The transcript from this week’s, MiB: Graham Weaver, Alpine Investors, is below.
You can stream and download our full conversation, including the podcast extras on iTunes, Spotify, Stitcher, Google, Bloomberg, and Acast. All of our earlier podcasts on your favorite pod hosts can be found here.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. Graham Weaver is the founder and partner at Alpine Investors, a private equity firm, focusing on software and services. Graham has a really interesting background, both engineering at Princeton and essentially launching a PE firm while he was a graduate student at Stanford. Everybody knows the story about Michael Dell launching a computer business out of his dorm room in Texas. This could be the first PE firm I’m familiar with, that got started in a dorm room.
What makes Graham so interesting is while everybody else in the world of private equity is focused on the analytics and crunching numbers and creating econometric models that will tell you where to invest, I think they’ve found a very different model that has been extremely successful for them, where the key focus is on talent. How do we find the best talent, put them in place running our investment companies and allow them to generate the sort of returns that you don’t really generate by just looking at a model? I found our conversation absolutely fascinating and I think you will also.
With no further ado, my discussion with Alpine Investors’ Graham Weaver.
Let’s jump right into this, starting with your background. When I hear someone has an engineering degree, I tend to think of venture capital, not private equity. Tell us a little bit how you went the PE route instead of the VC route.
GRAHAM WEAVER, FOUNDER AND CEO, ALPINE INVESTORS: Well, I actually started in private equity right out of undergrad. I really didn’t know the difference between private equity or consulting, or anything. I had zero knowledge of that. And I was fortunate to end up in Morgan Stanley’s private equity group, I loved it and I’ve kind of been at it ever since.
RITHOLTZ: Really interesting. So is it from Princeton to Morgan Stanley, and then Stanford, or am I getting the order right?
WEAVER: Yeah. When I was at Princeton then I went to Morgan Stanley in their private equity, then I worked at a firm called American Securities for a couple years, and then went to went to business school after that.
RITHOLTZ: And somewhere in the middle of this, there’s a pig farm in Missouri that I am having a hard time figuring out what a pig farm has to do with private equity.
WEAVER: So the very first deal I worked on, so I come out of school, I’m wearing my Cross pen and my lapel, and I’m like wearing a tie and —
RITHOLTZ: All buttoned down.
WEAVER: Exactly. And I think I’m a big shot being on Wall Street, and I get shipped out to this pig farm in Missouri which was a deal Morgan Stanley had invested in. They’ve invested a total of a billion, almost a billion dollars of debt and equity, and then suffice to say was not going well. So not that I was going to go save it as a 22-year-old analyst, but I’ve got shipped out. I lived in a CFO’s basement for about five months, and we did everything we could, but it turned out not to be a great investment.
RITHOLTZ: So there’s not big money in pigs?
WEAVER: Well, it turns out hog prices are wildly cyclical. And you know, there’s the expression, how does a six-foot man drowned in a river that averages five feet? You know, it’s because there’s parts of the river that are deeper. Well, you know, we build our whole model on hog prices being $47 and when we then —
RITHOLTZ: And that’s what they average, right?
WEAVER: That’s what they average.
RITHOLTZ: But that doesn’t tell you how much they swing up and down.
WEAVER: It turns out — yeah, they went to $18 and we had $700 million of debt, and that didn’t —
RITHOLTZ: $18?
WEAVER: That didn’t go well. So yeah.
RITHOLTZ: That’s the old joke. It’s not the price, it’s the volatility.
WEAVER: Yeah, it was rough. But it was a — that was my introduction to the glamorous business of private equity.
RITHOLTZ: And you didn’t turn around and say, “I want nothing to do with this?”
WEAVER: I had the time of my life.
RITHOLTZ: Really?
WEAVER: It was so fun.
RITHOLTZ: How was — how was sleeping in the CFO’s basement — was his house on the pig farm?
WEAVER: It was. Yeah, it was. The whole entire town smelled like a pig farm and everyone —
RITHOLTZ: Which was not especially delightful?
WEAVER: It’s not. No, it turns out. And pretty much everyone in the town worked and had some affiliation with the pig farm. The CFO was also a Morgan Stanley guy, and he was probably 27. So neither of us had any idea —
RITHOLTZ: So many years, years of experience over you?
WEAVER: Yeah, yeah. Exactly. Neither of us had any clue what we were doing. But it really wouldn’t have mattered when your revenue gets cut by like 80%, there’s just not a lot you’re going to do to turn that around.
RITHOLTZ: So there’s a cliche about tech firms being started in dorm rooms. How does a private equity firm start in a dorm room?
WEAVER: So I show up at Stanford, and I’m in my first week of class. And then similar as today, you have to take these core classes in your first year, which are just not that — you know, they’re just fundamental. They’re not that exciting. So the first class I sit down, and there’s this 25-year-old who’s never worked a day in his life. He’s a PhD student. He’s never taught before, and he’s kind of just reciting out of this strategy book. And I just thought to myself, oh, my God, what have I signed up for?
So I had this idea that I was going to go try to buy a business. And I had — you know, in your first three years as an analyst, you basically build a financial model. But I had the confidence of someone I thought I was much more — much better than I was. So I convinced an owner — I started cold calling companies in a sector that I had looked at previously, and I convinced this owner to sell me his business, and then I had to go raise the money, most of which was debt and the little bit of equity that was needed. I financed with credit cards. So that was literally how I started, not your typical private equity founding story.
RITHOLTZ: How did that initial PE transaction work out?
WEAVER: I did a total of three labeled deals with some add-ons, lost money on one, made money on — or lost a little bit of money on — loss — made a little bit of money on the second one. And then the third one was a total homerun, which actually just sold this year, 20 years later. So that that one turned out well.
RITHOLTZ: 20 years? That’s impressive. That’s not the typical private equity holding period.
WEAVER: Yeah, well, it was just me. I was the — it was just my —
RITHOLTZ: So you could afford to be patient.
WEAVER: And it was awesome. It was great. That one —
RITHOLTZ: What space was that at?
WEAVER: It was the — we had these companies that made these little labels that went on products, like for example in Trader Joe’s private labels things, we made all those labels. It’s a totally unsexy business.
RITHOLTZ: Right.
WEAVER: But it was very consistent and —
RITHOLTZ: And it’s profitable.
WEAVER: It was really profitable. And no one wakes up and says, “You know, I’m going to be a hero because I’m going to save half a cent on my label.” So it tends to kind of like just clip along like a bond.
RITHOLTZ: Right.
WEAVER: So it turned out — it turned out well, but I mean, I had absolutely no idea what I was doing. And so I made every mistake you can imagine.
RITHOLTZ: And it still worked out. When you launched in 2001, you started with $50 million, $55 million, something like that?
WEAVER: Yeah.
RITHOLTZ: And now it’s up to $8 billion close to eight funds.
WEAVER: Yeah.
RITHOLTZ: And your most recent fund just closed about $2 billion, more or less?
WEAVER: Yeah, about 2.4. Yeah.
RITHOLTZ: All right. So that’s real money, 2.4. Obviously, you’re doing something right. The track record has to be attractive. Is it the same investors rolling over, or new and different investors? Who is the clientele for this?
WEAVER: In the very early days, it was a number of individuals because no institution was going to back —
RITHOLTZ: Right. Well, you have to have a certain track record, be around for certain length of period, be able to check all of their due diligence boxes, and that takes time and money.
WEAVER: Yeah. And I checked zero of those boxes.
RITHOLTZ: Right. Dorm room, check. What else? What else we got?
WEAVER: Yeah. Track record.
RITHOLTZ: How old is he? 22?
WEAVER: No.
RITHOLTZ: Sure. Let’s write him a big check.
WEAVER: Exactly. I checked no boxes. And that took me like almost a year to figure out. I went to all these institutions and I never got past the first meeting anywhere. And then I found a number — really two individuals who, thank God, I still owe everything to these two. One, I don’t know if I can —
RITHOLTZ: Sure. You can say whatever you like.
WEAVER: So, one was Tom Steyer, who ran for president.
RITHOLTZ: Oh, sure.
WEAVER: He was one of the early ones. And then Doug Martin from the Stephens family. And they were just the two best investors you could ever have. They were supportive. And most importantly, they were supportive after Fund I which was not a good fund. So that’s the reason we’re still in business today.
RITHOLTZ: Why not good fund, just performance wise, or was it — because when you launch in ’01, we’re still in the early days of a massive downfall in technology, media, Internet straight across the board. Not — you know, it’s not — unless it’s a distressed fund, that’s not the ideal time to launch.
WEAVER: Yeah. I would love to say that it was the market, but it wasn’t. It was self-inflicted.
RITHOLTZ: Yeah.
WEAVER: It was me making a lot of dumb mistakes, being overconfident, you know, and just investing in companies that looked great in the spreadsheet and didn’t — what looks great in the spreadsheet is low purchase price and a lot of leverage. That looks — always looks good in a spreadsheet, but the —
RITHOLTZ: Leverage is the problem.
WEAVER: The qualitative — yeah, the leverage is the problem and the qualitative things about is it a quality business? Those things you can’t model in a spreadsheet. And so, I just made a lot of dumb mistakes. And actually the whole fund, overall, lost money. I would highly, Barry, not recommend having your first fund when you launched and lose money. It was a —
RITHOLTZ: Probably not the best long-term strategy?
WEAVER: Yeah. It was anchored around our neck for pretty much a decade.
RITHOLTZ: So that raises the question, if the first fund was a bit of a stiff, how did you raise money for the second fund?
WEAVER: Well, thankfully, we were — I really communicated a lot with Doug and Tom, and they understood. They could see us getting better. You know, they could see us making a lot of improvements, fixing a lot of the things that we got wrong. And both of them were pretty seasoned investors, both of them had had mistakes they’ve made before. And so they, you know, thank God, were really supportive. And then it wasn’t like immediately we started knocking out of the park either, but we started getting better and better. And then really around the time of the recession was when we really completely transformed and became kind of the business that we are today.
RITHOLTZ: And it’s a little bit of a cliche, they’re not so much investing in a fund as they’re investing in you as the manager. Obviously, they saw something that was, “Hey, needs a little seasoning, but there’s a lot of potential here.”
WEAVER: Yeah. They saw someone who was willing to literally run through walls and run through a burning building to make it work, and I almost literally did. I mean, it was that — we were — and not just me, but our whole team was really committed to try and make it work, and I think they saw that.
RITHOLTZ: Quite interesting.
(COMMERCIAL BREAK)
RITHOLTZ: I have to talk a little bit about your growth rate. You began with $54 million. All-in, you’re $8 billion in assets totally. Obviously, a lot of that is not just growth, but new investors coming along. But still that’s a — as a PE company, Alpine has really seen quite a corporate growth trajectory. Tell us what led to this success rate.
WEAVER: Yeah. So when the recession hit, we were in — we were not well positioned. We didn’t —
RITHOLTZ: Now, when you say recession —
WEAVER: Yeah.
RITHOLTZ: — because some of our audience is, you know, older than 25, I’m assuming you mean, ’08. ’09, the financial crisis?
WEAVER: ’08. ‘0.
RITHOLTZ: Okay.
WEAVER: Yes.
RITHOLTZ: Not the one in 2020.
WEAVER: Right.
RITHOLTZ: And not the one that maybe happened sometime in 2022 and certainly not 2000.
WEAVER: That’s right.
RITHOLTZ: So the great financial crisis —
WEAVER: So great financial crisis happens. We were — we invested the last dollar from our third fund two weeks before — two weeks before Lehman Brothers blew up.
RITHOLTZ: Wow.
WEAVER: And so we were out of money and we had — it took us forever to raise the next fund. But that period, where we didn’t have any money, turned out to be the most important period for us.
RITHOLTZ: Why?
WEAVER: Because we started deciding we were going to look at our own business, you know, kind of like rather than working in the business, we’re going to start working on our business. So I hired an executive coach —
RITHOLTZ: Really?
WEAVER: — and he helped — he really helped me kind of redefine the business that I truly was in, which I’ll come back to. We hired a consulting and coaching firm for our whole organization. And so, we really started doing some soul-searching for lack of a better word. And then — and from that, we really, you know, changed our strategy and developed kind of a new playbook.
RITHOLTZ: So let me interrupt you there because that you raise something that I’m fascinated by. So first, what leads you to say, “We need a pro to come in and show us how to do this?” And second, how do you even go about finding an executive coach? That sounds like, man, that’s a consulting field fraught with, you know, let’s be polite and just say high risks.
WEAVER: Yeah. It’s a great question. And I am a huge fan of executive coaching. I’ve had a coach since 2009.
RITHOLTZ: Wow.
WEAVER: I talk to a coach every week or every other week since ’09.
RITHOLTZ: No kidding?
WEAVER: And we, at Alpine, have 23 coaches that are part of our — they’re 1099 folks, but they’re part of our ecosystem that’s available to our people at Alpine and our executive. So I’m just a huge fan of coaching. And basically what I love about coaching is you create space away from the busyness of the day to day. You ask yourself a bunch of really important questions. You know, what do I want? What success look like? What do I want in — what does a five-year plan look like? And you actually have to really burn some energy and some thinking time, thinking about those answers, which are really hard answers, which most of us never spend time thinking about.
RITHOLTZ: Was it just in the midst of the crash and recession that you said, “Hey, maybe we just need a little help. We’re not — we don’t have the professional background to run the business. We know the investing side, but the business side is something very different.” How did you get to that —
WEAVER: Yeah, 100%. I mean, I think one of the benefits of phase planning in your first fund is that you get some humility.
RITHOLTZ: Right.
WEAVER: And you — I’ve always just been open to learning from people that are smarter and better than I am. And so, coaching was an exercise — back then in 2009, it was not very well known and it was definitely an exercise in humility of saying, “I think I need some help.”
RITHOLTZ: That’s the old joke. Experience is what you get when you don’t get what you want, right?
WEAVER: Yeah. Exactly. Yeah.
RITHOLTZ: So once you make the decision, “Hey, we want to bring in a professional to show us ways to improve our business methods,” how does one go about finding a business coach?
WEAVER: So I had an introduction from a friend and then we had a number of lunches, and his business wasn’t going well in ’09 either, as you could imagine, so —
RITHOLTZ: Well, who’s on — and other than people doing distressed debt investing, whose business was going great in ’08?
WEAVER: Yeah. Exactly. Nobody. So —
RITHOLTZ: Then in short sellers, everybody else was in trouble.
WEAVER: So we had this awesome conversation. I can still — it’s one of these conversations you can still remember where you are and what you — you know, exactly the moment. So we had — this is actually after I brought him on. We have this awesome conversation where I said, “Hey, I have to” — his name is JP Flaum, and I said, “Hey, I have to cancel our coaching engagement. I’m just too busy,” which was like we’ve already decided ahead of time that that was no go. I had to stick with the — we made an agreement.
RITHOLTZ: Right.
WEAVER: So he texts back immediately says, “No, we’re having it.” So I get on the phone, he says, “Well, what’s — you know what’s so crazy that you’re so stressed?” I said, “Oh, my God, JP, you know, I got to fly to Dallas and fix this. And then I got to — you know, we got to deal we’re about to lose and then we lost a huge customer in Chicago. And then I got to go to D.C.” and then, you know I’m going on and on.
And he said, “Okay, well, let’s kind of slow down and chill out. Let’s talk about Dallas. What’s going on there?” “Well, we — you know, we just missed our bank projections a second time,” and I’m going on and on. And he starts saying, “Well, tell me about the CEO in Dallas.” I’m like, “What does that have to do with anything? You know, we’re in the middle of the Great Recession,” like, blah, blah, blah. You know, it’s not — you know, it’s the markets or whatever.
Anyway, it comes to points, he says — well, eventually, he says, “Well, how would you — how would you rate that CEO, you know, A, B, C?” I was like, “Oh, he’s probably a B.” He said, “Well, Graham, in one of our engagements, you said you wanted to build the greatest private equity firm of all time. Are you going to — are you going to do that with a B CEO?” And I just — it like hit me between the eyes. And then he asked me another question, he said, “And Graham, if you’re someone who keeps a B CEO” —
RITHOLTZ: What does that make you?
WEAVER: — “how would you rate yourself as a CEO?”
RITHOLTZ: Right.
WEAVER: and I just — like, it stopped me dead in my tracks. And that was really this light bulb that went off, that ended up having us — having me realize I’m actually in the talent business. That’s the fundamental business that I’m really in. And that was like ’09 that we came to that realization, and then started completely redesigning our firm to like build our companies around talent, build our firm around talent, build our investment strategy around talent. So that was just a huge turning point.
RITHOLTZ: So let’s talk about that because all of your investments eventually get a CEO that’s been trained at Alpine and has the benefit of all of this coaching, all of this training, all of this expertise. It’s not that you’re just looking for attractive balance sheets, it’s where can we put someone in charge to move the needle by taking our expertise and applying it to this business model. Is that what you mean by when you say, you’re in the talent business?
WEAVER: Yeah. I think that’s what I mean. There are two parts of it. One is our investment strategy, which is what you described the others, how we run our own firm. But sticking with what you were talking about, Barry, the investment strategy, we found that the single most important investment decision we make is the management team. And it’s more important than the price we pay. It’s more important than the leverage levels. It’s more important than the prior growth rate.
And so, we just said, “Well, if that’s really the most correlated, most effective, or most important criteria, you know, let’s make sure we get that right. And so let’s actually kind of build our own CEOs and put our own CEOs in so that we can make sure that we’re getting a world-class person to run each one of our companies.”
RITHOLTZ: So in some ways, this is almost parallel in the public markets to activist investing, where they identify a very attractive business that isn’t quite living up to potential, right?
WEAVER: Yeah.
RITHOLTZ: And they say, “Hey, with a few management changes, we can turn this into a really good business.” On the private equity side, I’m assuming the conversation is something like, “We want to either buy 30%, 40% of your business or your entire business. But regardless, we want one of our professionals to come in and manage it.”
WEAVER: Yeah, that’s right. A lot of the companies we’re buying don’t have management. You know, it might be a corporate carve-out. It might be a management team that wants to retire, or exit. And that’s great. So there’s never any conflict. We’re totally transparent. We’re not doing hostile deals, nothing like that. It’s always the transaction that the seller wants to do is they want to retire. So it’s always very friendly. But we — there aren’t a lot of private equity firms that want to go through the process of changing management because it’s very, very hard to do.
RITHOLTZ: And that’s the value add that you guys bring.
WEAVER: That’s a big part of it. Yeah.
RITHOLTZ: Yeah. That’s really quite fascinating. So there’s a quote of yours I have to lead with, which I find really intriguing quote, “People create returns, not deals, not price.” That’s a huge statement, considering most of the analyst community, especially private equity, is so analytical and modern driven. You’re saying this is a people business.
WEAVER: Yeah, 100%, Barry. I think that if you want to do something different than people, you have to have some fundamental belief that’s different than what other people believe. And our belief is that returns come from people. They come from talent. And I think maybe one of the reasons why people shy away from that is it’s hard to analyze, it doesn’t fit in a spreadsheet, and it’s incredibly hard to manage. It’s a lot easier to manage the hard numbers, the financial statements and things than it is to, you know, really manage a team of people.
RITHOLTZ: So we were talking earlier that you appoint the CEO at these purchased businesses that you’ve trained yourself. Tell us a little bit about what that in-house training looks like.
WEAVER: So a lot of the CEOs we’re hiring, we’re bringing right out of MBA programs, and they have five years of experience typically before they go into business school. And that could be anything, that could be they’re in the military. They could have been in consulting firm. They could have been in investment banking. And we have success with any of those — any and all those backgrounds.
So — and they’ve just been in two years of business school, so we don’t want to put them back in business school. But what we’re really teaching them, the fundamental thing we’re teaching them is how to hire, how to build their team, how to set a vision, how to create priorities, how to get everyone in their organization excited and aligned behind what they’re trying to do. Those are things that not a lot of business schools teach. It’s one of the things I try to teach in my class, but it’s something that we bring in — it’s the biggest thing we bring in that training program that we do.
RITHOLTZ: Hiring has been described as the most difficult aspect of building a company versus everything else.
WEAVER: 100%.
RITHOLTZ: How do you teach good hiring?
WEAVER: You can actually, to some extent, make hiring a science. And the simple — I could talk for you — I could talk for three hours about this, but I’ll try to do it in about two minutes, which is you build a scorecard for what you want that role — in that role, a specific list of outcomes you want that role to do. And then as you’re assessing a candidate, you’re looking for very specific evidence that they’re going to be able to perform against that scorecard. And you have two things, you’re looking for attributes and experience. Those are the two different parts of the interview process.
RITHOLTZ: But we all know what experience is. Define what attributes mean.
WEAVER: So attribute is about who somebody is versus what they’ve done. So an example for us, when we’re hiring young people to become CEOs, we’re looking at, you know, do they have a will to win? Do they have emotional intelligence and self-awareness that they can get along with people? And then did they have grit? Can they — are they going to be able to see things through after getting kicked in the teeth, because they’re going to get kicked in the teeth. So those are the three attributes that we’re looking for.
Those are wildly more important than experience, because they’ll get experienced quickly. And you can teach experience, you can’t teach those three things. You can’t teach, you know, the will to win. They’re kind of coming to us with that or not.
RITHOLTZ: That’s an — that’s an intrinsic aspect of the personality. You either have it or you don’t. There’s no way you’re going to learn that.
WEAVER: Not in a period of time, or we don’t know how to teach it if it is writable.
RITHOLTZ: Right.
WEAVER: Yeah.
RITHOLTZ: Really, really interesting. So you mentioned your class, let’s talk about the management course that seems to be related to that, CEOs-in-Training. Tell us about that.
WEAVER: Yeah. So the CEO-in-Training is the — that’s the name for the people that we’re hiring. Did you want to talk about that, or the class itself?
RITHOLTZ: Both, either/or.
WEAVER: Okay. All right. So the CEO-in-Training is the name we give to those people we’re hiring right out of business school. We’re giving them that experience — training that I mentioned, and then we’re putting them right in. A lot of them are CEOs on day one of add-on acquisitions, and they get the reins and they’re — you know, they’re off to the races. And you know, there aren’t a lot of positions out of business school that you can become a CEO within — you know, right when you graduate. So we’re — we’ve designed that and it’s been — it’s been a homerun. We — I underestimated how amazing these students would do and the roles that they’ve done. And it’s been fantastic.
RITHOLTZ: Do you end up hiring people right out of your classes or —
WEAVER: Yeah. I mean, I don’t —
RITHOLTZ: So this is really devious recruitment.
WEAVER: I don’t interview anybody from Stanford, period. I don’t even know if they applied. I keep a wall between —
RITHOLTZ: Right.
WEAVER: — you know, my teaching and recruiting. But I will say probably teaching there has helped the Alpine brand.
RITHOLTZ: Sure.
WEAVER: And helped me — and more importantly, helped me understand what students are capable of, which is a lot, and what they want, which is they want to be the boss right away. And I think — so it’s helped — it helped me learn a little bit more about how to build a program that the students want to actually do.
RITHOLTZ: So one of the things the CIT program does is to try and increase underrepresented individuals in PE. Tell us a little bit about what diversity does for your business.
WEAVER: Yeah. Well, it’s awesome what we can do. If you — the great thing about hiring for attributes over experience is that we can actually have a huge impact on diversity. So for example, if I said we’re hiring a CEO to run a healthcare software business and our criteria is they have to have done it for 20 years.
RITHOLTZ: Right.
WEAVER: Then I’m — that battle has been won or lost 20 years ago.
RITHOLTZ: Right.
WEAVER: Yeah. I could hire someone who’s a diverse candidate from one of my competitors, but I haven’t really created any value. If I hire someone right out of business school, let’s just use women as an example and that woman wouldn’t have necessarily seen a path to become a CEO, and I can provide her a clear path, then I can actually increase the number of women that become CEOs, which is exactly what we’ve done. We have over 50% of our CEOs-in-Training that we’ve hired have been women. About 30% to 35% have been underrepresented minorities. And so we have — we can have a — we can really move the dial on creating more diversity in CEO ranks.
RITHOLTZ: That’s really kind of interesting. Let’s talk a little bit about software and services, why focus on those areas in particular?
WEAVER: So one of the things that we figured out, which probably took us way too long to figure out, is if you buy recurring revenue, there’s just a lot fewer things that go wrong. So we’re not unique in focusing on recurring revenue, but that we turn the dial in around that Great Recession time, and decided that was all we were going to do.
RITHOLTZ: And so it’s less focused on winning that one big sale and it’s more about building a business that has a fairly steady revenue stream?
WEAVER: That’s right. And then if you marry that with what I was saying before, about putting young people to run them, recurring revenue is really helpful because in the first year, they have a big learning curve. And you —
RITHOLTZ: Right.
WEAVER: You know, they — we need them to have a little bit of a cushion for them to get up to speed. So recurring revenue helps a ton because it does take a little while to learn how to be a CEO.
RITHOLTZ: That’s really interesting. Software obviously has been really hot over the past couple of years. Any chance that that changes or slows down, or is software just the driver of the future?
WEAVER: I mean, I think software is the driver of the future. And I think anything, even the driver of the future can get overpriced.
RITHOLTZ: Sure.
WEAVER: And you can overpay for any asset. And I think in the last few years, you know, people have gotten a little ahead of themselves with some of the multiples that were paid. But I don’t think that changes fundamentally that I think software — you know, software is here for a long time and it’s got a lot of really exciting trends.
(COMMERCIAL BREAK)
RITHOLTZ: I’m going to ask you a question. I’m going to have you put this back earlier in the hiring discussion because I missed something and I want to come back to it. You’ve discussed episodic versus programmatic hiring. Explain the difference between the two.
WEAVER: Yeah, great question. So I might have made up those two terms, but —
RITHOLTZ: Well, that’s why it jumped out at me. I don’t know what either those things are. I have to ask that question.
WEAVER: I think I did make them up, but — so episodic hiring is what everyone does. Okay. We need a —
RITHOLTZ: We have an opening.
WEAVER: Yeah.
RITHOLTZ: Fill this — go to LinkedIn —
WEAVER: Exactly.
RITHOLTZ: — put out an ad, get me somebody here.
WEAVER: Exactly. Or yeah, we’ll hire Russell Reynolds to get us a CFO, whatever. That’s how everyone hires. That is two problems — well, a number of problems. One is it’s slow, and two is it’s expensive. And three is it actually doesn’t even work that well. Like, the hit rate is pretty low. The hit rate across the board in hiring statistically is about 50%, but that’s measured as are they still there in three years? Not this they — were they successful? So it’s even worse than that. So that’s the problem with episodic hiring.
So programmatic hiring is you’re going to hire the same role a lot, and so how do you make that more of a program? So for example, you know, we’re hiring 17 people from business schools that start next month, or we’re hiring 27 undergrads to be interns who will matriculate into full time roles. And so, there’s a group of people that are graduating. You can kind of have a class of folks. You can give them way more training. You can build a whole program using the — to use the programmatic term around that, and it’s just a lot more effective.
That’s two roles that we do at Alpine, the CEOs-in-Training and then the analysts. But then in our companies, you know, in some cases, that’s engineers, technicians, where that’s their recurring hire that they’re doing. And we’re helping them build programs to start with people who don’t know how to do those functions, and bring them up, you know, through training to learn those.
RITHOLTZ: Really quite interesting.
WEAVER: And you can scale — you can just scale a lot better, and you have a way higher hit rate doing that.
RITHOLTZ: So you’re constantly maintaining a pool of either potential hires or actual employees that you’re waiting to promote?
WEAVER: Absolutely. Yeah.
RITHOLTZ: Before we get into the current market environment for private equity, I have to circle back to you teaching at Stanford, at the graduate school, tell us a little bit about the courses you teach and what students learn.
WEAVER: So I teach two courses there. I teach — they’re both — they’re both basically similar. One is for first years, and one is for second years, but they’re both centered around entrepreneurship. And the idea of the courses is that there’s lots of classes on analysis and accounting and finance; and there aren’t a lot of classes around how to actually manage people, lead people. And I’m talking the nitty-gritty stuff of literally like what to say, if you have to fire someone. My students have to rule — my students will say, “Oh, I would just fire that person.” I said, “Okay, great. I’ll be them and you tell me.”
RITHOLTZ: Right. Fire me.
WEAVER: Fire me, and then they have to do it and they realize —
RITHOLTZ: It’s harder than it looks.
WEAVER: It’s a lot harder than it looks. So they’ll say —
RITHOLTZ: That’s why people just cheat and send email. He’s so mortified.
WEAVER: Yeah. That would not be something we teach. We do not — we not teach people to send an email.
RITHOLTZ: So tell us about the role-playing. What does that —
WEAVER: So we — so the student will actually play the protagonist in the case, and I’ll play the antagonist for lack of a better word of the other characters. And then they’ll fire me, or they’ll have to demote me, or they’ll have to tell me that they no longer want to be my partner, or whatever the situation is that they’re trying to get through. And then we’ll play around with it. And they’ll realize, you know, some things they do right, some things they do poorly.
And then the entrepreneur about whom we’ve written the case is in the class, and so then they’ll chime in and say, “Well, wow, this is — you did this this way, this is why I didn’t do that,” or “I wish I would have done it that way. Instead, I did this.” So it’s a really — it’s a really, really fun class. It’s — and it’s something that they don’t get anywhere else where they actually have to kind of implement the stuff they’re talking about.
RITHOLTZ: So aside from firing, what else do you teach them?
WEAVER: So everything, we actually teach a lot on hiring. We have whole modules and playbooks and videos and things I’ve made and we do a class on that, which is really important. We talk about complex partnership issues, things with your board. They have to sell stuff. They have to fundraise, how to make an offense and defense deck to sell — to sell something, you know, a whole list of basically things that entrepreneurs are going to have to face in their life.
RITHOLTZ: Really intriguing. I have to imagine having been a graduate student at Stanford, it’s deeply satisfying teaching there.
WEAVER: It’s a blast. I started off as a case guest, where they wrote a case about me buying stuff in my dorm room, and I was a case guest and I kept — I would come home all energized. And it was my favorite day of the year. And then when the — Irv Grousbeck, who wrote the case about me, who’s a legend at Stanford, when he — he called me one day and said, “Hey, you know, I’m going to stop teaching this class, would you want to teach in?” And my first response was, “No, I have a job, you know, and I can’t,” but I didn’t say that. I said, “Hey, I’ll think about it.” And then, thankfully, everyone I was around was like, “Graham, you have to do this. And it’s your favorite thing you do.” And we figured out a way to make it work. So it’s a blast.
RITHOLTZ: That sounds like — that sounds like it’s a lot of fun.
WEAVER: One more thing I would just add is what I realized after a few years is I’ll teach students all about entrepreneurship, and we have this great class. And then they go take a job, you know, in consulting or investment banking; they never become entrepreneurs, even though that was what they wrote their essay about and that was what they’re excited about.
So I added to the class a whole part on, okay, wait a second, what is it you really want to do with your life? You know, what’s holding you back? How’d you make a plan to go do that? What are your limiting beliefs? What are the things — what are your fears? So we have a whole thread, probably 25% of the class is on those things because I’m like what’s the point of teaching people to be entrepreneurs if they don’t become entrepreneurs?
RITHOLTZ: Right.
WEAVER: So I’ve invested a lot into, like, personal growth. And that’s a really, really fun part of us, too.
RITHOLTZ: Are any of those skill sets transferable to consultants who arguably —
WEAVER: Oh, 100%, a 100%.
RITHOLTZ: — they’ll be working with other entrepreneurs and maybe haven’t been exposed?
WEAVER: Yeah, a 100%. It wasn’t so much that I have anything against consulting, it was just that the student at the beginning of the class said, “My goal is to do X, and then they don’t do X.” That was all.
RITHOLTZ: So tell us a little bit about your approach, what’s your process like to finding a potential acquisition target. And since we look at both private and public markets, what do you think of in terms of valuation? How do you come up with a number?
WEAVER: Yeah. Yeah, great questions. We have a large team that looks for potential companies. We have actually 52 people at Alpine and in our portfolio companies that are looking for deals.
RITHOLTZ: 52?
WEAVER: 52.
RITHOLTZ: So that’s a lot of people.
WEAVER: Yeah.
RITHOLTZ: How big is the firm overall?
WEAVER: Overall, if you include the CEOs-in-Training and we have —
RITHOLTZ: And your 1099 consultants.
WEAVER: We probably have roughly 200.
RITHOLTZ: All right, so that’s a —
WEAVER: Yeah.
RITHOLTZ: That’s a decent size.
WEAVER: The 52 also includes a number of people that are working at the company who’s doing sourcing, but they’re doing the same thing. They’re calling companies, looking for investments. So we have 52 people looking for deals, and then a lot of those conversations are directly with founders. And what we’re trying to do is figure out — the way we think about it is we can pay a price, that we can hit our target returns, which I can’t talk about on, you know —
RITHOLTZ: Right.
WEAVER: But if we can hit our target —
RITHOLTZ: We all have compliance departments.
WEAVER: So we can pay a price so we could hit our target returns with like a 70% base case. And then we need there to be a lot more upside to that than downside. So we want there to be like a case where we could hit many multiples of our target returns. And so based on that, we kind of back into a price. And then where we get in trouble or where things get turned down at Investment Committee is when everything in the world has to go perfectly to hit that target.
RITHOLTZ: Right.
WEAVER: Because I’ve been in this business for 28 years, and when you start pricing in perfection, that’s a time when you realize you’re overpaying.
RITHOLTZ: Right.
WEAVER: So that’s — it’s that 70% probability and less a margin of safety thing that you really — as someone who’s like a little bit more senior at our firm, I have to bring that to the discussions.
RITHOLTZ: Yeah. That perfect 10 stuck at landing, those are the outliers. You certainly can’t rely on that.
WEAVER: Exactly. You can’t underwrite to that, for sure.
RITHOLTZ: Yeah. So when you look at this macro environment, it seems to be pretty supportive of economic expansion generally. How closely do you pay attention to things like, hey, the Fed is raising rates pretty rapidly, maybe they’re going to cause a recession next year?
WEAVER: We pay attention to it to some extent. If you go back to the ’08 crisis —
RITHOLTZ: Now, that’s a recession.
WEAVER: Yeah. And we’re just in a very different position. I think we’re way underbuilt on housing. So you know, I don’t see —
RITHOLTZ: Wildly.
WEAVER: Wildly underbuilt on housing, so I don’t see — you know, I don’t see things happen — you know, crashing there. I think we have — the consumer isn’t as leveraged as they were back in 2008. Businesses aren’t as leveraged as they were. I just think it’s a lot healthier. On the flip side, we also don’t have — the Fed can’t print money like they did in ’08 because of inflation. But I think, generally, it just feels like we’re a lot healthier than we were back then.
RITHOLTZ: Right. You’re singing my song. I’m in the exact same place. I’m kind of perplexed by all the recession chatter. I mean, what are we? 27, 28 million new jobs in this year? That’s not what you usually see. Although, to be fair, some past recessions, we were creating jobs right until the moment it stopped and the bottom dropped out. But you know, it really depends on how aggressive the powers that you’re going to get about inflation.
So here’s the question related to that in ’08, ’09, let’s say the naysayers are right and the end of this year or 2023, we see something more than just a mild shallow recession, we see a real recession. How does that affect the companies you look at? And do you start doing, for lack of a better phrase, distressed private equity investing?
WEAVER: You know, I think that what we’ve been trying to do over the last 14 years is underwrite companies that would do well in a recession. So hopefully, we’re going to — our company is going to hold up well in that time. In terms of what we look for, it does open up the door when — you know, when there is a recession, there’s a lot more different things that are for sale at different prices. And I think one of the great assets is if you have a whole team of managers that you can put in to run distressed things, you have a lot of options open to what you can look at. So there — you know, there will be a lot more interesting things to do with, you know, if that happens. Certainly, we don’t wish that on the economy.
RITHOLTZ: On anybody else. And then, finally, I have to ask about the way you score software companies and services companies, you use a metric. I really am not familiar with eNPS. Can you tell us a little bit about that?
WEAVER: Yeah. So I think in general, that there are leading indicators and lagging indicators. Lagging indicator is revenue EBITDA. Those are lagging indicators. But yet, a lot of managers, they try to manage to lagging indicators. It’s like — and that’s just not very effective. So what we try to do is develop what are the leading indicators that are going to predict success. And the number one most important leading indicator, you’re not going to be surprised to hear me say, is talent. So if you tell me, “I’m on the board of your business, and we’re starting to build the world-class management team, I can tell you in two years, we’ll have a homerun investment.” So one of those leading — two of those leading indicators related to talent are employee net promoter score, which is the eNPS.
RITHOLTZ: Meaning how employees rate their employee?
WEAVER: Exactly. Yeah. Would they — would they recommend this company to a friend? And we measure that every quarter for every one of our companies. We measure it at Alpine. We measure it for a whole bunch of different groups within Alpine. And then retention is the other big one. So if we can be managing those and getting those right, those are leading indicators that are going to help us set up, you know, the revenue EBITDA that come later. And those are hard things to manage.
Getting those metrics right takes a lot of work. That’s actually where I spend most of my time at Alpine, believe it or not, is making sure that we’re creating an environment where the best people want to be and stay. And most people again in the finance world, they don’t think about kind of squishy, soft metrics like that, but they should be.
RITHOLTZ: Well, because they have a really outsized impact on the performance of a company.
WEAVER: Absolutely. That’s my view is they have — they have the biggest impact.
RITHOLTZ: And my last question before I get to our favorite questions we ask all our guests, so a little bit of a curveball, you are a captain on a national championship rowing team.
WEAVER: I was. Yeah.
RITHOLTZ: Tell us about that.
WEAVER: So —
RITHOLTZ: You look like you row.
WEAVER: So I came to college not even knowing anything about rowing. I didn’t even know that the boats went backwards till I got in a boat.
RITHOLTZ: Well, it’s not that they’re going backwards. It’s just that you’re facing backwards.
WEAVER: Exactly. Yeah. I didn’t even know that. So I started as a novice, I walked on the team. And it seemed like everyone else on the team had rowed before, so I was horrible, absolutely horrible. I got cut, and then just kept kind of — and so there’s a funny story where the coach says, “Okay, these are the people who are going to boats. The rest of you are, quote, “land warriors.” And you’re a land warrior means you go on the rowing machines.
And so that night when he kind of posted the boats and I wasn’t in the boat, he said, “All right.” So I did this calculus, and I’m like, okay, well, gosh, all the land warriors are going to show up before class. You know, classes — first class is at 9:00. So they’re going to show up at 8:00, but — so I got to show up at 7:00. No, no, no, everyone is going to think that, so I’ll show up at 6:00. So I show up the next morning, zero people. And one of the guys is like, “Hey, idiot, land warrior is another way to say you got cut.” But I still stayed as a land warrior, and kept getting better at — getting my Erg times better and better over time. And it was one of the greatest things I ever did. I had a great time and —
RITHOLTZ: And when were they national champions?
WEAVER: My senior year, I was —
RITHOLTZ: So by then, you’re on the team?
WEAVER: By my — yeah, by my senior year, I was pulling one of the best Erg times in the nation at the rowing machine —
RITHOLTZ: Erg time?
WEAVER: On the concept to rowing machine like you see in the gym, they actually have a standard test, which is 2000 meters which you submit, you know, nationally. And by my senior year, I had one of and maybe a few times the number one Erg time in the country, and I was elected captain by my teammates of our team. And then that year, we were supposed to have a rebuilding year because we lost all these seniors and we actually won the whole thing.
RITHOLTZ: That’s amazing.
WEAVER: So it was awesome.
RITHOLTZ: Wow. That’s really amazing.
(COMMERCIAL BREAK)
RITHOLTZ: Let’s jump to our favorite questions that we ask all of our guests, starting with what kept you entertained during the pandemic lockdown? Tell us what you were streaming.
WEAVER: I went on this whole Buddhist thing during the pandemic and I started reading a lot about Buddhism and streaming Buddhism, and it was — it was amazing.
RITHOLTZ: Meditating or —
WEAVER: Meditating and just kind of learning about Buddhism, and you know, why we all suffer and how to — you know, how all these thoughts we have in our head, our own imagination. And I went on this whole kick during the pandemic, which was phenomenal. I highly recommend it. And basically, the concept is that your reality is going through a filter. And everything that’s happened externally, you’re telling yourself a story about what that means, and whether that’s good, or whether that’s bad. And that that’s really — your reality isn’t what’s happening, it’s the story you’re telling yourself and that you have complete control over that story.
RITHOLTZ: Right. That’s the classic narrative fallacy.
WEAVER: Yeah, that’s the narrative fallacy. And that’s kind of the fundamental premise of Buddhism, which is your suffering is coming, not from what’s happening, but the story you’re telling yourself. So I went on this long, you know, meditating and reading, and kind of journaling about that. And that was — that was a lot of fun.
RITHOLTZ: So the — we had this old joke about, we had a softball team here over in Central Park and we had the Buddhists playing the stoics and the game never finished. Everybody just sat down instead of having a long conversation. But I’m right there with you. You mentioned your — two of your mentors, who were some of your earliest investors. Are there anybody else you want to mention as mentors? The professor at Stanford you referred to also.
WEAVER: Yeah. I’ll — both of those, Tom Steyer. Doug Martin and Irv Grousbeck were super important in my life. I’ll talk about Irv. He is probably if you had — there’s probably literally, Barry, a hundred people you could have on this podcast that would list Irv as one of their most important people.
RITHOLTZ: Really?
WEAVER: Yeah.
RITHOLTZ: Wow.
WEAVER: He a professor at Stanford and just, you know, makes time for folks. He built an incredible business. And he just has this, you know, unwavering moral code. He was an early investor. He’s the one who asked me to teach at Stanford. And I just — I just find the way he set up his life and his — just the way he treats other people, you’re always the most important person in the world when you’re with him. And so, I’ve definitely learned a lot from him.
RITHOLTZ: Really interesting. Let’s talk about books. What are some of your favorites and what are you reading currently?
WEAVER: I — it’s funny, I ended up rereading like the same 10 books. In terms of my favorites, I read — I have some I read currently too, but “Good to Great,” Warren Buffett’s Biography “Snowball,” Steve Jobs biography by Isaacson, Walt Disney’s biography by Neal Gabler, “Switch” by Dan and Chip Heath, “Made to Stick” by Dan and Chip Heath, Buffett’s annual letters. Like, those are like — I reread those and every time I reread them, I get kind of reenergized. And we’ve modeled a lot of our business and a lot of my life around some of the things I learned in some of those books. And a lot of those required reading and help.
RITHOLTZ: I can imagine. What are you reading currently?
WEAVER: And right now, I started getting on this Brene Brown kick. I don’t know if you’ve read some of her stuff, but “The Gifts of Imperfection” I’m reading right now, which is just phenomenal. She is — I actually downloaded it on Audible so I get to hear her talk about it. But she has just this incredible way of talking about things that other people don’t talk about, like shame and how to — how to deal with the things you’re not good at, and how to be intellectually honest and admit when you don’t know things. And she’s — I love her work.
RITHOLTZ: What’s the title of the book you’re reading currently?
WEAVER: “The Gift of Imperfection.”
RITHOLTZ: It sounds really —
WEAVER: Yeah, it’s phenomenal. It’s phenomenal.
RITHOLTZ: Before I forget, just as an aside and you could edit this out. So I went to law school with a guy named Lawrence Cunningham, who was the first person who recognized, hey, all these letters from Warren Buffett, they’re really fascinating, deep stuff. He bound them.
WEAVER: Yeah. I bought that book. I own that book.
RITHOLTZ: That book has been like a perennial bestseller.
WEAVER: Yeah.
RITHOLTZ: And it’s — you know, the old joke about the two economists walking down the street. One says, “Is that a $100 bill on the floor?” And the other says, “No, if it was a $100 bill, someone would have picked it up.” It’s the same theme with that.
WEAVER: He picked it up. Yeah.
RITHOLTZ: These have been around for literally —
WEAVER: Yeah.
RITHOLTZ: I mean, I think he first started in like ‘90 or ‘92, something like that. And Buffett had been around for 30 years by then already, or 25 years, nobody had thought of doing that.
WEAVER: And you know what, like, it doesn’t matter if it’s crypto or software valuations or the Internet. The stuff Buffett writes about is still the right stuff.
RITHOLTZ: Fundamental common sense, block and tackling.
WEAVER: You’re going to discount the cash flows back and decide what you can pay. You’re going to put a premium on the discount rate if the stuff is a lot more uncertain. It’s this — it is exactly the right formula today and it was 50 years ago, and it will be 50 years from now. And anytime that there’s something new, where people says this time, it’s different, you should be really skeptical.
RITHOLTZ: Always. All right. Our final two questions, what sort of advice would you give to a recent college or business school graduate interested in a career in private equity?
WEAVER: Well, I’ll start with the first part, just general advice, and then I’ll go the private equity. But, you know, as you can imagine, I actually give this advice all the time teaching. But the first thing that I think a lot of people graduating don’t ask is like, what they — what do I want? What is five years from now, 10 years from now, if I could — if I knew I wasn’t going to fail, what would I want to do with my life? And they can start with that question. And then start working backwards from that about what job you should take now and next year and five years from now.
Instead, a lot of people just think, “Oh, these firms are interviewing on campus, and I’ll go here, I’ll go here.” And that’s okay. But if you know where you want to be 10 years from now, it will inform which firm you go to work and what skills you’re trying to acquire. So I think — I think that would be my advice is like, in 10 years, you will — you can do almost anything you set your mind to and so give yourself permission to really answer that question, what do I want to do in 10 years?
RITHOLTZ: Why does it matter if you quote, “know you wouldn’t fail?”
WEAVER: Yeah.
RITHOLTZ: Just to open the set of possibilities or —
WEAVER: Because — yeah, I always frame it as if you knew you wouldn’t fail, what would you do? Because without that, people already jumped to, “I can’t do this,” like subconsciously in the mind.
RITHOLTZ: Fear of failure, is that big really?
WEAVER: Fear of failure is so powerful.
RITHOLTZ: Even amongst really high performing talent —
WEAVER: I think it’s even —
RITHOLTZ: I mean, Stanford graduate students, I have to think that’s the cream of the crop out there.
WEAVER: In some ways, it’s almost more prevalent because they have had so much success, and they don’t — you know, they have this incredible track record. But I would say the number one thing that Stanford Business School students or really just about anyone in the world, it’s the same thing, which is their subconscious mind defaults to fear and fear of failure.
RITHOLTZ: That’s fascinating because when I have discussions like this with colleagues or friends in Europe, the thing — or even Asia, the thing that makes United States so unique in the developed economy world is that failure isn’t a scarlet letter, especially in Silicon Valley. It’s almost a badge of honor. Look at all the VCs that list all, “Hey, we missed Apple and Cisco. We invested money in Pets.com. Look how terrible we are, except for our 40% compounded returns.” It’s a badge of honor to say, “We tried this face planted, brush yourself off and moved on.”
WEAVER: But when you’re starting out your career and you don’t have anything to fall back on, and you haven’t yet had the success that you can look back, it’s really scary for people. And the thing that they miss is they underestimate what they could really do in 10 years and they underestimate themselves. They forgot what got them in that seat at Stanford Business School.
RITHOLTZ: Sure.
WEAVER: And they compare themselves to, you know, their roommate or their classmate or something.
RITHOLTZ: So the other half of the question is advice about private equity.
WEAVER: Yeah. I would say — I would say if someone is interested in a career in private equity, I would — I would say all private equity is not created equal. And there are — literally, like probably a thousand different models, and figure out, you know, go talk to a bunch of companies that are doing private equity in a whole bunch of different ways, and figure out what resonates with you and your interests and your superpowers, and where are you going to line up because it’s, it’s a very diverse industry.
And you know, there are some firms that are making their money based on, you know, hardcore fundamental analysis. You know, we’re making our money on talent. There’s others that are, you know, doing cost cutting. There’s a whole bunch of different ways and one or more of those is going to line up a lot better with what you’re excited about.
RITHOLTZ: And our final question, what do you know about the world of software services in private equity today that you wish you knew 28 years or so ago, when you were first getting started?
WEAVER: Well, two things. The first thing is I wish I knew that it was going to work out fine. So I was so stressed and I put so much pressure on myself, that I wish — if I could go back and tell myself anything, it would be like, “Hey, Graham, you know, it’s going to be okay,” because I went through a lot.
RITHOLTZ: That’s a really — that’s a really interesting answer because, you know, we just don’t realize how much we freak ourselves out and very often, unnecessarily. What’s the second thing?
WEAVER: The second thing would be I would — if I could have realized earlier on just how important the world of talent is, and how that was really the thing that drove performance because that that would have saved me a decade.
RITHOLTZ: It sounds really like you’ve honed in on exactly what makes your business work and really quite fascinating. Graham, thank you for being so generous with your time. We have been speaking with Graham Weaver, founder and partner at Alpine Investors. If you enjoyed this conversation, well, be sure to check out any of our previous 400 discussions that we’ve had over the past eight and a half years. You can find those at iTunes, Spotify, wherever you feed your podcast fix.
We love your comments, feedback and suggestions. Write to us at mibpodcast@bloomberg.net. Sign up for my daily reading list @ritholtz.com You can follow me on Twitter @ritholtz. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Robert Bragg is my audio engineer. Atika Valbrun is my project manager. Sean Russo runs all of our research. Paris Wald is my producer.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.
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