Below is the embedded link to an interesting and wide-ranging interview with John Goff, a private investor based in Forth Worth who worked closely with the legendary Richard Rainwater in the 1980s before founding Crescent Real Estate in the early 1990s. He eventually sold that company to Morgan Stanley for ~US$6.5bn in 2007, only to buy it back in 2009 at a fraction of what he sold it for. He currently invests in a variety of public and private companies through his family office.
I have included some notes from the interview (please note that these are for personal reference only and any mistakes in transcription are my own).
On his background: he grew up in a small town in Texas (Lake Jackson) where there wasn’t a lot to do. So he found fun things to do, which typically involved taking things apart and rebuilding them. He always had an intense curiosity about things. He also loved sports. Went to the University of Texas where he studied electrical engineering because Dow Chemical had a program where they desperately needed engineering graduates and would pay for your school if you agreed to work for them. He worked for them for three summers, which is where he first got some exposure to business people on a plant they were designing down in Brazil. Realized he was on the wrong side of the table as an engineer, so he went back to UT and changed his major to accounting and business.
On how he met Richard Rainwater: He was working at Peat Marwick (now KPMG) in their Forth Worth office, which was a very important office because it had the Bass Brothers account and they were very active because of Richard as the Chief Investment Officer. He used to work out with Richard in the afternoons and one day Richard said he needed somebody from the firm helping him out full-time in his office. He worked with Richard for 2-3 years and then when Richard left the Basses in 1986, he called him and asked him to join. That was what he had been waiting for his entire career. He didn’t even know what his role was or what he was going to make, but it didn’t matter. He went to work with Richard in June 1987 and helped him start Rainwater Inc.
On taking risk: he is definitely a contrarian and he learnt that from Richard, who was one of the best contrarians of them all. But in his mind, he doesn’t take big risks even though the perception might be that he does. He also makes big concentrated investments, he doesn’t like to do a lot of really small things. Richard and him once hired a firm to come in and audit their results after they had been together for about 8 years. They found that 80% of the profits came out of 20% of the investments. All these little things were big distractions. Quick story – after Black Monday (Oct 1987), Richard called him into his office to join a call with someone that was running a fund in partnership with the Bass family. Richard asked the guy to wire John US$50m and told him to put it to work in the market. He was only 32 years old at the time and scared out of his mind. In hindsight, he would love to think that Richard thought he was some boy genius. The reality was Richard was the ultimate contrarian and he knew the market was so oversold that this young kid wasn’t going to goof this up. He could basically buy anything and it would go back up. Worked out well but it was all timing.
On his biggest mistake: 1 or 2 years after Black Monday, they had some executives from PVH (the US clothing company) in the office. They had the opportunity to buy a subsidiary of a listed company for really cheap and they needed the money to do that. So he looked at the deal, went through the math, and thought it was pretty interesting. So he did the deal, but he ended up overengineering it, in part because the only way he really got paid when working with Richard was by coinvesting alongside the deals they did. In this case, they were going to own half the company without putting up any of their own money (because he was able to get some financing) and the PVH executives were going to put up all the equity. That was a bad construct and it blew up later because them as the capital investors and the management team were not unified; they had different starting points and it ended up being a big problem.
On starting Crescent and selling it just before the financial crisis: real estate was in a ditch in the early 1990s. He pitched Richard about taking everything else off his desk and focusing on his real estate business plan, which he had written on a single piece of yellow paper. Richard said he loved the idea but then asked him to put up his entire net worth. Richard then scribbled down how much he would allocate and told him to get after it. That was how it got launched and he was the first employee. He eventually sold Crescent to Morgan Stanley in August 2007 close to the top of the cycle. He was not smart enough to see everything coming but nothing felt right. They were getting offers that made no sense to him on virtually everything in their portfolio. At this point in time, they had north of a ~US$6bn company that he built from a yellow pad. He had more to lose than anyone because he had his net worth on the line. But he saw bank and mezzanine financing that made no sense to him, he saw buyouts at prices that made no sense. They had a complicated business with a lot of disparate investments, it wasn’t just pure office and so there were no natural buyers. Morgan Stanley came to him and said they loved the company and his team, had this concept of rolling North America up under his team. They got the deal done at ~US$6.5bn, but it was way overleveraged, and he actually told them that it wouldn’t work. He left shortly after to focus on his family office.
On buying Crescent back: Barclays put up the majority of the debt on the deal (~US$3.7bn) and they never syndicated that debt. It had been paid down some but Barclays approached him in the spring of 2009 and asked if he wanted to buy his old company back. He had just sold it in August of 2007. He told them he would love to buy it back but that they wouldn’t like the number. He didn’t even know how to value anything because the world was in freefall at the time. By the fall, they negotiated a deal to buy it back in partnership with Barclays. It was the single best real estate deal he has ever done, but it was right place, right time and right structure. Crescent today has ~130 people, between AUM and buying power they are north of US$10bn. He is blessed to have a team with a great culture that has been with him for a long time, and his role as chairman today is as more of a cheerleader.
On what he looks for in investments: he likes good deals. In particular, he loves when there is really good alignment between management and themselves, he likes things that can scale in a big way and he likes the idea of focused effort. One relatively nascent space they have invested in recently is esports. ~1/3 of the world’s population are gamers. In the US, the gaming industry eclipses in size both the music and the film industry. It is a ~US$60bn industry growing by US$10bn a year. He thinks the next Disney will come out of the gaming industry and he thinks they might have found it (a private company they invested in called ProbablyMonsters).
On lessons from the pandemic: first of all, from a business perspective, he had never been more fearful in his life. There was no playbook and you had the wildcard of what is the government going to do. He started thinking about all the employees he was responsible for. Take a company like Canyon Ranch, they just had to shut down. You couldn’t rebuild the business if you lost the people. On working from home, he doesn’t know how you build a culture on Zoom. He has not seen one big idea come out of a Zoom call. You can process things, advance the ball etc. and it can be pretty efficient in certain situations, but people will come back to the office. For some reason, we had this transfer of power from employers to employees that is probably is similar to when unions were started. He thinks they will come back to office, it will take time but economics will drive it. He thinks it will nibble on the edges of the office business. It definitely has an impact on what they at Crescent are looking to buy – commodity products are just not going to be competitive.
On his biggest concerns: his first concern is population. He follows population data intensely. The US was blessed for 40 years (1970-2010) with 1% growth a year. If you took that 1% between now and 2030, the US would add the equivalent of 26 Dallas-sized cities. That has been the fuel behind the real industry for a long time. Now they are shrinking to flat, due to several factors including an aging population, young people deferring the decision to have children etc. Doesn’t worry him but impacts their thinking in terms of where and how they want to invest. You really have to look at demographics more closely than ever. His second concern is about government policy. Take, for example, the whole thing with clean energy. The climate is obviously important but let’s be scientific about it and not political. All of these incentives are going to create craziness and bad investment, it will not clean up the environment.
His advice to young people: first, turn off your phone for some period of time each day and just think. Second, have a plan and work it. Third, read The Four Agreements by Don Miguel Ruiz, it is a lifechanging book in his opinion. He reads it at least once a year and got his children to read it. Fourth, find great mentors and try to emulate the good things about them. Finally, stay humble.
On the oil market: Russia has been highly dependent on Western E&P and service companies to exploit their oil. Most of the productive fields have been found and developed by the majors in the last 10-20 years and they are all out now. Limited expertise left in the country. He thinks we will see a sharp decline in production from Russia. Europe is dependent on Russia for its oil and gas and at some point that is going to be a real problem. We are woefully underinvested in oil. Oil should have never been in the US$50-80/barrel range, didn’t really make economic sense there. It needs to be priced higher to generate the right economics for new incremental production. When he had dinner with Henry Kravis during the pandemic, he told him private equity is never going to be able to raise another nickel for oil & gas investment. All of that capital is drying up because of ESG. All of this feeds into an equation that is going to exacerbate the problem in the commodity. If we had 100x the number of electric vehicles that we have today, we would not reduce hydrocarbon demand by 10%.
On ESG: he thinks there are components of ESG that are very important. He would like to think they have embraced the important ones a long time ago, they didn’t need someone to come up with this acronym. He thinks on the environmental piece, there are going to be a lot of poor decisions made that will be politically-driven and not necessarily what is right for the environment. On governance, he thinks a lot of that is woefully overstated and it will cause a lot of difficulties for public companies that have to adhere to some of these standards and get the right expertise on boards.