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The show featuring luminaries from across the world of private equity.
Brought to you by Affinity Presents. Public conversations in private capital.
Carried Interest Ep. 3 - From Citibank's CFO in 2008 to Private Equity Investor | Gary Crittenden
English (US)
00:00:00.120 — 00:00:28.960 · Gary Crittenden
If you are selling your time for a dollar an hour or $50 an hour, or $100 an hour, that's all great. But there's a limit based on the number of hours you can work down how much you can actually make. And so you have to break that tyranny by investing in an asset. But just investing in any asset doesn't work. You have to have a uniquely definable expertise in order to have outsized returns.
So invest in an asset where you think you can add value to the asset in a way that other people are not thinking of.
00:00:33.040 — 00:01:16.010 · Sam Andersen
Today's guest is someone who has operated at the absolute summit of global finance, but to me, he's been a mentor for over a decade. Gary Crittenden has a resume that reads like a history of modern Wall Street. He served as the CFO of American Express during its golden years, and was the CFO of Citigroup during the most volatile period in financial history, where he famously managed an over $2 trillion balance sheet through the Great Recession.
Today, he is a lead architect in the private equity world as an executive director of HGGC, a firm that justified a brutal fundraising market to close a $3.2 billion Fund V. Gary is a man who lives by a philosophy of the long game, a principle I've watched him apply to business, mentorship and his personal life.
Gary is an absolute honor to have you here.
00:01:16.050 — 00:01:17.770 · Gary Crittenden
Thank you Sam. Great to be with you.
00:01:17.810 — 00:01:43.890 · Sam Andersen
I thought we would start the conversation maybe going all the way back to the beginning. You started your career, as did I at Bain and Company, and you were famously a desk mate or shared a cubicle with Ken Chenault to would eventually be your CEO and colleague at American Express. When you were at Bain in those days, did you realize the talent density that sat around you?
How did you feel about those colleagues and about that time looking back?
00:01:44.090 — 00:02:16.020 · Gary Crittenden
It's it's sort of interesting. It's hard to think about it in these terms today. But when I joined Bain, I think we had about 75 employees, and there was one client that represented maybe half of the total revenue that we are doing. And so it was a relatively small place. And so day to day you would actually work with people like, you know, Mitt Romney, Mitt Romney was there.
Bill Bain, the original founder, was there. And so there were this group of wonderful people. But you only found out with the passage of time just how incredible they were.
00:02:16.060 — 00:02:31.260 · Sam Andersen
Yeah. And, you know, at least when I was at Bain, there were times where I certainly felt that density. And there were other times where I was just trying to survive the the workweek. How did you feel about the experience that you were having? Did you know that it would become something as a firm and as a group?
00:02:31.300 — 00:03:02.640 · Gary Crittenden
Yeah, yeah. So probably not. So I guess the way I would think about it is, uh, Ken Chenault, who became the CEO of American Express eventually, and I shared a cubicle at Bain, and we had both kind of gotten out of school at the same time. And we actually bonded during that time period in large measure, because we could complain about the people that we reported to.
Yeah. And so we didn't at the time have any idea. I don't think about what a sizeable company it would become. But yeah, it was it was a great experience together.
00:03:02.680 — 00:03:35.640 · Sam Andersen
And I mean, it obviously has gone on to become a legacy in and of itself. But that group in particular has left their mark across so many industries. Eventually you left Bain and you joined the world of retail. Yeah. The first stop outside was Filene's Basement. If I'm not mistaken, and I think historically, you've mentioned to me that you weren't a technical CFO.
You weren't the the quant, the accountant or the investment banker. How did you think about that shift? And how did you think about the role of a CFO coming out of a place like management consulting?
00:03:35.680 — 00:04:30.770 · Gary Crittenden
It's it's an interesting question because I think in large measure, the way I approach the job as a CFO came because I had spent time at Bain. So Filene's Basement was a client of mine. Even though it was a small company, it had had about $600 million in revenue at the time. And so I had I had worked for them for a while, so I knew that a business and we had a good controller there who could actually do the the financial math that was necessary.
But the thing that I brought to the equation, I think, was kind of a strategic construct for thinking about retailing in that particular time and place. And, and so that sort of went with me through the rest of my career, at least the portion of my career that was involved with being a CFO. It was really much more strategically oriented than technically oriented.
I think a lot of CFO kind of roles or responsibilities can really be handled by people who report to the CFO, who have those technical skills.
00:04:30.810 — 00:04:47.650 · Sam Andersen
Do you think today, as AI and all of these technologies have largely taken the math, so to speak, aside, and they're abstracting the decisions, do you think that strategic toolkit is as valuable today as it was before?
00:04:47.690 — 00:05:20.900 · Gary Crittenden
I do, because you sort of have to know what the kind of underlying dynamic is that drive success competitively within an industry and having that strategic ability, the strategic insight to think about where I should invest and why I should invest, I think is still really critical. I think the question is there are a lot of repetitive jobs that are done in finance.
And I was actually on a call this morning talking about this a little bit, but I think in a fairly rapid way, we're seeing the adoption of AI in areas where it really is a repetitive task.
00:05:21.100 — 00:05:36.539 · Sam Andersen
You started in the world of retail, which is somewhat famously high volume, low margin. How does that change in the way that you think about private equity today, or how does that influence your thought on private equity today, where it feels like a lot of the financial
00:05:37.820 — 00:05:42.500 · Sam Andersen
tools of the past seem to have all been commoditized away.
00:05:43.180 — 00:06:57.200 · Gary Crittenden
You know, I would say I would say and this is a little bit technical, but I would say that there is one core thing that has remained consistent throughout. Kind of all the dynamic changes that have happened, you know, since I was at a place like Filene's Basement and it really revolves around, uh, return on capital.
So I have come from seeing lots and lots of examples, and I'd be happy to share some of those if it makes sense. But lots and lots of examples of where the return on capital that you earn relative to your cost of capital, that spread is a key driver of what your share price actually is. Obviously, people think about cash flow per share, and which is kind of a little bit of a derivative of what I just said.
They think about cash flow per share. They think about earnings per share. But I think I could persuade you, if we had enough time that return on capital above the cost of capital executed well over time and growing is the key factor that kind of drives profitability. And that was true of retailing way back when.
So there are certain things in each industry that you have to do in order to make that metric drive. Financial success and what you need to do in each business is different, but the underlying objective remains the same in terms of driving value.
00:06:57.240 — 00:07:08.200 · Sam Andersen
When you left retail and you entered the world of finance, American Express, do you think the same principle applied in the way you thought about the balance sheet and the investments for Amex?
00:07:08.240 — 00:08:14.860 · Gary Crittenden
It did, but let me so in a completely different way than in retail. So right after 9/11, we were having a meeting at the Marriott Hotel across the street from what was then the, you know, Ground Zero. And we were talking about how we could grow the share price of the company because it had been that obviously had really had a significant impact on American Express.
And we were looking at the difference in return on capital. Between giving out or between giving someone a credit card versus a charge card. The credit card is fairly easy to have somebody take from you, because if you're willing to give them money, they're almost always willing to accept it. Yeah. Charge card is a little different because you could only get like 20 days of float on a charge card, so it's harder to sell.
The return on capital on a credit card is, say, something like 14 or 15%. The return on capital on a charge card is more like 38%. And the insight was, gee, it's easier to grow the credit card business, but if we can actually grow the charge card business, the value of the EBITDA out of the charge card is $1 of EBITDA is vastly more valuable than it is in the credit card.
00:08:15.300 — 00:08:22.340 · Sam Andersen
How do you make money on a charge card if you're paying it off within the period? So there shouldn't be any interest assessed? I would assume.
00:08:22.340 — 00:08:27.940 · Gary Crittenden
There isn't, but the magic is in the fees that people pay. So I think merchant fees.
00:08:27.980 — 00:08:28.820 · Sam Andersen
Yeah. Okay. No.
00:08:28.860 — 00:08:47.230 · Gary Crittenden
Well, in the merchant fees, in part where American Express had a premium. But more importantly, if you look at the $895 that I pay now for my platinum card, that $895 is pure fee income. And, you know, you look at other businesses like, uh, you know, take Costco, right? The fee income that Costco gets from.
00:08:47.270 — 00:08:48.550 · Sam Andersen
Literally running through my head, as you said.
00:08:48.710 — 00:09:02.390 · Gary Crittenden
Yeah. And so you that businesses that have the ability to drive fee income at a relatively modest capital investment have the ability to drive up that margin and tend to be the leaders in terms of value creation.
00:09:02.430 — 00:09:11.110 · Sam Andersen
Plus, it's got to be so much more predictable over time, which then leads to better cash flows and higher valued cash flows, I guess, from the market.
00:09:11.150 — 00:09:26.150 · Gary Crittenden
Yeah, I always say that that not all EBITDA is created equal. Yeah, there are some that are is is very valuable and there's some that is much less valuable. It's easier to find and grow businesses where it's less valuable. Yeah. And it's really hard to grow businesses that where it's very valuable.
00:09:26.190 — 00:09:54.000 · Sam Andersen
Yeah. The private equity world feels like it is full of funds that are potentially past their prime. And these are legacy funds with assets that they've held too long. You at Citi famously managed and over $2 trillion balance sheet during a very volatile period in history. What lessons did you learn or have you learned that could help private equity managers who have assets that will likely never hit their marks again and are just needing to clean the attic, so to speak?
00:09:54.000 — 00:11:16.450 · Gary Crittenden
So it's interesting there is a connection between what you just said, the big company thing and the private equity thing. So and it's somewhat driven by accounting, paradoxically. So if you're a private equity firm and you have a mark on a particular asset and you've had it at that mark level for a while, what you're trying to reflect is what the market value would be for that asset when you provide that information to your investors.
It turns out, however, there's a critical thing that has to happen in a public company, which is a true mark to market on an asset, including a liquidity discount associated with selling that asset today if you needed to sell it today. So even if the credit might be good, even if the business might be performing okay, if there's no ability to sell the business today, Whether or not you believe it, there is a liquidity discount before somebody is willing to pay for that.
And that liquidity discount is not reflected typically in a private equity mark. And as a result, the assets can't trade because people are thinking that the true valuation is up here, when in reality it's down here. And until that issue is addressed, I think we're going to find that there is sort of a logjam of these companies in private equity firms that just have a hard time finding their way out to market, because the market value is actually because of liquidity or illiquidity below where they're being marked today.
00:11:16.490 — 00:11:26.290 · Sam Andersen
Is there any mechanism that forces a private equity manager to say, okay, this one's a loss. We just have to move it out the door. It's time to be done.
00:11:26.290 — 00:11:54.340 · Gary Crittenden
Well, I think there could be a mechanism, but there's none today. And in fact, there's every incentive not to move it out the door. And so as a result, people are holding these positions for very long periods of time. I still have a position that is probably 20 years old in a fund, and they recently came through.
This wasn't HGGC, it's a private venture capital firm. They recently came through and we extended it another nine months. Now, I don't know what nine months does on 20 years. Yeah, but what.
00:11:54.340 — 00:11:56.380 · Sam Andersen
Was the original hold period supposed to be?
00:11:56.460 — 00:11:58.180 · Gary Crittenden
Well, usually 3 or 5 years,
00:11:59.740 — 00:12:02.940 · Gary Crittenden
I guess since it was venture capital, it was ten. But it's been a long time.
00:12:02.980 — 00:12:27.900 · Sam Andersen
And I mean, it speaks to the abundance of private equity funds that are out there. It feels like interest rates have now settled in between 4 and 6%. Capital is not going to get significantly cheaper, nor is it likely to get significantly more expensive. And the returns have just largely SAT stable. Do you think that there's a reckoning in the asset class generally, that just too much money is sitting in this space?
00:12:27.900 — 00:13:17.920 · Gary Crittenden
I think, and particularly because public companies, as a percentage of the total sort of company universe, Hat is smaller than it used to be in private, or a lot larger than it used to be. The public markets have lots and lots of benefits associated them in the sense that benefits associated with them, in the sense that you have to sell.
I mean, today there is a real price on your company, and it reflects all of the risks and opportunities around that business. And my own belief is that that real pricing has not taken place in the private equity world today. And so companies stay there for a very long period of time, and they can be challenged.
But there's no regulatory reason why people have to mark things at what would truly be a market clearing price. And so as a result, you have this logjam that, you know, is is keeping the market from clearing.
00:13:17.920 — 00:13:26.800 · Sam Andersen
And it feels like they often just circulate. One private equity fund sells to another. Who sells to another. They buy and sell assets in a circle.
00:13:26.800 — 00:14:25.610 · Gary Crittenden
So that so that is very true. And it used to work. But it's not going to work going forward is my is my prediction. And the reason for that is that the private debt market has got issues right. And that kind of, you know, ring around the roses kind of thing that existed in the past was dependent on being able to originate new private debt to do that acquisition.
And not only are the interest rates stuck at a little higher rate than they were, you know, ten years ago, but, uh, the private debt markets, I think, are increasingly, you know, as obvious, are increasingly running into issues. And so you say, okay, so let's say I want to, uh, you know, raise money. Raising money is based on my track record.
My track record is influenced by what I've actually been able to sell and realize, and I'm trying to sell things, and not only am I marked incorrectly, the buyers have difficulty getting the amount of debt they need in order to engage in that transaction.
00:14:25.610 — 00:14:40.020 · Sam Andersen
So with all these funds out there, these assets that they've held for such a long time, they continue to circulate. How does a private equity fund find an edge? How do they differentiate both in terms of the way they operate their portfolio and the way that they present to their LPs?
00:14:40.540 — 00:16:13.270 · Gary Crittenden
So let me take the second one first. Yeah. So in terms of present to the LPs, I think there are relatively few side of brand name private equity firms. And I do think there is. So there are some people who have been terrific investors over time, people who have had parallel careers to being in private equity.
They become known quantities. And I do think there can be a brand equity kind of position built around those people. But that's relatively you and I could name those firms. Yeah. And it's relatively few who have the ability to do that. I also believe that firms that have deep expertise in a particular area really can differentially add value.
And as I have, you know, over time, you know, been on boards of private companies, not necessarily part of HGGC but of others. And I have observed private equity firms that have, you know, bought those companies. And, you know, in some cases they've asked me to stay on the board. I've been able to observe how bringing outside expertise that really is gifted in that business can make a positive difference.
So I think if you are undifferentiated in focus and don't have a brand name, that's the sell of the two by two matrix that you don't want to be in. If you have a differentiated expertise and you have some branding that is important for you, that's the sell on the matrix that you want to be in. And then there are people who are on the edges.
So I think here you've got your top tier firms, then you have kind of the middle tier. And then in the bottom corner you have a lot of these firms that are really struggling.
00:16:13.310 — 00:16:39.400 · Sam Andersen
Yeah. Do you think there is a segmentation then that's happening between the mega funds that are hundreds of billions and what we used to call mid-market in in the sense of funds that operate obviously at a lower dollar amount in how LP should think about the asset class is investing in, you know, your mega fund.
And we could again we could name them versus a mid market fund fundamentally a different investment.
00:16:39.400 — 00:17:21.959 · Gary Crittenden
I don't think there are different asset classes. I think they are, you know, different return profiles. So if you're a middle market private equity firm, I think the ability to double or triple your outcome should be better. All things being the same, it's really hard to double or triple a very large company.
And the very large private equity firms have to put a lot of cash to work in order to make that return work. On the other hand, they can have big float with their public company trading. Also, that provides an opportunity for somebody who wants to invest in something that has a float associated with it and can make sense.
But I do think it's the return profile of the middle market is just better than it is in larger company.
00:17:22.000 — 00:18:08.850 · Sam Andersen
We're seeing something in venture that is probably a corollary here, where you have the Sequoias, the a16zs, etc. of the world that raised these massive funds. And then you have the local or regional fund or specialized vertical fund that is raising something, you know, a 10th the size, fraction of the size.
Yeah. And no one's expecting the Sequoias of the world to triple, quadruple, quintuple their fund on a single deal. But if you're a local fund and you hit one home run, that certainly can return the fund many times over. And so I think what you're saying is that in the private equity world, there's a similar dynamic at play, which is larger funds have to deploy more money and are less likely to produce some incredible outsized return, whereas the mid-market, the potential still exists.
00:18:08.890 — 00:19:15.470 · Gary Crittenden
Yeah, I think the potential does still exist, but it has all those other kind of headwinds that we talked about just a minute ago. So you've got lots of people competing for the same transactions. You have difficulty in getting financing. You have probably kind of legacy assets in prior funds that haven't been properly marked.
And so, you know, the opportunity today, I believe, is somewhat limited compared to the opportunity that we might have seen 20 years ago. Yeah, it really is kind of a different point in time. It doesn't mean there is an opportunity in private equity. It just means that you have to be much more selective in terms of the kinds of firms you're investing in, and what the ability of that firm is to add value.
Yeah, there's probably I probably heard 25 firms in the last year that say our skill set is our ability to work with middle managers. That's like saying our skill set is being a good neighbor. Yeah. You know, and I just don't my own my own belief is that's that that's not a, you know, irrational thing to say, but you can't really build a firm around that idea.
00:19:15.510 — 00:19:16.230 · Sam Andersen
Not sufficient.
00:19:16.270 — 00:19:17.070 · Gary Crittenden
Not sufficient.
00:19:17.110 — 00:19:50.560 · Sam Andersen
Yeah. The topic du jour that's on everyone's lips is AI. And the way that it's changing the world, the way that it's changing business, the way that it's changing finance, it's often being used to replace many of the tasks that analysts and associates did all those years ago, but maybe without the Bane analyst of Gary Crittendon, you don't get the private equity executive director of Gary Crittendon.
How do you think about the role that AI is playing, and how somebody who's just starting their career should think about AI in terms of their own progression?
00:19:50.560 — 00:22:56.110 · Gary Crittenden
I think it's a really interesting question. I'm sort of engaged in this right now with my own grandkids that are kind of getting to that point in their lives where they're thinking about college and what they want to do while they're there. Um, so obviously we're still at an early age in AI. I am personally all in on what the opportunity is and what the potential is.
I think it's really dramatic. I think I think right now people are still in the process of figuring out how to best apply it. The companies that I'm in involved with, virtually everybody is working on it, but they, you know, are still, I think they would say at an early age of its application. But I think it's going to be very dramatic down the road.
And the question is, am I doing something that directly. So maybe a way to think about it is obviously I was involved in business in, in the, you know, the year 2000 when, you know, people were talking about website development and.com, that whole thing. And it was a it was a big thing. And it's been a huge thing.
And the, the use of that, I mean, think about that. When I was at Bain, I literally was doing spreadsheets with a calculator on a piece of paper. And, and today it's just I mean, everybody uses spreadsheets and that kind of thing. And now obviously they use AI to populate their spreadsheets. They do all of those things.
And it doesn't mean there's there's less opportunity. It means the opportunity has changed significantly. And I think if you're if your focus is on I'm going to try to shoot for kind of a traditional role and I'm going to go, you know, maybe get a business management background and, you know, maybe make my way into sort of the private equity world or the investment world.
I think maybe less opportunity there, but I think there's going to be a lot of opportunity in people who figure out how to uniquely apply artificial intelligence in ways that are just stunningly eye opening today. I, I mentioned that I was on a call a little bit earlier today that was focused on resources in a finance function, and I am amazed at how they have been able to shift, um, the quality of what they're doing from where it was just a couple of years ago.
And, and they're doing that in a way that hasn't changed the employment of this group, but has allowed the group to to to demonstrate an ability to add value that they just didn't have before. So if I were kind of starting that process again, I would be asking myself sort of, how does this fit with the world, as I can only imagine it today, because I think that's where it's going to be.
I think this is a fundamental kind of rethink of, uh, of what people do. And, you know, the interesting thing about it is the different industries that it actually impacts in terms of significant opportunity. You know what I mean? I never thought I would own shares in the Southern Company. Yeah, a utility in the southeast.
But I do, you know, and, you know, you go through and there's just so many sectors that are both going to be positively impacted by providing, you know, you know, products into this, but also, more importantly, allowing people who can ask really important critical questions about the technology as it evolves and the opportunity financially that it creates.
00:22:56.110 — 00:23:16.930 · Sam Andersen
So for those that are operating either portfolios or or businesses and they're seeing this AI wave come, how can they I guess, best capitalize or best predict, hey, is this a sustaining innovation? Is this a disruptive innovation for those that are managing these portfolios, how can they best use this technology or think about this technology.
00:23:16.930 — 00:24:47.500 · Gary Crittenden
So, you know, I've seen in in companies where people have kind of stratified their the application of AI into different categories. So the first and most straightforward one is how do I take my existing processes and improve the quality or reduce the cost? I think that one is fair is fairly far along in terms of how people are thinking about it.
I think a lot of companies have got groups that are focused on this and are asking those kinds of questions. The second kind of category for me is how do you turn it to be a revenue generator? I think there's much less attention that's been placed into that today. But it it does create, uh, you know, real changes.
So, you know, think about what's happened to Salesforce. Think about what's happened to FIS. Uh, you know what I mean? There are fundamental changes in the way people have thought about the revenue opportunity that might exist for them if they could use AI in a way that they just hadn't contemplated using it before.
And, you know, and I know both of those companies that I just mentioned have kind of a rationale for why they're going to be successful. And, you know, I hope certainly that they do. But I can also see what's going on. As people say, the facilitator inside here is going to be AI. Yeah. And AI is going to reach out and decide which pieces of application I need to use.
And so you think about AI as the as the core is kind of how I think about it. I think that's kind of the second category. And then the third for me is redefinition. So there is going to be people who
00:24:49.260 — 00:25:11.380 · Gary Crittenden
have the insights that I don't have today that think about something in a completely different way, providing a service in a completely different way that will disrupt industries. And so that's sort of how I think about it. I think we have years to go before this cycle kind of works its way through. But I think I think clearly it's it's headed down a pathway that's going to be extraordinary.
00:25:11.430 — 00:26:04.430 · Sam Andersen
Yeah. It's interesting. In venture, we're seeing this almost bifurcation of investment where massive dollars, billions, if not trillions of dollars are being poured into these large language models, these frontier labs. And then you have a series of businesses who maybe raised capital over the last 5 or 8 years before the AI wave really took hold that are really struggling to raise.
And then you have these new AI native businesses who are growing and starting underneath this technology, who are again, getting massive investment at huge valuations, largely disconnected from the fundamentals of those businesses. On the promise of AI. And it almost makes you wonder what's going to happen to that middle chasm of businesses, solid businesses still growing 20, 30, 40% a year, but just don't have that AI story and hope built into their pricing?
00:26:04.470 — 00:26:46.280 · Gary Crittenden
Yeah, I think I think it really is an issue. And you know what I was talking about a minute ago with the return on capital versus the cost of capital. Yeah, I think it even applies here. I mean, you really the people who are, I believe, going to be the winners in AI are people that are generating enormous amounts of cash flow with return on capital that is hard to comprehend today.
And and I do think that, you know, obviously some of these valuations are incredibly lofty and you have to assume some things. But but I think, you know, for the for the names that are right at the top of the list, I think the opportunity is extraordinary. There's going to be more names that fit into that category.
It's going to be harder for people to achieve those kinds of returns that are in the middle group that you talked about just a minute ago.
00:26:46.320 — 00:26:54.480 · Sam Andersen
We talked briefly about private credit, and I think a lot of that middle group is what's causing this private credit.
00:26:54.560 — 00:26:55.000 · Gary Crittenden
You know.
00:26:55.040 — 00:27:20.930 · Sam Andersen
Stress, tension volatility that we're seeing in the market today. They diversified across many companies but are highly concentrated in this software sector that is likely being disrupted. What parallels, maybe do we take from 2008 and what happened in the real estate world and the concentration there today with what's happening in the software world and the volatility and disruption?
Do you see any connection?
00:27:20.970 — 00:28:34.230 · Gary Crittenden
First of all, I think the diversification in the private credit world is better than it was in the mortgage world back in 2008. So obviously the mortgage situation cut across all financial institutions. You know, some obviously more than others. But it was a really very significant issue for a lot of people.
I do believe the private credit thing is, is somewhat isolated. It's a smaller portion of the total market. It's particularly the people who have been providing loans to, you know, by companies. Yeah. The names that, you know, we all know very well, I think those are the people who are going to struggle with, you know, what's going to happen over the next little while.
But so I think it's a really a very different circumstance. I think if we were seeing a lot of cracks in the banking industry where people had, you know, invested behind people who were then turning around and I should say lent to people who are then turning around and lending that money somewhere else. I think we would find that there were a lot more issues, but I just don't see that being the case.
I think it's much more likely that this is a narrower issue. Having said that, it does eliminate a source of funding for private equity and becomes, you know, an issue that makes that business a little tougher now.
00:28:34.270 — 00:28:59.470 · Sam Andersen
Banks have been, I think, until recently, trying almost to get into this space themselves. They've seen what these lenders have been able to earn, and I think have been frustrated by the own by the regulatory regime that's held them back from those returns. Do you think if, you know, we could sit down with some of your colleagues, your former colleagues today, they would maybe be grateful that they weren't more invested in this asset class.
00:28:59.510 — 00:30:14.810 · Gary Crittenden
So here's an interesting thing. I'm going to say something nice about regulators for a change. So I went to a banking regulators meeting maybe 4 or 5 years ago. It was in Washington, D.C., and they were talking about the primary concerns they had, and the primary concerns they had at the time revolved around CLOs and investment in CLOs and leveraged lending to purchase companies.
And I kept thinking, well, is that a very big deal? I mean, and then they kept talking about it and talking about it and talking about it. I'm talking about over the course of years. And lo and behold, this year we discovered that there is a not trivial problem in that area, particularly in this space that they were focused on.
And I was really amazed that they were way out in front on this issue a long time in advance. And so I think because they did that, you see, the banks are relatively clean. Yeah. I mean, there's obviously been the notorious few, but the banks have been relatively clean. I was I heard a regional bank CEO today on CNBC talk about this a little bit.
And in his portfolio. It was 1% of his banking portfolio and his. And it was a pretty comfortable set of loans that they had made there. So, uh, fortunately, I think the regulators did a good job, and I think they would thank the regulators, the regulators today.
00:30:14.890 — 00:30:37.530 · Sam Andersen
Interesting. So it speaks to a broader question of a return to discipline. I think there were years where money was free. Yeah, prices were going up and irrationally so in many in many cases over the last few years we felt this return to discipline. Do you think that's here to stay? How do you feel like the AI story is impacting?
00:30:37.570 — 00:30:38.050 · Gary Crittenden
Interesting.
00:30:38.250 — 00:30:41.930 · Sam Andersen
Maybe the discipline that they've learned over the last few years.
00:30:42.170 — 00:31:31.340 · Gary Crittenden
Um, so I don't I don't know if we've gained the discipline that we need to have to be perfectly honest. I mean, I think if I were a regulator today, I would really be focused on this liquidity discount that we talked about before, because so much is invested in these businesses that just can't trade. Yeah.
And I think that's not good for the economy. And it trades because there is no liquidity to buy that particular asset at the price it's currently held at. And I think if that discipline could make its way into the regular regulatory process that already exists here, that it would be a good thing for the industry overall, be a good thing for the country overall.
It might force some of these companies that are that are sort of tracked within private ownership into public ownership, which I think would be healthy as well. Yeah.
00:31:31.380 — 00:31:55.260 · Sam Andersen
So HGGC just wrapped up another fundraising cycle. Broadly speaking, fundraising has been incredibly difficult over the last few years. What lessons did you learn or what lessons have you observed over the last few years, both as you've been on the LP side, being fundraised from and as the GP, going out to fundraise about this cycle and about what is speaking today.
00:31:55.580 — 00:33:23.330 · Gary Crittenden
So let me first of all say that I wasn't involved in the raise of Fund V for HGGC, so and the team actually did a really good job. And I you know, I would say that funds that have a solid return profile and they have a unique expertise. Those and they have access to LPs. And that can come either because of the people at the firm or the historical relationships that they have.
I think they can still raise money and do fine, as apparently our friends at HGGC were able to do in this last fundraise. That said, I just I think that we really are in a fundamentally different place than we were 10 or 15 years ago, and it's in large measure related to the fact that we do have these what you called, you know, attic funds where things get caught up in the attic and they just can't make their way out.
And and unless people have been paid out, it's very hard for them to commit new dollars. Everybody has a budget for how much they're going to be investing in private equity and to the extent it's tied up and not been liquidated, they don't have any liquidity associated with it. It becomes tougher and tougher for them to make new commitments, which then narrows the number of people that are, you know, targets for private equity when they're trying to raise raise money.
So it is a difficult fundraising environment. I think that at least for me, the answer lies in getting liquidity. You get liquidity by marking these these investments to market.
00:33:23.370 — 00:33:45.290 · Sam Andersen
Yeah. It's interesting. IRR um, it's frequently not spoken as much as multiples on invested capital. Yeah. And IRR has two components of course. One is the multiple on the invested capital. The other is the time it takes to get there. And it feels like maybe the multiples will look fine. But if the fund took 20 years the IRR is not going to materialize.
00:33:45.330 — 00:34:22.899 · Gary Crittenden
Well, and the thing that I don't really understand is that Kerry, which is where the real money is made in private equity, Kerry is a function of your return And and if the company is staying the same and you're just holding on to it, even though profitability is coming through each year into the company, your carry is going down significantly.
And so the, you know, the true money that is made in this business would cause people to want to think that I should, you know, get rid of this asset. I think there's such a concern that if you have a goose egg, that a goose egg is really going to hurt your, you know, your fundraising ability, that people just have a hard time stepping up to the plate.
00:34:22.940 — 00:35:00.870 · Sam Andersen
Yeah. You were famously CFO of Citigroup during the global financial crisis, managing in over $2 trillion balance sheet during what must have been an incredibly stressful, tumultuous time. The narratives were all over the place, the political interest and involvement in what you were doing and and what the other banks were doing at the time was at all time highs.
What advice or what lessons did you learn from that time in protecting what is your most valuable asset, your reputation. During a period when a lot of the narrative is out of your control.
00:35:01.750 — 00:38:26.430 · Gary Crittenden
So, you know, I would as I think about that time, I think one of the things that enabled all of us who were going through it to get through was that a couple of people who had their hands on the steering wheel were really good and knew what they were doing. So Hank Paulson from Goldman Sachs, obviously serving as Treasury secretary, he was he was amazing.
And, you know, there's obviously I can tell you a lot of detail about that, but it was an amazing kind of addition to the ability of the country to deal with that. And then Tim Geithner, who at the time was the head of the New York Fed, uh, who is a was a strong and powerful regulator, but also a very thoughtful guy and understood the tools that needed to be put into place to enable the banks to survive.
And you probably recall the term TARP. He was sort of the developer of having, Uh, you know, a TARP loan available to all banks and insisting that all banks had it and and the the stability that the leadership provided from the regulatory world was really critical to getting through that. That being said, it was a it was an incredibly difficult time.
You might recall that Citigroup had struck a deal with Wachovia Bank to do a transaction. And at that time, the worst cracks in city's infrastructure had not become apparent to anyone. And and yet, to a day or so before we were to actually sign the the deal with them, that deal was taken from us and moved over to Wells Fargo, which put us in a place that I said to the regulators at the time, I don't know if it's going to be six months from now, six weeks from now, six days from now.
But because that decision has been made, Citigroup is now going to be in the same kind of situation that Wachovia was in. And that turned out to be accurate. It was about 60 days after that that the issues at Citigroup really first surfaced, and we all became aware of them. And so, you know, there was there was a lot of backdrop in terms of what was going on.
That being said, you know, there were a lot of people that were having difficulty at the time. We weren't alone. We may have been the worst at the time. Uh, and, you know, and there's and there's reasons for how the bank got itself into that position that largely go back to growing businesses with low return on capital, as opposed to businesses that were more difficult to to grow, that had higher return on capital.
Uh, but, you know, during that time period, uh, you know, obviously there was a lot written in the press and the relationships that, you know, that I and others had built over years with people who were the the most important, uh, kind of reporters on these kind of issues, uh, you know, paid off. It was people who knew that we were trying to do the right thing, that obviously we'd made a lot of mistakes, but in spite of the fact that we had made mistakes, we were trying to get things back on the right track.
And, uh, and then, you know, there were wonderful groups of colleagues. You know, I some of my best memories of that time period were that, you know, late night Chinese food and pizza and sleeping on the couch in my office. I don't know how many nights I slept on the on the couch in my office, but it was many.
And with great friends that were there at the same time. And those friendships have endured all of this time as well. So, uh, it's it was obviously a very difficult time, but, uh, friends or friends both before and after. And I'm glad I've got a bunch of them.
00:38:27.390 — 00:38:46.480 · Sam Andersen
You've told me many times to think about the long game to to play my career in decades. If you went back and were starting over again, a Harvard Business School graduate age of 25, how would you think about the long game today? How would you think about where you put your chips?
00:38:46.520 — 00:40:15.130 · Gary Crittenden
So, Sam, you've done a pretty darn good job with what you've done so far. Um, so the the value of compounding is really, really hard for people to understand. So I can remember years ago, my wife and I sat down with a, an estate planner, and the estate planner was saying, well, it's a little amount of money today, but if you just do this consistently over a long period of time, you're going to find that the results are extraordinary.
And, uh, and I think that concept applies to just about everything. So, you know, you make a down payment of understanding the financial services industry. You learn about it a little bit over time. You learn the key factors that drive success and the mistakes that you made. That kind of worked against success.
And and if you consistently apply the things that you've learned over time in a way that is durable, You find that. Compounding knowledge. Compounding reputation. Compounding actual returns can make a huge difference. And and so we look back on life and say, boy, life has been so good to us, good to us in all of these ways.
And I do think it's because of this law of compound interest. It's compound interest financially in your relationships, in the insights that you have about business. All of that kind of taken together result in a, in a what's for us been an okay outcome.
00:40:15.170 — 00:40:31.210 · Sam Andersen
Yeah. Gary, if you're looking at a 2026 deal today and you're wondering, is this company built for success, what are some non-financial metrics that you can use and look at to evaluate? Is this a ten year deal or is this just a quick three year flip?
00:40:31.530 — 00:42:26.950 · Gary Crittenden
So one of the things I think that people don't do enough of is when they're looking at a business, actually understand what the basis of competition is. And if you can be clear about what the basis of competition is, then that can help you understand. Against that criteria, how is this company going to succeed, you know, in changing environments?
And, um, you know, there are there are simple. Let me give you a very simple example in the self-storage industry, which ought to be, uh, you know, an industry that everybody is very familiar with. So, uh, there's a company in the self storage industry called Extra Space Storage. Extra Space Storage is just like many of the other self storage.
I mean, you look at them, you say they're all pretty similar buildings. They have similar kind of terms. You would think it would be a hard business to build a moat around. When that business was founded. It was founded by a guy by the name of Ken Woolley. They decided that they would own some of their own buildings, but they would also increase their management capabilities so much that people would actually pay them to manage their buildings for them.
And even though they were paying that extra amount, uh, They would make more money by having Extra Space manage their buildings. So fast forward now 20 years. Extra Space, I believe, is the largest company in Utah by valuation. And and they have the highest return on capital in the industry, not because they build a lot of warehouses, which took a lot of capital, but because they built an insurance business around that, that company.
And they built a management business around that company that generates fee income, that gives them a superior return on capital and has allowed them to thrive relative to others. And so I think that but you have to go back to the fundamental question, what is the basis of competition? And we'll and if I understand that, will this company have a durable business model.
00:42:26.950 — 00:42:50.000 · Sam Andersen
So Gary, we've talked before how diversification preserves wealth. But it's concentration that really creates it for a private equity VP. Yeah. Sitting out in the market today with a little bit of their own liquidity. Where would you recommend that they invest it? Should they invest in their own fund?
Should they diversify across a sector? What advice would you give.
00:42:50.280 — 00:44:41.110 · Gary Crittenden
So first of all, that was Warren Buffett. That, uh, this I stole that from him. So, uh, but it is a is a really good idea, a really good thought. And I have, you know, considered it a lot over time. So the advice I give to my kids is own an asset. So if you want to become wealthy over time, owning an asset is the way to do it.
So if you if you're selling your time for a dollar an hour or $50 an hour or $100 an hour, that's all great. But there's a limit based on the number of hours you can work to how much you can actually make. And so you have to break that tyranny by investing in an asset. But just investing in any asset doesn't work.
You have to have a uniquely definable expertise in order to have outsized returns so invested in asset where you think you can add value to the asset in a way that other people are not thinking of. And, you know, there's a million examples I could give of this kind of thing. But let's say you're a real estate developer and you're doing multifamily housing.
That's an asset that you can own. And the question is, how do you add value to that asset relative to somebody else? So if you're looking at an index fund and you're investing in an index fund, you're investing in an asset, but you don't have any relative insight. So you can have relative insight based on industry, based on customer segment, based on reputation.
There's there's different ways in which you can define competitive advantage, but without having both of the pieces invest in an asset which anybody can do, any old fool can do or invest in something where you have the ability to add value to the asset. Adding value to the asset is really the hardest thing to determine what you could do.
But I think at the end of the day is the concentration that you should focus on that will deliver extraordinary returns.
00:44:41.150 — 00:45:19.630 · Sam Andersen
We met at a dinner when I was a student at BYU. You handed me a business card and you said, hey, I'd love to hear how your first year at Bain goes. Shoot me an email sometime. And I decided to take you up on it. And I assure you, an email. We maintained an email correspondence for years before we ever worked together.
As you think of the long game and as you think of networking and relationship building over time, what did you see in those emails? Or what did you expect from that cadence that made you willing to engage with a student? And what lessons are out there for others as they try to build relationships over a long period of time?
00:45:19.630 — 00:46:41.690 · Gary Crittenden
So it's interesting. I actually remember that that event that I was at. Yeah. Yeah. At BYU, when you and I were together for the very first time. And I have really Appreciated all of that years of correspondence. It's funny. There have been a few people in my life who have made a huge difference. I gave a talk not long ago about the five best bosses that I had had and their characteristics, and it was really fun for me to go back and kind of review the things that they did uniquely well.
That helped me become not just a better employee, but but a better person. And and I have always felt the blessing that comes from trying to encourage people who who have potential and who are trying to get to an extraordinary spot. And obviously, when I met you that very first time at BYU, I thought, wow, this this kid is really different.
And and then we did keep in touch over a long period of time. And then we had the opportunity to actually work together. And I don't know how many times I have said to people, Sam Andersen is really incredible. And but there's a number of people in my life that today I would say so-and-so is really incredible because they are.
They've worked hard, they've tried to do something. And in some small way I might have contributed the way they think about things.
00:46:41.810 — 00:47:21.170 · Sam Andersen
Obviously, as the beneficiary, I am exceptionally grateful. And I think your ability to build a relationship with me and be willing to extend that time has made a world of difference. And I think what I respect the most out of it is that I felt valued, is that I felt that it wasn't you charitably giving time, but sincerely interested in what a partnership or an ongoing professional relationship would look like.
Yeah, and that meant a lot. It both bolstered my own confidence, made me want to deliver better, and also increase my gratitude.
00:47:21.170 — 00:48:21.580 · Gary Crittenden
So one of the happiest days in my life I can remember I was driving up to our place in the mountains. I don't know if you'll remember this. We were having a conversation about whether you should take a particular job, and you said, I just don't know if I should take this job, because if I if I do take it and and everything works out, it's going to be an amazing home run if I don't take it and the company sells in six months, what am I going to do?
I'll be I'll be out on the out on the street. And, uh, you know, you were young, and I think what we talked about was, you know, taking, you know, focusing on, you know, concentrating your risk and swinging in an opportunity hard. And you ended up deciding to do that. And the rest is kind of history worked out well about having that work out so well.
And, uh, you know, that's that's a great example, I think, of of saying, what am I really good at? How can I add value? What's the opportunity for this to improve? And a lot of times people don't think critically about that. And you do. Yeah.
00:48:21.820 — 00:48:37.800 · Sam Andersen
Gary, as you pivot your career and your time and your thought away from the private equity world and more towards your family and your legacy. What what focuses your time today? What captures your attention and interest?
00:48:37.840 — 00:49:33.730 · Gary Crittenden
So when somebody asks me what I'm doing today, I always say, I'm driving, Miss Daisy. So, as you know, my wife has MS, and she's had it now for 43 years, and she's done remarkably well for a long period of time. We've been blessed to have just fantastic doctors that, you know, have helped out during that time period.
But sadly, with MS, about 85% of the time, after you've had it for a long time, your your strength and capabilities declined. So she's sort of in that phase right now. And so I have the pleasure of being able to escort her around. And we have a wonderful group of grandkids. We now have a great grandchild, we have new people marrying our grandkids, and we have a wonderful family, and it's great that we now have the time to be able to fully appreciate those things.
It was a little harder to do that back in 2008 than yesterday. Yeah.
00:49:34.010 — 00:49:42.250 · Sam Andersen
Um, as someone who's obviously had the chance to meet and spend time with Cathy, she's exceptional. Yeah. It's no surprise that you've been a wonderful team over many years.
00:49:42.250 — 00:49:51.130 · Gary Crittenden
She's a happy soul. So she was she's one of these people that was born with a happy spirit, and she gets up every day and it's going to be a great day.
00:49:51.370 — 00:49:58.330 · Sam Andersen
Gary, thank you so much for coming. It's been an absolute honor. Obviously the relationship means the world to me and I've really enjoyed this.
00:49:58.370 — 00:50:01.010 · Gary Crittenden
Yeah. It's so fun to be with you. Sam, thanks very much.
00:50:01.410 — 00:50:12.490 · Sam Andersen
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