Vlad Barbalat on Permanent Capital, Branded Capital, and AI's Repricing of Risk

Vlad Barbalat

What is the thing? The thing is the balance sheet of one of the largest insurance companies in the world — one of the most diversified insurance companies in the world, Liberty Mutual Group, which has, I would say, two primary insurance businesses that ultimately feed the investment platform. First is the one most people are probably familiar with, the Liberty jingle — our personal lines business, one of the largest in the US. That's the home and auto component of our business. And then there's the business that's much more global in nature, and really serves a sophisticated set of companies, brokers, and partners, providing commercial and specialty insurance across many domains of business.

Those two insurance businesses ultimately seed an investment platform that takes the reserves as well as the surplus capital of Liberty Mutual Group and invests it for the benefit of our balance sheet — ultimately for the benefit of our policyholders, so that we can ensure our promises are always met and have the financial strength behind them. So we're about $120 billion in capital.

What's interesting about our platform is that it allows us an incredibly unique way of behaving as investors, which is to say we're not focused on any form of third-party capital — which has lots of benefits but also lots of challenges when you manage money. It allows us to think about investing from a long-term perspective, and it allows us to do the right thing, not the expedient thing. It allows us to maintain what I'd describe as investment hygiene. That's one of the most difficult things to do when you're managing other people's money.

The other part that's really unique is the ecosystem we're in, which allows us to grow our capital base in the service of our policyholders. We're not driven by shareholders, for example, whose priority is return on capital in the form of dividends and buybacks. That's not part of our structure, and it allows us, again, to think about making the right decisions, not the expedient ones.

Vlad Barbalat

What's really interesting to me is how insurance is one of these industries that serves so many different purposes. The way I like to think about it is that one side of our business — one side of our balance sheet — is all about protecting and syndicating that risk, allowing risk to be taken by people in the world. We have a way we think about that at Liberty: we want people and businesses to embrace today and confidently pursue tomorrow. That's what the insurance part of our business does.

When we sell those promises, when we take in those premiums, we then move them to the other side of the balance sheet and do something else that's really interesting for the economy and society. We invest that float, as Buffett would say — ultimately investing our policyholders' premiums in order to grow the economy, support the economy, invest in critical infrastructure, fund entrepreneurs, create jobs. Where we sit in the economy is quite a unique place. We do things on both sides of our business that allow us to protect and create — really, the foundation of commerce — and at the same time grow the economy. That's a unique spot.

Vlad Barbalat

120 is a snapshot — I think that number will be bigger next time we talk, a couple of years from now.

Vlad Barbalat

Exactly. So let's talk about the 120. I'd say you could probably think of roughly 70 to 75 billion of that as reserves. That could be described as tightly managed — again, going back to this notion that whatever happens in the investment portfolio, you always want to be in a position to fulfil that sacred promise of an insurance policy to your policyholder. But even there, I think we have quite a unique approach. We're not just buying investment-grade bonds, putting them in the drawer, and waiting for that coupon to come once a quarter and then, ultimately, maturity. That could be a sleepy, boring way to manage that kind of capital pool historically. We're quite innovative — we do a lot of different things that allow us to be a liquidity provider into that marketplace. But that's about 75 billion dollars.

I'd say you could think about the rest as broken out between what we describe as growth credit and growth equity. Those two pools of capital are growing as a function of our surplus, and they're a way we can really be a full-service capital provider into all parts of the economy. What we've done with our credit business is take an approach not of "public versus private," which currently gets a lot of headlines, but really: what is our levered corporate credit business? We've put those parts together. Our public credit — high-yield and leveraged loans — sits with our capital solutions business, sits with our direct lending business, and with our partnership structure focused on credit. All of them sit together, with one platform, one reporting structure, because we believe the expertise is what matters.

Vlad Barbalat

100 percent. The way I like to describe it: people very often start with a product — you could say direct lending, or high-yield, or whatever else. I think we ask the question, "What exposure do we want in the totality of our business?" Once you've figured that out and have the ability to build that portfolio of risks, the next question is, "What's the best way for me to get those risks?" And the options are many.

The challenge is most organisations don't have options. Some have only one way — to be an LP. So you go out, meet managers, and allocate capital. Others are direct originators of that risk. Perhaps that's a GP. And many more. Our toolkit is vast. So once we determine what exposure we want, we've got a lot of different ways of getting that exposure. This is really critical, because as an investor sitting in our platform, you have a choice set very few investors have — figuring out: do I want that in direct form? As a co-invest? In some kind of club format with other sophisticated investors? Or do I want to be an LP, because frankly the particular risk is so difficult to access, so specialised, that I have no aspiration of trying to replicate it — I'll view that as an extension of my workforce, and that's how I'll get the exposure.

Vlad Barbalat

Let me first tell you what it's not. It's not an attempt in any way to predict the future. In fact, one of the sayings we have at Liberty Mutual Investments is that we're not in the business of predicting the future — we're in the business of being prepared for all its eventualities. A house view that tries to predict where Europe goes, or any of that — I've been a macro trader, and I just think that game hardly works, and certainly doesn't work for an institution like ours. God bless those who keep playing it and are successful at it.

Our house view is much more about what long-term businesses and franchises we want to be in. Being in a business like private equity isn't a one, two, three, or five-year business — it has very little relevance to what our feelings may be on the environment over the next two or three years. What I always want to be is in a position to be valuable to our partners, to deploy capital into interesting opportunities, and to structure our risks in a way that's always cognisant of our obligations to Liberty Mutual Group. Those obligations aren't only about meeting our policies — that's sacrosanct — but Liberty Mutual Group is a large enterprise that can decide to add businesses to its structure, to acquire, and we need to always have the right balance of liquidity versus long-term investments to allow all of that.

So liquidity management is actually an incredibly important component of how that broader portfolio gets constructed. We know credit is going to be a large component of our business, and we want to make sure that anything we enter, we have the right level of expertise. For example, we haven't expanded much into the European market, largely because we don't think we have the right relationships or expertise there — even though that region is more interesting than it has been in the past, given the geopolitical dynamics, it's not where we're spending our time. Despite the size of the book, despite the growth, we continue to identify opportunities in the US that we feel a lot more comfortable with.

So largely US-focused asset classes, across different parts of the capital structure. It's a multi-dimensional view that gets developed but constantly refreshed at the top of the house for sensibility. There's no notion of "we have to be this and we have to be that." The market's changing, the world's changing — we need the liquidity to always react, but at the same time have permanence and stay in some of these businesses, because that's what makes you a good partner and a good investor.

Vlad Barbalat

Yep.

Vlad Barbalat

Yep.

Vlad Barbalat

Above all, if you're coming with a newish idea and looking for capital partners — one, we always want to get that phone call. By virtue of the approach I've described, the way we partner with people, these kinds of things tend to come as referrals rather than a barrage of cold calls, and that in itself is super helpful.

What are we interested in? There's a very wide waterfront of things we do, and we already know that. If something falls outside the waterfront, there's obviously a higher burden of proof — we may not have the expertise, we may not be able to find a fit in the book. But that's more rare. What's more interesting is: what's the unique proposition being brought forward? Those aren't frequent — it's not easy to be original in many of these industries and sub-industries. But we're willing to back people. We're willing to take a risk on people we believe in, if we see integrity, if we see an idea that makes sense, and if we can find a true partnership that serves both the originator and Liberty for the long run.

That links to something that's been very important to me in this role: what possesses a professional sitting at a stable, large insurance asset manager to take entrepreneurial risk? That's a cultural dynamic that shouldn't be taken for granted, because the easy answer is, "this falls outside my area of comfort, why would I take the risk?" We've been incredibly purposeful in developing a culture where people have the incentive, and are the type, to be curious and interested, and have the governance structure in place to actually take those risks. I view that component of the organisation as one of the largest and most important responsibilities I have — making sure we have people who will engage the right way. Because the first time someone turns that call away, or behaves in a way that doesn't demonstrate curiosity and entrepreneurial spirit, those referrals dry up — the reputation is built on that entrepreneurial spirit.

Vlad Barbalat

I really do believe what I described before — it's a unique place to sit in the financial system, in the fabric of the economy. You support the economy in two different ways. But specifically, why not just invest the whole thing in a bond portfolio and go away? That would prevent you from being a balance sheet that can adopt new technologies — that's obviously a constant in our world. It's a balance sheet that's able to adapt to the evolution of the economy. Risks are evolving all the time. The risks insurance companies took on 25 years ago are very different from today, and for sure they'll be different tomorrow.

Take data centres, for example — a totally different scale of asset and value than anything that's existed before. Insurance balance sheets aren't large enough to just absorb that; that's why you see an extension into all forms of third-party capital coming in. But that's an example of where, if you build a fortress balance sheet, you're able to do things others can't. How do you build that fortress balance sheet? Through two main engines of profitability. One is underwriting, but that's a thin-margin business. The other is the asset side — if you simply buy a 4 percent investment-grade bond, or a 5 percent one, versus try to achieve a 7, 8, 9, 10 percent return on the totality of your portfolio, it's all the difference in the world. It's a competitive business, where the amount of capital you have dictates the opportunity set available to you, both on the liability side and the asset side.

Vlad Barbalat

I'd actually reverse that. I think as a public insurer, you're not likely to be able to pursue what we're doing, because if you're a shareholder of a public insurer, you can bifurcate these two things: you say you've historically not been a sophisticated investor, you've been much more conservative, and so what I ask of you, management, is to deliver a very consistent margin on the underwriting, and I'd like to get as much capital back as possible in the form of dividends or buybacks. I don't need you to recreate an investment firm on the asset side of your balance sheet, because if I wanted that, I could just make that investment myself. That's a classic example of what conglomerates run into — shareholders generally don't welcome that approach. It's especially difficult if you're starting from scratch: why should you have the right to build a world-class investment organisation if you're not really starting there?

So I think the public sphere operates differently, and is held to a very tight standard on the underwriting side. The flip side is, if you're a mutual, you don't have the forcing function of shareholders to ensure you're operating at your best. But that's an optional feature of mutuality, not a requirement — the only requirement is that you can't raise equity. I think we've made the choice that we want to be an exceptional operator, including exceptional underwriting results and an exceptional investment organisation.

How does it benefit our policyholders? First and foremost, we're going to be there through thick and thin when trouble strikes. The other component is that our insurance businesses are incredibly diverse. Take a company like Progressive — incredibly successful, lots to admire, but very focused on a particular vertical, motor in the US. They're incredible at it, but those risks require a certain type of balance sheet — not particularly long-tailed. Our mix has risks that can come back from 20 or 30 years ago and be very fat-tailed. So it's really important to differentiate the balance sheet a company like Progressive needs versus a company like Liberty Mutual. Our tails are fatter; our balance sheet requirements are very different.

That goes back to what we describe as a flywheel: if we do well for our policyholders — underwriting efficiently, creating products that suit their risks, and then investing our capital well — we can perpetuate that strength in the service of our policyholders.

Vlad Barbalat

Product breadth — future risks that may not currently be visible to you but are going to evolve. We can be your partner in solving those.

Vlad Barbalat

That's right. I'd say at the most extreme, you can think of Berkshire as being that. People think about Berkshire's insurance operations — the most visible is obviously GEICO — but they're the insurer of last resort very often. The reason they can do that is because of that incredible balance sheet. I think Berkshire is in a universe of its own, particularly in the way shareholders have regarded Berkshire in not asking for capital back. But that's an extreme example of what you can do with a balance sheet like that.

Vlad Barbalat

Correct.

Vlad Barbalat

Exactly. We're incredibly diversified in our insurance businesses, and you're spot on in the way you've described what Ajit said — but we think about the similarity between our more esoteric lines, particularly in the commercial and specialty space, as very similar in spirit to the practice of investing: you're deploying capital into uncertainty to achieve a return. That's true across both. And the risks tend not to be six-month or one-year risks — they tend to be multi-year risks. The same disciplines and conceptual framework apply: how do you manage your reserves, how do you manage your liquidity. These concepts go back and forth between the balance sheet. To be clear, these businesses operate in their own spheres and ecosystems — not a lot of operational synergy, but definitely strategic synergy.

Vlad Barbalat

Yes, I do love America — we're going to celebrate America's 250th birthday this summer. When you're born outside the United States, you're exposed to a way of life that's very difficult to actually understand for those fortunate enough to be born here. You take certain things for granted, as though they're like gravity, because they just exist. But they're not.

I was born in Moldova, a former republic of the Soviet Union, currently an independent country right outside Ukraine. I was very fortunate that my parents decided to uproot their lives in 1990 and make the journey to the United States. To be clear, this wasn't a difficult decision — it was something people could only dream of, and we were very fortunate, for a number of reasons, to take the direct path that we did.

What's true in the US, and has always been true, is that the level of agency you have as a citizen or resident of the US is unparalleled anywhere else in the world. It's a vast country, with vast regional and cultural differences, and we've done an incredible job of integrating people into our society. If you have talent, if you have motivation, there's an infinite number of ways you can define what success is, define how you'll contribute, and live a life where you have the option to thrive. Not everyone thrives, but you have the option to — and that option isn't available to the vast majority of humanity, because you'll be burdened by your family's history, your ethnicity, your religion, your government's oppressive system, and an inability to move up the socioeconomic ladder because of how the economy is set up. All those things, in various combinations, are present just about everywhere. But in the US, you have an opportunity.

One of the ways I describe the fascinating thing about America is, believe it or not, through the lens of a croissant. I remember, as a kid in the Soviet Union, at about six years old, my mum would send me to go get bread. The way you get bread is you go to the bread store — there's really one, maybe two types of bread, there'd be lines outside, and you'd get your loaf. I never went hungry, so I don't want to overstate those impressions, but the view was very simple: bread is bread, so why would you need more bread? You get your loaf and go have your calories.

In the US, we take the exact opposite view. If you want to reinvent the croissant — which exists in a thousand different ways right around Union Square — you can do that. And if you can figure out a way to make it special to you, your customer, there'll be a market for it. What is the act of that? That's human creativity — people iterating, perfecting, continuing to apply and express themselves on something that doesn't necessarily need a different way of consuming calories, but it's beautiful. That's what drives people in the United States: constantly making little tweaks that make things better, and we all benefit from those.

Vlad Barbalat

At the highest level, you're not given permission to dream — you're born to survive. You're born with an attitude, a notion that you need to navigate these ways of life so that you can survive. I experienced difficult persecution, being Jewish in the Soviet Union.

Vlad Barbalat

That looked like being called out in school. I was a 9-year-old kid, and I still have memories of that. My parents experienced it in much more stark ways — as a Jew, you weren't allowed to pursue certain professions, or there'd be hard quotas on how many people could be in those professions. You'd be assigned where you lived. There were university quotas, and so on. I didn't experience those things directly, but I experienced a society where that was normal — Jews were persecuted, and many other groups were persecuted too. That was normal behaviour: overt, explicit persecution and bullying, all part of the social fabric.

When you're born into that, you're consumed by the notion of, "okay, this is my reality, how do I navigate it and survive?" Never mind iterating on innovation — I'm just trying to survive. At the same time, I was a reasonably happy kid, because when you accept those things as part of your life, you don't dwell on them, you don't think of yourself as a victim — you just accept them and form the rest of your life around them as constants. So I have both kid memories, happy memories, as well as some of those stark moments of greyness — a society with no spirit, no real art. That's not a statement on the people; it's a statement on how the society was constructed, and how it suppressed those otherwise natural human traits.

When you come to the US, you experience literally the inverse of that — this notion of individualism. It's the opposite of what you'd experience in a place like the Soviet Union, but I'd argue many other societies too. Like everything else taken to an excessive corner, you'd probably find issues with individualism as a way to construct a society, and we wrestle with those in the US. But what it does do is free a person to pursue their talents, their interests, and a network of friends they want to be associated with, in a way that's just impossible elsewhere.

Vlad Barbalat

Yeah. I'd first relate it to this notion of risk-taking — not assuming, not taking anything for granted, not being entitled to anything. That's a fundamental trait immigrants share. When you come with nothing, just looking for a life, you don't think of yourself as entitled to anything, and I think that carries through, no matter how your life in the United States ultimately evolves. You know you're not entitled to anything, no one owes you anything, and that permeates the way I go through my life.

We talked about entrepreneurship — why do this at all? Well, why not? Why wouldn't you want to make something better? We've tried to have that culture at LMI, where we don't say "this is good enough." If you're passionate about your work, and you really care about your craft, you're going to continue to iterate, because it's what you do, and it leads to better results. It's no different, in my mind, from that act of trying to create a better croissant — it exists in its current form, it's great, but you can make it better. Culturally at LMI, we try to make things better, whether it's our internal process, the way we engage the world, or the way we're willing to experiment with technology and move fast. All of that's part of our culture.

In terms of the investing activity, or the type of person we'd back — we look for traits of entrepreneurs, people eager to make the world better through the lens of whatever it is they're doing. I think the best investors are obsessed with their craft, not because they're financially driven. So we look for that in our partners: people who are incredibly passionate and good at what they do, able to communicate it and make it come across, and clear about what they're trying to accomplish — because if you can't communicate a brilliant vision, it stays in your head and doesn't get realised. Lots of things go into it, but passion for your craft is really important.

Vlad Barbalat

It's evolved. Through time we've created much more of those options. Historically, the primary way would have been to back a GP — a pretty narrow path, a perfectly good one, but I'd say we've been very focused on the same thing I described before: we want as many ways as we can to engage and help our business partners. First question: what's the exposure? Then: how do we best get that exposure?

The mix today is dramatically different from five years ago, both in the types of exposure and how we source it. For example, we used to have a meaningful amount of exposure to natural resources; we have much less today. One could have looked at that and said, well, natural resources is a way to get exposure to energy, or perhaps an inflation hedge — but the way we were getting it wasn't serving us well, both because we didn't have the capabilities to be operators of some of these energy businesses, and because they were quite narrow. When you're focused on an operating business, it can be swamped against a macro backdrop that says, "okay, energy prices are up, but why isn't this thing providing what I thought it would?"

Instead, today, one of the verticals we have is energy and infrastructure — both a credit and equity business — where in many cases we choose to own certain assets, or have ownership in them, but not operate them: capital across the capital stack, providing solutions, which sometimes lets us do things like provide credit but have upside exposure via warrants, or back partners in parts of the industry that are quite technical, where we'd never seek to reproduce that kind of insight ourselves. That's an example of diversification in our portfolio — are we benefiting in the moment from that exposure to energy? Absolutely. Would we have gotten the same level of exposure and benefit from our previous way of expressing it? No. Having that diversity of businesses and exposures matters, but I keep coming back to how you acquire that exposure — that difference can mean the difference between it actually being effective or not.

Vlad Barbalat

Branded capital could mean, literally, for one reason or another, you're viewed as someone a GP should engage with. That could be many things. If you're a mega-fund coming to raise through your fundraising cycle, branded capital could be a large state pension that will always write the big cheque. That's not what we do, that's not our brand. Our brand is to come and help you build a business. Our brand is to be quick in the way we ingest information, and come back with how we do or don't want to participate, so we don't waste your time. We operate much more like a GP in that way, and frankly look to hire people who come from GPs or operators rather than a traditional LP background.

Of course, we compete in a variety of spaces, but our reputation continues to build on the way we show up. Any one of our people who goes out into the world can do tremendous damage, or bring tremendous benefit, in the way they engage — because if you do great things with ten business partners, the next ten things get easier, because at least a few of those will come from that network. We're a hub of incredibly interesting relationships, and we've tried to approach that with all the care, diligence, and thoughtfulness I mentioned before. If I can identify a way we can be helpful to two or three of our partners and not be involved ourselves, we're always going to do that — because we really do feel these are valuable relationships and friendships, and we're rooting for our business partners. We know that, one way or another, that's going to help our business in the long term, and that's part of our value proposition.

Vlad Barbalat

Yes, that's exactly right. I think we want to be one of those institutions, but I'd say we want to be even more bold than that, because there's a notion of a name on the capital roster that allows others to come in — that's an asset you have as that type of LP. But we want to be more than that. We want to sustain it, maintain it, but also be known for our creativity to structure solutions, and our willingness to take risks that some institutions with that halo of a brand just aren't set up to do. That's not meant as a negative. In the venture ecosystem, for example, which you're so familiar with, we're not going to try to replicate that outside our organisation — that's where you're competing truly with other capital to get on the roster. In other places, that's just not the game. The game is: are you creative, are you quick, can you take risks that others don't even think about? The game is different across different types of exposure.

Vlad Barbalat

I love history, and I'm particularly tempted to engage with this. A couple of things I try to remind myself of: whatever it is you're living through feels particularly acute — it always feels like the sharpest moment, and it probably isn't. If you go back and look at people in earlier parts of life, they experienced things and thought it was the most acute thing too.

In my career I've now been through more than enough crises — some feeling like, "could this really be happening during my lifetime?" I distinctly remember walking, after a long day on Zoom, in March or maybe April of 2020. It was a rainy day, a ten- or eleven-hour marathon on Zoom, and I just needed to walk outside. I was thinking: is it really possible that my life happened to coincide with this moment in humanity, where a pandemic was going to completely upend society and human life as I knew it? I told myself the odds were very small, that it was unlikely to be the case. And then I remind myself there were many pandemics before that wiped out large parts of humanity, and yet humanity goes on. It's true that if you're living through that period, your experience is quite different from the lens of history many years later.

I have those thoughts over and over again about the unbelievable moment in technological progress we're living through. That feels really real, and very different, in a way that you can imagine society ten or fifteen years from now looking nothing like it does today. But that was also probably true during the Industrial Revolution — for people looking back fifteen years after the steam engine became mainstream, society looked nothing like it did fifteen years before. Is it really that different, or is it just continuous progress?

Then I think about geopolitics today, and it does feel like we're breaking the order that's governed economic flow and security architecture across the globe more or less since World War Two. You can argue there were major shifts along the way, like the Berlin Wall falling, but it's been a period where certain norms in international relations, and certain alliances, held through all that. It does feel like that's changing. That in itself doesn't affect investing much, if you're focused in the US. What does clearly matter is that the economic architecture is changing — from an energy perspective, from a supply chain perspective — and there are real investing opportunities and risks that evolve from that.

I continue to think the US is endowed with inherent advantages — the ability to innovate, the energy abundance we have. All those things continue to conspire for American exceptionalism. But we've also gotten quite accustomed to a world where just-in-time inventories were a thing, and now that's being challenged. The ability to identify the cheapest pockets of labour, or other competitive advantages, may face structural impediments, which has implications for inflation and rates. How does that balance against what I perceive as an incredibly deflationary impulse from technology? I'm not sure. I think we're reasonably good — not just at LMI, but people in general who like to think about these things — at identifying the variables that drive economic outcomes, but terrible at assigning weights to them. That's why forecasting is next to impossible: you may get the right issues, but you don't know how they interact, or what people do within the system to adjust and mitigate the roadblocks that come up. So I do think we're living through a moment — a reset in the way Pax Americana governs — but I don't think it's a reset away from American power in the world, at least on a relative basis. I think the world continues to need America.

Vlad Barbalat

What's super different about this technology, versus other versions of how this kind of thing has come about, is it requires people to engage with it, get a relationship with it, have agency with it. It's not a software package the technology department installs on your desktop that you then put your workflow through. It's an absolute superpower given to you, to get the thoughts out of your brain — a superhuman assistant able to rationalise your thoughts, present them coherently, interact with you. It makes you sharper if you go back and forth and jostle with it, and really become an editor, rather than just taking the first output it gives you and saying "good enough" — because that's where slop tends to live. If you just ask for something and take what you get back, it'll give you generalities and drive everything towards an average. That's what these models are. To get the best out of them, you need to engage your own knowledge, experience, ideas, and creativity — and it's amazing what you get back.

In investing, creativity is such an important part — the ability to take a well-organised, or obscure, set of data and find insights that aren't easily observed. That's the art of investing, and now you can iterate on that in powerful ways. I find myself using AI every single day, more and more so. And frankly, it raises other questions for me — the more I spend my day with AI, the less I'm spending with my colleagues. I'm beginning to worry about that. How much are you trading from those messy, human relationships, messy ways of getting information, for the interesting, smart, efficient way of interacting with artificial intelligence? I don't know how that's going to play out — if you take it to the max, it's almost isolating.

Vlad Barbalat

I'd start with one of the newer ones, which is really interesting: how do you think about valuations, not just in software — though software's been the most talked-about one — but businesses in a world where the future is increasingly invisible? It was perhaps always invisible, but you could get comfortable that certain things had a lot more staying power through thick and thin than others, and whenever you had that dynamic, you could put a higher multiple on things. That's how you rationalise paying a price for an asset. Today, you've got to ask: do I really know which businesses will thrive ten or fifteen years from now? That's really difficult — and it could be everything from software to maybe even Home Depot or John Deere, things not obviously in the AI crossfire. So that leads to the question of whether multiples should actually be lower across the board.

I don't think I've experienced a question like that in my career — where you question multiples based on macroeconomic variables, like "inflation's higher, rates are higher, so multiples should come down." This is different — you're literally saying the future is so unpredictable, how can I place a higher multiple on something? That's a fascinating question, because it comes against a backdrop of possibly very favourable macro, which historically would have just meant higher multiples. It comes against the backdrop of an expanding economy. Another way to put it: you will likely have trillion-dollar companies in 2030 that currently don't exist, and you probably have trillion-dollar companies, or many hundred-billion-dollar companies, that won't exist. We're starting to see that. So we're starting to see more volatility, and combined with tactical things — like perhaps the SEC not requiring quarterly earnings — you can argue that volatility is just going to be structurally higher going forward.

The other part I've talked about so far is through the equity lens. In credit, similar concepts apply. Am I worried about four-year paper in most software names? Probably not — they're contracted out, that's not a four-year issue, that paper should be money-good. Would I be worried about holding thirty-year credit on Salesforce or Oracle or any of these things? I think that's a much riskier proposition. That should drive steepness in credit curves. If that's a structural shift, it will change capital markets behaviour.

I go back to the fact that I haven't experienced a framework, or a time in my career — and I can't really identify something similar in history — where it's not really the macro conditions per se, although you could maybe call this macro, that are driving a potential repricing of equities and long-duration credit and volatility, all because it's uncertain how this technology will evolve and change the fabric of the economy. We've had things that changed the fabric of the economy before, but they were a slow burn — not something you needed to think about today. Take Salesforce: it's embedded in the vast majority of large companies in the US, and maybe globally. The first question isn't, "are people just going to code their own CRM?" No, of course not — that's absurd. The question is whether the trillion-dollar company I mentioned before, that isn't even around today, that's still an idea somewhere, will ever use Salesforce as part of their ecosystem. If the answer is no, that should be a massive headwind to the valuation of Salesforce, even though every Fortune 500 company may use Salesforce into perpetuity. It's going to slowly become a different business — a cash-cow business, deserving a different multiple. That's what markets are wrestling with in the public sphere, which has its own cascading effects into the private sphere.

Vlad Barbalat

I think public markets are substantially more difficult to hold than private markets. There are many parallels — you don't think about the value of your house every day, even though it changes hourly, but if you own a public REIT, you'll probably look at it every day and have some feelings about it. Fundamentally, though, equity exposure is equity exposure, so we don't think about moving between the two based on that dynamic. It comes back to what we own in private markets.

I think the more significant reason private markets have evolved the way they have over the past decade is that historically, you went public for very specific reasons: you needed to raise a certain amount of capital that was simply unavailable in private markets — they weren't robust enough. There was also a clear element of prestige to going public; it was a milestone in a company's history. The trade-off was giving up a significant amount of control, the ability to make decisions on longer horizons, and sitting through difficult moments, because public markets punish you — shareholders react, boards react.

Private markets have more or less addressed those challenges. You can now raise gigantic amounts of capital, so the capital need has been solved. The prestige and milestone thing has gotten diluted — these companies have grown so large, we all know what they are. And now the cost of being public is actually quite high, whether that's the literal cost of compliance, or people being careful about whether they want the pressures naturally present in public markets in how they run their company. Can you operate quarter-to-quarter, or does your business really need that three-to-five-year window that public markets very rarely give?

I think that's what's driven the growth of private markets. Some of that may mean-revert — regulatory burden, for instance, that's at least fixable. But the main reason, capital being available to you as a private company, I think that stays, and this balance will persist. If you're an equity investor, you should look at the equity risk first, and then decide the best way to get it. We haven't stopped investing in private markets by any means. There are other reasons our balance sheet specifically isn't best suited for public market exposure — that's specific to our balance sheet. It doesn't mean we don't participate, doesn't mean we don't take opportunities when they look particularly compelling. But we'll continue to largely focus on the private space for our equity exposure.

Vlad Barbalat

Yeah.

Vlad Barbalat

Goldman's one of those places where, when you're there, you're amongst such talented and driven people — it's a hard place to be, and a thrilling place to be, but you particularly appreciate it once you're not in it, because of all the things you didn't know you were learning while you were learning them. I think we brought a drive for excellence with us. That's the most overarching theme — I find it implausible to just sit still, to take something and say "this is good enough." It involves risk, but it's this motor that I think people who've been reasonably successful in these organisations have inherent to them — they're always pushing forward, even though another person might look at that and say, "why do you bother?"

Vlad Barbalat

I think about this a lot, and I don't know that I know the answer. As I've gotten older, I think about it in a very existential way. When you have a family, and think about the incredibly important lens that provides, particularly through your kids, you could split your identity in so many different ways, and if you over-swing to one or the other, something suffers. Everybody's got their own equilibrium. But I've continued to find that I get an incredible amount of personal satisfaction from building, and being part of an organisation that's making progress — that can mean product, customer experience, or the careers of the people around me. It's one of the most satisfying things in the world, to help other people progress through their careers. You don't think about that when you're younger, but it's truly satisfying. So I've gotten more comfortable, through time, spending more of myself at work than I did before. Before, I was wary of that, because I didn't want my kids to see less of me for being a workaholic. But my frame around it is that I'm not a workaholic — I'm obsessed with making things better, with being part of this organisation and team. It's not about you, it's about the organisation as a whole, and how it can keep getting better. That gives me real satisfaction.

I have three kids, so inevitably I want to set an example for them, as best I can, of what it means to be a productive human being, what it means to be a good father — unbelievably important — what it means to show them love and support and care. I try to do that as best I can every day. I think they'd say they get a healthy balance, and that balance moves through time. My 17-year-old, my firstborn, needs a lot less of me today than he did ten years ago. I think that's less something he thinks about, because it's so natural — it's something I think about, and grapple with: is it okay that we interacted for 10 to 15 minutes today? It might have been a high-quality interaction, but it was still only 10 to 15 minutes. I go to bed thinking about that sometimes. But I also think this is a forever thing — you think about your parents a lot less than they think about you. That will forever be true. It's true of your kids, and it's true of the way you interact with your own parents — they probably think about you much more than you think about them. It's just reality.

Vlad Barbalat

The downside of permanence is that people change. So even though the capital may be permanent, people come through the organisation, and you're always dealing with some version of "another team made that investment," or "there was a decision made in the past." You can dwell a lot on that — usually the ones being discussed are the difficult ones, not the good ones people are happy to absorb into their window of time.

Let me come back to that. What I've found about managing your own balance sheet, as opposed to managing third-party capital, which is inherently not permanent, is that it completely changes what you think about. When you're in a fund cycle, when you have to deliver returns to your investors and then think about the next one, you're consumed by the business you're running — investment outcomes are kind of a product you sell, but you're ultimately running a business, and your business strategy will always dwarf your investment process. No matter how many times you talk about your long-term horizon, the time comes when new funds need to be raised. If you're a public alternative asset manager, you care about how the market will give you the highest multiple, which then drives how you structure your business, and the craft of investing is inherently diluted, one way or another. It just is. That doesn't mean there aren't excellent investors, but they have to think about other things. In some cases that really does take the business away from the bespoke nature; in others, people stay small and try to deliver truly outsized returns because of how they approach the problem.

When you don't have to think about any of that — when all you're thinking about is how do I take my capital, deploy it into the world, get the right rate of return, and see the fruit of what that capital does — it's just inherently different. You're able to sustain much better investment hygiene. You don't have to worry about doing an investor update where some of your investors have circumstances or priorities that differ from other investors in your fund, creating tension, polluting your investment process with the nature of the business. We just don't have that. We're singularly focused on being in the service of our policyholders and our balance sheet, doing the best we can to deploy capital for the right opportunity and the right rate of return.

The other part you mentioned is very real: there's a downside to that permanence, because it can make people a little more complacent about the long term. I always try to be careful with saying we can make long-term decisions that others can't, because for the most part, when people say that, what you end up with is some form of excuse for why, sure, this isn't great, but it will be if you wait long enough.

Vlad Barbalat

Yes. I've always had this strange, fixed-income version of my thinking around long term versus short term — the ten-year rate is just a series of shorter rates that build up to it. So yes, you can talk about the long term, but the long term is constructed of a bunch of short terms, and you have to hold both truths. The ability to make long-term decisions and focus on the long term is really valuable, but if it becomes a crutch, an explanatory variable for why you're inconsistent or things aren't going the way you'd like, it's not useful — in fact, it's an impediment.

I'd add one more thing, because this is really important: I think all businesses have a constraint of an annual calendar. That's just how we've structured ourselves — some have it very acutely, on quarterly constraints, but the annual one matters for everybody; everyone has some notion of a financial plan or objectives to hit annually. But very few businesses actually have those horizons. So you have to hold both truths, particularly when you're responsible for the organisation: your business isn't a one-year business, we know this, and anything can happen in a one-year window — yet that one-year result has importance to your stakeholders. The way I navigate that is to be cognisant of the calendar year, but establish three-to-five-year targets and put yourself on the hook for those in a much more meaningful way than the one year — or at least make sure more people in this organisation are really on the hook for the three-to-five year than for the one year.

The other part is that all businesses with this dynamic require a great degree of transparency from all your stakeholders, in order for you to ride those waves — because if your business is opaque, not understood, and volatile, that's a recipe for not being supported through difficult times. I try to always remind myself, and my leadership team, that transparency is what allows you to have autonomy. No transparency, no autonomy. Critically important, difficult to deliver, and people don't always focus on it.

Vlad Barbalat

This is the one question I knew was coming. I've thought about it — I've had so many thoughts about who to describe, I've been fortunate to have many. I'm going to come back and say something I haven't seen others say on your podcast: the kindest thing is this group of people who fought to construct pathways for legal immigration to the United States. My gratitude is to America, and my gratitude is to the people who, for reasons they didn't have to, allowed people like me to come to America and have a very, very different life than I'd otherwise have had.

To allow me to have an impact on the people in my vicinity and surroundings — hopefully a positive one. And to find a way to learn from that gratitude, and continue to have pragmatic optimism that America is essential to the world. It's still the shining city on a hill, and I want to do whatever I can to remind people of that, to contribute to it, and every single day be grateful for being an American citizen.

Vlad Barbalat

Awesome. Thanks.