Talks at GS

Scott Kapnick
Founder & CEO, HPS Investment Partners, LLC
Alison Mass, Moderator
Recorded: September 22, 2022

Scott Kapnick: We'd been through, probably, eight, nine

cycles since I started. And you never know exactly how it's
going to play out.

[AUDIO INTRO]

Alison Mass: Hi everyone and welcome to Talks at GS. I'm

Allison Mass. I'm the Chairman of the Investment Banking
Division. And I am delighted to welcome Goldman Sachs
alum, Scott Kapnick.

Scott spent 21 years here at Goldman Sachs. He launched

the firm's business in Germany, after the fall of the Berlin
Wall. He rose to become the Co-Head of the Global
Investment Bank. And he was my boss and the boss of a
lot of people sitting in this room. And later, Co-CEO of
Goldman Sachs International.

Since leaving Goldman, he served as a CEO of HPS

Investment Partners. And today, we're going to talk with
him about deploying credit in the current economic
environment. And how he sees the private credit landscape
changing.

So, welcome back to Goldman Sachs, Scott.

Scott Kapnick: Thank you. Thank you for having me.

Alison Mass: I thought we'd kick off a conversation with a

little trip down memory lane. So, I have in my hand your
ID.

Scott Kapnick: Oh my God.

Alison Mass: Your Goldman Sachs ID from 1985.

Scott Kapnick: Wow. That's 37 years ago.

Alison Mass: That's a long time ago. You look the same.
Actually, not.

Scott Kapnick: I don't think so. I don't think so.

Alison Mass: So, my question is, what thoughts come to
mind when you look at this photo? And looking back to
that time and all you've accomplished since then; how big a
role has Goldman Sachs played in shaping your
professional career and your leadership style?

Scott Kapnick: Great to be in the building and see

everybody. 37 years ago, as most of us who start, I knew
nothing when I joined. Some would say I haven't learned
that much. But I started right out of JD MBA Chicago.
Started in investment banking and corporate finance. In
that day, the firm was very small. A private partnership
still. And one of the things that when I was joining, and I
think it's still true today and I hear it from the alumni
network, is that Goldman will take time to train you and
teach you. And that was certainly true of me.

I was fortunate to make partner in 1994. And that group,

58 partners at that time. And I was going through the
group. It was an incredible group. You could spend three
years of content interviewing just that group. And two of
those partners from that class, Tom Montag and Paul
Achleitner had left Goldman when I left and were critical
that we wouldn't be here, you know, HPS wouldn't be
where it is without their help, both Alliance and Bammel
[PH]. So, just an incredible network of people that help you.

And I guess the message for all of you in the room is, you
know, remember who you're working with. You never know
who's going to help you.

Back in the day, we were hyper competitive. I know we're

still a hyper competitive organization.

Alison Mass: Nah.

Scott Kapnick: But we would, literally, if you left, we

would not talk to you for ten years. And we would never
want to, "Oh, I don't want to talk to somebody at some
other firm." And I would say for you all, maybe in this day
and age learn from both your colleagues, but also some of
those people that are out there on the street. It's okay. Lord
knows we all needs friends in this industry. And it's okay
to build those bridges because you never know what you're
going to be doing and who's going to be helping you.

Alison Mass: You wore many hats here at Goldman. We

talked about that. But the one I find the most fascinating is
your experience launching the business in Germany right
after the fall of the Berlin Wall, literally on the front lines of
globalization. And describe what it was like to work at that
time. And how was the investment world transformed at
that time? And what strategies did you employ to seize the
opportunities that were unlocked by the German
reunification?

Scott Kapnick: It was an unbelievable time. The firm

was just starting to really make the decision to be a global
firm. I think that's really hard for people to understand
sitting here right now given how big it is and how global
and how important it is in financial markets.

And when you get into globalization, first, I don't love the
deglobalization word. I think it's sort of realignment. But
globalization had a lot of tailwinds that the world was-- and
people forget, before the wall fell, probably half the world, 3
billion people, were really involved in democratic
capitalism. And it shifted over the last 35 years, which
we've all benefited, Goldman Sachs benefited incredibly
from those tailwinds.

But that drive for efficiency, labor, arbitrage, all that was
what really drove those markets. And what we were doing
was bringing expertise from the US markets and Europe,
London, from the big bang era into markets. There really
wasn't a market for corporate control there. But mostly we
learned to hire great people locally. And who understood
the culture, understood the financial system. And then we
were applying best practices from around the world to that.
And that lasted. It's still today that the firm does that in
various areas. And, you know, really as an opportunity.

Alison Mass: Are there lessons that you learned from being
at the forefront of that period of time in Germany that you
can apply today as the world trends towards, and I won't
say the word, deglobalization, towards this shift?

Scott Kapnick: People, again, won't realize. When we

started Germany, I think it was the first office that started
with all four revenue producing divisions. Fixed income,
equities, asset management, investment banking. And
what was then called the federation. So, operations. And
so, that, we were One GS before One GS was cool.

On the broader front, you know, the realignment, again, is

a shifting of the, if you want to call it deglobalization, it's
now a headwind to growth. But I do think, just Germany, I
was talking to some people last week, they are going to
realign. They're going to figure out how to move their
manufacturing to low-cost energy. They're going to figure
out how to adjust their system. It won't be a year. It might
be a couple of years. But they will do that. And that
realignment creates huge opportunities for the firm as
people do that because it takes capital. And big
opportunities for firms like ours to provide the capital to
allow them to do that.

And then the big issue with deglobalization is the focus

now on resiliency of supply chain. So, we're a lender. We
want to focus on how people are doing that and what's that
mean. That means usually increased costs. Duplication.
So, that means they're going to make less money. And
they're going to have more capital into that, which is going
to be huge for financial markets.

So, I don't really think that while growth needs to maintain,

I think it's still an opportunity. It's just different.

Alison Mass: You mentioned energy. So, I want to talk a

little bit about the energy crisis playing out in Germany
and greater Europe now that Russia has cut off natural
gas. Do you believe the desire for energy security will
accelerate the adoption of renewables and other clean
energy? Or do you see countries abandoning net zero
commitments and resorting to using whatever's convenient
as a source of fuel?

Scott Kapnick: No. I don't. And I know there are certain

topics that come out in media. We have a lot of clients in
institutions, pension funds, and European insurance
companies. They still are very focused on net zero and
achieving net zero. So, no, I don't think. I haven't heard
that they're moving off that.

And again, you have to remember, people, financial

institutions, the people that are here, the backdrop to that
was climate. Temperatures were rising. Sea levels were
rising. And the insurance industry, that's hard to insure
those risks. So, some of this was driven by real insurance-
based activities. And I don't think they want to back off
that.

Now you have an energy crisis. So, now during a crisis, all
energy is fungible. So, yes, that, as prices have risen, you'll
have renewables come into play much more. But you'll also
have fungibility. And people will try to find security of
energy. Security of both energy and then they do want to
move to less carbon. So, we'll see how that plays out.

And I think the debate has shifted back now. You're

starting to get push back. And the realization that you
absolutely need carbon-based energy. So, I think that's
more a rational debate now.

Alison Mass: Like many of us, you know what it's like to
enter a challenging cycle. You've weathered several
recessions. The dotcom bubble for one. The global financial
crisis actually altered the lending landscape in a big way.
So, how did those times compare to the cycle we're in now,
in your view, and how challenging do you expect the
economic climate to be over the next year?

Scott Kapnick: You know, I think that most of us, at

HPS and probably the average age at Goldman is in the
thirties. Certainly, for us, it's thirties. So, almost none of
those people have experienced an environment that we're
in with rising rates and inflation. And so, you have to really
roll out the education of, well, okay, what happens in those
types of markets.

We've been through probably eight, nine cycles since I've

started. And you never know exactly how it's going to play
out. And so, I think that uncertainty, I remember, I think it
was after the dotcom, I presented information IBD and
used the Stockdale Paradox, which was this guy from the
Hanoi Hilton, a very famous admiral, who said, "You've got
to know that you'll get through it. But you know you don't
know how long it's going to take. And you have to realize
that there is a lot of uncertainty."

I think in this recession, the other thing that we have here

that we have not experienced is quantitative tightening. So,
you've got rising rates. Federal Reserve. Quantitative
tightening. On top of a lot of the COVID-- we still have a
pandemic. We have a war in Europe. So, we have a lot of
uncertainty to resolve. And then we still have China locked
down. So, how those factors play out are completely
uncertain.

We're credit underwriters. So, we're more focused on

downside. And we want to make sure that whatever we're
lending to can weather through a recession and shrinking
profit margins, things like that. And rising cost of capital.

Alison Mass: You've said that volatility is not necessarily a

bad thing for HPS.

Scott Kapnick: Right. That's true.

Alison Mass: And in this challenging environment we've

talked about, the inflation and rising rates, how have you
positioned the firm to capitalize on this market dislocation
and distress situations? And are there particular industries
and regions that you see offering the greatest opportunities
to deploy credit in the next couple years?

Scott Kapnick: Well, we've been fortunate as a firm after

the great financial crisis and then the regulatory change
that came after that. The regulators really were asking the
banks-- charging higher capital charges in non-investment
grade credit, which is private credit, what we do. And
wanting depositors, and there was debate about this, I
think the framework they set up was limits on lending. And
that framework also raised the capital for banks.

And if you look at what's happened, private credit has

grown immensely in the last since '08. It's grown from
several hundred million to a trillion-and-a-half-dollar
market, growing at 15 percent for the foreseeable future.
So, it's going to double or triple. And the reason for that is
that borrowers want certainty. They don't necessarily want
a syndicated loan. The syndicated loan markets continue to
grow, but at a much slower rate.

So, I think that the opportunities in private credit to deliver

that solution, and larger scale, the larger and larger deals
is what we positioned the firm to do. And we're one of the
larger lenders to non-sponsors, as well as sponsors. And
being able to do, we're one of the few that can do a billion-
dollar deal and deliver certainty to the borrower for growth
capital. And then really wanting to do whatever our
investors find across the risk spectrum for a return,
anywhere from sort of six to 15 plus, where they want to
deploy capital that we can scale, that's what we're focused
on.

Alison Mass: Because private markets lack the same level

of transparency as the public markets, we're hearing more
and more about the risk of them being over saturated and
that they could be the next bubble to burst. I'm curious
what your perspective is. Are the private markets at risk
given their accelerated growth? And do you see any
correction on the horizon?

Scott Kapnick: Yeah. I mean, you hear a lot about it.

And you hear a lot about shadow banking. I think when
people talk about shadow banking, they're really talking
more about, sort of, very liquid funds that have illiquid and
may break the buck or things like that that we saw some in
the crisis. Or people that have matched illiquid assets and
liquid vehicles. We don't tend to do that.

The market has grown so much. So, a trillion and a half,

any time you get a recessionary environment, you're going
to have surprises. So, I'm sure there are going to be some.

Where we said, A, we don't think there's risk to the

financial system. And B, we think that we have a lot of
capital below us in equity. And we have companies that are
earning, in most cases, hundreds of millions of dollars of
EBITDA. So, they're operating performing credit, we think,
will weather the storm. I'm sure we'll have our moments of
stress. But we'll weather the storm. So, I don't really think
that it's a risk to the financial system.
Alison Mass: What's the most important economic statistic
for business leaders to follow over the next ten years?

Scott Kapnick: For me, it goes back to the globalization.

Global growth, real global growth is critical. And it has to
be economic value added. It won't be sustainable if it's all
government funded. It has to be real economic growth
around the world. And to the extent that we can do that,
you know, you can get a lot of people out of poverty.

Alison Mass: So, let's talk a little bit about leadership. As

you know, we're living in an era that's been governed by
leadership in crisis. Business leaders across all sectors
really stepped up and led during the pandemic. We now
have a war in the Ukraine. And leaders have had to step up
in ways they never imagined. So, how has this time, the
last few years, shaped your perspective as a leader? And
how do you think it will change the way executives lead
their companies moving forward?

Scott Kapnick: I'm a big believer in great institutions

where you learn-- leadership is sort of a function of culture
and what you stand for, what you say yes to and what you
say no to. And leader, it's more about what you do and less
about what's on the social media.

I think that in periods that we're living through now, the

COVID experience, there were many places where you
needed to do the right thing. And yet, it was an experience
where you hadn't been through it before. So, you know, the
whole work from home environment. And we learned a lot
about-- it did remind me a little bit of 9/11 in some regards
that safety became the number one priority. So, really for
running an organization, you want to make sure your
people are safe. They have a good environment they're
working in.

And then, people also, we all learned being at home was a

hard environment for a lot of young mothers and young
fathers because they were in an environment where they
couldn't really work. And so, you needed to try to give them
what you could give them to support. And I think you've
just got to change and adapt to the environment that you're
facing as leaders.

I think one of the other leadership things after the George

Floyd murder here, we got together as a group and people
decided, we want to do something. We want to do
something, and we want it to be significant. So, with you
know, created the partnership with Howard where we gave
them $10 million to really help broaden some of the
activities that they're doing in asset management. Created
a Center for Financial Excellence. And really trying to
provide scholarships and work at the school, plus
internships, to get people. And they've done an incredible
job for people to know, they've done an incredible job in
medicine and in law. And we're trying to bring that to asset
management. And I've been thrilled with the support that
the financial community has given to, yeah, let's help. Let's
get focused on it.

Alison Mass: You talked about the average age of the

people at HPS. We have many young people who work here
as well. What advice do you have for the next generation on
how to be good stewards of the firm?

Scott Kapnick: When I left, I think investment banking

was a couple of billion of revenues. And you've broadened it
out to every--

Alison Mass: That's like a week for [UNINTEL].

Scott Kapnick: Yeah, every industry group has multiples
of that. And regions. So, my hat's off to everybody.

I would say for people who are in the firm, any time
anybody asks me, you only get to leave Goldman once. You
all hear that. But that is true. So, I think broadly, my
father used to say this about Arthur Anderson, I think
people do leave too early most of the time. Of course, I
would never say that I left too early. So, nobody says they
left too early. But they oftentimes don't realize they can get
through to the next level and their career is going to have a
huge rocket.

And people who've stayed, you're a great witness, have

done really, really well. And so, I do think that the common
theme out there now for young people is you shouldn't stay
at a firm for long. You should move. Go from three. You
know? And I would push back on that.

Most of the young people in the firm are going to live to 90-
or 100-year life expectancy. So, you've got a long time. Take
your time.
And then I also think, you know, times have changed with
technology. And people who are in the firm that have then
gotten more senior have to remember to look down and be
a mentor, practically, and you know this as well as
anybody, mentoring, particularly, women and minorities.
You have to mentor people. You have to find them mentors.
And you have to help them.

Look back. I always say this to people. I'm like, whenever I

have a conversation, and no matter where it's been really,
people will always say, "Well, I look up. I should be that. I
should be that." And you say, "Well, have you looked
down?" And you've got to look both down, laterally, and try
to help people in the organization.

Alison Mass: What is your definition of success, Scott? And

how did Goldman help you shape it?

Scott Kapnick: Well, I had the good fortune of having a

father that I was very close to and, you know, sort of taught
me that you want to build a balanced life. You want to give
back to your community. It's making the world a better
place. That sounds trite, but Goldman's done that. A lot of
those lessons that we try to apply to HPS. And then most
importantly, it's your family and what you create with your
family. And you know, what you do to help others in
making the world a better place. So, that really is success.

Alison Mass: Well, Scott, thank you so much.

Scott Kapnick: Thank you.

Alison Mass: And please join me in thanking Scott.

Scott Kapnick: Thank you.

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