FULL TRANSCRIPT

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slava (00:01.826)Hello and welcome to another episode of Smart Humans. I'm very excited for today's guest. He has a long history of becoming one of the best private equity investors in the world with over $15 billion of AUM under management. Very excited to introduce Stuart Cole, co-CEO of the Riverside Company and also a friend to join for the show. Hi Stuart.

stewart_kohl (00:24.074)Hey, Slava, how are you today?

slava (00:26.802)I'm good, I'm good. So we always like to start with the same question, which is how did you even get into what you do? How did you get into alternative investments and show us the path of how you got here?

stewart_kohl (00:41.302)Of course, and I'll start by warning your listeners not to try this at home. It worked well for me decades ago. I don't think it would today. I was doing something completely different out of Oberlin College when I graduated for about 10 years. And that took us to the mid-80s. And I was reading a lot about these things called leverage buyouts. And I thought that would be really fun and exciting to be a part of. Mind you, I had never taken a finance or accounting course.

course, and I am not exaggerating here, I could not spell Ibutiae. But that didn't stop me from my dream. And through Oberlin Connections, I was very fortunate to get ultimately hired by an arm of Citicorp, which ultimately became Citicorp Venture Capital, and learned the business and applied my trade there for five years.

slava (01:34.97)And what were you studying at Oberlin since you said you didn't know, you know, finance or accounting or what EBITDA means?

stewart_kohl (01:42.734)I was an economics and government major. And I was very involved with the cooperatives at Oberlin, the student housing and dining co-ops feed and or house about a quarter of the student body. So it's pretty big business and it's all student run. And that was a lot more fun than my courses. So ultimately, I was president of the Student Co-op Association. And I like that so much that for the first 10 years of my career, I worked professionally with cooperative businesses. So.

think about all kinds of co-ops, housing co-ops and agricultural co-ops, credit unions, worker co-ops. And it was a fun and exciting 10 years, but again, I was itching to do something different and this is what that led to.

slava (02:27.746)So I mean, economics is not that far away from finance. Were you doing something before you got into leveraged buyouts?

stewart_kohl (02:34.79)Now, economics was pretty far in those days. It was mainly macroeconomics and a little bit of micro. But again, no finance, no accounting. And in those days, it was very theoretical, not highly applied. So I had held a variety of jobs through high school and college, but all those were just really to pay the bills, if you will.

So I've really only had the two careers. I've had the 10 years working with cooperative businesses and now the 35 years of doing what I'll describe as alternative investing, but I'm sure by the end of the podcast, we'll have narrowed that quite a bit from the range of alternative investing that you apply.

slava (03:21.822)And just for the audiences understanding of what you do, can you give us like perspective on, you know, what is your business today? What is the core thing that you're doing? What's the size of it? The people they am just, you know, for people that don't know.

stewart_kohl (03:35.842)Sure. As I mentioned, Riverside Company has been around now for 34 years. During that time, we've emerged as a leader among the private capital firms that invest at the smaller end of the middle market. And we define that as companies that have enterprise values of less than $400 million. You can translate that into sales, generally, again, under $400 million, or EBITDA generally under about $30 million.

But in many cases, less or even much less than that. We have a micro cap fund that focuses on companies less than 10 million of EBITDA. We have a product which is designed for young B2B SaaS software businesses that will invest in companies that have as little as three to five million of ARR. So we're doing dinky deals, but we do a lot of them. So in our history we've done, we've invested in

well over 800, almost 900 companies. And last year alone, we invested in 125 companies. Now that was a banner year for us. And the number I'm quoting includes both platforms, which is a new company that we established as our platform holding in that industry, and then add-ons to that platform. And it's very typical for us to do three or four or five add-ons and not unusual for us to do.

five to 10 add-ons to a platform. Just to finish answering your prior question, in terms of scale, we have 250 employees spread out across 15 offices across four continents. We are investing across North America, Western Europe and Australia. But we also have a small team in China to help with sourcing and operations there.

slava (05:30.37)So just to repeat, just even in 2021, you invested in 125 companies that are worth up to about $400 million of enterprise value. So.

stewart_kohl (05:42.338)But if you include those add-ons, many of those are tiny companies. To decompose a little further, the 125 would be 50 new platform investments, which tend to be the larger ones, up to 400 million. But many of them are 50 million, 100 million, again, enterprise value. And then the add-ons, which can be literally any size, some are $7 million, but that's unusual.

slava (06:07.234)So there's so many questions I want to ask about your actual business of what you do today. But first, we want to get to know you a little bit more. So beyond your sweet spot of these buyouts and the private equity deals, what are you doing with your own investments? Meaning not Riverside the company, what do you like to invest into? There's real estate, there's art, there's crypto, there's NFTs, there's sports cards. What do you like to lean into? What do you shy away from? How do you think about diversifying your investments?

stewart_kohl (06:34.142)Yeah, I'm now going to probably start to disappoint you and your listeners because I'm very conservative in my own personal investing. And let me just give a little bit of quick history there. Once upon a time, I had more than all of my money invested in the Riverside and its deals, which is uncomfortable, but was a blessing for me personally. Over time, I started to have some assets outside of Riverside.

so much exposure to private equity through Riverside that I really had to be extremely conservative with what's outside of Riverside. So I invested mostly in municipal bonds. Now in those days, you could actually get a return investing in municipal bonds. We may be heading back for those days. And in fact, that ended up being good returns after the, and it was a blessing again, because during the global financial crisis, I had worried a lot about how Riverside investments would do.

but I didn't have to worry about how my personal investments would do. Um, post the global financial crisis, I realized that what I was doing, which is kind of a barbell, you know, most of my money in leveraged bets, uh, private and a little bit of my money and munis was not a sustainable form of investing. So, uh, since after that time, I kept increasing my exposure to the public equity markets, uh, with

the money outside of Riverside. And that, you know, I evolved to a 60-40 and then ultimately to closer to a 90-10 type portfolio. But starting.

slava (08:14.902)Sorry, when you say 60-40, you're referring to the public market 60 and 40, like municipal bonds or other stuff.

stewart_kohl (08:20.758)Exactly, 40 fixed income, which for me was overwhelming, overwhelmingly municipal bonds. Keep in mind, this is for the small portion that's not already in Riverside.

slava (08:26.674)and then you slowly shift.

slava (08:31.966)Of course, you're concentrated in Riverside. We know how that is. Lots of the guests have the thing that they're very good at, and that's where a lot of their investment is. So now though, you've shifted more towards 90% public equities and 10% into these.

stewart_kohl (08:39.803)Yeah.

stewart_kohl (08:46.206)That was a shift I made gradually. Let's say I was 60, 40 after the global financial crisis. Kind of you can think of it as a slope, but eventually getting down to about 90, 10 for that money. But along the way, I started to think about alternatives and you gave a great list of how many choices there are. Again, I'm not that adventurous.

For me, the things that I've done is I've added a real estate sleeve. I access that through a limited number of people that I know personally, that I think highly of who have spent their career in real estate. I think of them as people who I would be happy to have as colleagues and partners of mine at Riverside if they were doing private equity, they have chosen to do real estate, but they do it with the same...

ethical approach, the same thoughtful approach, the same analytical approach that we would use, and therefore I'm very happy to have them investing that money. So real estate is a portion today. Along the way, I have gotten quite involved with healthcare in a variety of ways, most importantly, as a member of the board of directors of the Cleveland Clinic. And I've seen the

incredible research that is going on, which I would define as both the passion of the investigators, the doctor scientists, as well as the results of that. And we're all living through this period that I refer to as the miracle of the molecule. Sometimes it's a little too miraculous, but you can take a pill for almost anything today. It's remarkable.

So I said to myself, I would like to have some exposure to that, but I basically washed out of Organochemistry 101. There's a reason I'm not a doctor today. And I have no way to really evaluate these. So in that case, I work through a firm that gives me exposure to young. And so I could go into public equity markets and just buy, there's lots of ways to invest in that through the public equities.

stewart_kohl (11:07.33)But I'm not looking to get an index type return here. I'm looking to either make a lot of money or lose my money. And I'm investing an amount that I could lose. But I don't want to do it in one company. I'm on my way to about a dozen of these investing in young biopharma companies. And it's too early to say how that's going to work out for me. And then I have to go ahead.

slava (11:32.542)Yeah, that was actually going to be a question, which is, you say you've invested into about a dozen. Are you doing those direct on your own? Or are you going through a fund to do those? Or?

stewart_kohl (11:42.454)So I do them direct, but they're brought to me by a firm that does this for a living and takes a promote, if you will. So you can effectively think of it as if it were a fund. But I retain discretion investment by investment. And do.

slava (11:59.766)Promote, promote meaning they take like a percentage of the investment that you might make.

stewart_kohl (12:03.878)They take a fee for the money they bring into the company.

slava (12:06.582)Got it, got it. And then you were gonna say another asset that you're investing in as well, or I cut you off there, sorry.

stewart_kohl (12:12.778)Yes, yeah, so no, I cut you off. So then I do also kind of watch the market for things that I think are less correlated to what I do for a living, Riverside. And with that in mind, I've, for example, invested in a fund called Primary Wave, which is in the music royalty space.

slava (12:40.046)That sounds so interesting. Tell me more.

stewart_kohl (12:41.898)Yeah, so this is actually starting to get a lot of press attention now, but if you were a musical artist, maybe you are. I know you're a man of many talents or outstanding on the grill, for example. Maybe you're maybe you're an outstanding musician, too. Now, if you were. If you were, and let's just say like Bruce Springsteen, one of my favorites, you would have a body of work.

slava (13:01.494)I don't think I ever got that talent.

stewart_kohl (13:10.798)over decades that pays royalties to you over time. A nice formula, except there's two problems. One is you're not going to live forever, although I think the boss might. So the royalty thing is not money you're going to get, it's money your state's going to get. And the second is royalties are ordinary income. But if you capitalize all of that.

and you sell it as a catalog, you get the money today, and it's capital gains. So a wide, you know, many artists have been selling their work. The other reason to do it is that artists are good at many things, but maximizing the value of an asset like this may not be one of them. So the firms that buy these, the rights, are expert at how do you...

for example, sell this music to score a movie. So there's more royalties coming from that. How do you even enforce all the royalty collection? How do you come up with related products around the brand? So they're much more adept and they can maximize the value. So I think there's a number of very compelling reasons why artists are and should consider selling.

and why the buyers of these assets can generate an above expected return, above risk adjusted return over time. And is it correlated to what I do at Riverside? Everything is correlated ultimately. The world ends, none of our revenue streams are going to, none of our discounted cash flows are going to pay out. But fortunately, the world ends far less often than we think it's going to.

I do believe a stream of royalties like this is a little different from the other things I'm invested in a little less corely.

slava (15:16.458)Absolutely. And the way you're getting exposure there is through a fund, not doing individual investments into catalogs.

stewart_kohl (15:23.062)That's right, because I have no ability to pick the winners and I would have no ability to maximize afterwards. So it's such an interesting question you asked because I'm obviously paying fees in carry. And I'm not morally opposed to fees in carry. In fact, I'm a big believer in fees in carry. Riverside collects them obviously, and we need those to pay for our 350 people and to do a great job for our investors. But...

But I have the ability to invest as much as I want in Riverside not paying fees in carry. So the decision to invest in a real estate project that might be promoted or a royalty, music royalty fund that has a promote is a decision I have to make that it's worth it to me to pay that to achieve the diversification. And diversification is something we can chat about this today if you're interested in my views on it.

I'm a believer to a point I have observed over the decades that some of my diversification has been de-worsification I said to myself this is great. I'm investing in something different from Riverside so I can sleep better at night, but the Return was that the amount I gave up in return made that not a wise choice

slava (16:43.062)Yeah, I mean, it seems like you really didn't start diversifying for a while, because you were very concentrated in the earlier days, right? So it's, right.

stewart_kohl (16:48.114)I really didn't have a choice. Private equity is a get rich slowly scheme. We don't make money overnight, we make money over time. And it took a decade or more, really much more before it can start to say there's some money that doesn't have to be all in on Riverside. I don't wanna lose the thought. You then listed many other things that aren't in NFTs and on and on.

There's the plethora of alternatives is remarkable. And I'm not participating in most of those, not because I don't think there's good opportunities there. I just haven't had the time to really think through and focus and find the right ways. Again, for me, it heavily comes down to the who. Yep. And I need to do a lot of who diligence before I do the due diligence.

slava (17:37.634)So.

slava (17:46.698)I like that. Back to the music rights. Is that really considered more of a yield play? More of a, kind of like, let's call it like dividends almost?

stewart_kohl (17:56.846)So great question and the answer to that would be yes, to a degree, but I think what's gonna happen is that the firms that are leaders in this space and primary waiver, where I'm investing is one of them, I think will, as they build up a big diversified library, that they will be able to capitalize, if you will, that.

royalty stream again, whether it's a public offering or bringing in private investment and that folks that are investors will share in the benefit of that. I think this will emerge as a, it's not going to be the biggest asset class just because just like art, it's, you know, can't go back and paint more monnaies right now to fill the pipeline even though there's plenty of demand.

stewart_kohl (18:55.262)intellectual property out there. The Beatles, think about the magnitude of these. So I think it's going to emerge as a meaningful asset class, which creates the potential for that to become some capital gains. But yes, along the way, it's mostly a play for distributions.

slava (19:18.43)Yeah, I mean, IP rights, I totally didn't expect to have this conversation here. So that's amazing that you brought it up. You know, you said you're not that into alternatives that you might not be as interesting to the audience, but you know, in the last few minutes, you said you got into real estate, you're doing health tech and other types of investments. That is kind of like binary big win or a loss, which is the exact opposite of kind of the slow and steady IP rights. So you really have an interesting portfolio there you're trying to put together.

stewart_kohl (19:47.974)I might be a Buick, not an Oldsmobile, but I drive a Tesla, but put that aside. I did miss one other thing, which is related to the health care. In addition to the miracle of the molecule, I am investing in some still relatively early stage cancer companies. Obviously, sometimes it's a drug, but often it's something else. And that just comes because fighting cancer

slava (19:51.233)Nice.

stewart_kohl (20:16.77)passion of mine. We've all been touched by cancer, although I hate that euphemism, nobody gets touched by cancer, you get clobbered by cancer. We all basically live in fear of a cancer diagnosis and for us, for our loved ones. And I like the opportunity to fight back. And some of these young companies are, I think, gonna have real breakthroughs, game changers.

I also in my philanthropy, I also have a real interest in things that would reduce if not eliminate cancer.

slava (20:54.11)Yeah, I share your thought about cancer. Actually, my dad died of cancer when I was a kid. Multiple.

stewart_kohl (21:00.062)I'm sorry. How old were you? Yeah, terrible.

slava (21:02.57)I was 15, multiple myeloma. I mean, great progress has been made in the last, you know, approximately 30 years. And that's based on, you know, a lot of people doing fundraisers and research and all that. And I know that you've been pushing that forward. I think it's called Velosano. So I think you've raised something like $30 million for fundraisers, for cancer research and grants. Can you tell us a little bit more about that? And what was the original impetus to even start that?

stewart_kohl (21:17.432)That's right.

stewart_kohl (21:27.714)Sure, I'll tell you about it first. Velo and sano, velo is a word well known to cyclists and I'm a pretty avid, though slow recreational cyclist. And it's speedy, it's Latin word for speedy and sano is for health or cure. So, velo sano means speedy cure. And it uses a pretty well established model of a bicycle event as our core.

although we've expanded well beyond just the bicycle event. And the way the bicycle event works is that riders sign up to ride distances of anywhere from six to 200 miles and people agree to pay them. Sometimes by the mile they ride, sometimes just a fixed amount. But it creates a very capillary-like fundraising system where lots of small gifts.

get aggregated to raise larger sums. Because you're getting a very interesting group of people very passionately involved, business sponsors logically want to join in and have their names associated with it. So typically, 100% of the cost of the event is underwritten by the corporate sponsors plus fees that riders pay to ride. And the bicycle ride is fantastic. So you're happy to pay a fee to have this great experience.

And that means that 100% of those small contributions you raise end up being available. In the case of El Osano, we've raised over 30 million. This is our ninth year. We just held the right this past weekend. So remains to be seen how much we'll raise this year. But last year we raised over $5 million. I'm hopeful we'll raise a similar amount or more this year. And what's really magical about that money is it is all

immediately deployed for cancer research. So we're not building buildings or endowing chairs. By the way, those are both also very worthy things to do that are part of the fight, but we want the next 15 year old Slava not to have his father die. And we don't wanna build a building that does research that 10 years from now find something. We wanna deploy that money next Tuesday.

stewart_kohl (23:52.874)and see what we can find. So the money gets immediately distributed. We have a peer review scientific council that makes those decisions. And it's invested in a very venture capital-like way. In other words, if a doctor or a scientist has an idea that they wanna prove out, we're willing to be the early money that lets them try to prove it out. If it's successful.

then they can go to other sources and most importantly, NIH to get much larger grants. But NIH, the paperwork you submit to NIH to get a grant looks about like that. And you need a national, I'm sorry, National Institute of Health, the government grants, and they're not in the business of funding, you know, things that are unlikely to work. They want to see some evidence first. So we're happy to be the early money and

slava (24:32.464)NIH being like a

stewart_kohl (24:47.802)Our 30 million that we've already raised and deployed, plus the money we'll raise this year, which is yet obviously all coming and be deployed, has already leveraged $22 million of government funding. So we're very excited about the progress that we can make. And in terms of how I got involved, I am an avid cyclist, a friend of mine had lost her mom to an ovarian cancer.

slava (25:04.278)That's awesome.

stewart_kohl (25:14.43)She is named for her aunt who died before she was born. Her earliest memories are going door to door, collecting money for the American Cancer Research. She was kind of cancer was her, touched her whole life. And she herself had the BRCA1 genetic predisposition and had to go through everything you go through. And later in life now as a survivor of cancer. So cancer is quote unquote, touched every part of her life. She's also a cyclist and she.

a road in something called the pan mass challenge 26 years ago and called me up and said, you've got to do this with me next year. So I did. And yet I was hooked. I did that for 16 years. And then nine years ago, said I would love to do the same thing, but I, instead of having to drive to Boston to do it, which is where the pan mass challenge is held, I would love to do it in Cleveland where I live. And I joined the board of the Cleveland clinic and

I was very pleased to find out there were some folks there that were familiar with this model and were willing to be a part of the launch of it. So today it's effectively an arm of the Cleveland Clinic and that provides us a lot of benefits to resources and scale and is also where the money goes for research.

slava (26:32.254)That's amazing. I love all that. Keep up the good work. My last question.

stewart_kohl (26:37.314)And along the way, we all have our cancer stories. And for me, many friends, many families, some survivors, some not, and most importantly, a couple of years ago, my brother, who was not young, but by my standards, was very young and vital and glioblastoma, a particularly just tragic, horrible, terrible diagnosis and form of the disease took his life. And he's...

I had lost two friends to glioblastoma before that.

slava (27:10.534)I'm sorry to hear that, I should get you, not that this will help, but this is my little way of, as you say, fighting back. I make a cancer sucks, so it sucks that say cancer sucks. So I'm gonna have to get you some of those. So the last question on this chapter is, you know.

stewart_kohl (27:20.746)I love it.

Please.

slava (27:29.142)before the financial crisis, you pretty much were zero in alternatives and now you've definitely, you know, moved into more alternatives. You said you've converged toward 90-10 public equities, bonds or fixed income. What percentage, if you just had to have an aggregate percentage for all these other alternative things, how much of that has eaten into 100%? Is it 1%, 20%? If you just had one number.

stewart_kohl (27:50.89)Yeah, yeah, so it's approaching another 10%. So if you think about it, then public equities traditional would be 80%. These other alternatives are 10%. And debt fixed income, if you will, is 10%. But it is growing faster and will

I believe, depending on how the public equity markets perform, will become a higher and higher percentage. Look, the reason not to do alternatives is that they're higher risk and they're illiquid in some cases. Some are actually quite liquid, but most of what I'm doing, once I invest in these little companies, it's either the company is going to succeed or you're going to lose your money. There's not a lot you can do along the way to change that.

stewart_kohl (28:50.058)So that would argue, don't put in money that you can't afford to lose or that you're going to need. But if you've reached a point in terms of wealth creation that you have the money you need to live, and if you lost it, your lifestyle would not dramatically change, then you have to ask yourself, what's gonna perform better, a bag of these alternatives?

or simply more in public equities, which is the null case, the default case, if you will, for me. And while public equities have been surprisingly rewarding for most of the last decade plus, and for most of the history of the financial markets in the US, obviously we're in a challenging period right now, but we've had lots of challenging periods before in public equities.

while they performed very well, the facts will show that the premium you get paid for taking more risk and illiquidity allows for ultimately outperformance from those assets if you're a patient. Now, taking more manager risk, I might invest in the wrong real estate, I might invest in the wrong biopharma or the wrong medical device.

I might be wrong in my guess on royalties, but it is a mixed bag. And I am betting that overall, the premium I will get paid for the risk I'm taking and the illiquidity I'm suffering will lead to outperformance. And I will therefore have generated more return than it would have if I simply, easy case would just be, you know, leave it in the public equity markets.

slava (30:43.774)Yeah, that's a great takeaway for the audience. Just that kind of, you know, you're rationally doing that math and trying to understand what the returns could be for the risk. And, you know, you think it's a good trade off. You you segued us here very nicely towards today's market. And today is an interesting market, given it's the day after yesterday. And now when this show goes live, you know, just to put into context.

stewart_kohl (31:01.282)I'm going to go to bed.

slava (31:08.782)We just found out that CPI number was hotter than expected and that had a significant impact on the markets you know a lot of risk off kind of

actions. So, you know, you're in the middle of all of this. You have to make decisions and understand the macro, the micro, understand individual companies. So I'm just gonna give you a kind of the mic to like, what's your point of view? Where are we today? Where are we headed? What do you think about inflation? What do you think about the stock market? What do you think about the economy? What do you think of where things are at with the globe? So take it wherever you'd like.

stewart_kohl (31:41.898)Yeah, so happy to answer the question, but with a caveat that I know won't surprise you, which is that even though I studied macroeconomics 100 years ago in college, I do not view myself as a macro investor. In other words, I don't, I never make an investment on the riverside side or even on the personal investing sleeve side because my macro view is X.

I make that investment because I, let me personalize it with Riverside, because I believe this company that we are looking, where we're talking with the owner, we have a very credible idea for how we're going to double or triple the size of the company and professionalize the company such that it's going to be worth more than we paid, hopefully two or three or five times more.

over a reasonable period of time. We typically think about five years. Macro is inherently in that because we have to make some decisions about headwinds versus tailwinds. And as a cyclist, I really understand the impact of headwinds and tailwinds. A slight headwind makes a long 100 mile ride like I did on Saturday a lot harder and a slight tailwind makes it a lot easier.

And we want to always be investing with a tailwind if we can. But the fundamental underwriting is a micro underwriting. All right, that's the caveat. My view is on the macro. The public equity markets will go up and down. I feel fairly confident of that. But over time, they will go up. I'm still.

positive on them. I think we've been spoiled by the returns over the last two to four decades because we've been in this pervasively low inflation, low interest rate period. And we've been in a period which has been, from a geopolitical perspective, relatively good. Now, people are dying, people are starving, people are on

stewart_kohl (34:04.506)under educated, people don't have social justice and opportunity. I don't want anybody to think, I think the world is perfect. The world is deeply imperfect and I believe over the thousands of years it's always been imperfect and hopefully is on a path to more perfection. But when you step back, I believe we've had a very good period.

You could argue that what's happening now, Ukraine, China, which is a concern to me, portrays a darker geopolitical period. You could argue, I would argue, that the internal divisions in our own country pose an existential type threat different than what we've experienced in the past, at least going back to the Civil War. But...

But I'm still fundamentally a believer that, you know, if you buy and hold public equities, you're gonna have a positive return over time. But probably less than the last few decades would predict and with maybe more volatility than we've experienced historically. If you're asking for more of a near-term prediction, I think the Fed's hand is being forced to have

higher interest rates and maybe much higher interest rates for a period of time. I believe I'm accurate in saying that Paul Volcker, who I kind of grew up under and I view as a bit of a hero, ultimately had to take interest rates higher than inflation to tame inflation. I believe there was one Saturday night he raised interest rates by 200 basis points over the weekend.

I'm not predicting we'll do something like that again, but I do believe that Jerome Powell is a student of history. I do think he wants to be perceived more like Paul Volcker, notwithstanding the difference in height. And I think the Fed is going to take a very activist approach to inflation, and that's going to have...

stewart_kohl (36:30.978)consequences for the economy. Do I predict a deep recession? I don't. Unemployment is simply too low. Put it the other way, the number of unfilled jobs is too high. And while again, there's tremendous pain and suffering, tremendous inequality, there is also tremendous wealth in America today. And the worst case of cabin fever I've ever seen, people are...

eager to get out and spend and enjoy. We all went through a very challenging couple of years with the pandemic and are still going through it in some ways. So I just don't see the ingredients that would lead to a very deep recession. Recessions are a normal part of the business cycle that they're required to set up the next period of growth. And the market could

go down quite a bit because we're seeing the market is reacting in extreme ways, not just being down 1200 points yesterday, but being up 5% the week before. It's very, it's a lot of sentiment in the market. There's a lot of program trading that goes on in the market to exaggerate. But putting the market aside, do I think we're going to go through like a deeper session? I've worked, my investment career included.

The first Gulf War recession in 91, the second Gulf War in 2001, not to mention the dot com bubble bursting. Of course, 2008-9, which we thought was lights out when it happened, it was terrible, the global financial crisis and a very difficult recovery. I'm not predicting something, things about that.

slava (38:21.302)So, just to dig into that for a second, so let's say it doesn't go to the depth of the financial crisis of 2008, but if interest rates stay high or...

have to go even higher because the Fed is pushed to go higher because you know you said inflation might stay you know up for a little while so let's just predict for a second that it stays above six for another year and then you said Volcker you know on a Saturday you know took it up two points because he had to take it over inflation right so let's just predict the same thing has to happen so are we going to get to Fed rates that lead you know to over six like some crazy numbers and in that sort of situation mortgage rates just being impossible real estate having an impact.

I mean, there is the potential for maybe not the financial crisis of 2008 or not the end of the world and lights out, but maybe that is, you know, a fairly deep recession. What do you think?

stewart_kohl (39:13.15)It's possible. My view would be more 4% to 5%, not north of 6%, but it's possible. Look, the housing market has cooled considerably already. Really interesting to see how sensitive really it is to interest rates and sentiment, and it's cooled a lot already. You could argue that the Fed should kind of view that as mission accomplished there already.

So I don't think that alone is gonna push them. The big, to me, the big thing that happened in the global financial crisis were the banks, the failures of the banks, the challenges the banks had. Banks are in very, bank balance sheets are in very good condition today. You could worry about the underlying loans, but I think banks have been pretty sober about lending even during this period of low interest rates and pretty good economy.

The regulatory environment for banks has been quite strict. So I'm not predicting that we're gonna have a bank led crash. Housing is gonna go. So yeah, what happened in 2009 is, if you think about the big headlines with Bear Stearns and all the issues that rippled through in the banking sector.

slava (40:23.762)meaning not as much like bad debt.

stewart_kohl (40:40.518)and then all the bad loans and then banks not making loans because of their balance sheets. I just don't see that happening this time around. Look, there's a lot of investment that made sense when interest rates are 2% or 3%. That won't make sense if they're even 5%. And that's okay. Those projects won't move forward for a while until and unless interest rates get lower. But I don't see

Again, I could be wrong, but I don't see a deep recession here.

slava (41:15.81)You mentioned a couple of times that the public markets might not see as good of a run for the next year or two, et cetera. Does that make you position anything differently or is the simple answer, hey, I invest for the long run, so I see some ups, I see some downs, I close my eyes and I just keep looking forward.

stewart_kohl (41:31.918)Well, keep in mind that overwhelmingly, continuously for 35 years, I've had all of my money, more than all of my money, then all of my money, then most of my money in Riverside in private equity. I keep saying private equity. We do some private credit. We do some what we call flexible capital, which is between equity and debt, but it's all private. It's all a liquid.

So that to me, to me, what's the best place to have your money in a period like this? Obviously, I'm hopelessly biased and your listeners need to know that. But to me, the best place to have it is in a private company that is growing profitable and has pricing power. That has proven its ability to increase prices faster than its costs and faster than inflation.

faster than its wage rates increase. And you and I have not talked about wages, but to me, that's the biggest risk right now in the equation is that after an extended period of arguably wage increases that were too low, it's not, you know, for the average worker, it's not been a rewarding enough period. We're gonna need to make up for that and we are. I think you're seeing the leading edge of that with, you know.

there was so much controversy about whether we should raise the minimum wage to $15 an hour. And basically, most companies need to pay more than $15 an hour just to get, you know, good sober employees to come to work. So, um, it's, uh, to me, to me, that that's the biggest risk, but, but if you can, if you have the privilege of investing in a company like that, that's a great place to have your money. That's, you know, and that's what.

firms like ours do. We look for those companies and we support them.

slava (43:27.81)How do you suggest not everybody gets to run their own PE, private equity organization? So like the listeners, some are accredited, some are not, some have significant wealth. How do you suggest they try to find that private company? Because it's obviously not a public company, right? It's not on the stock market. So.

stewart_kohl (43:32.686)I'm going to go to bed.

stewart_kohl (43:47.07)You know, look, public companies, you could say the same thing, go find a great public company. And for those who have the time and ability to research and find them, they're out there. But it's challenging because you've got to then figure out what's market sentiment and yet it's a great company, but it's fully valued or overvalued or it's a okay company, but it's undervalued. There's a lot of things to figure out. You know, I'm going to stop well short of giving.

investment advice and also from a regulatory perspective. I want to be very, very careful here, but folks should work with their financial advisors, their wealth managers. Once upon a time, I would say that they weren't very helpful in this regard because they didn't understand alternative investing and they mostly just warned people off of that. But I think today, investors

increasingly are expecting or even demanding their wealth managers to be knowledgeable, to be able to give advice about how to invest in other classes, on investment classes. And then of course, the emergence of platforms, and you're the expert here, that provide the quote unquote average investor, however you want.

find that the ability to get exposure to some of these other asset classes is a dramatic innovation in our markets. I mean, these things that just literally didn't exist, you know, not just a decade ago, but last year or two years ago. I mean, there's a real blossoming right now. And at the heart of the blossoming, I think, is a recognition by investors that, you know, some of them are...

you know, very high net worth and qualified purchasers, but others are accredited and on down and down, that a portion of their investments should be in classes other than the historic ETF or fixed income that they might have been investing in. And I would urge folks to become smart about that and to get the right advisors and to...

stewart_kohl (46:10.894)find the right platforms to do it. It's, again, the opportunity for outperformance comes, risk and return are opposite sides of the same coin. They're fellow travelers. They, you can't get one without the other. But that doesn't mean every investment ends up with the same return. Some work splendidly and some fail miserably. And

the right selections, there is the potential for meaningful outperformance with the right selections.

slava (46:48.962)So just as a quick commercial break here, we're running a little long. I'm okay with that. I just wanna make sure I'm about to dig into your Riverside experience. We probably have like about another 15, 20 minutes. Is that okay? Okay, great. This will be edited out. So.

stewart_kohl (47:00.152)Yeah, yeah, great.

slava (47:06.166)You know, that's a great segue into what you are actually doing at Riverside. You've invested into nearly 900 companies and a bunch of them you call add ons. Can you give us perspective of how you target those, you know, let's call it 200 platform companies. How do you identify them? And then what do you do once you, you know, invest? Are you fully investing into them? 100% is a minority investments, majority investments. Can you give us perspective on that?

stewart_kohl (47:30.67)Sure, of course. So in terms of how we find them, we have an origination team of about 20 people around the world who get up in the morning and they brush their teeth, I hope. They have a cup of coffee, I think. And then they get on the phone, on the computer, in a car, in a plane, and they talk to what we call intermediaries. And there are thousands of intermediaries. It does include the business owners themselves, but they're much harder to find.

but it also includes their lawyers, their accountants, their commercial and investment bankers and brokers. And we challenge them that anytime there's a company of the size or ilk that we might want to invest in being sold in the area that they cover, we'd like the privilege of considering it. And last year alone, they found 5,000 of these opportunities. Pretty quickly, you can whittle them down, about a third of them are worth spending time on, but that's how we find them.

What we're looking for are companies in the specializations where we focus in the size range we play in, in the geographies we're active in. And then most importantly, where we see that potential, the double or triple the size of the business through a combination of organic growth and add on investments. And when we find an opportunity like that, we fall in love with it, we're all over it and try to...

If it's a competitive situation, try to prevail in the competition. If it's a non-competitive situation, try to convince the owner that we would be a great partner, which gets to the second part of your question. Typically we're buying somewhere between 60 and 90% of the business. 80% is very common with the rest being owned by some combination of the management team and the prior owner.

who in many cases will continue to be part of the management team, but in other cases won't by their choice. That's the most common formula for us in terms of our ownership. So we are in those cases, the controlling owner. Now I wanna just take a quick pause. And as I mentioned before, we have a credit arm. This is separate. In this case, we're not equity investors. We're making a loan to a company.

stewart_kohl (49:51.466)It's being acquired probably by a firm like Riverside, but not Riverside. It's in the same areas, geographies and specialties that we focus on. But in this case, we're just looking to be the lender to that company and to the buyer of that company. And then we have this very interesting in-between equity product.

We call it flexible capital. When we get it right, it has equity-like returns with debt-like risk. And that is something we are particularly doing for B2B SaaS software companies. So that's a different format, because in that case, we're not the controlling owner. We're looking for a founder-owned business, in most cases, that is growing. It's consuming capital.

because it should be, it's losing money because it should be in the sense that it's spending all or more than all of its profits on growth, hiring more salespeople and increasing marketing expenses because it has such a positive CAC ratio and because it's adding so much value and we're happy to be a provider of that growth cap.

slava (51:08.45)So is that kind of like a venture debt where it's kind of like almost like a debt product with like an equity kicker?

stewart_kohl (51:11.385)Idiot.

Yes, you can think of it that way. And for a select group of those companies that perform exceptionally well, it can become then a pure form of growth equity, if you will, later. But it starts out life very much the way you described.

slava (51:30.942)And how do you decide whether or not you're taking the 80% actual ownership or whether you're coming in as a lender? Is that based on the seller deciding where they want you to sit or is that some other decision?

stewart_kohl (51:44.163)Yeah, it always starts with the seller. But it is interesting how often we meet a company that says, I know it's time for me to do something, and I'm not exactly sure what I want to do or what I should do. Then we are happy to help them think through their alternatives, because in today's world, you have a lot of alternatives. There are a lot more alternatives than business owners would have had even just 10 or 20 years ago. There's many forms of capital today.

slava (52:11.906)This might seem like a very beginner's question, but I think it'll be helpful. Why does your industry exist? Set a different way, set a different way. Why can't the entrepreneur or the management team that is running the company be able to achieve the results that you believe that your influence or whatever word one wants to use can then get to, the two to three X return or maybe even more?

Like why, you know, you're not obviously the only private equity shop. There's a lot of people that have done a lot of great work and a lot of great results. Why does that even exist? Can you kind of explain what the issues are in the market?

stewart_kohl (52:50.134)Absolutely. At the highest level, I would say it exists because the public equity markets work exceedingly well for a very small percentage of all the companies in the world. And that when I say work well, they provide capital for growth and they provide liquidity for owners. That's a small number of companies. Then you've got the thousands, tens of thousands, hundreds of thousands of other companies, which are the public markets don't work for.

But they have the same needs. They need capital to grow. They need capital for liquidity. Owners eventually die, get ill, God forbid. They have changes in lifestyle, divorced, retirement, wanting to go to the beach. So...

I believe that the private capital markets have blossomed the way that they have, not just in the US, but in developed markets around the world and to some degree, even emerging markets around the world, because we provide this form of capital. And the best players in this market, and I like to include Riverside among them, have realized that the optimizing solution is to provide not just financial capital, but intellectual capital.

So when we go into a company, it's not just a matter that we say, okay, you know, you want some liquidity or you want some growth capital, here it is. We also bring in our expertise and we help them to grow faster, to become more profitable, to fully appreciate the opportunities. Just looking at add-ons, which have come up multiple times in our discussion because they're so important for value creation.

Most private companies don't have 20 people brushing their teeth and drinking coffee, looking for the add-ons. They don't have the expertise to negotiate structure, finance, and close those add-ons. And even if they did, they haven't integrated hundreds of add-ons, which is an art. So the odds that they're going to successfully do all of that one off are relatively low. For us,

slava (55:07.042)So you're providing those almost like as a service? Got it.

stewart_kohl (55:10.21)Totally. And we're 100% incentivized to do it because it makes our equity more valuable and we're perfectly aligned because they own 20% and we own 80% of the value we create.

slava (55:24.258)And you mentioned multiple times, you know, the verticals are the spaces that we play in. You also said geographies, but outside of geographies, what are those verticals? What are the kind of the spaces that you're targeting?

stewart_kohl (55:35.15)Sure. The most active one for us today is SAS and other related technology companies, not high tech, more basic, but SAS. We love the recurring revenue streams. We have a significant vertical that's close to that we call tech-enabled business services. So think about all the ways to help companies to be more successful.

where technology, the incentive for them to outsource to us to help them is that we are doing it for hundreds or thousands of others and have automated the process, whereas they would have to do it manually or create the code themselves. That's a very fast growing area for us. Once upon a time, we, like almost all other...

private equity firms focused on manufacturing distribution. And that's still about 20% of what we do, but don't think about smokestacks, don't think about capital intensive cyclical businesses. Most of the companies that we own in that sphere, if you dropped what they made on your foot, it wouldn't hurt. And mostly we don't make it, the manufacturing is outsourced. What we want is that we wanna own the IP, the customer, the distribution.

And that's our focus there. Education training has been a very rewarding vertical for us, especially online training that is not nice to have, it's need to have. It's the training you need to get a job, to keep a job like CE, continuing education units, to get a raise or a promotion, to be regulatorily compliant. We love that type of business. Subscription model online.

The marginal cost of the next customer approaches zero. So as you scale, they become very profitable businesses. Again, recurring revenue because of the subscription model. Franchiseurs has become a nice smaller but passionate vertical for us. Again, we love the recurring revenues that come through the royalty stream from the franchisees.

slava (57:56.242)You mentioned the kind of target of the 400 million, up to 400 million of enterprise value, the 30 million, up to 30 million of EBITDA. Is there like an average? If I was inside your meetings and say, what is exactly our average? You know, was there an average enterprise value for 2021?

stewart_kohl (58:09.28)Yeah.

stewart_kohl (58:12.498)So our average EBITDA for a platform investment is below $10 million, and that translates to an average enterprise value of around $100 million, a little less. Add-ons, much less than that. Add-ons average out EBITDA of under $2 million, and the multiples are much lower there when you buy an add-on. So the average enterprise value there would be sub $10 million.

slava (58:41.282)Got it. And why is that your sweet spot? Why is it not smaller than that? And why is it not bigger than that? Why is that where you all focus?

stewart_kohl (58:51.55)Okay, so now I need to introduce my better half, a chap named Bela Sigethy. You introduced me as the co-CEO. It takes two of us at Riverside to own and run the firm and do what one normal human being would otherwise do. I know the title of this is Smart Humans, and we're humans, but we may not be that smart. So...

He and I have been 50-50 business partners for 30 years. And the first 10 years, we did small deals because we didn't have any money. And without money, it's easier to do a small deal than a big deal. But as we started to be able to raise bigger funds because our early deals were successful, we had the option to move up market, which is the very well-worn path in my industry. And in a series of discussions he and I had in the late 90s,

culminating in the year 2000. We said to ourselves, if we move up market, it may be more rewarding for us, but we doubt we're going to be able to provide better returns to our investors because we're going to be competing in more perfect markets with better players. By definition, the best players move up market, the less good players stay, and the bad players descend and eventually disappear.

So why don't we stick around at that small end? Why don't we achieve scale at the small end? Why don't we use the scale to enable resources at the small end and really build a sustainable competitive advantage? So that of the 34 years of Riverside, that's been our journey the last 22 or so of those years, or a little more. And it's played out as more and more small deals.

not bigger deals, spreading our wings to include flexible capital and credit, Australia, Europe, not just North America, spreading our wings, and then most importantly, better and better with incredible attention to process. Because if you're only gonna do a few deals a year, process doesn't matter that much. But if you're gonna do 125 deals, you better have like a great process and...

stewart_kohl (01:01:13.01)And we believe that process is actually not the enemy of creativity. We think it's the enabler of creativity. We think when you have a great process, you routinize that, which can be routinized, you de-risk that, which can be mitigated and you free up creativity, if you will, where it can really make a transformative difference.

So that's the model, that's the strategy. It's been very consistent now over those two plus decades. And luck beats planning. We started small, we discovered small is beautiful because we didn't have a choice. And now we continue to believe small is beautiful.

slava (01:01:54.154)Yeah, just to repeat something that you said that's so impressive is usually for an investor or an AUM manager, it's very easy to try to go after bigger deals to be able to take in more AUM. But you knew that you were good at the small and you stuck to the small, which challenged you to grow small through scale, which means you have to do more deals, which is a very easy place to flop, right? Maybe you were good at five deals, but can you do 15? Everything gets worse because the systems don't work.

But somehow I'm not going to call it magic, but you magically were able to build it to this massive scale, $15 billion AUM, 125 deals in one year, you know, with add-ons, et cetera. I know you mentioned process, but can you just give us one more sentence or two about like, what is that secret sauce that allows you to now do 125 and potentially you'll be able to do 200 without, you know, any loss of issues.

Which is very impressive because you have to add on more people they have to be part of the system They have to still stay quality you have to get out of the quality deals. So yeah, what's your answer that?

stewart_kohl (01:02:56.194)We've almost answered it, it is the people, but that's what we'll come across as glib. Look, Svav, you have to institutionalize it, you have to create processes, you have to get people who buy into that, and very importantly, you have to push down authority and responsibility. So while there are two of us who quote unquote, own and run the firm, the reality is the investment activities all occur in our eight product areas.

where those fund managers really are presidents of their own businesses. Bela, my partner and I are on the investment committee. We provide advice and guidance. We have a series of formal processes where we can weigh in on the key decisions. We have a lot of informal meddling that goes on to, but the reality is they are running their businesses because...

If we tried to do all of this with us sitting in our ivory tower, it wouldn't work. Then, because each of us cut our teeth at Citicorp, we saw both the best and worst of kind of big bureaucracies. But at their best, they institutionalized what needs to be done in a proper fashion. And we're...

big believers in compliance and process. And we've got a team of people that buy into that and want recognize that the success, ultimately the success of the enterprise requires us to be really disciplined in how we go about this business.

slava (01:04:46.05)That's awesome. We're coming towards the end of the discussion. So I'm just going to ask you a couple more questions, which is you being you, you know, we want to be more like your listeners want to be as smart as you as accomplished as you. So what is it that you're listening to? What is it that you're watching? What is it that you're doing that's helping you to be informed or helping you be Stuart?

stewart_kohl (01:05:05.61)Yeah, again, I'm a little old fashioned. So I actually read newspapers, not the paper version, but the digital version. My day is not right until I've read the New York Times, the Wall Street Journal, and the Plain Dealer. That's the Cleveland newspaper where I'm very involved. That's not sufficient, but it's necessary for me, because it does frame the big issues.

Then there's a private equity has emerged as a true asset class of an industry. So like all industry, it has its industry rags and the things that you must read. Sure. So a pitch book, PEI, there's a half a dozen or more now that I would, the deal that I would cite as being kind of must reads if you're in

slava (01:05:47.39)Is there one or two that you can mention that you like reading?

stewart_kohl (01:06:04.194)private equity, private capital. So there's a lot of reading involved for me. I would view those as being my primary source of news, of information.

slava (01:06:23.382)Gotcha. And then I think I read that you're really into jazz. Is that?

stewart_kohl (01:06:30.13)There's a myth about that. Okay, I have no musical ability. Let me start there. And let me just say that I appreciate music in the sense of as a consumer, but not like a crazy avid consumer. When I was on the board of Oberlin College, and I'm still emeritus but not active on the board, when I was active on the board,

slava (01:06:32.04)Oh, okay.

stewart_kohl (01:06:55.45)The number one priority for the college at the time was to build a new building to house its outstanding jazz program, which is part of the outstanding Oberlin Conservatory of Music. So even though I'm tone deaf, and even though I have no real knowledge of music, I was very happy to promote that, to be the lead donor, if you will, to promote that project.

because it was important to the college. Along the way, it was a lot of fun. You met a lot of interesting people and we built, I think, an outstanding facility, which is serving the students exceedingly well. But it's not because I have any special knowledge or ability or even a passion, if you will.

slava (01:07:47.702)Sounds good. So let's segue to the last question then, which is if I put you on the spot today and we had you back in a couple of few years and I asked you what is one specific investment that you would recommend, and I know you're gonna say no financial advice, yada, but what would be one thing that you would recommend to invest into that three years from now will have really interesting returns?

stewart_kohl (01:08:13.39)Yeah, yada, yada. So I am, look, I can't stop eating my own cooking. So I am passionate about the smaller end of the middle market, private equity investing. There's lots of good firms in the market today that we compete against all the time. So there's multiple choices people can make in that regard. Again, the key is to find the right advisor to help you find the right manager. And then I think private credit.

is fascinating.

stewart_kohl (01:08:46.362)So we talked about municipal bonds being the way I was expressing my desire to be in fixed income because I wanted something very low risk. And the problem is it's a remarkably low return. It's remarkably unrewarded. So and that's true. I think that's true in general of the widely available debt options.

Private credit is the loans that when we buy a company, the loans that we sign up to repay from a private lender. Those can have a low to mid-teens return. Default rates through the cycle is not me. This is independent research done by very credible sources, show default rates of

stewart_kohl (01:09:45.074)And by the way, these loans are typically made at some spread to the library or so for their variable rate loans. So if inflation is, God forbid, 8%, the interest rates go up accordingly. So to me, that's for people that don't want all the illiquidity and risk of private equity, but want some of that excess return.

I think it's an incredible alternative to traditional fixed income. You won't make three times your money. It's not designed to make three times your money. But if you made 12 or 13 or 15% current return, including credit losses and everything, I think you'd be thrilled.

slava (01:10:36.722)I love that answer, just the diversity of that answer is so unique on this show. So thank you so much for all your time, Stuart. This has been great. Just as a quick summer, you started, you know, in a macro world, macroeconomics, and here you are in the middle of finance. You started super conservative, just in municipal bonds. And over time, you now have a 10% sleeve in alts, you know, things like even music rights and obviously real estate and more.

My favorite line that you said in this whole show was, who diligence before the due diligence? That I will remember forever. You know, you told us about where music rights and IP rights are headed. The VeloSano work that you're doing, the speedy cure and all the contextualization, we really appreciate you sharing the stories there. You know, it's the best place to put money in and you just find a private company that's doing well. You make it sound so easy, but obviously you've done it for so many years. Risk and return, they travel together. We all should understand that.

And the way you've scaled this organization is really through process. It's an enabler of creativity. You said that yourself. Believe in the people and push down authority. I think that's amazing. And thank you for giving us your idea about private credit. We haven't heard that one yet. And getting 10 to 15% return with 1% risk or whatever is pretty amazing. So it's been a great conversation. We covered a lot. It went longer than expected. And thank you.

stewart_kohl (01:11:52.142)Thank you Slava, I thoroughly enjoyed it and that was an outstanding summary and you almost made me look like a smart human. Thank you. You too.

slava (01:11:59.95)Have a great day.

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