David Swensen walks into the office every day embodying Yale’s perpetual time horizon. The way he instills and reinforces that mindset is one of his many unique skills. Shortly after I left Yale and had a summer job at Brahman Capital, I was taking in a ball game in the old Shea Stadium with Yale’s longtime real estate star Alan Forman. I don’t remember what we were talking about, but I distinctly remember Alan responding to a concern I had a few years away with one of the office’s oft-repeated cliches, “Don’t be so short term.” At that moment, I realized how quickly and easily I lost sight of that all-important lesson, and I made a mental note to never forget it.
I recently remembered the phrase when speaking to a few friends in the institutional community about Arctos Sports Partners. Arctos is a first-mover among institutional investors buying minority stakes in professional sports franchises. I find the strategy attractive because of its business economics, scarcity of assets, and structurally limited pool of buyers. The pricing environment isn’t cheap pretty much anywhere in private equity (Brent Beshore’s Permanent Equity micro buyouts notwithstanding), but after spending fifteen years in hedge fund land, I am happy to own a great asset and let it compound over time.
One aspect of these conversations has me scratching my head. A few investors inquired about Arctos’ exit strategy. While relevant, the question feels like missing the forest for the trees. Yes, a sports team is hard to buy. Yes, it may not be easy to sell. Yes, Arctos has plans for an exit strategy. And no, I don’t think it’s important to the investment case. Exit strategies matter in value traps and roach motels. High-quality, novel assets find sellers when a marketplace broadens its ownership. The dynamic reminds me of Asian equities in the mid-1990s (then trading at single-digit earnings multiples), timber in the late 1990s (at low double-digit yields), and structured credit in 2009 (at high double-digit yields). All were good assets with no liquidity in sight that eventually found a strong bid.
Extending beyond Arctos, in a world where we grumble about short-termism, institutions with long time horizons are asking questions that imply a desire for managers to shorten their window. Our words lead to actions, which have consequences for our capital. In fact, private equity holdings are now expected to last only 3-5 years, creating repeated frictional costs on the path to long-term compounding.
I’m a proponent of long-life funds, continuation funds, and direct investments to improve the short-termism in private markets, but these solutions are only a small percentage of the universe. As a minnow among minnows in this space, the best I can do is remind myself time and again, “do