everybody was paying 90%, and therefore the government’s getting basically 90% of all the wealth created in the United States. Would our country be better off? I don’t know. 

We’re now witnessing what’s going on in Congress. They can’t even select a leader in the House of Representatives? Is it a good idea to say to our government, “You take 90% of the money and you figure out what to do with it because you’re so much smarter and better organized?” Probably not. So I think having some smart people who have made some money and are pretty intelligent trying to address, in a modest way, some social problems is not such a bad thing. But I realized that is not the zeitgeist of the era. The zeitgeist of the era is more to criticize philanthropists for picking their social priorities over those of the government.

[00:41:18] Kevin  

I should have been more clear with my question. That wasn’t what I was getting at in the sense of criticizing Bill Gates directing money to a particular cause. It was more that if one recognizes that we need, say, a circulation of wealth to basically help recirculate power, because wealth and power are very closely connected although they probably shouldn’t be in a democracy, but they are. 

I guess my question was more, should we rely purely on the philanthropy of individuals in terms of giving back their wealth or should there be a wealth tax? Not a 90% income tax, but more that, hey, above a certain level of wealth, we’re going to start recirculating that back to society.

[00:42:12] David  

Over the years, societies and governments that have tried wealth taxes have found they’re very hard to administer and you tend to force people to leave the country. Tell me a country where there is a great wealth tax, a significant wealth tax, where people of high income are staying in that country or creating great entrepreneurial new ventures. I don’t really know where that would be. So I do think that you can argue that our tax rates are too low. 

In some cases, you can argue that that system is poorly administered. But I think when you get into the wealth tax area, it’s very hard to figure out how to tax wealth. For example, you have illiquid real estate, what do you do? If you own prairie land, hundreds of thousands of acres of prairie land, how do you really tax that? There’s no cash there. So it’s very complicated. 

I wouldn’t say we have the best system in the world but I prefer the current system over some wealth taxation system which I think is very difficult to administer and easy to cheat your way out of.

[00:43:12] Kevin  

Do you think that the inequality of the distribution of wealth is an issue? Is that one of the things that’s causing capitalism maybe not to get as good a name as it had when you and I were growing up?

[00:43:24] David  

Look, the inequality of wealth in the United States is increasing, and it should be an issue and it is an issue. But it’s not clear to me that you would solve that problem by taxing people more. For example, we have a problem in this country where 30% or so of adults are functionally illiterate. If you take all the money that the 40 people who signed the Giving Pledge have committed and just take all their money away, would that money get distributed in a way that’s going to solve the illiteracy problem? I don’t know. I suspect not. 

So I’m just not sure that you can easily solve these problems by just taxing people more. You need to make sure that the programs that you already have work better. But I realize that given my position, people will say, I’m a wealthy person so why would I want to be taxed more? Unlike some well-known public figures, I do pay staggering amounts of money, nine-figure amounts of federal government income tax a year, and so I feel I’m paying more than my fair share.

[00:44:30] Kevin

Yeah. I’ve lived in California for a long time so I understand what it’s like to have tax rates well above 50%. To me, I think taking more than half of someone’s income just doesn’t make a lot of sense. But I do wonder if we need a more active way to recirculate wealth mainly because just wealth and power are so closely tied together in our society. Let’s put a pin in that. 

You mentioned something actually in your response to the charitable question, that charitable donations are kind of like a kickstarter for issues that need broader societal attention. They can’t solve it, but they can bring attention to it. And that reminded me of a quote that Larry Fink had in your interview. He said when finance recognizes a problem, it brings it forward. 

In other words, when the markets say ESG is an issue, it doesn’t solve the problem, but it brings it into our consciousness. I just thought that was a really, really clear way of expressing what’s happened with ESG. It was something that was kind of out there but nothing was really happening. And then when firms like BlackRock started making it central to their business model, it really did force it to come to the attention of the broader society. 

But then there was this really ferocious backlash that we’ve seen in the last 12 months and it almost sort of happened, I think, after your interviews and after you published your book. So my question is, were you surprised by the scale and nature of the backlash against BlackRock and ESG in general?

[00:46:25] David  

I was surprised. As you probably know, I think the state of Florida said they weren’t going to give any more money to BlackRock to manage things like that. I would say that Larry Fink has done a really good job of developing the concept that ESG is important to money management. Whenever you have an action, there’s a reaction, like the law of physics, there’s always a reaction. And I think this reaction came about in part because of concern about political correctness but also the war in Ukraine emphasized how important it is to have oil and gas for people to heat their homes and so forth during winter.

People were saying we’re more focused on climate change than we are about heating people’s homes in a time of crisis like the Ukraine war. But I don’t think the ESG movement is going away. Nothing goes forward in a straight line all the way to the sun. You have oscillations and there’s an oscillation here, maybe it’s a down period, but ESG is here to stay and it’s not going away. Maybe it’ll be going somewhat slower than it would have otherwise been, but I don’t think it’s going away.

[00:47:29] Kevin

I don’t know if you’re currently on any investment committees for the various charitable institutions that you support. How do you think about that then in terms of investing in say… I could probably make the case that investing in, I don’t know, natural gas, pipelines and infrastructure is actually good for the environment in the sense that it makes the energy transition faster.

[00:47:54] David

I’m on a number of investment committees and I chair a number of them as well in the nonprofit area. If it’s a government-oriented agency, for example, like the National Gallery of Art, I chair its investment committee, there we are very sensitive to diversity, DEI, ESG, and we have metrics and we’ve put into place ways that we would measure how we’re doing in that area. 

Some nonprofits I’m involved with are less focused on it. They’re not completely ignoring it, but they’re less focused on it because they’re more focused on rate of return and they often have a view that rate of return will be higher if you don’t focus on those things. I don’t agree with that but that’s a more conventional point of view. So I would say people are focused on it. The nonprofit world tends to be more focused on ESG than I would say the for-profit world at this moment.

[00:48:47] Kevin  

So you believe basically BlackRock’s core motto in this sense which is that ESG is not a social preference but it’s something that is ultimately going to mean higher returns.

[00:49:06] David

Look at this way. Young people want to buy products and services from companies that are good on the environment. If you are terrible on the environment, you may have fewer customers, fewer suppliers, fewer people who want to work with you. If you are seen as a really great environmentally friendly company, you may get younger employees who are more talented, you may get more customers, you may get more employees, you may get a whole variety of other benefits. 

So the conventional view is that if you worry about ESG, you’ll get by definition, a lower rate of return because you’re foreclosing certain investment options. But I think there’s an increasingly good view that more and more people want these things to be part of the products and services they buy and so they will buy things more readily from people that are good on ESG and so forth. 

Now, how do you measure whether somebody is good on ESG? We have PE ratios, we have Sharpe ratios. We don’t have an ESG ratio that is in the stock table that says to everybody IBM’s ESG ratio is X. Once we get that, which we’ll probably have in five years or so, everybody will have an agreed-upon number on their ESG ratios, I’d say, and therefore people can be judging more accurately how good some of these firms are in that.

[00:50:19] Kevin  

Yeah, I think that’s right and that’s another example of finance bringing things forward. I think your interview with David Blood of Generation Investment Management talked about that as well, where the IFRS is working on new ESG standards that ultimately, hopefully, will be part of just standard international financial reporting giving investors more transparency there. 

I think part of the issue but much of my personal opinion is that the origins of ESG, because I was involved in some of the early stuff, was really just kind of tossing stuff out saying we’d get rid of gun manufacturers or get rid of this or that and it wasn’t nearly as thoughtful as I think it is now.

[00:51:06] David  

Well, look, in the early days of investing, not so early days but I’d say in the 1960s and ’70s, Milton Friedman had a view that a CEO’s obligation, a board’s obligation, was only to worry about shareholders. That’s changed. Is that a mistake? Now we worry about shareholders or what we call stakeholders, we worry about employees, we worry about communities, we worry about other things. It’s probably better for capitalism to have done that. But remember, if you did that 40 years ago, people would say you were practically a communist.

[00:51:38] Kevin

I know we’re coming up here on a time limit so maybe if I could ask you a couple of maybe more personal questions to wrap up. We talked right at the beginning about books. This is a show interviewing authors and reading is something that came through in almost every interview, just an insatiable appetite among these investors to learn more, to read. 

How do you decide what to read? Presumably, your time is pretty limited. How do you figure out what you’re going to read?

[00:52:19] David  

Well, I have a number of programs where I’m going to interview authors. So I feel it’s a courtesy to read the book of the author you’re interviewing and so I try hard to do that. While I’m involved in selecting the authors, not all the time, and so I tend to read books in areas I know something about so I can read them more readily and quickly. So I know a fair bit about biographies, history, business, philanthropy, politics, and I tend to read a lot of those kinds of books. 

If you gave me a book on science or a book on some kind of technology or astronomy, I probably wouldn’t get through it so readily. So my trick is to kind of read books that I know reasonably well. I don’t read fiction. Fiction outsells non-fiction generally and obviously, people love it, but I generally like to read non-fiction and so that helps focus me a bit. But generally, I’m interested in a limited number of subjects, I guess, and so I tend to read books in that area.

[00:53:20] Kevin  

With the show, will you be the one proposing the books or will someone say, “Hey, take a look at this. What do you think?” Or will you be saying, “No, I want to do this particular book.”?

[00:53:30] David

You mean for the interviews, programs I do?

[00:53:34] Kevin

Yeah. You just said you are…

[00:53:38] David

Well, I have a number of programs. At the New York Historical Society, I interview historians. In front of the Library Congress, in front of members of Congress, I interview historians, and the people organizing the programs will ask me about the books and I generally will probably go along with their recommendations. 

But then I have to read the book and sometimes books sound better than they actually turn out to be. And sometimes, there are surprises and books are much better than you thought they’d be. I’m reading one book now that I can barely keep my eyes awake because it’s as boring as can be. But I would never tell the author that. And then sometimes, their books are so good you can’t put them down.

[00:54:16] Kevin

Yeah. It’s a struggle for me because I’m a slow reader. But we had Chris Miller on the show who wrote Chip War about the semiconductor industry. That won the FT business book of the year and I blitzed through that in a weekend, which is a wreck. 

[00:54:35] David  

Right here. 

[00:54:36] Kevin  

There you go. You’re holding a Chip War. Have you read it?

[00:54:40] David

I have not, but I am going to be. I just got it delivered today and I’m going to be reading it. I don’t know if I’ll interview him, but maybe I will. 

[00:54:47] Kevin  

Yeah, that’s an excellent one. Last question for you. You were born in Baltimore, grew up in Baltimore, and you played baseball at least until the age of 9. Presumably, you were an Orioles fan growing up, but then the Nationals came to town, that’s the Washington DC team for non-US listeners. So my question is, did you switch loyalties or have you stuck with the Orioles?

[00:55:16] David  

I still am loyal to my hometown as most people are, but I still like the Nationals. We’ll see what happens with both of them. Both teams are probably at some point going to be sold, but we’ll find out.

[00:55:28] Kevin

Okay, hedging your bets, diversifying. Well, listen, I know you’re exceptionally busy and I really appreciate the time you took to speak with us and the time you took to write the book.

[00:55:40] David  

All right, well, thanks a lot. I enjoyed it. 

[00:55:42] Kevin  

Thanks, David.

[00:55:43] Niels

Thank you so much David and Kevin for a much more wide-ranging conversation than I had expected and that I think our audience will also appreciate the depths and the widths of the topics that you covered. It was of course fun to hear about David’s own experience as an interviewer and what he had learned from Oprah, but also the benefits that he sees from doing all the interviews that he does. 

I loved his observation that nobody had won a Nobel prize for being a good investor but that this really is something that should not be undervalued by society. The discussion about capitalism was fascinating so I enjoyed that as well, and learning about what David is looking for when he hires people for his business and the skills that are not taught today at universities but that are really important in real life. 

Finally, the topic of ESG is fascinating to me because it has such deep implications about how society is moving forward. So I found this section quite interesting as well. Make sure you go and follow David and Kevin’s work as well as getting a copy of their books, because as you can tell from today’s conversation, some of these ideas and topics are not being discussed enough on mainstream media. 

From Kevin and me, thanks so much for listening and we look forward to being back with you on the next episode. In the meantime, take care of yourself and take care of each other.

[00:57:10] Ending  

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