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Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Master's in

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Speaker 1: Business with Barry Ritholds on Bloomberg Radio.

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Speaker 2: This week on the podcast strap Yourself in for another

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Speaker 2: spectacular conversation. Tony Joseloff has been with Davidson Kempner pretty

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Speaker 2: much his entire career, past twenty seven years. What a

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Speaker 2: knowledgeable expert about all things. We used to call it

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Speaker 2: distressed credit, now it's opportunistic investing, much more than merely

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Speaker 2: being credit driven. They focus on everything from M and

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Speaker 2: A arbitrage, to real estate investing, to private equity to

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Speaker 2: public debt. A masterclass in how to think about risk,

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Speaker 2: how to think about diversification, how to put together a

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Speaker 2: portfolio of alt ernatives that is both non correlated to

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Speaker 2: your core portfolio but simultaneously creates a form of offset

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Speaker 2: or ballast to the volatility of equities. In addition to

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Speaker 2: being CIO and Managing partner at Davidson Kempner, he's also

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Speaker 2: chairman of the Investment Committee for the New York Public Library.

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Speaker 2: He's Vice chairman for the Investment Committee for New York Presbyterian,

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Speaker 2: as well as sitting on the board of Trustees and

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Speaker 2: the Investment Committee of Princeton University. I thought this conversation

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Speaker 2: was fascinating, and I think you will also with no

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Speaker 2: further ado my discussion with Davidson Kempner's Tony Yoselov.

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Speaker 3: Thank you, Barry. I was going to say, longtime listener,

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Speaker 3: first time caller.

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Speaker 2: So I'm kind of amazed. I'm kind of overwhelmed by

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Speaker 2: your curriculum, vitail, and the fact that you've never been

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Speaker 2: in this building, which is kind of amazing because a

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Speaker 2: lot of my guests have similar background board seats and

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Speaker 2: Dowman's investment committees, and I feel like I know everybody,

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Speaker 2: but I don't know everybody. There's a million people I

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Speaker 2: haven't met, and you've been on my list for a while.

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Speaker 2: So let's just start a little bit with your background,

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Speaker 2: which is really kind of interesting. Undergrad you go to

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Speaker 2: Princeton School of Public and International Affairs, and then you

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Speaker 2: get a jd MBA from Columbia, which leads to the

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Speaker 2: obvious question, what were your original career plans?

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Speaker 3: You know, it's interesting. So first of all, I've got

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Speaker 3: a pretty boring background in the sense that I grew

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Speaker 3: up in central New Jersey in a town called East Brunswick,

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Speaker 3: I went to college. Sure, I went to college half

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Speaker 3: an hour from where I grew up, and then I

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Speaker 3: moved to New York City the day after I graduated

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Speaker 3: from Princeton and haven't left, and so I've lived within

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Speaker 3: a fifty mile radius my entire life. My original career plans,

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Speaker 3: to the extent that they were fully formed, would have

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Speaker 3: been to do a career in law or potentially public policy.

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Speaker 3: My high school happened to have a very good civics

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Speaker 3: type program. I think I was probably at the only

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Speaker 3: public high school in the United States that produced a

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Speaker 3: cabinet member for both the first Trump administration and the

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Speaker 3: Biden administration, which I thought was pretty amazing for a

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Speaker 3: suburb public high school. It was really during my time

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Speaker 3: at Princeton and during my time at Columbia where I

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Speaker 3: made the decision to pursue money management as a career

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Speaker 3: instead of something in public policy. The nineteen nineties were

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Speaker 3: really the heyday, I'm going to say, of mutual funds,

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Speaker 3: and it was sort of the early days of electronic

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Speaker 3: stock trading. My family is a family of academics and

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Speaker 3: book publishers, so it wasn't necessarily through my family background

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Speaker 3: that I interested in investing, but it was sort of

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Speaker 3: around us in the ether. I did a lot of

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Speaker 3: reading on it in high school. In college, I was

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Speaker 3: fortunate enough that I had a number of my friend's

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Speaker 3: parents were willing to take me out to coffee and

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Speaker 3: kind of educate me on the financial services business. And

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Speaker 3: really the inflection point was when I was at Columbia,

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Speaker 3: where I had to kind of choose a path between

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Speaker 3: going to Washington and working for a law firm that

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Speaker 3: would have gotten me in the regulatory side of things versus,

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Speaker 3: you know, working at a law firm which I did

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Speaker 3: for a couple of years as a summer associate where

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Speaker 3: the focus was private equity, and that was the path

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Speaker 3: I chose, and I sort of never never looked back.

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Speaker 3: I'm really glad I have the legal background, and I'm

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Speaker 3: really glad I have the public policy background. It's actually

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Speaker 3: super helpful as an investor. But it wasn't like, you know,

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Speaker 3: I never set out on this path. It's just sort

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Speaker 3: of the journey found me.

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Speaker 2: I'm kind of fascinated by the joint JDMBA. I have

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Speaker 2: a JD. And what I always appreciated about law school

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Speaker 2: was that it didn't teach you so much as what

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Speaker 2: to think as to how to think, whereas an MBA

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Speaker 2: feels more like a deep dive into the specifics of

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Speaker 2: investing theory and a lot of aitative analytics. How do

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Speaker 2: you find the combination that sort of left brain right

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Speaker 2: brain JDNBA works for you as a as an investor.

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Speaker 3: Well, it's super helpful. So first of all, I also

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Speaker 3: went to law school with the same idea that you did,

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Speaker 3: that law school was an amazing education and that good

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Speaker 3: things would come out of it, whether I was interested

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Speaker 3: in pursuing law or not. I was very fortunate. I

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Speaker 3: actually finished all my coursework at Princeton in three years,

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Speaker 3: and I had a chance to start Columbia Law School

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Speaker 3: during my fourth year at Princeton, which was a program

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Speaker 3: that Princeton and Columbia have with each other at the time,

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Speaker 3: but very few students did, so I kind of had

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Speaker 3: a free look at law school. I enjoyed my time

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Speaker 3: at law school. My time working in law just sort

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Speaker 3: of made it seem like it wasn't for me ultimately,

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Speaker 3: but I think it's a great field that would highly

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Speaker 3: recommend it to others. The business school side initially started

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Speaker 3: out as a path to getting a job I actually

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Speaker 3: found it. You know, it's sort of hard to think today,

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Speaker 3: but it wasn't so easy for someone with a law

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Speaker 3: degree and no work experience to go work on Wall

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Speaker 3: Street in the nineteen nineties. In fact, I had a

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Speaker 3: few hr folks. I'd make it pretty far along and

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Speaker 3: my recruiting process at different places, and they'd say to me,

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Speaker 3: how do we know what you're going to wake up

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Speaker 3: caring about finance? How do we know you're going to

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Speaker 3: read the Wall Street Journal every day? And so questions

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Speaker 3: that kind of seems silly with the benefit of hindsight,

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Speaker 3: But you know, I had no financial services background there.

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Speaker 3: Once I went to Business School Boom, I had the

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Speaker 3: financial services background there. But the courses I took at

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Speaker 3: Columbia were exceptional, Like I really enjoyed taking courses, particularly

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Speaker 3: the ones that were taught by adjunct professors where they

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Speaker 3: had real world experience and so you could learn, you know,

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Speaker 3: derivatives from someone who's trading derivatives every day at JP Morgan,

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Speaker 3: or I learned about the retail business from someone who

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Speaker 3: was a former CEO of a mid sized regional retailer

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Speaker 3: department store with a lot of department sportes that period

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Speaker 3: of time, and they bring in a different CEO every

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Speaker 3: week to talk to you, and that stuff just fascinated me.

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Speaker 3: And so if I think about like my Columbia Business

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Speaker 3: School education, like, there was a lot of good things

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Speaker 3: took from that, and so the combination proved to be

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Speaker 3: very powerful for me.

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Speaker 2: Huh, really interesting. The data point that always sticks out

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Speaker 2: in my head is something like, seven years after graduation,

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Speaker 2: fifty percent of JD holders are no longer practicing a law.

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Speaker 2: It's like a big feeder for other fields.

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Speaker 3: Yeah, and I believe that. I mean, look, I'm very

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Speaker 3: fortunate that I went to law school with some folks

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Speaker 3: who are literally among the leaders of their field in

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Speaker 3: the United States as attorneys. And I also went to

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Speaker 3: law school with a number of folks whore no longer attorneys,

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Speaker 3: some of whom found that journey immediately like me, some

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Speaker 3: of whom found it many years into the future. There's

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Speaker 3: no controlling the fact that it's a great education and

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Speaker 3: it's a great way to learn how to think, and

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Speaker 3: especially for the types of investing we do, it's been

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Speaker 3: super helpful.

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Speaker 2: So let's talk about some of the investing you do.

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Speaker 2: You joined Davidson Kempner in nineteen ninety nine, pretty much

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Speaker 2: the peak of the dot com boom. We were at

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Speaker 2: that point, you know, a couple of quarters away from

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Speaker 2: everything peaking and heading south. Tell us about your experience

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Speaker 2: at the tail end of the dot com situation and

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Speaker 2: how did that affect how you looked at the world

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Speaker 2: of investment.

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Speaker 3: You know, it's really interesting, right, So I didn't necessarily

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Speaker 3: seek out to do the type of investing that we

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Speaker 3: do with Davidson Kepner, which is a combination of opportunistic

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Speaker 3: credit and event driven investing. But it actually goes back

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Speaker 3: a year earlier to nineteen ninety eight. I was looking

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Speaker 3: for summer jobs for the last summer of my JDMBA program,

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Speaker 3: and so I applied to a number of the banks.

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Speaker 3: I applied to some of the investment shops, and I

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Speaker 3: found Davidson Kepner because they posted at Columbia for a

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Speaker 3: full time merger arbitrage analyst, and so I didn't really

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Speaker 3: know any better. So I sent in a resume and

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Speaker 3: I got a call from them and they said, well,

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Speaker 3: we think your background is actually really good for then

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Speaker 3: what would have been called distress debt and why don't

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Speaker 3: you come in and talk to us and work for

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Speaker 3: us for summer. So I literally met three partners. They

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Speaker 3: offered me a job, and I said, these folks have

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Speaker 3: about a billion dollars under management and there's about fifteen

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Speaker 3: people working here. That seems like a pretty good ratio

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Speaker 3: in terms of number of people to dollars under management.

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Speaker 3: And I knew a little bit about distressed at investing,

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Speaker 3: just because I had taken a bankruptcy course in law

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Speaker 3: school and there was maybe like half of one class

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Speaker 3: was devoted to what this was. It was really a

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Speaker 3: pretty nascent industry. And so I said, Okay, I can

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Speaker 3: go be one of one hundred or two hundred people

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Speaker 3: or whatever at a bank training program for the summer,

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Speaker 3: or I could be the only person who is doing this.

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Speaker 3: And they had hired an intern in the year before,

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Speaker 3: so I spoke to him on the phone. His name

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Speaker 3: is Dan Zwern. He went on to founding money management

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Speaker 3: firm that ultimately didn't work out and now runs Arena Partners.

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Speaker 3: And it seemed like a pretty good ratio in terms

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Speaker 3: of opportunity. And I got there and it just spoke

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Speaker 3: to me, and it spoke to me because I liked

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Speaker 3: the fact that I could do a form of investing

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Speaker 3: that used both my legal background and my financial background,

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Speaker 3: and I felt like there were many areas I might

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Speaker 3: spend time on that might do one or the other,

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Speaker 3: but wouldn't do both of them. So the joke of

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Speaker 3: it is, I'm literally the only person who applied for

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Speaker 3: this job. They literally got one resume, and that probably

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Speaker 3: speaks as much to the time as it does to

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Speaker 3: anyone else. I mean, so, if you weren't doing a

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Speaker 3: dot com startup in the late nineteen nineties from Columbia,

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Speaker 3: you were going to work in investment banking, or you

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Speaker 3: were going to work in consulting. They were like a

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Speaker 3: handful of people who were going to work in money

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Speaker 3: management at all, Right, that really was not a big area,

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Speaker 3: despite the fact you had a big value investing program there.

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Speaker 3: At a time, these would have been the more popular

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Speaker 3: career paths, and obviously non financial services career paths as well,

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Speaker 3: And to me that was kind of fun, Like I

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Speaker 3: don't know, I mean, so the first two years of

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Speaker 3: my career, Davidson Kaepner, I hated most of what I

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Speaker 3: was looking at as an investor, and I kept saying

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Speaker 3: no to things. And what I didn't know is that

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Speaker 3: was actually the right answer, right. You know, when you

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Speaker 3: get to an investing job, you want to put, you know,

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Speaker 3: investments on the book, and that makes you feel like

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Speaker 3: you're accomplishing things. Most of the companies that were in

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Speaker 3: trouble in the late nineteen nineties deserve to be and

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Speaker 3: it was because it was sort of a peak of

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Speaker 3: financial markets. The really good opportunities probably started three to

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Speaker 3: four years into my career. So I felt very proud

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Speaker 3: of the fact afterwards that I didn't like anything. But

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Speaker 3: at the time I was like, are they just tossing

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Speaker 3: me the bad stuff that I'm looking at all these

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Speaker 3: investments and not wanting to do them. But it turned

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Speaker 3: out no, that was actually what most of the opportunity

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Speaker 3: set was in our world.

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Speaker 2: In the late night, were you getting guns from senior

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Speaker 2: partners or other people who have lived through other distress

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Speaker 2: cycles saying, hey, you're doing the right thing. You're looking

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Speaker 2: for a diamond in the rough, but most of the

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Speaker 2: stuff is too risky relative to the potential upside.

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Speaker 3: Yeah, I mean, look, we obviously would try to steer

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Speaker 3: our time towards things that were actionable. I definitely was

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Speaker 3: getting support. I mean my senior partners. There was two.

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Speaker 3: There was Tom, Tom Kaptain or Michael Lefel. I mean,

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Speaker 3: those are the only two folks who really were doing distressed.

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Speaker 2: No.

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Speaker 3: Davidson, Marvin Davidson was still running the firm at the

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Speaker 3: very end of his career, but he really deferred to

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Speaker 3: Tom and Michael in terms of running the debt portfolios

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Speaker 3: that we had at the time. So we found things

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Speaker 3: ultimately that would call like solid singles, you know, things

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Speaker 3: where like you could, you know, buy bond in the

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Speaker 3: mid nineties and there was a takeout at one on

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Speaker 3: one and you don't coupon. It wasn't things you were

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Speaker 3: going to earn giant amounts of money, but you're gonna

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Speaker 3: earn very good IRRs on them. And so I cut

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Speaker 3: my teeth doing things where you could put relatively small

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Speaker 3: amounts of money to work. And keep in mind we

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Speaker 3: had a billion dollars at the time, so you know,

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Speaker 3: ten million dollar investment was a one percent investment in

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Speaker 3: the fund. It was it was still meaningful to what

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Speaker 3: we were doing.

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Speaker 2: I'm intrigued that they get one application for an one

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Speaker 2: open opening. You got the job and you've been there

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Speaker 2: for twenty five years. It kind of talks to how

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Speaker 2: we never know what the future holds, and how completely

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Speaker 2: random sometimes these things feel. Had you not applied there,

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Speaker 2: how might your career have been completely different?

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Speaker 3: You have those what if moments in life. I do

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Speaker 3: believe in fate to some degree, and I got very

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Speaker 3: fortunate with how it all worked out. And look, I

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Speaker 3: liked what I was doing, and I liked who I

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Speaker 3: was doing it with, And I would say, probably those

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Speaker 3: are two of the most important factors that you have

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Speaker 3: in choosing a career, is what are you doing and

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Speaker 3: who are you doing it with? And so I never

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Speaker 3: felt the need to leave. The other thing I would

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Speaker 3: say is, you know, Davidson Kamptner is an old school

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Speaker 3: Wall Street style partnership where we make new partners every

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Speaker 3: couple of years. When partners leave our firm, they get

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Speaker 3: an earn out of their shares, and the shares are

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Speaker 3: ultimately effectively acquired by the ongoing partners in the firm.

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Speaker 3: And that structure existed in the nineteen nineties. We've made

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Speaker 3: some changes over the years to it, but a lot

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Speaker 3: of it's still substantially similar to what things look like.

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Speaker 3: And that's because if you look at the founding of

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Speaker 3: Davidson Kamptnor, you know, Marvin Davidson had been a senior

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Speaker 3: executive at Bear Stearns and Tom Kaepner was a junior

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Speaker 3: person at Goldman Sachs, but knew the Goldman Sacks structure

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Speaker 3: quite well, and they didn't know each other when they

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Speaker 3: formed the partnership in the mid nineteen eighties, and so

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Speaker 3: they came up with an arms length agreement that took

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Speaker 3: the best of what they knew from Bear and Goldman,

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Speaker 3: and that structure stuck and it sticks today. And so

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Speaker 3: what I knew for me was if I did a

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Speaker 3: good job, there could be a career for me at

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Speaker 3: Davidson Kepner. And so not only did I have like

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Speaker 3: people that I liked and a thing I liked doing

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Speaker 3: with my time, but I knew if I put my

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Speaker 3: head down and did a good job, there was like

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Speaker 3: a future there for me. And so that was just

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Speaker 3: very very powerful. I mean, I will say, like you

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Speaker 3: look back, I mean from when I started for the summer,

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Speaker 3: it's almost twenty seven years ago. It does feel like

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Speaker 3: a long time, but it never felt that way along

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Speaker 3: the way, you know, I mean, you know, with any career,

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Speaker 3: there's always good in bad, but overall I've had an

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Speaker 3: amazing experience.

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Speaker 2: The days are long and the decades are short. You know,

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Speaker 2: it's funny you mentioned that Davidson Kepner is a partnership.

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Speaker 2: There was a lot of I don't want to say criticism,

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Speaker 2: but when a lot of the big Wall Street partnerships

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Speaker 2: went public, there was a little bit of pushback and

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Speaker 2: some questions, what is this going to do to risk management?

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Speaker 2: And when not that much long after we have the

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Speaker 2: financial crisis, the companies that were partnerships still with their

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Speaker 2: joint in several line ability somehow managed to not get

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Speaker 2: into trouble. I guess they were highly focused on putting

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Speaker 2: everything at risk. The agency problem with companies that had

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Speaker 2: become public where the partners no longer have joined several

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Speaker 2: They look at every company that ran into trouble, none

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Speaker 2: of them were partnerships. It's kind of fascinating how that

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Speaker 2: turns out.

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Speaker 3: Yeah. No, I hadn't thought about it that way, but

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Speaker 3: I agree with you in terms of your conclusion. And

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Speaker 3: you know, look, there's basic building blocks of what you're

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Speaker 3: doing in as an investor, as a firm, and who

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Speaker 3: you're doing it for you know, So I take like

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Speaker 3: the basic building blocks of Davidson Kepner today, which by

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Speaker 3: the way, we're similar to what they were twenty seven

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Speaker 3: years ago. We're primarily an investing firm, We're not an

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Speaker 3: asset gathering firm, and so for us to offer an

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Speaker 3: investing fund, my partners and I we want to invest

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Speaker 3: our own money side by side with our LPs. We're

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Speaker 3: by far the largest single investor collectively in our five

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Speaker 3: and so if an investing product is not a good idea,

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Speaker 3: we're not going to offer it, even if we have

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Speaker 3: clients who would want it, because we can't put our

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Speaker 3: you know, imprompt centuur or whatever behind it.

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Speaker 2: Or your own money, your own money, and so I think.

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Speaker 3: That speaks very powerfully. We require all of our partners

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Speaker 3: to reinvest a substantial majority of their networks back into

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Speaker 3: the funds every year. We all invest paripes too, across

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Speaker 3: our funds, so you can't cherry pick which funds you

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Speaker 3: want the partnership straight across.

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Speaker 2: Collectively, if you offer it to clients, the partners and

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Speaker 2: employees of the firm are the largest investors.

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Speaker 3: Yeah, not necessarily in any individual fund, but collectively across

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Speaker 3: the funds we are. In any individual fund, we're can

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Speaker 3: put a meaningful amount of money relative to the size

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Speaker 3: of the fund.

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Speaker 2: So you eat your own cooking.

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Speaker 3: Yeah, and that's that's the first test to me. I mean,

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Speaker 3: you know, in investing, how much money do you have

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Speaker 3: in the product? How a skin do you have in

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Speaker 3: the game. You know, we obviously use operating partners sometimes

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Speaker 3: in our private market investments. That's the first question I ask,

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Speaker 3: how much money does the operating partner having the investment?

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Speaker 3: And isn't meaningful to them? Right, So sometimes it's not

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Speaker 3: just the quantum of money, it's how meaningful it is

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Speaker 3: to the person who's who's involved. And again, having a

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Speaker 3: being a private firm, you know, we're one hundred percent

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Speaker 3: owned by our current and retired partners, with our retired

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Speaker 3: partners in an earn out, so they eventually don't own

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Speaker 3: shares of the firm anymore. And so you're beholden to

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Speaker 3: two constituencies. You're beholden to your LPs and you're beholden

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Speaker 3: to yourself and your employees. And you know, that's really

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Speaker 3: how we run our business, and so you know, it

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Speaker 3: kind of keeps you out of trouble. It also keeps

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Speaker 3: you very focused when things are going payd right. You know,

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Speaker 3: we have lived through a lot of crises. I lived

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Speaker 3: to the Global financial crisis. I lived to the COVID crisis.

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Speaker 3: COVID was probably even harder in a way because Tom

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Speaker 3: Kaepner had just retired a few months before that, and

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Speaker 3: I joke that he left me a playbook for a

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Speaker 3: financial crisis, but he didn't leave me a playbook for

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Speaker 3: a pandemic. And so some of the hr things we

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Speaker 3: all had to deal with, and getting people out of

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Speaker 3: the office and getting people back in the office, we

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Speaker 3: had to kind of invent along the way. It really

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Speaker 3: focuses the mind when you've got your money with your mouth.

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Speaker 2: I had to say to say the very least. So

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Speaker 2: you brought something up that's really intriguing, And I don't

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Speaker 2: know if there's an answer to this, but I just

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Speaker 2: want to get your take on it. So over the

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Speaker 2: past twenty seven years, we've had a repeated one hundred

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Speaker 2: year flood every five or seven years, which, while not

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Speaker 2: statistically impossible, certainly seems unlikely. So we have the dot

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Speaker 2: com implosion, and then after that nine to eleven, and

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Speaker 2: then we have the financial crisis, and then in the

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Speaker 2: twenty tens we have Brexit and the threat of Grexit,

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Speaker 2: and we have the flash crash, ultimately leading a few

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Speaker 2: years later to the pandemic. Does it feel like we

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Speaker 2: have these situations, these credit crises, which must be great

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Speaker 2: for an opportunistic credit investor, But does it seem like

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Speaker 2: they're coming along more frequently than historically? Like my recollection

383
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Speaker 2: is growing up is the SNL crisis and then we

384
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Speaker 2: really didn't have like a major problem until the dot

385
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Speaker 2: com crisis. Are we getting these more frequently or does

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Speaker 2: it just feel that way?

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Speaker 3: Well, you know, I would maybe say a couple of

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Speaker 3: things for that. So, first of all, I think the

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Speaker 3: pandemic was an exception compared to some of the other crises,

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Speaker 3: because I would suggest that the dot com bubble or

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Speaker 3: the GFC, or maybe some of the European crises in

392
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Speaker 3: the mid twenty tens were very predictable, like if you

393
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Speaker 3: looked at where share prices were in the nineteen nineties

394
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Speaker 3: for tech stocks, or how levered banks were with a

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Speaker 3: couple with the subprime crisis that was going on in

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Speaker 3: the mid two thousands, or you know, some of the

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Speaker 3: issues with you know, the sovereign credit in Europe in

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Speaker 3: the mid twenty tens, Like those were all with the

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Speaker 3: benefit of hindsight, like, oh yeah, of course that was

400
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Speaker 3: going to happen.

401
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Speaker 2: Predictable but not well predicted.

402
00:19:39,480 --> 00:19:41,960
Speaker 3: Predictable but not well predicted. I mean, hindsight's always twenty

403
00:19:41,960 --> 00:19:45,040
Speaker 3: twenty in these things, right, But there was certainly predictable

404
00:19:45,080 --> 00:19:48,320
Speaker 3: by people who were following markets. I would differentiate the

405
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Speaker 3: COVID crisis from the sense that, you know, you probably

406
00:19:51,160 --> 00:19:53,080
Speaker 3: had a month or two head start if you really

407
00:19:53,080 --> 00:19:56,479
Speaker 3: followed what was going on in Wuhan, but fundamentally it

408
00:19:56,520 --> 00:19:59,200
Speaker 3: was much harder to figure that out. Like six months earlier,

409
00:19:59,400 --> 00:20:01,040
Speaker 3: no one was going to say a pandemic was going

410
00:20:01,080 --> 00:20:05,160
Speaker 3: to overwhelm financial markets. And so the reason I want

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00:20:05,160 --> 00:20:06,680
Speaker 3: to flag that is, you know, we do a lot

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Speaker 3: of up down analyses in what we're doing right, and

413
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Speaker 3: we try to really stress test investments, and so when

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00:20:12,560 --> 00:20:14,800
Speaker 3: you're a credit investor, there's a lot of things that

415
00:20:14,840 --> 00:20:17,200
Speaker 3: you say, well, this can happen, and that can happen,

416
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Speaker 3: but we're still not going to lose money on this investment, right,

417
00:20:19,680 --> 00:20:21,919
Speaker 3: because there's subordination below you one way or another. In

418
00:20:21,920 --> 00:20:24,440
Speaker 3: the capital structure, or there's assets that you can claw

419
00:20:24,440 --> 00:20:26,600
Speaker 3: them on too, that you can sell off, or maybe

420
00:20:26,640 --> 00:20:30,359
Speaker 3: not all those assets are markets driven. COVID created a

421
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Speaker 3: lot of random winners and losers. Sometimes they were winners

422
00:20:33,720 --> 00:20:36,120
Speaker 3: and losers for a year or two and ultimately made

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Speaker 3: their way back, And so I think there was some

424
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Speaker 3: more random noise in what happened in COVID. So I

425
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Speaker 3: probably would take less lessons on a going forward basis

426
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Speaker 3: from the COVID crisis than I would take from some

427
00:20:45,320 --> 00:20:48,399
Speaker 3: of these other crises. I do think that you know,

428
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Speaker 3: if you look at a very long period of time

429
00:20:50,520 --> 00:20:53,239
Speaker 3: twenty five years, you had twelve or thirteen of them

430
00:20:53,240 --> 00:20:55,800
Speaker 3: where you had interest rates at zero right or close

431
00:20:55,840 --> 00:20:57,800
Speaker 3: to zero and closer to fifteen when you added up,

432
00:20:58,119 --> 00:20:59,640
Speaker 3: and then the interest rates for most of the rest

433
00:20:59,640 --> 00:21:01,280
Speaker 3: of the time I am. You know, US treasury is

434
00:21:01,320 --> 00:21:03,439
Speaker 3: probably peaked around six percent, a lot of it's been

435
00:21:03,440 --> 00:21:05,639
Speaker 3: four or five percent, and so you know, these have

436
00:21:05,720 --> 00:21:08,040
Speaker 3: been pretty tame periods of time, and so you are

437
00:21:08,040 --> 00:21:10,720
Speaker 3: gonna have an occasional CRISI I mean you go back

438
00:21:10,760 --> 00:21:13,760
Speaker 3: over like long periods of time in finance, I do

439
00:21:13,840 --> 00:21:17,320
Speaker 3: think having the economy blow up every ten years was

440
00:21:17,320 --> 00:21:21,080
Speaker 3: a very you know, eighteen eighties eighteen nineties thing as well,

441
00:21:21,119 --> 00:21:23,480
Speaker 3: and so I think I think history does repeat itself

442
00:21:23,520 --> 00:21:25,399
Speaker 3: a lot. To me. I don't want to say it's

443
00:21:25,400 --> 00:21:26,960
Speaker 3: part of the fun of being an investor, because I

444
00:21:27,000 --> 00:21:30,200
Speaker 3: don't mean to be crassy. And these are people's jobs

445
00:21:30,200 --> 00:21:30,879
Speaker 3: and livelihoods.

446
00:21:30,960 --> 00:21:33,440
Speaker 2: I know exactly what you mean by that. Yeah, because

447
00:21:33,720 --> 00:21:38,680
Speaker 2: if you identify, if you identify something that is potentially

448
00:21:38,720 --> 00:21:43,159
Speaker 2: a great investment opportunity, especially if you're one of the

449
00:21:43,200 --> 00:21:46,720
Speaker 2: few voices talking about it and everybody says, no, no, no,

450
00:21:46,760 --> 00:21:49,639
Speaker 2: that's not a big deal. When the opportunity comes along,

451
00:21:49,720 --> 00:21:53,360
Speaker 2: it's got to be deeply satisfying that you sussed out

452
00:21:53,400 --> 00:21:56,200
Speaker 2: something that the rest of the investment community missed well.

453
00:21:56,240 --> 00:21:59,640
Speaker 3: I mean, one of the fun things about doing opportunistic

454
00:21:59,680 --> 00:22:02,960
Speaker 3: credit is that you need to be a little contrarian, right,

455
00:22:03,080 --> 00:22:05,760
Speaker 3: because you are looking at opportunities that other people have

456
00:22:05,880 --> 00:22:08,600
Speaker 3: turned down. Right. So you know, there's this idea in

457
00:22:08,680 --> 00:22:12,600
Speaker 3: credit or an op credit of good company, bad balance sheet, right,

458
00:22:12,920 --> 00:22:16,360
Speaker 3: and those exist sometimes but not often. And the reality

459
00:22:16,440 --> 00:22:18,640
Speaker 3: is that the market's efficient enough that many people will

460
00:22:18,640 --> 00:22:20,560
Speaker 3: figure out quickly it's a good company with a bad

461
00:22:20,600 --> 00:22:22,639
Speaker 3: balance sheet, and so it's not going to price the

462
00:22:22,640 --> 00:22:24,600
Speaker 3: way it probably would have priced twenty five or thirty

463
00:22:25,640 --> 00:22:27,639
Speaker 3: years ago. But there are a lot of businesses that

464
00:22:27,720 --> 00:22:30,080
Speaker 3: just go through cycles, right, and they may appear to

465
00:22:30,119 --> 00:22:32,639
Speaker 3: be bad businesses today, but they're actually going to be

466
00:22:32,680 --> 00:22:35,119
Speaker 3: great businesses again tomorrow. And it's more of like a

467
00:22:35,119 --> 00:22:37,119
Speaker 3: temporary thing that happens to the business and not a

468
00:22:37,160 --> 00:22:40,720
Speaker 3: permanent thing. And you know, that's where I get really excited.

469
00:22:40,800 --> 00:22:42,120
Speaker 3: I mean, it's interesting. You have to be a little

470
00:22:42,160 --> 00:22:44,199
Speaker 3: bit contrarian to do what we do, but you have

471
00:22:44,280 --> 00:22:46,639
Speaker 3: to also actually be a little bit optimistic when other

472
00:22:46,680 --> 00:22:49,920
Speaker 3: people aren't optimistic. And so you take a bad situation

473
00:22:50,000 --> 00:22:51,159
Speaker 3: and you say, hey, this is how we're going to

474
00:22:51,200 --> 00:22:53,840
Speaker 3: make it good. And sometimes we're actually you know, especially

475
00:22:53,880 --> 00:22:56,639
Speaker 3: in our private market investments, we're applying the elbow grease.

476
00:22:56,680 --> 00:22:59,280
Speaker 3: We're making the management changes to make it better. In

477
00:22:59,320 --> 00:23:02,960
Speaker 3: our public market investments, we're serving on creditors committees and

478
00:23:03,000 --> 00:23:05,320
Speaker 3: often bringing in a new management team to do that.

479
00:23:05,440 --> 00:23:08,800
Speaker 3: Repositioning a business sometimes selling off subsidiaries it don't make

480
00:23:08,840 --> 00:23:10,399
Speaker 3: sense for them to have, or they can't afford to

481
00:23:10,400 --> 00:23:13,480
Speaker 3: have any more. And so yeah, it does feel satisfying,

482
00:23:13,520 --> 00:23:15,119
Speaker 3: you know, three to five years later to look at

483
00:23:15,119 --> 00:23:18,200
Speaker 3: that and say, see how this is perceived today compared

484
00:23:18,200 --> 00:23:20,919
Speaker 3: to how it was perceived when we got involved in it.

485
00:23:21,000 --> 00:23:23,280
Speaker 3: You know, we were among the only people who you know,

486
00:23:23,320 --> 00:23:25,240
Speaker 3: figured this out at the time, or we figured it

487
00:23:25,240 --> 00:23:28,280
Speaker 3: out first or whatever it is, so that you know,

488
00:23:28,320 --> 00:23:29,800
Speaker 3: I sort of you know, as I just said, like,

489
00:23:29,880 --> 00:23:33,359
Speaker 3: that's part of the like enjoyable part of this job.

490
00:23:33,440 --> 00:23:36,200
Speaker 3: Some of the psychic benefit is being first or among

491
00:23:36,240 --> 00:23:38,160
Speaker 3: the first to figure these things out.

492
00:23:38,800 --> 00:23:44,600
Speaker 2: So so last crisis questions, and it might have predated

493
00:23:44,640 --> 00:23:47,199
Speaker 2: you because you probably were still in school during this,

494
00:23:47,760 --> 00:23:51,320
Speaker 2: but before the dot com implosion in the late nineties,

495
00:23:51,760 --> 00:23:55,159
Speaker 2: we had a series of credit problems. First was the

496
00:23:55,200 --> 00:23:58,680
Speaker 2: Asian contagion with the tie Bot crisis. Then we had

497
00:23:58,680 --> 00:24:02,840
Speaker 2: the Russian rubled fault, and then long term capital management

498
00:24:02,960 --> 00:24:07,159
Speaker 2: was the direct result of the Russian default. What was

499
00:24:07,200 --> 00:24:10,520
Speaker 2: your experience during those periods or is that really early

500
00:24:10,680 --> 00:24:11,320
Speaker 2: history to you?

501
00:24:11,400 --> 00:24:14,679
Speaker 3: Yeah, I mean it's literally right when I started, right,

502
00:24:14,720 --> 00:24:17,639
Speaker 3: So I started at Davidson Kaepner as a summer intern

503
00:24:17,720 --> 00:24:20,040
Speaker 3: in May of nineteen ninety eight. And so the Russia

504
00:24:20,080 --> 00:24:23,280
Speaker 3: crisis and the long term capital crisis were August or

505
00:24:23,280 --> 00:24:26,359
Speaker 3: September of nineteen ninety eight. By the way, thank goodness,

506
00:24:26,359 --> 00:24:28,560
Speaker 3: they liked me at Davidson Kaepnor, and we're willing to

507
00:24:28,560 --> 00:24:30,080
Speaker 3: give me a job because it was a very tough

508
00:24:30,160 --> 00:24:32,320
Speaker 3: job market in the fall ninety four dealing with those

509
00:24:32,359 --> 00:24:35,680
Speaker 3: particular things. The Asia contasion I think was more ninety seven,

510
00:24:35,800 --> 00:24:38,000
Speaker 3: and so I saw parts of it. I mean that

511
00:24:38,040 --> 00:24:41,120
Speaker 3: was also a learning lesson. People made a fortune in Asia,

512
00:24:41,440 --> 00:24:43,520
Speaker 3: we just weren't equipped to do it at Decay. We

513
00:24:43,560 --> 00:24:45,359
Speaker 3: looked at a few things, and what we figured out,

514
00:24:45,400 --> 00:24:47,879
Speaker 3: which was right, was we couldn't invest there unless we

515
00:24:47,920 --> 00:24:50,080
Speaker 3: had boots on the ground and a real knowledge base,

516
00:24:50,119 --> 00:24:52,520
Speaker 3: and so we didn't. And so folks like Allman Sachs

517
00:24:52,520 --> 00:24:55,439
Speaker 3: made a fortune in that era. Those are lessons I

518
00:24:55,480 --> 00:24:57,840
Speaker 3: corrected later on, where we sort of boots on the

519
00:24:57,840 --> 00:25:01,480
Speaker 3: ground in places around the world, advantage of opportunities as

520
00:25:01,480 --> 00:25:03,440
Speaker 3: they emerged. But I learned that from Asia in terms

521
00:25:03,440 --> 00:25:05,479
Speaker 3: of what we weren't doing. But look, I mean I

522
00:25:05,560 --> 00:25:07,280
Speaker 3: was on a trading desk when the world was falling

523
00:25:07,280 --> 00:25:11,040
Speaker 3: apart in August of nineteen ninety eight, And you know,

524
00:25:11,119 --> 00:25:13,200
Speaker 3: I've told this to some of our younger people over time,

525
00:25:13,400 --> 00:25:15,879
Speaker 3: Like the best time to be on a trading desk

526
00:25:15,960 --> 00:25:18,080
Speaker 3: is when you have no responsibility, right, so it's not

527
00:25:18,119 --> 00:25:20,520
Speaker 3: your fault that things are going bad, and you just

528
00:25:20,800 --> 00:25:23,040
Speaker 3: learned from it and you watch the people around you.

529
00:25:23,119 --> 00:25:25,520
Speaker 3: And I remember how cool and calm and collected everyone

530
00:25:25,680 --> 00:25:28,719
Speaker 3: was in the face of you know, dramatic adversity. And

531
00:25:28,760 --> 00:25:30,480
Speaker 3: you know that was super helpful to me when I

532
00:25:30,480 --> 00:25:32,800
Speaker 3: was dealing with O seven or eight or things that

533
00:25:34,280 --> 00:25:37,400
Speaker 3: happened after the fact, and so you know, I quite

534
00:25:37,480 --> 00:25:39,800
Speaker 3: enjoyed having that opportunity. Huh.

535
00:25:39,920 --> 00:25:43,920
Speaker 2: Really really interesting. So let's talk a little bit about

536
00:25:44,200 --> 00:25:47,440
Speaker 2: a piece that you and the firm put out titled

537
00:25:48,000 --> 00:25:51,880
Speaker 2: the Party is Just Getting Started discuss.

538
00:25:52,000 --> 00:25:54,240
Speaker 3: Sure, Well, you know it's interesting. This is something that

539
00:25:54,320 --> 00:25:58,119
Speaker 3: I reflected on last year, and so the general subject

540
00:25:58,320 --> 00:26:00,520
Speaker 3: of the Party is Just Getting Stile, which is a

541
00:26:00,520 --> 00:26:03,879
Speaker 3: white paper that we put out recently, is about the

542
00:26:03,960 --> 00:26:07,639
Speaker 3: role of absolute return in a portfolio. And the reason

543
00:26:07,720 --> 00:26:10,359
Speaker 3: I reflected on this is if you go back to

544
00:26:10,359 --> 00:26:12,840
Speaker 3: the start of my career, so the nineteen nineties and

545
00:26:12,920 --> 00:26:15,800
Speaker 3: the two thousands, you would have relied upon absolute return

546
00:26:15,840 --> 00:26:18,439
Speaker 3: strategies to be a volist in your portfolio and a

547
00:26:18,480 --> 00:26:21,560
Speaker 3: diversifier in your portfolio, but you also would have relied

548
00:26:21,640 --> 00:26:23,840
Speaker 3: upon them to get you home in terms of the

549
00:26:23,880 --> 00:26:26,399
Speaker 3: overall portfolio objectives. Right. So if you look at a

550
00:26:26,400 --> 00:26:30,720
Speaker 3: typical allocator, right, they've got a five percent spend rate

551
00:26:30,960 --> 00:26:33,160
Speaker 3: and they want to earn something plus inflation over that.

552
00:26:33,280 --> 00:26:36,040
Speaker 3: So many allocators are shooting for kind of higher single

553
00:26:36,080 --> 00:26:38,159
Speaker 3: digit rate return seven or nine percent, depending upon the

554
00:26:38,200 --> 00:26:43,080
Speaker 3: institution and the needs. And in the two thousands, when

555
00:26:43,080 --> 00:26:46,439
Speaker 3: I started my career was a first partner at Davidson Keepner,

556
00:26:46,760 --> 00:26:48,760
Speaker 3: that would have been the expectation of absolute return was

557
00:26:48,800 --> 00:26:50,760
Speaker 3: that you were going to earn high single or lower

558
00:26:50,800 --> 00:26:54,440
Speaker 3: double digit rates of return in the strategy NBA diversifier

559
00:26:54,560 --> 00:26:58,560
Speaker 3: and have low volatility. There were other strategies within abbsolute

560
00:26:58,560 --> 00:27:01,320
Speaker 3: return that might have had higher return higher volatility expectations,

561
00:27:01,320 --> 00:27:04,479
Speaker 3: but that would have been the base expectation. So what happened, right,

562
00:27:04,520 --> 00:27:08,359
Speaker 3: You had a period of time with fifteen years roughly

563
00:27:08,400 --> 00:27:11,560
Speaker 3: of zero percent interest rates. The longer that period went on,

564
00:27:11,880 --> 00:27:15,040
Speaker 3: the more and more returns got reduced in the area.

565
00:27:15,119 --> 00:27:18,440
Speaker 3: I would say by twenty twenty, when the pandemic hit

566
00:27:19,160 --> 00:27:22,679
Speaker 3: an allocators expectations for appsort return strategies would have just

567
00:27:22,880 --> 00:27:25,040
Speaker 3: been to be a ballast against their portfolios. And what

568
00:27:25,080 --> 00:27:27,040
Speaker 3: I mean by that is we need a ballast, we

569
00:27:27,040 --> 00:27:29,600
Speaker 3: need a volatility dampner. We're going to use absolte return

570
00:27:29,960 --> 00:27:32,360
Speaker 3: for that. But we expect to earn our quote unquote

571
00:27:32,400 --> 00:27:34,720
Speaker 3: real returns off of our equity strategy. So whether that's

572
00:27:34,880 --> 00:27:37,720
Speaker 3: public equities or private equities, or maybe if you're a

573
00:27:37,760 --> 00:27:41,520
Speaker 3: little bit more adventurous growth equity or venture capital, and

574
00:27:41,520 --> 00:27:43,240
Speaker 3: you pair those two things together and you'd have a

575
00:27:43,240 --> 00:27:46,520
Speaker 3: great portfolio. So you fast forward to twenty twenty four,

576
00:27:46,920 --> 00:27:49,040
Speaker 3: I think things are very different today, and we wanted

577
00:27:49,080 --> 00:27:52,080
Speaker 3: to figure out why. I mean, absolute return strategies collectively

578
00:27:52,080 --> 00:27:54,320
Speaker 3: had their best year at a very long time last year.

579
00:27:54,400 --> 00:27:56,240
Speaker 3: I think they're off to a very good twenty twenty

580
00:27:56,320 --> 00:27:59,240
Speaker 3: five as well. So why is this happening? So is

581
00:27:59,240 --> 00:28:02,439
Speaker 3: it just rates? And so you're unquestionably in a period

582
00:28:02,520 --> 00:28:04,520
Speaker 3: of higher rates today versus what you were in the

583
00:28:04,560 --> 00:28:07,040
Speaker 3: two thousand and tens. But it's not just rates, it's

584
00:28:07,080 --> 00:28:09,400
Speaker 3: actually dispersion. And so what we did is we looked

585
00:28:09,440 --> 00:28:12,560
Speaker 3: over long periods of time and there's a high correlation

586
00:28:12,840 --> 00:28:16,560
Speaker 3: between dispersion and markets and higher rates, and so not

587
00:28:16,600 --> 00:28:19,000
Speaker 3: only do you get the benefit of a interest rate

588
00:28:19,040 --> 00:28:21,440
Speaker 3: premium today compared to what you had four years ago,

589
00:28:21,840 --> 00:28:24,680
Speaker 3: but you actually get about fifty percent it's a touch

590
00:28:24,720 --> 00:28:28,840
Speaker 3: more than that expectation of return above the risk free

591
00:28:28,920 --> 00:28:31,719
Speaker 3: rate today because of where a dispersion is in markets,

592
00:28:31,720 --> 00:28:36,560
Speaker 3: and that dispersion exists in both credit markets and equity markets,

593
00:28:36,600 --> 00:28:38,680
Speaker 3: so it's in both those strategies, and that's why you're

594
00:28:38,680 --> 00:28:42,120
Speaker 3: getting better performance than absolute return. We think the rate

595
00:28:42,200 --> 00:28:44,440
Speaker 3: story is here to stay. But even if it's not

596
00:28:44,520 --> 00:28:46,280
Speaker 3: for a period of time, even if you have the

597
00:28:46,320 --> 00:28:49,560
Speaker 3: short term rate go down, ultimately we think that dispersion

598
00:28:49,640 --> 00:28:51,040
Speaker 3: is going to last for a long time, which is

599
00:28:51,080 --> 00:28:53,840
Speaker 3: kind of what happened in the two thousands as well.

600
00:28:53,920 --> 00:28:56,760
Speaker 3: And so again you have a whole generation of allocators

601
00:28:56,800 --> 00:28:59,560
Speaker 3: who are trained for absolute return to serve one role

602
00:28:59,600 --> 00:29:02,200
Speaker 3: in their portfolios, and we actually think it serves a

603
00:29:02,280 --> 00:29:04,560
Speaker 3: second role in their portfolios as well, which is a

604
00:29:04,560 --> 00:29:07,880
Speaker 3: return driver. And so you take those two things together,

605
00:29:07,920 --> 00:29:10,680
Speaker 3: we think it's a really powerful asset class. And I

606
00:29:10,720 --> 00:29:12,400
Speaker 3: wrote this paper because I just don't think there's been

607
00:29:12,440 --> 00:29:14,800
Speaker 3: a lot of work that's out there on it. You know,

608
00:29:14,840 --> 00:29:17,640
Speaker 3: you see headlines about people are getting more interested in

609
00:29:17,680 --> 00:29:19,880
Speaker 3: apps or return our hedge funds. Again, you see other

610
00:29:19,920 --> 00:29:21,760
Speaker 3: headlines that there's not a lot of capital available for

611
00:29:21,800 --> 00:29:24,960
Speaker 3: the strategy because many allocators are over allocated to private

612
00:29:24,960 --> 00:29:27,200
Speaker 3: equity or growth equity or venture capital and they don't

613
00:29:27,240 --> 00:29:29,440
Speaker 3: have the liquid capacity for it. But I think for

614
00:29:29,480 --> 00:29:31,320
Speaker 3: those who do, who are interested in it, they're getting

615
00:29:31,320 --> 00:29:33,560
Speaker 3: rewarded for it right now. And so that's the root

616
00:29:33,560 --> 00:29:34,040
Speaker 3: of the paper.

617
00:29:34,320 --> 00:29:37,840
Speaker 2: So I'm fascinated by so many aspects of that. One

618
00:29:37,920 --> 00:29:41,880
Speaker 2: is you brought up ballast, and when I think of

619
00:29:41,960 --> 00:29:46,719
Speaker 2: what's typically been the ballast to offset volatility of public equities,

620
00:29:47,040 --> 00:29:50,680
Speaker 2: it historically has been bonds. But once yields went down

621
00:29:50,720 --> 00:29:55,520
Speaker 2: to practically nothing, the question was what's going to take

622
00:29:55,600 --> 00:29:59,000
Speaker 2: up that role. I know a lot of people just said,

623
00:29:59,000 --> 00:30:02,240
Speaker 2: all right, those seventy th the equity will make up

624
00:30:02,240 --> 00:30:07,560
Speaker 2: for the performance, but not for that offsetting diversified ballast.

625
00:30:08,320 --> 00:30:13,120
Speaker 2: Is it distress credit, is it absolute returns? What is

626
00:30:13,160 --> 00:30:17,320
Speaker 2: filling that role going forward? And then we'll talk about

627
00:30:17,480 --> 00:30:20,840
Speaker 2: how the higher rates have changed the calculus somewhat later,

628
00:30:21,120 --> 00:30:25,000
Speaker 2: But what is the new ballast today that used to

629
00:30:25,000 --> 00:30:25,600
Speaker 2: be bonds.

630
00:30:25,920 --> 00:30:28,040
Speaker 3: Well, I mean again, i'd start out with like, I

631
00:30:28,080 --> 00:30:32,440
Speaker 3: think absolute return can play that role. So opportunistic credit

632
00:30:32,520 --> 00:30:36,520
Speaker 3: can be part of a absolute return strategy, whether it's

633
00:30:36,520 --> 00:30:39,920
Speaker 3: accessed in public format or private format. Some people put

634
00:30:39,960 --> 00:30:43,040
Speaker 3: opartistic credit in larger what they would call private credit

635
00:30:43,240 --> 00:30:46,640
Speaker 3: buckets as well. But I do actually think that absolute

636
00:30:46,680 --> 00:30:50,360
Speaker 3: return will eliminate the rate risk portion of things. You know,

637
00:30:50,680 --> 00:30:53,320
Speaker 3: I mean, bonds are a ballist except if they're not. Right,

638
00:30:53,400 --> 00:30:58,040
Speaker 3: So you go back to two twenty two in twenty

639
00:30:58,120 --> 00:31:02,240
Speaker 3: twenty two was certainly the worst year for fixed income

640
00:31:02,400 --> 00:31:04,680
Speaker 3: in one hundred years. It may have arguably been the

641
00:31:04,680 --> 00:31:06,240
Speaker 3: worst year for fixed income in the history of the

642
00:31:06,280 --> 00:31:08,200
Speaker 3: United States. If you go back over very long periods

643
00:31:08,240 --> 00:31:12,400
Speaker 3: of time and performance of bonds, you're basically down mid

644
00:31:12,480 --> 00:31:14,840
Speaker 3: teens depending upon what you own, whether it was treasuries

645
00:31:14,920 --> 00:31:17,760
Speaker 3: or investment great or high yield of things along those lines.

646
00:31:17,880 --> 00:31:19,720
Speaker 3: Twenty twenty was not a great year for the equity

647
00:31:19,760 --> 00:31:22,200
Speaker 3: markets either, right, So that was a year where people

648
00:31:22,200 --> 00:31:25,640
Speaker 3: started to seriously question the sixty forty or seventy thirty

649
00:31:26,760 --> 00:31:29,320
Speaker 3: model with where things were. If you were an absolute

650
00:31:29,320 --> 00:31:31,800
Speaker 3: return type strategies, you did much better that year, if

651
00:31:31,800 --> 00:31:33,280
Speaker 3: you were not opt just a credit strategies, you did

652
00:31:33,360 --> 00:31:37,000
Speaker 3: much better that you protected capital I think at a

653
00:31:37,000 --> 00:31:40,040
Speaker 3: minimum in those strategies, and that gave you more of

654
00:31:40,080 --> 00:31:43,360
Speaker 3: a chance to take advantage of upside in twenty twenty three,

655
00:31:43,360 --> 00:31:47,200
Speaker 3: in two thousand and twenty four. I mean opportunistic credit

656
00:31:47,600 --> 00:31:51,640
Speaker 3: has the additional advantage that it tends to be pretty

657
00:31:51,720 --> 00:31:54,840
Speaker 3: inversely correlated in terms of when it does well to

658
00:31:55,040 --> 00:31:57,880
Speaker 3: strategies like growth equity and venture capital. So again, those

659
00:31:57,880 --> 00:31:59,880
Speaker 3: are like perfectly good strategies. I'm not like put polling

660
00:31:59,920 --> 00:32:02,520
Speaker 3: the I'm just saying they're very cyclical in terms of

661
00:32:03,200 --> 00:32:05,920
Speaker 3: making investments in those strategies, and so they actually pair

662
00:32:06,120 --> 00:32:09,360
Speaker 3: very well with opportunistic credit in portfolio is because typically

663
00:32:09,360 --> 00:32:11,680
Speaker 3: oportistic credit is doing well when those strategies are not

664
00:32:11,720 --> 00:32:13,360
Speaker 3: doing well, and sometimes vice first.

665
00:32:13,320 --> 00:32:16,080
Speaker 2: Right, And to put a little meat on that worst

666
00:32:16,200 --> 00:32:20,240
Speaker 2: year in fixed income in twenty twenty two, the last

667
00:32:20,280 --> 00:32:23,120
Speaker 2: time you had both stocks and bonds down double digits,

668
00:32:23,160 --> 00:32:25,600
Speaker 2: I want to say was nineteen eighty one, about forty

669
00:32:25,680 --> 00:32:28,920
Speaker 2: forty one years earlier. So these things don't come along

670
00:32:29,400 --> 00:32:32,520
Speaker 2: very often, but when they do, I would imagine event

671
00:32:32,640 --> 00:32:35,800
Speaker 2: driven opportunistic credit is a perfect offset.

672
00:32:35,960 --> 00:32:39,840
Speaker 3: We completely agree with that. And also, you know, I

673
00:32:39,880 --> 00:32:42,840
Speaker 3: think that it's tough to just do a simple sixty

674
00:32:42,920 --> 00:32:46,200
Speaker 3: forty or seventy thirty portfolio. I mean maybe for very

675
00:32:46,240 --> 00:32:49,800
Speaker 3: smaller institutions that make sense, but once you have some

676
00:32:49,920 --> 00:32:52,240
Speaker 3: degree of sophistication that you can bring into your portfolio,

677
00:32:52,280 --> 00:32:54,400
Speaker 3: it makes sense to have some alternatives of different sorts

678
00:32:54,440 --> 00:32:56,400
Speaker 3: to balance out that risk.

679
00:32:57,200 --> 00:33:00,840
Speaker 2: So you mentioned higher rates as an ongoing issue. It

680
00:33:00,880 --> 00:33:04,640
Speaker 2: certainly looks like higher for longer is the Fed's posture,

681
00:33:05,320 --> 00:33:09,640
Speaker 2: which raises the question our higher rates a tailwind for

682
00:33:09,760 --> 00:33:14,680
Speaker 2: absolute return strategies, especially opportunistic credit or are they a headwind?

683
00:33:15,360 --> 00:33:16,960
Speaker 3: Well, I always say a couple of things. So first

684
00:33:16,960 --> 00:33:19,959
Speaker 3: of all, we're in an environment of higher rates, it

685
00:33:19,960 --> 00:33:22,400
Speaker 3: doesn't mean that we're in an environment of high rates, right.

686
00:33:22,440 --> 00:33:24,920
Speaker 3: And so if you look at the hundred the nice

687
00:33:24,920 --> 00:33:26,920
Speaker 3: thing about interest rates is you have hundreds of years

688
00:33:26,960 --> 00:33:28,880
Speaker 3: of history you can actually look at in these things.

689
00:33:29,120 --> 00:33:30,600
Speaker 3: And so if you look at the one hundred year

690
00:33:30,680 --> 00:33:33,040
Speaker 3: history of interest rates in the United States, I believe

691
00:33:33,040 --> 00:33:35,560
Speaker 3: the ten years between four and five percent, right, So

692
00:33:35,600 --> 00:33:37,800
Speaker 3: that's about where it is today. So you don't have

693
00:33:37,960 --> 00:33:40,480
Speaker 3: a high ten year today. You only have a high

694
00:33:40,480 --> 00:33:42,480
Speaker 3: ten year today compared to what people got used to

695
00:33:42,840 --> 00:33:45,920
Speaker 3: from the late two thousands until two thousand and twenty

696
00:33:45,960 --> 00:33:49,240
Speaker 3: one in terms of rates of return. So, first of all,

697
00:33:49,280 --> 00:33:53,320
Speaker 3: I do think that higher rates is a tailwind for

698
00:33:53,480 --> 00:33:57,120
Speaker 3: absolute return strategies in general. So that would include opportunistic

699
00:33:57,160 --> 00:33:59,640
Speaker 3: credit strategies, that would include a vent driven strategies, which

700
00:33:59,680 --> 00:34:02,080
Speaker 3: we do. It also include relative value strategy, so we've

701
00:34:02,120 --> 00:34:04,160
Speaker 3: got some of that in our portfolio, but it's not

702
00:34:04,200 --> 00:34:07,560
Speaker 3: the dominant strategy that we have because of the dispersion

703
00:34:07,640 --> 00:34:09,680
Speaker 3: you have in markets in that period of time. I

704
00:34:09,800 --> 00:34:13,759
Speaker 3: also think it's a really good tailwind for opportunistic credit specifically,

705
00:34:14,120 --> 00:34:16,200
Speaker 3: but I give a little bit more of a nuanced

706
00:34:16,239 --> 00:34:19,600
Speaker 3: answer to that, and an opportunistic credit I think you

707
00:34:19,640 --> 00:34:22,080
Speaker 3: need to go back to how we got here, right.

708
00:34:22,160 --> 00:34:25,880
Speaker 3: So it's not the absolute rate of return in fixed

709
00:34:25,920 --> 00:34:29,759
Speaker 3: income today that's interesting. It's the sixteen months that it

710
00:34:29,800 --> 00:34:34,120
Speaker 3: took from early twenty twenty two for the base rate

711
00:34:34,200 --> 00:34:36,840
Speaker 3: to go from zero went to the five and obviously

712
00:34:36,880 --> 00:34:39,080
Speaker 3: it's come off of that a little bit since then.

713
00:34:39,320 --> 00:34:42,280
Speaker 3: So most capital structures that are in the market place

714
00:34:42,320 --> 00:34:48,160
Speaker 3: today were set entirely or in some cases partially but meaningfully.

715
00:34:48,480 --> 00:34:51,239
Speaker 3: Prior to twenty twenty two, when the base rate was zero,

716
00:34:51,600 --> 00:34:53,759
Speaker 3: and when you're close to fifteen years into a base

717
00:34:53,840 --> 00:34:57,080
Speaker 3: rate of zero, companies were assuming, or people who owned

718
00:34:57,080 --> 00:34:59,600
Speaker 3: assets were levering them, were assuming, and probably rightfully so,

719
00:35:00,040 --> 00:35:03,160
Speaker 3: that the base rate would stay zero forever. And in fact,

720
00:35:03,360 --> 00:35:06,000
Speaker 3: you know, it's one of those things where it's so

721
00:35:06,160 --> 00:35:08,880
Speaker 3: easy to foresee with the inflation we had in twenty

722
00:35:08,960 --> 00:35:12,120
Speaker 3: twenty in twenty twenty one, that the base rate was

723
00:35:12,120 --> 00:35:13,839
Speaker 3: going to rise, but it still came as a shock

724
00:35:13,880 --> 00:35:16,480
Speaker 3: to the markets where it actually rose. And so you're

725
00:35:16,520 --> 00:35:19,040
Speaker 3: now in the middle of this I think several year

726
00:35:19,560 --> 00:35:23,120
Speaker 3: period of time where owners of assets are like, hey,

727
00:35:23,200 --> 00:35:25,880
Speaker 3: I got to actually raise money in my capital structure

728
00:35:25,920 --> 00:35:27,800
Speaker 3: to de lever I mean, some assets are going to

729
00:35:27,840 --> 00:35:30,759
Speaker 3: be you know, need to be just fully restructured because

730
00:35:30,800 --> 00:35:32,840
Speaker 3: they aren't worth what the debt is worth anymore. But

731
00:35:32,880 --> 00:35:35,200
Speaker 3: there are many other asset owners who have assets who

732
00:35:35,239 --> 00:35:37,440
Speaker 3: have equity value, maybe not as much equity value as

733
00:35:37,440 --> 00:35:40,360
Speaker 3: they had previously, and they look at their capital structures

734
00:35:40,760 --> 00:35:43,440
Speaker 3: and you probably need to raise twenty to forty dollars

735
00:35:43,480 --> 00:35:45,880
Speaker 3: of equity for every one hundred dollars a debt that

736
00:35:45,920 --> 00:35:48,959
Speaker 3: you had before to delever your capital structure. And that's

737
00:35:49,000 --> 00:35:51,400
Speaker 3: super interesting because there's a lot of different ways companies

738
00:35:51,440 --> 00:35:54,360
Speaker 3: can do that. They can do liability management exercises to

739
00:35:54,400 --> 00:35:57,240
Speaker 3: try to whittle down the debt. They can sell assets

740
00:35:57,320 --> 00:36:00,360
Speaker 3: off to you know, get their house in order, in

741
00:36:00,680 --> 00:36:03,839
Speaker 3: direct corporate lending land, private credit land. They can just pick.

742
00:36:03,920 --> 00:36:05,520
Speaker 3: They could say, hey, we're not gonna pay you interest

743
00:36:05,520 --> 00:36:06,959
Speaker 3: for a year or two, so just tack it onto

744
00:36:06,960 --> 00:36:08,840
Speaker 3: the principle and let's sort of try to fix the

745
00:36:08,880 --> 00:36:10,960
Speaker 3: ship that way. There's a lot of different ways this

746
00:36:11,000 --> 00:36:13,920
Speaker 3: can get solved for and that's like the theme an

747
00:36:13,920 --> 00:36:16,080
Speaker 3: opportunistic credit that we've been living in the last couple

748
00:36:16,120 --> 00:36:17,520
Speaker 3: of years, and it's a theme I think we're gonna

749
00:36:17,520 --> 00:36:19,360
Speaker 3: be living the next couple of years. And so I

750
00:36:19,400 --> 00:36:22,439
Speaker 3: think it's super interesting because unless you believe that rates

751
00:36:22,480 --> 00:36:25,640
Speaker 3: are gonna rise materially, like, there's no bailing out of

752
00:36:25,680 --> 00:36:28,399
Speaker 3: this situation of these companies. It's just math in terms

753
00:36:28,440 --> 00:36:30,720
Speaker 3: of where these are. And if you're an asset owner,

754
00:36:31,120 --> 00:36:34,080
Speaker 3: you're gonna play out your lower interest rate coupon to

755
00:36:34,080 --> 00:36:35,799
Speaker 3: the very end. It's an asset. It's an asset that

756
00:36:35,800 --> 00:36:37,840
Speaker 3: burns off, and so you're either going to try to

757
00:36:37,840 --> 00:36:40,560
Speaker 3: be opportunistic and use that to get something from your creditors,

758
00:36:41,080 --> 00:36:42,840
Speaker 3: or you're gonna say, hey, we're just gonna pay a

759
00:36:42,840 --> 00:36:44,200
Speaker 3: little rates for a while and we'll see what things

760
00:36:44,239 --> 00:36:45,919
Speaker 3: happen closer to maturity. Huh.

761
00:36:46,120 --> 00:36:49,680
Speaker 2: Really really interesting. Who knew the mantra move fast and

762
00:36:49,719 --> 00:36:51,919
Speaker 2: break things would be adopted by the Fed?

763
00:36:52,200 --> 00:36:52,439
Speaker 3: Yeah?

764
00:36:52,560 --> 00:36:55,719
Speaker 2: Right, that's more more Silicon Valley. So I'm fascinated by

765
00:36:56,239 --> 00:37:02,800
Speaker 2: the concept of opportunistic credit. You've been with Davidson Kapner

766
00:37:02,840 --> 00:37:06,399
Speaker 2: for twenty seven years, twenty six years something like that.

767
00:37:07,000 --> 00:37:09,759
Speaker 2: How has the DNA of the firm when it comes

768
00:37:09,760 --> 00:37:14,120
Speaker 2: to event driven investing evolved over that time. It can't

769
00:37:14,120 --> 00:37:16,520
Speaker 2: be the same today as it was in the nineteen nineties.

770
00:37:16,640 --> 00:37:19,000
Speaker 3: No, I mean so, first of all, you know, I'm

771
00:37:19,000 --> 00:37:21,399
Speaker 3: a believer in some of the truism of markets, which

772
00:37:21,440 --> 00:37:25,640
Speaker 3: is that capital chases returns and returns become effishent overtime. Like,

773
00:37:25,640 --> 00:37:27,279
Speaker 3: there's no getting away from that. If you have an

774
00:37:27,280 --> 00:37:29,560
Speaker 3: asset class and people are doing well and it, other

775
00:37:29,560 --> 00:37:31,560
Speaker 3: people will show up in your asset class, and eventually

776
00:37:32,160 --> 00:37:35,000
Speaker 3: change the dynamic, right, that is what it is. We

777
00:37:35,040 --> 00:37:38,520
Speaker 3: had a couple of strategic inflection points, and I think

778
00:37:38,520 --> 00:37:41,520
Speaker 3: we're very helpful in our business. So the first of

779
00:37:41,560 --> 00:37:45,080
Speaker 3: which was opening our international offices. So you know, I

780
00:37:45,120 --> 00:37:47,799
Speaker 3: mentioned earlier the fact that we kind of missed the

781
00:37:48,200 --> 00:37:50,719
Speaker 3: opportunity set in Asia in the late nineteen nineties because

782
00:37:50,719 --> 00:37:52,759
Speaker 3: we just weren't staff to do it. I'm a big

783
00:37:52,840 --> 00:37:55,040
Speaker 3: believer here, if you're going to invest in markets outside

784
00:37:55,080 --> 00:37:58,319
Speaker 3: the US, you want local people with local relationships and

785
00:37:58,360 --> 00:38:00,920
Speaker 3: local language skills doing that, right. You don't want it

786
00:38:00,920 --> 00:38:02,439
Speaker 3: to be a bunch of smart people in the room

787
00:38:02,719 --> 00:38:05,480
Speaker 3: doing it from New York or London. We opened our

788
00:38:05,480 --> 00:38:06,920
Speaker 3: London office, I don't know, at the end of two

789
00:38:06,920 --> 00:38:09,480
Speaker 3: thousand and two thousand and one, something along those lines,

790
00:38:09,520 --> 00:38:11,800
Speaker 3: and we really invested it in that in that office.

791
00:38:11,800 --> 00:38:14,279
Speaker 3: I mean, the story I like to tell is we

792
00:38:14,320 --> 00:38:17,279
Speaker 3: had a pretty good sized office in London. I make

793
00:38:17,320 --> 00:38:18,879
Speaker 3: a point of going, you know, four or five times

794
00:38:18,880 --> 00:38:22,000
Speaker 3: a year. I showed up in early January two thousand

795
00:38:22,040 --> 00:38:24,200
Speaker 3: and nine, which I remember because I remember seeing all

796
00:38:24,239 --> 00:38:27,080
Speaker 3: the Herod's holiday ornaments for sale in the gift shop

797
00:38:27,080 --> 00:38:29,680
Speaker 3: at the Heathrow Airport on my way home and I

798
00:38:29,760 --> 00:38:33,799
Speaker 3: go to see the old Merrils. Right, So Merrill Lynch

799
00:38:33,840 --> 00:38:35,680
Speaker 3: had been merged into Bank of America at this point,

800
00:38:35,680 --> 00:38:37,600
Speaker 3: but they were still there and they said, we just

801
00:38:37,640 --> 00:38:39,440
Speaker 3: want you to know you're the first American who's come

802
00:38:39,480 --> 00:38:41,759
Speaker 3: to our office in four months. Wow. And I said,

803
00:38:41,840 --> 00:38:44,000
Speaker 3: oh my god, how is that possible? And they said, well,

804
00:38:44,040 --> 00:38:45,320
Speaker 3: you know a lot going on in the US. This

805
00:38:45,480 --> 00:38:48,759
Speaker 3: was right past fall two thousand and eight, right, And

806
00:38:48,840 --> 00:38:50,719
Speaker 3: I said, you know what, there's an opportunity here. So

807
00:38:50,760 --> 00:38:53,000
Speaker 3: we did a massive hiring spree in London over the

808
00:38:53,080 --> 00:38:55,120
Speaker 3: next three or four years. And I said, okay, London,

809
00:38:55,440 --> 00:38:57,160
Speaker 3: because you know, all the stuff in the US had

810
00:38:57,200 --> 00:38:59,520
Speaker 3: cracked and in London it hadn't cracked in the same

811
00:39:00,520 --> 00:39:03,120
Speaker 3: in the same way. And so the European opportunities came

812
00:39:03,160 --> 00:39:06,840
Speaker 3: a few years later, but they came in big droves.

813
00:39:07,000 --> 00:39:09,520
Speaker 3: And you know, we followed the same playbook in Asia

814
00:39:09,600 --> 00:39:11,279
Speaker 3: as well. We opened an office in Hong Kong in

815
00:39:11,320 --> 00:39:14,920
Speaker 3: twenty ten. We now have smaller offices in Mumbai and

816
00:39:14,920 --> 00:39:19,080
Speaker 3: Shinzen as well to access the China and India markets.

817
00:39:19,160 --> 00:39:23,480
Speaker 3: And you know, that was a fantastic decision. Those markets

818
00:39:23,520 --> 00:39:26,719
Speaker 3: are less efficient than the US is some of that structural.

819
00:39:26,800 --> 00:39:29,320
Speaker 3: Some of that there's just fewer people trying to access

820
00:39:29,360 --> 00:39:32,759
Speaker 3: those opportunities. You need to have local people, you need relationships.

821
00:39:32,760 --> 00:39:36,480
Speaker 3: It's much more relationship driven. That was like one change

822
00:39:36,520 --> 00:39:38,799
Speaker 3: that we made and I think set us up for,

823
00:39:39,200 --> 00:39:42,080
Speaker 3: you know, continuing to grow and survive and thrive as

824
00:39:42,120 --> 00:39:45,160
Speaker 3: a firm. The second one i'd reference is our entry

825
00:39:45,280 --> 00:39:48,319
Speaker 3: more seriously into private markets. And so you know, if

826
00:39:48,320 --> 00:39:52,080
Speaker 3: you go back prior to twenty ten, all the capital

827
00:39:52,080 --> 00:39:55,480
Speaker 3: we had was sort of hedge fund structure capital where

828
00:39:55,800 --> 00:39:59,600
Speaker 3: it was reasonably liquid, maybe had the small ability to

829
00:39:59,680 --> 00:40:03,520
Speaker 3: do a side pocket. We generally didn't do that, and

830
00:40:03,600 --> 00:40:05,839
Speaker 3: she had to mostly stick to liquid securities in what

831
00:40:05,880 --> 00:40:07,759
Speaker 3: you were doing. We thought there was going to be

832
00:40:07,760 --> 00:40:12,760
Speaker 3: a really good opportunity in buying less liquid, longer duration opportunities.

833
00:40:13,000 --> 00:40:15,760
Speaker 3: We might own assets for four to six years, let's say,

834
00:40:16,080 --> 00:40:18,960
Speaker 3: versus things that were marked to market on a daily basis,

835
00:40:19,000 --> 00:40:20,160
Speaker 3: and we thought there were things that you could do

836
00:40:20,239 --> 00:40:22,840
Speaker 3: to those assets to improve them over time. This was

837
00:40:22,880 --> 00:40:25,080
Speaker 3: sort of the first wave of bank selling that probably

838
00:40:25,120 --> 00:40:27,480
Speaker 3: came to the US in the two thousand and eight

839
00:40:27,520 --> 00:40:29,840
Speaker 3: to twenty eleven timeline. And probably came to Europe in

840
00:40:29,880 --> 00:40:33,279
Speaker 3: the two thousand twelve to twenty fifteen timeline. So we

841
00:40:33,360 --> 00:40:35,560
Speaker 3: had our first you know, sort of private equity style

842
00:40:36,560 --> 00:40:40,240
Speaker 3: strategy due to Operatness to credit, which launched in twenty eleven.

843
00:40:40,840 --> 00:40:43,480
Speaker 3: And even though the opportunity to buy from the banks

844
00:40:44,080 --> 00:40:47,880
Speaker 3: ultimately dissipated, what we discovered was as private markets grew,

845
00:40:48,160 --> 00:40:50,880
Speaker 3: this just became a bigger and bigger opportunity. And so

846
00:40:51,000 --> 00:40:53,680
Speaker 3: this has really been a substantial portion of the growth

847
00:40:53,680 --> 00:40:55,560
Speaker 3: of our business in the last fifteen years, as being

848
00:40:55,600 --> 00:40:59,280
Speaker 3: in private markets and being an opportunistic credit in private

849
00:40:59,320 --> 00:41:01,640
Speaker 3: markets a lot us ultimately to be an asset back

850
00:41:01,719 --> 00:41:04,399
Speaker 3: lending led us to be in real estate as well,

851
00:41:04,400 --> 00:41:07,080
Speaker 3: which is a big strategy for us with operatistic credit,

852
00:41:07,120 --> 00:41:08,600
Speaker 3: and I think it is really important to have both

853
00:41:08,640 --> 00:41:11,560
Speaker 3: tools in your toolkit. You know, there's this term for

854
00:41:11,640 --> 00:41:15,280
Speaker 3: technology investors which is crossover tech investors, which is basically

855
00:41:15,520 --> 00:41:17,840
Speaker 3: investing firms like co To or Tiger Global that have

856
00:41:17,920 --> 00:41:21,160
Speaker 3: both big public market and private market businesses. I wanted

857
00:41:21,239 --> 00:41:24,319
Speaker 3: to be a crossover credit firm, and by that I

858
00:41:24,320 --> 00:41:27,120
Speaker 3: didn't mean between high yield and IJ What I meant

859
00:41:27,320 --> 00:41:29,879
Speaker 3: was between public markets and private markets, because I think

860
00:41:29,880 --> 00:41:32,880
Speaker 3: you learn a lot being in private markets that's helpful

861
00:41:32,880 --> 00:41:34,839
Speaker 3: for public markets, and I think you'll learn a lot

862
00:41:34,880 --> 00:41:37,080
Speaker 3: as a public markets an investor that's helpful for private

863
00:41:37,120 --> 00:41:40,080
Speaker 3: markets as well. So it's very complementary. And especially if

864
00:41:40,120 --> 00:41:42,720
Speaker 3: you can have both pools of capital in one place

865
00:41:42,760 --> 00:41:44,680
Speaker 3: and you can kind of toggle how you spend your

866
00:41:44,719 --> 00:41:49,400
Speaker 3: resources to between public and private markets. It's just super helpful.

867
00:41:49,440 --> 00:41:52,359
Speaker 3: And so those are maybe two of the bigger things

868
00:41:52,400 --> 00:41:54,239
Speaker 3: that we've done as a firm in the last twenty

869
00:41:54,320 --> 00:41:57,080
Speaker 3: five years to really, you know, help us to thrive

870
00:41:57,400 --> 00:41:59,879
Speaker 3: where the world is in twenty twenty five versus where

871
00:42:00,120 --> 00:42:02,439
Speaker 3: in twenty fifteen or two thousand and five. Huh.

872
00:42:02,880 --> 00:42:06,480
Speaker 2: Really really interesting. Leads to a question. You're the perfect

873
00:42:06,600 --> 00:42:10,319
Speaker 2: person to ask this because whenever we talk about what's

874
00:42:10,360 --> 00:42:14,239
Speaker 2: going on in Europe and the UK, especially Brexit, you

875
00:42:14,360 --> 00:42:19,160
Speaker 2: sort of get an academic answer from a distance. You

876
00:42:19,280 --> 00:42:21,880
Speaker 2: have a major presence in London, you've been there for

877
00:42:21,960 --> 00:42:25,440
Speaker 2: the past you know, decade and a half. Tell us

878
00:42:25,480 --> 00:42:28,120
Speaker 2: a little bit about the opportunities you see on the

879
00:42:28,200 --> 00:42:32,200
Speaker 2: continent and in the UK and how much has the

880
00:42:32,680 --> 00:42:36,799
Speaker 2: Brexit affected the dynamic not just London in the UK,

881
00:42:37,000 --> 00:42:39,320
Speaker 2: but in Europe overall.

882
00:42:39,920 --> 00:42:41,839
Speaker 3: Yeah, I think there's a lot of different things going

883
00:42:41,880 --> 00:42:45,000
Speaker 3: on in Europe. So, first of all, you know, Europe

884
00:42:45,040 --> 00:42:50,160
Speaker 3: tends to be a lower growth economy structurally than the US.

885
00:42:50,200 --> 00:42:51,960
Speaker 3: I think there's a couple of reasons for that. One

886
00:42:52,000 --> 00:42:54,520
Speaker 3: is regulatory, but the second one really is the country

887
00:42:54,560 --> 00:42:57,200
Speaker 3: by country nature and how things operate. I mean, overall,

888
00:42:57,239 --> 00:42:59,080
Speaker 3: it's a giant market, but when you break it down

889
00:42:59,120 --> 00:43:02,560
Speaker 3: and you've got Italian cupmpanies and French companies in German companies,

890
00:43:02,600 --> 00:43:05,680
Speaker 3: that's just much of a less efficient approach. Obviously are

891
00:43:05,719 --> 00:43:08,760
Speaker 3: some multinational companies in Europe, but it's maybe a smaller

892
00:43:08,800 --> 00:43:12,640
Speaker 3: part of how things work over there. And so while

893
00:43:12,640 --> 00:43:15,880
Speaker 3: I'm not sure i'd want to be a tech investor

894
00:43:15,960 --> 00:43:18,560
Speaker 3: in Europe, I'm super happy to be an opportunistic credit

895
00:43:18,680 --> 00:43:21,040
Speaker 3: or an advent driven investor there because these are really

896
00:43:21,120 --> 00:43:24,840
Speaker 3: very deep value markets in terms of where you're investing,

897
00:43:25,480 --> 00:43:29,680
Speaker 3: in terms of the specific impacts of bregsit. I mean, so,

898
00:43:29,719 --> 00:43:31,439
Speaker 3: first of all, it's not been great for the UK

899
00:43:32,080 --> 00:43:35,000
Speaker 3: in terms of where things are. I keep thinking they're

900
00:43:35,000 --> 00:43:36,480
Speaker 3: going to turn it around at some point, but it's

901
00:43:36,480 --> 00:43:39,000
Speaker 3: been a tough seven or eight years there in terms

902
00:43:39,040 --> 00:43:42,240
Speaker 3: of the economy and the need really for the human

903
00:43:42,280 --> 00:43:44,440
Speaker 3: capital that they've lost and maybe have a harder time

904
00:43:44,480 --> 00:43:48,000
Speaker 3: attracting as a result of where bregsit is in the

905
00:43:48,600 --> 00:43:53,000
Speaker 3: continental market. It's really a country by country scenario, and

906
00:43:53,080 --> 00:43:58,360
Speaker 3: so I look at markets like Greece or Portugal or Italy,

907
00:43:58,760 --> 00:44:02,040
Speaker 3: and they've actually proven to be really strong markets for US.

908
00:44:02,320 --> 00:44:05,520
Speaker 3: And those are markets that folks, particularly a pond away,

909
00:44:06,040 --> 00:44:09,359
Speaker 3: often shy away from because it's complex to be there.

910
00:44:09,440 --> 00:44:11,319
Speaker 3: They don't know how business is done. They have certain

911
00:44:11,320 --> 00:44:14,840
Speaker 3: assumptions about the markets that maybe aren't always true, and

912
00:44:14,880 --> 00:44:17,200
Speaker 3: then people have assumptions about the northern European markets that

913
00:44:17,239 --> 00:44:20,480
Speaker 3: also aren't trilling. Germany's in a very hard spot right now,

914
00:44:20,480 --> 00:44:22,440
Speaker 3: there's no getting around that. Again. I've got confidence it

915
00:44:22,440 --> 00:44:24,719
Speaker 3: will turn around over time, but I do expect there'll

916
00:44:24,719 --> 00:44:28,839
Speaker 3: be a lot of opportunities there between now and now

917
00:44:28,840 --> 00:44:32,799
Speaker 3: and then. And there's definitely a big macro lens over

918
00:44:32,880 --> 00:44:35,440
Speaker 3: Europe as well in terms of what can happen in

919
00:44:35,480 --> 00:44:37,480
Speaker 3: Europe over the next five years, which is not just

920
00:44:37,560 --> 00:44:40,360
Speaker 3: related to Brexit, but maybe related to some of the

921
00:44:40,440 --> 00:44:43,279
Speaker 3: geopolitical forces that are in play in two thousand and

922
00:44:43,840 --> 00:44:47,440
Speaker 3: twenty five as well. We like complexity, like we seek

923
00:44:47,480 --> 00:44:51,120
Speaker 3: out complexity, like when there's very few buyers of assets

924
00:44:51,719 --> 00:44:54,480
Speaker 3: or people willing to lend, because you know, you have

925
00:44:54,520 --> 00:44:56,759
Speaker 3: to sort through a lot of stuff, like even just

926
00:44:56,800 --> 00:45:00,440
Speaker 3: the complexity of understanding how different restructuring law as are

927
00:45:00,440 --> 00:45:03,640
Speaker 3: in Spain versus Portugal, right, Like, that's super helpful for

928
00:45:03,719 --> 00:45:05,600
Speaker 3: US in our strategies. The fewer people who can be

929
00:45:05,600 --> 00:45:09,319
Speaker 3: involved in assets, the better it is for US. And

930
00:45:09,400 --> 00:45:13,600
Speaker 3: Europe creates those opportunities, and so it continues to be

931
00:45:13,640 --> 00:45:15,360
Speaker 3: a fruitfall area for US. But if folks in the

932
00:45:15,440 --> 00:45:17,120
Speaker 3: United States don't want to look at it, that's okay.

933
00:45:18,440 --> 00:45:22,640
Speaker 2: I totally get that. It's funny because on the equity side,

934
00:45:23,280 --> 00:45:25,359
Speaker 2: I don't know if the past five years, maybe even

935
00:45:25,400 --> 00:45:29,360
Speaker 2: longer ten years, people have been saying US is pricedy,

936
00:45:29,520 --> 00:45:32,319
Speaker 2: Europe is cheap. Now's the time to move money from

937
00:45:32,360 --> 00:45:36,560
Speaker 2: the US at public equity to Europe, and that trade

938
00:45:36,640 --> 00:45:41,520
Speaker 2: hasn't worked. You Arguably, European stocks are cheap for a

939
00:45:41,560 --> 00:45:44,799
Speaker 2: reason and US stocks are expensive for a reason. What

940
00:45:44,800 --> 00:45:46,520
Speaker 2: do you see on the credit side, what do you

941
00:45:46,560 --> 00:45:49,760
Speaker 2: see on the private side? Do you run into similar

942
00:45:49,920 --> 00:45:54,040
Speaker 2: valuation issues or the math is the math, and when

943
00:45:54,080 --> 00:45:55,759
Speaker 2: the opportunities arise, it doesn't matter.

944
00:45:55,880 --> 00:45:59,240
Speaker 3: Yeah. I mean, look, I don't necessarily expect evaluation premium

945
00:45:59,239 --> 00:46:01,440
Speaker 3: for europe get it right. So I think we can

946
00:46:01,480 --> 00:46:04,080
Speaker 3: earn more money on our comparable European opportunities than we

947
00:46:04,160 --> 00:46:06,200
Speaker 3: can on US opportunities. And maybe some of that's getting

948
00:46:06,239 --> 00:46:08,800
Speaker 3: paid for the complexity and the things that we're speaking

949
00:46:08,840 --> 00:46:11,719
Speaker 3: about in terms of how we do that. I do

950
00:46:11,840 --> 00:46:13,799
Speaker 3: wonder in the in the equity side, if you take

951
00:46:13,840 --> 00:46:17,120
Speaker 3: out tech, if there's really such a valuation gap. I mean,

952
00:46:17,160 --> 00:46:18,879
Speaker 3: it's something like half the market cap in the US

953
00:46:18,960 --> 00:46:20,440
Speaker 3: and tech at this point when you look at the

954
00:46:20,520 --> 00:46:23,000
Speaker 3: S and P. That's not to say I'm in Europe right,

955
00:46:23,000 --> 00:46:25,160
Speaker 3: there's very little tech industry. So I do think the

956
00:46:25,200 --> 00:46:27,720
Speaker 3: tech separation is a big part of the US versus

957
00:46:27,719 --> 00:46:30,719
Speaker 3: European separation. For better or for worse, you don't do

958
00:46:30,760 --> 00:46:33,400
Speaker 3: a lot of technology related investing in opportunities to credit,

959
00:46:33,400 --> 00:46:36,280
Speaker 3: you get some chances. Sometimes tech companies are not often

960
00:46:36,320 --> 00:46:39,040
Speaker 3: great for opetusity to credit. Perhaps software will be different.

961
00:46:39,040 --> 00:46:41,279
Speaker 3: If there's often if there's ultimately a crack in the

962
00:46:41,280 --> 00:46:46,960
Speaker 3: software world, excuse me, but I would say that, you know,

963
00:46:46,960 --> 00:46:48,720
Speaker 3: in the sectors that we invest in, which is basically

964
00:46:48,760 --> 00:46:53,160
Speaker 3: everything else, you know, we are getting paid a premium

965
00:46:53,160 --> 00:46:55,359
Speaker 3: to invest in Europe for the reasons that we that

966
00:46:55,400 --> 00:46:56,120
Speaker 3: we said.

967
00:46:56,600 --> 00:47:02,359
Speaker 2: So you've recently transitioned to become executive managing member. That

968
00:47:02,400 --> 00:47:06,160
Speaker 2: goes back to the pandemic after was it Davidson or

969
00:47:06,160 --> 00:47:07,800
Speaker 2: it was Kampnor who retired.

970
00:47:07,960 --> 00:47:10,759
Speaker 3: Yeah, I became our executive managing member with Tom in

971
00:47:10,800 --> 00:47:14,000
Speaker 3: twenty eighteen, and then Tom formally retired on January one,

972
00:47:14,000 --> 00:47:16,480
Speaker 3: twenty twenty, so I became the sole head of the

973
00:47:16,520 --> 00:47:17,440
Speaker 3: firm at that point.

974
00:47:17,600 --> 00:47:21,400
Speaker 2: What was that transition like? Because your chief investment officer,

975
00:47:21,800 --> 00:47:25,120
Speaker 2: I got to imagine thirty five plus billion dollars and

976
00:47:25,200 --> 00:47:26,279
Speaker 2: how many employees do you guys?

977
00:47:26,320 --> 00:47:27,240
Speaker 3: About five hundred?

978
00:47:27,520 --> 00:47:30,880
Speaker 2: I mean, that's no small task to run. How do

979
00:47:30,960 --> 00:47:33,719
Speaker 2: you balance the two? What was that transition like?

980
00:47:34,080 --> 00:47:36,080
Speaker 3: Well, you know, I'm very fortunate in the sense that

981
00:47:36,120 --> 00:47:39,200
Speaker 3: the transition with Tom and I took place over many years,

982
00:47:39,280 --> 00:47:43,400
Speaker 3: and so I'm actually the third managing partner of Davidson kemptainer.

983
00:47:43,440 --> 00:47:46,960
Speaker 3: Marvin Davidson was the first, and Marvin Davidson Randy Kay

984
00:47:47,120 --> 00:47:49,440
Speaker 3: for about twenty years before Tom took over, and then

985
00:47:49,440 --> 00:47:52,359
Speaker 3: Tom Randy k for about fifteen years. I was there

986
00:47:52,400 --> 00:47:55,479
Speaker 3: for the last five years of Marvin's running the firm,

987
00:47:55,520 --> 00:47:57,279
Speaker 3: and so I got to actually see two models. I

988
00:47:57,280 --> 00:47:59,520
Speaker 3: got to see Marvin's model and Tom's model, which were

989
00:47:59,640 --> 00:48:02,319
Speaker 3: very different from each other. And then I was the

990
00:48:02,320 --> 00:48:05,640
Speaker 3: deputy managing partner for several years before becoming the cohed

991
00:48:05,680 --> 00:48:08,319
Speaker 3: with Tom for two years. You know, Tom was very

992
00:48:08,360 --> 00:48:11,960
Speaker 3: focused on succession and leaving the place in better shape

993
00:48:12,000 --> 00:48:14,879
Speaker 3: than he got there with, so to speak, and that's

994
00:48:14,920 --> 00:48:17,480
Speaker 3: super helpful. I got a lot of calls because we're

995
00:48:17,480 --> 00:48:19,960
Speaker 3: now third generation and running the business about how you

996
00:48:20,000 --> 00:48:23,200
Speaker 3: do this. And my first thing I say to people,

997
00:48:23,239 --> 00:48:24,840
Speaker 3: which is sort of a joke, but it really isn't,

998
00:48:25,280 --> 00:48:26,879
Speaker 3: is the person in front of you have to want

999
00:48:26,920 --> 00:48:29,480
Speaker 3: to retire. Like that's step one. You know, transitions don't

1000
00:48:29,480 --> 00:48:31,640
Speaker 3: go well if the person who's leaving doesn't actually want

1001
00:48:31,640 --> 00:48:33,640
Speaker 3: to retire. I was very fortunate Tom actually wanted to do.

1002
00:48:34,080 --> 00:48:35,400
Speaker 2: That's what the chairman emeritith.

1003
00:48:36,320 --> 00:48:39,759
Speaker 3: Tom actually wanted to retire and do other things. I mean,

1004
00:48:39,800 --> 00:48:42,239
Speaker 3: there's things you learn along the way. I mean again,

1005
00:48:42,239 --> 00:48:45,200
Speaker 3: I wouldn't have wished a pandemic upon anybody. But it

1006
00:48:45,239 --> 00:48:47,520
Speaker 3: was sort of sink or swim, right, because you know,

1007
00:48:47,800 --> 00:48:50,720
Speaker 3: it was two months in the markets were falling apart.

1008
00:48:50,960 --> 00:48:52,359
Speaker 3: No one wanted to be in the office in early

1009
00:48:52,480 --> 00:48:55,319
Speaker 3: March of twenty twenty, right, for reasons that obviously became

1010
00:48:55,360 --> 00:48:58,560
Speaker 3: pretty clear soon afterwards. And how do you make that

1011
00:48:58,640 --> 00:49:00,920
Speaker 3: all work? How do you get every on the same page,

1012
00:49:00,960 --> 00:49:03,239
Speaker 3: how do you broadcast your message out? How do you

1013
00:49:03,239 --> 00:49:04,480
Speaker 3: make sure that the things that are happening in the

1014
00:49:04,480 --> 00:49:07,120
Speaker 3: portfolio are happening in a way that you want them

1015
00:49:07,120 --> 00:49:09,120
Speaker 3: to happen. How do you empower people when everyone's sitting

1016
00:49:09,120 --> 00:49:11,520
Speaker 3: in their home or whatever. So we rode through the

1017
00:49:11,520 --> 00:49:13,919
Speaker 3: pandemic and we learned a lot. But I did have,

1018
00:49:14,200 --> 00:49:17,759
Speaker 3: you know, twenty plus years of training to do this.

1019
00:49:17,920 --> 00:49:19,960
Speaker 3: And because I've only been at one firm in my

1020
00:49:20,160 --> 00:49:22,480
Speaker 3: entire career, like, i didn't have the benefit of being

1021
00:49:22,520 --> 00:49:24,560
Speaker 3: CEO somewhere else, but I'd the benefit of really knowing

1022
00:49:24,600 --> 00:49:27,560
Speaker 3: David's and Kepner cold and that probably proved to be

1023
00:49:27,560 --> 00:49:28,480
Speaker 3: the biggest advantage.

1024
00:49:28,560 --> 00:49:32,400
Speaker 2: How do you maintain a corporate culture when everybody's working

1025
00:49:32,400 --> 00:49:36,320
Speaker 2: from home and you have people in how many different

1026
00:49:36,320 --> 00:49:37,320
Speaker 2: cities around the world.

1027
00:49:37,520 --> 00:49:41,239
Speaker 3: So we have seven offices, although you know, two of

1028
00:49:41,280 --> 00:49:44,240
Speaker 3: those offices are quite small sub ten people, and another

1029
00:49:44,280 --> 00:49:48,239
Speaker 3: two of those offices are you know three, I'll still.

1030
00:49:48,040 --> 00:49:50,000
Speaker 2: Far flong different times, zoon.

1031
00:49:50,200 --> 00:49:53,440
Speaker 3: Far it's far flong. So first of all, like when

1032
00:49:53,480 --> 00:49:55,759
Speaker 3: you go from fifteen people to five hundred people, you

1033
00:49:55,840 --> 00:49:58,399
Speaker 3: have to understand there's parts of your culture that you're

1034
00:49:58,400 --> 00:50:00,319
Speaker 3: going to maintain and there's parts of your culture you're

1035
00:50:00,320 --> 00:50:02,319
Speaker 3: not going to maintain. So, for example, when I got

1036
00:50:02,360 --> 00:50:05,440
Speaker 3: to Davidson Kaptner, every time it was someone's birthday, you

1037
00:50:05,480 --> 00:50:07,480
Speaker 3: get a birthday card signed by the whole office, and

1038
00:50:07,520 --> 00:50:10,839
Speaker 3: you get a cake, right, And so we have kept

1039
00:50:10,880 --> 00:50:12,919
Speaker 3: the cakes, but we got rid of the birthday cards

1040
00:50:12,960 --> 00:50:17,040
Speaker 3: at some point, right. We you know, have brought in

1041
00:50:17,120 --> 00:50:20,719
Speaker 3: different things over the years to speak to what our

1042
00:50:20,760 --> 00:50:24,440
Speaker 3: workforce is today, not what our workforce was ten or

1043
00:50:24,440 --> 00:50:26,399
Speaker 3: twenty years ago. So the example I give is when

1044
00:50:26,400 --> 00:50:29,279
Speaker 3: I got to Davidson Kapner in the nineteen nineties, I

1045
00:50:29,280 --> 00:50:32,400
Speaker 3: feel like our workforce mostly cared that we had clients, right,

1046
00:50:32,440 --> 00:50:34,279
Speaker 3: and by two thousand and eight, two thousand and nine,

1047
00:50:34,560 --> 00:50:35,920
Speaker 3: they didn't want too many of the clients to be

1048
00:50:35,920 --> 00:50:37,680
Speaker 3: fund of funds just because fund of funds weren't doing

1049
00:50:37,760 --> 00:50:39,040
Speaker 3: very well at that period of time. That was a

1050
00:50:39,080 --> 00:50:42,200
Speaker 3: transition where more and more investors in apps return strategies

1051
00:50:42,200 --> 00:50:44,480
Speaker 3: were investing direct and obviously there are still a few

1052
00:50:44,840 --> 00:50:47,120
Speaker 3: allocators that are out there of scale in that world.

1053
00:50:47,400 --> 00:50:49,799
Speaker 3: And then by the mid twenty tens, people wanted to

1054
00:50:49,800 --> 00:50:52,200
Speaker 3: know not only that we had clients, but what public

1055
00:50:52,239 --> 00:50:54,880
Speaker 3: good are we doing right, So we instituted a program

1056
00:50:54,920 --> 00:50:57,400
Speaker 3: called DK pledge Right, and it was a way that

1057
00:50:57,400 --> 00:50:59,439
Speaker 3: people could learn a little bit about what our clients did,

1058
00:50:59,719 --> 00:51:01,719
Speaker 3: you know, so whether returns went to you know, a

1059
00:51:01,760 --> 00:51:04,160
Speaker 3: lot of our clients are endawments or foundations or pension

1060
00:51:04,160 --> 00:51:06,279
Speaker 3: funds or people who are doing real good and even

1061
00:51:06,280 --> 00:51:08,560
Speaker 3: our high networth clients, many of them have big philanthropic

1062
00:51:08,719 --> 00:51:10,400
Speaker 3: arms that are doing very good things with the returns

1063
00:51:10,400 --> 00:51:12,360
Speaker 3: that we generate for them as well. But it was

1064
00:51:12,360 --> 00:51:15,920
Speaker 3: also a chance for our employees to give back to charities,

1065
00:51:16,000 --> 00:51:19,000
Speaker 3: bring charities into the organization. So we've given away like

1066
00:51:19,040 --> 00:51:22,320
Speaker 3: six million dollars and I think had a thousand different organizations.

1067
00:51:22,320 --> 00:51:25,839
Speaker 3: We've impacted twenty five hundred hours of volunteer time. That's

1068
00:51:25,880 --> 00:51:28,359
Speaker 3: all stuff that came from like thinking about where our

1069
00:51:28,360 --> 00:51:31,080
Speaker 3: workforce was today. It's not to say that our workforce

1070
00:51:31,120 --> 00:51:33,760
Speaker 3: wasn't very philanthropic in the nineteen nineties and two thousands.

1071
00:51:33,800 --> 00:51:36,920
Speaker 3: That actually was. It's just people did that more outside

1072
00:51:36,960 --> 00:51:40,080
Speaker 3: the office. And by the mid twenty tens are people

1073
00:51:40,120 --> 00:51:42,279
Speaker 3: wanted more of an integrated experience where they could do

1074
00:51:42,600 --> 00:51:45,120
Speaker 3: things that were philanthropic while doing their day jobs. Right,

1075
00:51:45,160 --> 00:51:46,800
Speaker 3: And so you have to just kind of keep a

1076
00:51:46,880 --> 00:51:51,319
Speaker 3: pulse to where people are today, and I've tried to

1077
00:51:51,480 --> 00:51:54,600
Speaker 3: really do that in terms of my role. You know, again,

1078
00:51:54,640 --> 00:51:56,239
Speaker 3: the place is going to be exactly the same in

1079
00:51:56,280 --> 00:51:59,160
Speaker 3: terms of how do you keep people in seven offices

1080
00:51:59,320 --> 00:52:02,560
Speaker 3: like singing from the same page. There actually were really

1081
00:52:02,600 --> 00:52:04,680
Speaker 3: good learning lessons from that in the pandemic, and by

1082
00:52:04,719 --> 00:52:06,799
Speaker 3: the way, I did my best to get people back

1083
00:52:06,800 --> 00:52:09,400
Speaker 3: in the office as soon as humanly possible. We returned

1084
00:52:09,400 --> 00:52:11,080
Speaker 3: to the office, I think well before many of our

1085
00:52:11,120 --> 00:52:13,920
Speaker 3: peers did. That was important to me in terms of

1086
00:52:13,920 --> 00:52:17,759
Speaker 3: continuity of the teams and keeping the culture. But I

1087
00:52:17,800 --> 00:52:21,239
Speaker 3: started doing a bi weekly email to the entire firm

1088
00:52:21,320 --> 00:52:23,400
Speaker 3: during the pandemic, and I did that because that was

1089
00:52:23,400 --> 00:52:24,880
Speaker 3: the best way to communicate with people. We did some

1090
00:52:24,960 --> 00:52:27,040
Speaker 3: videos and things like that too, but I wanted something

1091
00:52:27,400 --> 00:52:30,319
Speaker 3: in writing, and it was a combination of PEP talk,

1092
00:52:30,600 --> 00:52:33,920
Speaker 3: firm news, sometimes some market insights and not sure I've

1093
00:52:33,920 --> 00:52:36,799
Speaker 3: got amazing market insights every two weeks. But over time

1094
00:52:36,840 --> 00:52:38,879
Speaker 3: I certainly do right, and when I really had something

1095
00:52:38,920 --> 00:52:41,640
Speaker 3: to say, I would say it. And we've kept doing

1096
00:52:41,719 --> 00:52:44,080
Speaker 3: those even through today. It's become like a hallmark of

1097
00:52:44,120 --> 00:52:46,440
Speaker 3: our firm. We get very good internal feedback on that

1098
00:52:46,480 --> 00:52:48,800
Speaker 3: because it was important to me. That's the way everyone

1099
00:52:48,840 --> 00:52:50,399
Speaker 3: knows they're going to hear from me every couple weeks,

1100
00:52:50,400 --> 00:52:51,279
Speaker 3: no matter what. Huh.

1101
00:52:51,320 --> 00:52:55,000
Speaker 2: Really interesting last DK question, So you've been there for

1102
00:52:55,040 --> 00:52:58,839
Speaker 2: twenty seven years. Kind of unusual these days. Not many

1103
00:52:58,840 --> 00:53:03,120
Speaker 2: people have that sort of longevity with one firm. Tell

1104
00:53:03,200 --> 00:53:06,640
Speaker 2: us what's kept you at Davidson Kampner this whole time?

1105
00:53:06,840 --> 00:53:09,520
Speaker 3: Well, I'm very fortunate, you know, I sort of joke

1106
00:53:09,560 --> 00:53:12,279
Speaker 3: I show up at my college reunions, right, and if

1107
00:53:12,320 --> 00:53:14,439
Speaker 3: I'm not the only person who's been at one from

1108
00:53:14,440 --> 00:53:16,920
Speaker 3: the entire time, it's virtually virtually the only person who's

1109
00:53:17,680 --> 00:53:21,399
Speaker 3: done that. I got very fortunate, right, and I got

1110
00:53:21,480 --> 00:53:23,759
Speaker 3: very fortunate that I happened to find people that I

1111
00:53:23,800 --> 00:53:25,960
Speaker 3: really wanted to work with in an industry that I

1112
00:53:26,000 --> 00:53:29,239
Speaker 3: really liked that was growing, right, And so I think

1113
00:53:29,239 --> 00:53:33,480
Speaker 3: if you hadn't had any one of those three factors aligned,

1114
00:53:34,000 --> 00:53:35,800
Speaker 3: like you know, possibly could I could have stayed. But

1115
00:53:35,800 --> 00:53:38,120
Speaker 3: if there wasn't going to be a growth in the industry,

1116
00:53:38,200 --> 00:53:39,920
Speaker 3: I wanted there at least to be growth for me, right.

1117
00:53:39,960 --> 00:53:41,719
Speaker 3: I just wanted to be doing different things at a

1118
00:53:41,719 --> 00:53:44,560
Speaker 3: more senior level twenty seven years in than I where

1119
00:53:44,560 --> 00:53:46,720
Speaker 3: I started that. But fortunately all three of those things

1120
00:53:47,360 --> 00:53:50,759
Speaker 3: did align. Look, there's real human capital you get by

1121
00:53:50,800 --> 00:53:52,799
Speaker 3: being at a place for a long time, right, I mean,

1122
00:53:52,800 --> 00:53:54,080
Speaker 3: you know't you don't want to be somewhere for a

1123
00:53:54,080 --> 00:53:56,319
Speaker 3: long time just because of that, But the reality is

1124
00:53:56,320 --> 00:53:58,080
Speaker 3: there are switching costs that you have when you leave

1125
00:53:59,080 --> 00:54:01,799
Speaker 3: our roles. And so I was very fortunate that I

1126
00:54:01,840 --> 00:54:04,839
Speaker 3: was able to grow with the organization, and I'm very

1127
00:54:04,880 --> 00:54:06,120
Speaker 3: fortunate that I enjoy what I do.

1128
00:54:06,520 --> 00:54:10,880
Speaker 2: Huh, really really interesting. Talk a little bit about the

1129
00:54:11,000 --> 00:54:14,880
Speaker 2: rise of alternatives and why this has become one of

1130
00:54:14,920 --> 00:54:19,719
Speaker 2: the hottest parts of the investing world for really more

1131
00:54:19,719 --> 00:54:22,799
Speaker 2: than a decade. Certainly since the FED took rates down

1132
00:54:22,880 --> 00:54:27,759
Speaker 2: to zero, people started looking around DKY has a variety

1133
00:54:27,760 --> 00:54:32,000
Speaker 2: of different strategies. Let's start with distressed investments. Tell us

1134
00:54:32,040 --> 00:54:34,840
Speaker 2: a little bit about the work Decay does in distressed

1135
00:54:34,840 --> 00:54:38,719
Speaker 2: investments and why do you think this space has such legs?

1136
00:54:39,239 --> 00:54:40,799
Speaker 3: You know, I would say a couple of things on

1137
00:54:41,120 --> 00:54:43,080
Speaker 3: you know, we could call it distressed investments, we can

1138
00:54:43,120 --> 00:54:46,360
Speaker 3: call it opportistic credit. It's probably some combination of the

1139
00:54:46,400 --> 00:54:49,960
Speaker 3: two things. And so for Davidson Kaepner, you know, we're

1140
00:54:50,000 --> 00:54:53,520
Speaker 3: actively investing in both public and private markets in terms

1141
00:54:53,560 --> 00:54:57,480
Speaker 3: of distress data or optimistic credit. So we're buying public

1142
00:54:57,480 --> 00:54:59,959
Speaker 3: securities that have declined in price or with the people

1143
00:55:00,160 --> 00:55:02,400
Speaker 3: questions to whether the companies can mature their debt. There

1144
00:55:02,400 --> 00:55:04,160
Speaker 3: can be all sorts of different reasons that things are

1145
00:55:04,160 --> 00:55:07,319
Speaker 3: trading down, and that's one strategy. We also have a

1146
00:55:07,360 --> 00:55:10,240
Speaker 3: very active strategy where we've got more private equity style

1147
00:55:10,719 --> 00:55:14,520
Speaker 3: capital where we can basically take control of assets, fix them,

1148
00:55:14,840 --> 00:55:18,080
Speaker 3: sell off divisions, add things, you know, et cetera. Those

1149
00:55:18,120 --> 00:55:21,560
Speaker 3: are typically more like four to six year type of investments,

1150
00:55:21,760 --> 00:55:24,080
Speaker 3: and we're able to do this, you know, across different

1151
00:55:24,120 --> 00:55:26,800
Speaker 3: asset types. So we've got a big business buying real estate.

1152
00:55:27,040 --> 00:55:29,279
Speaker 3: We've got a big corporate business, you find a lot

1153
00:55:29,320 --> 00:55:32,560
Speaker 3: of things like liquidations that don't necessarily fit into any

1154
00:55:32,680 --> 00:55:35,560
Speaker 3: one nique category. Occasionally sovereign debts not a big part

1155
00:55:35,600 --> 00:55:37,000
Speaker 3: of our book, but every once in a while we've

1156
00:55:37,000 --> 00:55:40,120
Speaker 3: got a big evolvement with a sovereign as well. And

1157
00:55:40,160 --> 00:55:42,120
Speaker 3: I would say a couple of things about that strategy

1158
00:55:42,120 --> 00:55:44,680
Speaker 3: and why people are attracted to it. So, number one,

1159
00:55:44,719 --> 00:55:47,319
Speaker 3: the outright rates of return that you can earn on

1160
00:55:47,400 --> 00:55:50,239
Speaker 3: strategies like that, I think are compelling compared to many

1161
00:55:50,280 --> 00:55:52,799
Speaker 3: things in the market over time. But they also are

1162
00:55:52,880 --> 00:55:55,880
Speaker 3: very good diversifiers in portfolios, And so like, why are

1163
00:55:55,880 --> 00:55:59,600
Speaker 3: these strategies attractive to allocators? They're attractive to allocators because

1164
00:55:59,600 --> 00:56:02,239
Speaker 3: you can achieve your overall objectives just being in the

1165
00:56:02,280 --> 00:56:05,960
Speaker 3: strategy most people or not obviously, but you can also

1166
00:56:06,000 --> 00:56:08,399
Speaker 3: do it in a way to diversify your overall portfolio.

1167
00:56:08,680 --> 00:56:11,680
Speaker 3: And not only does it diversify your overall portfolio in

1168
00:56:11,760 --> 00:56:13,759
Speaker 3: terms of when your earn rates of return, ie, the

1169
00:56:13,840 --> 00:56:17,680
Speaker 3: strategies tend to do better when other strategies aren't doing well.

1170
00:56:18,000 --> 00:56:21,719
Speaker 3: It's sometimes when capitals return to you too. So you know,

1171
00:56:21,800 --> 00:56:23,560
Speaker 3: we did some work a couple of years ago We

1172
00:56:23,600 --> 00:56:26,600
Speaker 3: actually published a white paper on this in twenty twenty three.

1173
00:56:27,040 --> 00:56:31,640
Speaker 3: What there's actually an inverse correlation between when opportunistsic credit

1174
00:56:31,680 --> 00:56:35,840
Speaker 3: funds return capital to their LPs versus when growth equity

1175
00:56:35,880 --> 00:56:38,960
Speaker 3: and venture capital funds return capital to their LPs. And

1176
00:56:38,960 --> 00:56:42,160
Speaker 3: that kind of makes sense intellectually. So if you're you know,

1177
00:56:42,200 --> 00:56:44,840
Speaker 3: an allocator, you probably don't want to only have growth

1178
00:56:44,840 --> 00:56:47,200
Speaker 3: equity and venture capital funds in your portfolio. I think

1179
00:56:47,239 --> 00:56:50,200
Speaker 3: the allocators who had too many of those have some

1180
00:56:50,239 --> 00:56:51,400
Speaker 3: of them have learned that the hard way in the

1181
00:56:51,440 --> 00:56:54,360
Speaker 3: last couple of years. So those are strategies that manifest

1182
00:56:54,360 --> 00:56:56,600
Speaker 3: themselves over a very long period of time. But if

1183
00:56:56,640 --> 00:56:58,920
Speaker 3: you've had a mixture of both strategies in your portfolio,

1184
00:56:59,160 --> 00:57:01,839
Speaker 3: that's a much more power powerful way to earn returns them.

1185
00:57:01,880 --> 00:57:06,600
Speaker 2: And when you talk about distressed assets with sovereign nations,

1186
00:57:07,000 --> 00:57:09,680
Speaker 2: I'm imagining that it's not so much the sovereign that's

1187
00:57:09,880 --> 00:57:14,680
Speaker 2: distressed as whatever investing fund is the holder of that

1188
00:57:14,800 --> 00:57:16,760
Speaker 2: debt Or am I misreading that?

1189
00:57:17,120 --> 00:57:19,840
Speaker 3: Well? Look, I mean, you know these are all public names,

1190
00:57:20,000 --> 00:57:23,640
Speaker 3: whether it's you know, Greece or Argentina or Puerto Rico.

1191
00:57:23,720 --> 00:57:25,880
Speaker 3: There's a number of different sovereigns that have gone through

1192
00:57:25,880 --> 00:57:29,280
Speaker 3: restructurings of different sorts over the last several years. There

1193
00:57:29,280 --> 00:57:33,520
Speaker 3: are certainly times when holders of debt that's at least

1194
00:57:33,560 --> 00:57:36,600
Speaker 3: linked to municipalities, you know, may want to sell, and

1195
00:57:36,600 --> 00:57:38,960
Speaker 3: there's sort of force selling because of that. But I'd

1196
00:57:39,000 --> 00:57:41,520
Speaker 3: say more, you know, credits are credits, right, There's only

1197
00:57:41,560 --> 00:57:44,200
Speaker 3: so much that any one person can borrow, anyone entity

1198
00:57:44,240 --> 00:57:47,120
Speaker 3: can borrow, and so you know, there have been reasons

1199
00:57:47,160 --> 00:57:50,160
Speaker 3: you've had to restructure. Greece has been an incredibly successful restructuring.

1200
00:57:50,200 --> 00:57:52,600
Speaker 3: The Greek economy's booming right now, right, So that would

1201
00:57:52,600 --> 00:57:54,280
Speaker 3: be an example of one. And they don't come very often.

1202
00:57:54,320 --> 00:57:55,720
Speaker 3: It's not a very big part of our business, but

1203
00:57:55,760 --> 00:57:58,840
Speaker 3: they're out there in terms of things that people have

1204
00:57:58,880 --> 00:57:59,400
Speaker 3: invested in it.

1205
00:57:59,560 --> 00:58:03,440
Speaker 2: And you may public securities, I'm curious, are you buying

1206
00:58:04,040 --> 00:58:07,080
Speaker 2: equity in distressed companies or are you buying the debt

1207
00:58:07,440 --> 00:58:10,720
Speaker 2: or some combination. When we're talking about publicly traded.

1208
00:58:10,440 --> 00:58:13,840
Speaker 3: From it's a combination. I would say the super majority

1209
00:58:13,920 --> 00:58:16,680
Speaker 3: of what we're doing, certainly in the public markets is

1210
00:58:16,800 --> 00:58:20,400
Speaker 3: credit and it's not equities. But there are occasionally times

1211
00:58:20,440 --> 00:58:23,680
Speaker 3: where credit will lead us to the equities. Another strategy

1212
00:58:23,720 --> 00:58:27,000
Speaker 3: I will use sometimes is I may put a tale

1213
00:58:27,040 --> 00:58:30,400
Speaker 3: of equity onto a larger position in credit. You know,

1214
00:58:30,600 --> 00:58:33,240
Speaker 3: often the credit and the equity move the same way.

1215
00:58:33,400 --> 00:58:36,280
Speaker 3: Not always the case, but it happens frequently enough, And

1216
00:58:36,320 --> 00:58:38,400
Speaker 3: so if you like a credit, you know a tale

1217
00:58:38,440 --> 00:58:40,919
Speaker 3: of equity. My theory is, if it doesn't work, you've

1218
00:58:40,920 --> 00:58:44,040
Speaker 3: just spent some of your coupon on sort of equity optionality.

1219
00:58:44,040 --> 00:58:45,840
Speaker 3: If it does work, you can really juice your return.

1220
00:58:46,080 --> 00:58:48,280
Speaker 3: So again, not something we do in every time, in

1221
00:58:48,320 --> 00:58:51,040
Speaker 3: all the situations, many of the companies we invest in

1222
00:58:51,200 --> 00:58:54,040
Speaker 3: public credit actually are private companies, so there's no opportunity

1223
00:58:54,080 --> 00:58:57,280
Speaker 3: to do that in those obviously, But every once in

1224
00:58:57,320 --> 00:58:59,320
Speaker 3: a while, a credit opportunity will lead us to an

1225
00:58:59,320 --> 00:59:00,160
Speaker 3: equity opportunity.

1226
00:59:00,400 --> 00:59:04,920
Speaker 2: And you've mentioned also that you're expecting some form of

1227
00:59:04,960 --> 00:59:08,680
Speaker 2: an M and A revival. Let's talk about that. Is

1228
00:59:08,760 --> 00:59:12,440
Speaker 2: this structural because we've gone through such a long period

1229
00:59:12,600 --> 00:59:16,160
Speaker 2: of low rates, not a lot of M and A activity,

1230
00:59:16,360 --> 00:59:21,360
Speaker 2: and some administrative hostility to big mergers. Is this the

1231
00:59:21,400 --> 00:59:24,040
Speaker 2: politics of the moment or is it just, Hey, it's

1232
00:59:24,040 --> 00:59:27,760
Speaker 2: been so long since it's been consolidation and we're due.

1233
00:59:27,520 --> 00:59:30,000
Speaker 3: Well, I put it into two categories. And so I've

1234
00:59:30,080 --> 00:59:33,320
Speaker 3: now been at David and Kapner long enough that I

1235
00:59:33,520 --> 00:59:37,320
Speaker 3: was at Decay for multiple Democratic and Republican administrations prior

1236
00:59:37,360 --> 00:59:41,240
Speaker 3: to the Biden administration, and in most administrations, the people

1237
00:59:41,280 --> 00:59:44,560
Speaker 3: who are setting the anti trust policy are career professionals.

1238
00:59:44,600 --> 00:59:46,520
Speaker 3: It's a science, right, There's a lot of math behind

1239
00:59:46,520 --> 00:59:48,240
Speaker 3: the science it's been. I studied in law school. I'm

1240
00:59:48,240 --> 00:59:50,400
Speaker 3: sure you studied in law school as well, and so

1241
00:59:50,760 --> 00:59:52,840
Speaker 3: my take was that the decisions would mostly be the

1242
00:59:52,880 --> 00:59:57,080
Speaker 3: same whether a Republican or Democratic administration, and then a

1243
00:59:57,080 --> 00:59:59,520
Speaker 3: couple times in administration they make a case in something

1244
00:59:59,760 --> 01:00:02,800
Speaker 3: that they really thought they wanted to go after. So

1245
01:00:02,920 --> 01:00:04,960
Speaker 3: you know, there were some prominent cases, and both the

1246
01:00:04,960 --> 01:00:08,720
Speaker 3: first Trump administration and the Obama administration in that regard.

1247
01:00:09,280 --> 01:00:12,360
Speaker 3: The by administration tried to change the anti trust laws

1248
01:00:12,480 --> 01:00:15,360
Speaker 3: and they tried to use the laws as deterrence in

1249
01:00:15,400 --> 01:00:17,160
Speaker 3: terms of people doing mergers, and it was actually very

1250
01:00:17,160 --> 01:00:19,600
Speaker 3: effective in that regard, because you know, if you're a

1251
01:00:19,640 --> 01:00:22,000
Speaker 3: corporate CEO or you're a board and you think you're

1252
01:00:22,000 --> 01:00:24,280
Speaker 3: gonna get stuck in eighteen to twenty four months of

1253
01:00:24,320 --> 01:00:26,720
Speaker 3: litigation and your merger may not go through. You might

1254
01:00:26,720 --> 01:00:28,640
Speaker 3: just choose not to do the merger, right, And so

1255
01:00:29,120 --> 01:00:32,920
Speaker 3: you fast forward to twenty twenty five. It's not totally

1256
01:00:32,960 --> 01:00:34,960
Speaker 3: clear what the new anti trust regime is going to be,

1257
01:00:35,040 --> 01:00:36,480
Speaker 3: but all signs are it's going to be much more

1258
01:00:36,480 --> 01:00:38,800
Speaker 3: accommodating to mergers. Maybe not in every industry. I'm not

1259
01:00:38,880 --> 01:00:41,080
Speaker 3: sure this is true in big tech, but in many

1260
01:00:41,080 --> 01:00:44,240
Speaker 3: other industries as well. And so you've got a number

1261
01:00:44,320 --> 01:00:47,000
Speaker 3: of management teams and boards that we think have been

1262
01:00:47,040 --> 01:00:49,600
Speaker 3: sitting on the sideline. And then you know, people need

1263
01:00:49,640 --> 01:00:52,520
Speaker 3: to find growth, right and M and A is sometimes

1264
01:00:52,520 --> 01:00:55,520
Speaker 3: an easy way for people to find growth in their businesses.

1265
01:00:55,520 --> 01:00:56,800
Speaker 3: There are a lot of businesses that deserve to be

1266
01:00:56,840 --> 01:01:00,640
Speaker 3: consolidated or should be consolidated, and you know, the fancy

1267
01:01:00,760 --> 01:01:03,160
Speaker 3: markets I think are very amenable to it, right. A

1268
01:01:03,480 --> 01:01:06,120
Speaker 3: lot of pent up demand, a lot of pent up demand,

1269
01:01:06,520 --> 01:01:10,080
Speaker 3: a lot of demand for new debt to finance acquisitions

1270
01:01:10,080 --> 01:01:12,320
Speaker 3: for sure, because there's you know, a huge amount of

1271
01:01:12,320 --> 01:01:15,600
Speaker 3: demand for performing debt in general right now. So you know,

1272
01:01:15,880 --> 01:01:18,160
Speaker 3: in my mind, this is probably a US centric story

1273
01:01:18,440 --> 01:01:20,280
Speaker 3: first and foremost. You may see some in Europe, but I

1274
01:01:20,280 --> 01:01:21,920
Speaker 3: think you're going to see a lot more in the US.

1275
01:01:22,080 --> 01:01:24,200
Speaker 3: I don't know if it's two months into the administration

1276
01:01:24,280 --> 01:01:26,280
Speaker 3: or ten months into the administration, but I think it's coming.

1277
01:01:26,640 --> 01:01:29,880
Speaker 3: And these things tend to have positive effects, Like the

1278
01:01:29,880 --> 01:01:31,240
Speaker 3: more M and A you get, the more M and

1279
01:01:31,280 --> 01:01:33,480
Speaker 3: A you'll have because all of a sudden, if you're

1280
01:01:33,680 --> 01:01:36,360
Speaker 3: in an industry and two of your competitors have done

1281
01:01:36,400 --> 01:01:38,640
Speaker 3: a deal and you haven't, you're behind and it can

1282
01:01:38,680 --> 01:01:41,439
Speaker 3: actually endanger your franchise. And so you know, it tends

1283
01:01:41,480 --> 01:01:42,720
Speaker 3: to be there's a reason why the M and A

1284
01:01:42,800 --> 01:01:45,440
Speaker 3: comes in buckets in terms of like specific industries. Sure,

1285
01:01:45,440 --> 01:01:47,840
Speaker 3: and so once that like flywheel effect happens, I think

1286
01:01:47,880 --> 01:01:50,640
Speaker 3: you'll see a lot more of it. So that that's

1287
01:01:50,680 --> 01:01:52,440
Speaker 3: my viewpoint on where m ANDA is heading in twenty

1288
01:01:52,480 --> 01:01:52,920
Speaker 3: twenty five.

1289
01:01:53,160 --> 01:01:57,680
Speaker 2: So let's talk about real estate. It's certainly been tumultuous

1290
01:01:57,680 --> 01:02:02,600
Speaker 2: and you've mentioned dispersion earlier in equity and credit, wide

1291
01:02:02,680 --> 01:02:06,600
Speaker 2: range of different real estate opportunities. How are you looking

1292
01:02:06,640 --> 01:02:08,800
Speaker 2: at the space? What are you seeing in terms of

1293
01:02:08,960 --> 01:02:12,560
Speaker 2: credit and especially distressed and opportunistic credit.

1294
01:02:12,680 --> 01:02:14,440
Speaker 3: Yeah, so I would say a couple of things. First

1295
01:02:14,480 --> 01:02:17,400
Speaker 3: of all, we take a very opportunistic approach into how

1296
01:02:17,400 --> 01:02:20,160
Speaker 3: we invest in real estate, and so we don't limit

1297
01:02:20,200 --> 01:02:23,320
Speaker 3: ourselves by geography. We primarily invest in the US and Europe,

1298
01:02:23,320 --> 01:02:26,400
Speaker 3: but we're willing to invest across those two areas, and

1299
01:02:26,440 --> 01:02:28,720
Speaker 3: we don't limit ourselves in product type. And so we're

1300
01:02:28,720 --> 01:02:33,560
Speaker 3: happy to invest in self storage or industrial or data

1301
01:02:33,560 --> 01:02:36,440
Speaker 3: centers or residential or whatever it is that we think

1302
01:02:36,440 --> 01:02:40,040
Speaker 3: provides the best risk return in a given country. Many

1303
01:02:40,080 --> 01:02:42,919
Speaker 3: real estate investors don't invest that way. Many real state

1304
01:02:42,960 --> 01:02:45,840
Speaker 3: investors specialize in a country, or they specialize in a sector.

1305
01:02:46,360 --> 01:02:48,320
Speaker 3: I think that's hard. I mean, if you look at

1306
01:02:48,320 --> 01:02:51,760
Speaker 3: the last fifteen years, right, and you were to go back,

1307
01:02:51,880 --> 01:02:54,480
Speaker 3: you know, I don't know twenty ten, right, So I

1308
01:02:54,520 --> 01:02:57,720
Speaker 3: think retail assets and office assets would have been perceived

1309
01:02:57,840 --> 01:03:02,080
Speaker 3: much better in twenty ten. I think that data center

1310
01:03:02,360 --> 01:03:05,080
Speaker 3: assets and industrial assets would have been perceived much worse

1311
01:03:05,120 --> 01:03:08,120
Speaker 3: in twenty ten. Right. So just like there's I don't

1312
01:03:08,120 --> 01:03:10,160
Speaker 3: have a mathematical answer for this, but just like there's

1313
01:03:10,600 --> 01:03:13,240
Speaker 3: substantial dispersion and performance and equity and credit markets, I

1314
01:03:13,280 --> 01:03:17,880
Speaker 3: think there's actually substantial dispersion in performance in real estate

1315
01:03:17,920 --> 01:03:20,320
Speaker 3: markets as well. And geography too. By the way, there's

1316
01:03:20,360 --> 01:03:22,360
Speaker 3: geographies that have been big winners and geographies that have

1317
01:03:22,400 --> 01:03:24,320
Speaker 3: been big losers, And so you could have been the

1318
01:03:24,360 --> 01:03:26,880
Speaker 3: best office fund manager for the last fifteen years, and

1319
01:03:26,920 --> 01:03:28,800
Speaker 3: it's been a really hard place to make money, right,

1320
01:03:28,840 --> 01:03:31,320
Speaker 3: And so we try to take that out by investing

1321
01:03:31,360 --> 01:03:34,920
Speaker 3: across these areas. So the benefit of doing opportunistic real

1322
01:03:34,960 --> 01:03:37,720
Speaker 3: estate investing, and I don't just mean across geography or

1323
01:03:37,760 --> 01:03:39,680
Speaker 3: product type within real estate, but I mean buying into

1324
01:03:39,680 --> 01:03:42,720
Speaker 3: assets that other people don't want to own, is real

1325
01:03:42,800 --> 01:03:45,600
Speaker 3: estate markets have gotten hit much harder by the rise

1326
01:03:45,600 --> 01:03:47,960
Speaker 3: of interest rates, even that corporate markets have, you know,

1327
01:03:48,000 --> 01:03:50,320
Speaker 3: corporates at least there's been some growth, right, So real

1328
01:03:50,400 --> 01:03:53,280
Speaker 3: estate much less growth in terms of rents in most

1329
01:03:53,280 --> 01:03:55,280
Speaker 3: of these areas. Data centers and industrial would be an

1330
01:03:55,320 --> 01:03:59,240
Speaker 3: exception to that. And the covenants in real estate debt

1331
01:03:59,280 --> 01:04:01,919
Speaker 3: are much less for giving than they are in corporate debt,

1332
01:04:02,200 --> 01:04:04,200
Speaker 3: and the term of the debt is much shorter in

1333
01:04:04,240 --> 01:04:06,160
Speaker 3: real estate debt than it is in corporate debt. And

1334
01:04:06,240 --> 01:04:08,840
Speaker 3: so the crisis in real estate is like here and

1335
01:04:08,880 --> 01:04:12,160
Speaker 3: coming very quickly compared to maybe corporates, where companies in

1336
01:04:12,160 --> 01:04:13,800
Speaker 3: some cases have a little bit more duration, a little

1337
01:04:13,800 --> 01:04:16,760
Speaker 3: bit more time to try to solve their problems. And

1338
01:04:16,800 --> 01:04:19,240
Speaker 3: so you know, for us, real estate's a very interesting

1339
01:04:19,280 --> 01:04:21,480
Speaker 3: asset class. It's an asset class many people avoided in

1340
01:04:21,480 --> 01:04:23,920
Speaker 3: the twenty tens with rates where they were. I think

1341
01:04:23,920 --> 01:04:25,600
Speaker 3: there's a lot more alligat or interest in it than

1342
01:04:25,640 --> 01:04:28,800
Speaker 3: there was previously. There's different approaches, there's different ways to

1343
01:04:28,840 --> 01:04:31,800
Speaker 3: win in it, but we think it's very worthy of

1344
01:04:31,800 --> 01:04:32,280
Speaker 3: our attention.

1345
01:04:32,880 --> 01:04:36,520
Speaker 2: You mentioned it has been fun to be a manager

1346
01:04:36,680 --> 01:04:42,160
Speaker 2: of investments in office space outside of the super A's.

1347
01:04:42,600 --> 01:04:46,440
Speaker 2: Everybody else seems to be struggling. You look over at

1348
01:04:46,480 --> 01:04:52,120
Speaker 2: Hudson Yards, a giant layout of capital. Generally speaking, the

1349
01:04:52,200 --> 01:04:56,400
Speaker 2: castle carts wipe tracking is still showing with fifty sixty

1350
01:04:56,520 --> 01:05:00,880
Speaker 2: seventy percent back to return to office. I remember after

1351
01:05:00,960 --> 01:05:05,280
Speaker 2: nine to eleven all of Lower Manhattan was it was

1352
01:05:05,440 --> 01:05:09,920
Speaker 2: just a boom in converting office space to residential. Seems

1353
01:05:09,960 --> 01:05:11,960
Speaker 2: like you kill two birds with one stone if we

1354
01:05:12,080 --> 01:05:16,040
Speaker 2: do that in Manhattan and elsewhere, is that a viable

1355
01:05:16,800 --> 01:05:21,440
Speaker 2: opportunistic space in real estate or is it just building

1356
01:05:21,480 --> 01:05:22,800
Speaker 2: by building case by case.

1357
01:05:22,840 --> 01:05:25,200
Speaker 3: It's it's building by a building, case by case. There

1358
01:05:25,280 --> 01:05:27,200
Speaker 3: have been some issues in New York. I think actually

1359
01:05:27,240 --> 01:05:28,880
Speaker 3: we're in among the best positions of any of the

1360
01:05:28,880 --> 01:05:30,360
Speaker 3: cities in the US in terms.

1361
01:05:30,120 --> 01:05:33,080
Speaker 2: Of really, oh yeah, that was not the general consent.

1362
01:05:33,440 --> 01:05:35,480
Speaker 3: You go to Chicago, or you go to San Francisco,

1363
01:05:35,880 --> 01:05:38,680
Speaker 3: some of these places, it's it's still a ghost town.

1364
01:05:38,840 --> 01:05:40,520
Speaker 3: You know, we have many more people come into the

1365
01:05:40,560 --> 01:05:42,960
Speaker 3: office here because it is a vibrancy in New York

1366
01:05:42,960 --> 01:05:45,240
Speaker 3: that New York has. You know, every time every.

1367
01:05:45,120 --> 01:05:47,120
Speaker 2: Time someone tells me New York City is dead, I'm like,

1368
01:05:47,160 --> 01:05:51,560
Speaker 2: have you been here recently? It's you can't get rest reservations.

1369
01:05:51,960 --> 01:05:56,240
Speaker 2: Broadway plays are sold out. Torstan Slock actually tracks Broadway.

1370
01:05:56,320 --> 01:06:00,760
Speaker 2: It's back to above pre pandemic levels. Like, every time

1371
01:06:00,840 --> 01:06:03,120
Speaker 2: I hear about the death in New York, it's always

1372
01:06:03,120 --> 01:06:05,480
Speaker 2: from people who haven't visited in a decade.

1373
01:06:05,560 --> 01:06:07,520
Speaker 3: Yeah. No, I'm very fortunate that I get to go

1374
01:06:07,560 --> 01:06:09,120
Speaker 3: to most of the major cities in the US on

1375
01:06:09,160 --> 01:06:10,880
Speaker 3: a regular basis, and so I get to see it

1376
01:06:10,920 --> 01:06:13,080
Speaker 3: with my own eyes, and I agree with you one

1377
01:06:13,120 --> 01:06:16,840
Speaker 3: hundred percent. Look, it's building by building because office conversion

1378
01:06:16,960 --> 01:06:18,640
Speaker 3: to residential is not so.

1379
01:06:18,760 --> 01:06:23,080
Speaker 2: Easy, especially some of the sixties and seventies buildings where

1380
01:06:23,120 --> 01:06:25,000
Speaker 2: there's no windows.

1381
01:06:24,640 --> 01:06:26,960
Speaker 3: That's what I was gonna say as a starting point, right,

1382
01:06:27,040 --> 01:06:29,120
Speaker 3: So a lot of office buildings are square and a

1383
01:06:29,120 --> 01:06:33,000
Speaker 3: lot of residential buildings are rectangle. And it's because there's

1384
01:06:33,040 --> 01:06:35,120
Speaker 3: this rule that we have in New York City where

1385
01:06:35,160 --> 01:06:38,800
Speaker 3: I think every livable room has to have a window

1386
01:06:39,440 --> 01:06:41,520
Speaker 3: in it, right, And so very hard to put a

1387
01:06:41,520 --> 01:06:44,680
Speaker 3: window in all the square floor plan rooms, right. You

1388
01:06:44,720 --> 01:06:47,040
Speaker 3: want up with a huge amount of a square footage

1389
01:06:47,040 --> 01:06:49,960
Speaker 3: in the middle of the building that potentially becomes unusable, right,

1390
01:06:50,000 --> 01:06:51,640
Speaker 3: And then it's a huge cost to retrofit.

1391
01:06:51,760 --> 01:06:51,840
Speaker 2: Right.

1392
01:06:51,920 --> 01:06:54,760
Speaker 3: So in many cases you're actually better just tearing the

1393
01:06:54,760 --> 01:06:57,120
Speaker 3: thing down and starting over. But if you look at

1394
01:06:57,120 --> 01:07:00,200
Speaker 3: the price that loans trade at, most of them don't

1395
01:07:00,200 --> 01:07:01,960
Speaker 3: assume you're doing that, right, So you're not buying them

1396
01:07:02,000 --> 01:07:05,320
Speaker 3: for land value or things along those lines. Maybe occasionally

1397
01:07:05,320 --> 01:07:07,640
Speaker 3: at the opportunity, but it's not regular, so you have

1398
01:07:07,680 --> 01:07:09,040
Speaker 3: to kind of pick your spots. It's not to say

1399
01:07:09,080 --> 01:07:11,360
Speaker 3: there aren't conversions that that makes sense. There definitely are

1400
01:07:11,720 --> 01:07:13,320
Speaker 3: some of those, but I don't think it's the majority

1401
01:07:13,360 --> 01:07:15,720
Speaker 3: of situations, And so you know, you do, and it

1402
01:07:15,760 --> 01:07:18,560
Speaker 3: really is the sixties and seventies buildings that are the

1403
01:07:18,560 --> 01:07:20,720
Speaker 3: ones that are in trouble. Because you know, I think

1404
01:07:20,760 --> 01:07:24,200
Speaker 3: about like Midtown East where we are right now, it

1405
01:07:24,240 --> 01:07:26,000
Speaker 3: actually isn't so easy to get space in mid ten

1406
01:07:26,040 --> 01:07:29,480
Speaker 3: East right now because guess what the Plaza district, which

1407
01:07:29,520 --> 01:07:31,960
Speaker 3: is what it's widely called, it is like a super

1408
01:07:31,960 --> 01:07:33,640
Speaker 3: popular place to be. Not everyone wants to be in

1409
01:07:33,720 --> 01:07:36,440
Speaker 3: huts and yards no offense. And so if you want

1410
01:07:36,440 --> 01:07:37,919
Speaker 3: to be in this area and you want office space,

1411
01:07:37,960 --> 01:07:39,600
Speaker 3: there's only so much of it, right And by the way,

1412
01:07:39,840 --> 01:07:42,160
Speaker 3: because rates are high and people are down on office,

1413
01:07:42,160 --> 01:07:43,600
Speaker 3: they're not building a lot more of it. And it's

1414
01:07:43,640 --> 01:07:46,200
Speaker 3: super expensive to build more of it. I mean, the

1415
01:07:46,200 --> 01:07:48,640
Speaker 3: cost of what JP Morgan's doing on Park Avenue in

1416
01:07:48,640 --> 01:07:51,560
Speaker 3: the forties is astronomical, right, and so not everyone could

1417
01:07:51,560 --> 01:07:53,400
Speaker 3: afford to do that or wants to invest in that.

1418
01:07:53,480 --> 01:07:55,000
Speaker 3: And so if you want to be in the area,

1419
01:07:55,080 --> 01:07:57,720
Speaker 3: actually people are rapid or running out of space. That's

1420
01:07:57,760 --> 01:08:00,400
Speaker 3: not true for Class B buildings, right, all the things

1421
01:08:00,440 --> 01:08:02,560
Speaker 3: you can can't give away in terms of my spaces,

1422
01:08:02,640 --> 01:08:04,920
Speaker 3: and so you know, you may have you know, eventually

1423
01:08:04,960 --> 01:08:06,880
Speaker 3: the market will come to equilibrium, right, but it has

1424
01:08:07,320 --> 01:08:08,120
Speaker 3: you brought something.

1425
01:08:08,000 --> 01:08:11,040
Speaker 2: Up that I'm kind of intrigued by. The market has

1426
01:08:11,120 --> 01:08:14,680
Speaker 2: yet to price out a lot of these buildings as

1427
01:08:15,120 --> 01:08:18,240
Speaker 2: only worth land value. They're still valuing as if hey,

1428
01:08:18,280 --> 01:08:20,360
Speaker 2: we're going to have a seventy five percent occupancy rate

1429
01:08:20,400 --> 01:08:23,200
Speaker 2: for the next thirty years. What's it going to take

1430
01:08:23,320 --> 01:08:28,160
Speaker 2: for that mispricing to get more in line with what's

1431
01:08:28,200 --> 01:08:29,880
Speaker 2: going on on the ground.

1432
01:08:30,040 --> 01:08:32,880
Speaker 3: You know, my experience with private assets in general is

1433
01:08:32,920 --> 01:08:36,400
Speaker 3: eventually buyers and sellers find each other, right, and essentially,

1434
01:08:36,479 --> 01:08:39,519
Speaker 3: you know, that usually is more pain for the sellers,

1435
01:08:39,600 --> 01:08:41,439
Speaker 3: and usually buyers get a little bit more realistic about

1436
01:08:41,439 --> 01:08:43,639
Speaker 3: how cheaply they're gonna buy things. And by the way,

1437
01:08:43,640 --> 01:08:46,920
Speaker 3: it's also banks and owners of assets, right. So you know.

1438
01:08:46,960 --> 01:08:49,639
Speaker 3: The other thing is institutions don't like to sell assets

1439
01:08:49,680 --> 01:08:52,519
Speaker 3: at a discount where they're marked at them right, And

1440
01:08:52,600 --> 01:08:55,200
Speaker 3: so the first place is for marks to get correct, right. So,

1441
01:08:55,240 --> 01:08:57,120
Speaker 3: whether it's real estate funds and their marks or whether

1442
01:08:57,160 --> 01:08:59,240
Speaker 3: it's banks and their marks. You know, once things are

1443
01:08:59,280 --> 01:09:01,240
Speaker 3: marked down at they can sell alone at a profit.

1444
01:09:01,280 --> 01:09:03,240
Speaker 3: They're much more likely to get sold. And that just

1445
01:09:03,280 --> 01:09:05,519
Speaker 3: takes time. I mean, that could take years in terms

1446
01:09:05,560 --> 01:09:05,800
Speaker 3: of word.

1447
01:09:05,840 --> 01:09:09,479
Speaker 2: That's really wow, that's that's quite amazing. So we've covered

1448
01:09:09,800 --> 01:09:13,360
Speaker 2: opportunistic credit, we've covered m and A, we've covered real estate.

1449
01:09:14,200 --> 01:09:17,400
Speaker 2: I have to get into the world of acronyms. You

1450
01:09:17,520 --> 01:09:21,800
Speaker 2: have to explain to me what are lmees and piks.

1451
01:09:21,840 --> 01:09:23,240
Speaker 2: I don't know how you pronounce either.

1452
01:09:23,560 --> 01:09:29,000
Speaker 3: So lmes or liability management exercises liability.

1453
01:09:29,160 --> 01:09:32,040
Speaker 2: So if you're an insurance company or more likely a

1454
01:09:32,120 --> 01:09:34,639
Speaker 2: pension funds and you know you're going to owe out

1455
01:09:34,840 --> 01:09:36,840
Speaker 2: X ten, fifteen, twenty years from.

1456
01:09:36,720 --> 01:09:40,320
Speaker 3: Now is now. These are corporate issuers. So basically, if

1457
01:09:40,320 --> 01:09:43,320
Speaker 3: you look at corporate debt, right, so ninety percent of

1458
01:09:43,360 --> 01:09:45,560
Speaker 3: the debt that gets issued in leverage loan markets in

1459
01:09:45,600 --> 01:09:49,840
Speaker 3: public markets has fairly like covenants in it. And so

1460
01:09:49,880 --> 01:09:53,240
Speaker 3: what that allows companies to do is basically have carve

1461
01:09:53,320 --> 01:09:56,360
Speaker 3: outs of baskets where they can offer to creditors a

1462
01:09:56,479 --> 01:09:59,280
Speaker 3: chance to exchange their debt for a smaller amount of

1463
01:09:59,320 --> 01:10:02,400
Speaker 3: debt that might rank ahead of you in the capital structure. Right,

1464
01:10:02,439 --> 01:10:04,559
Speaker 3: So if you own a bunch of unsecured debt and

1465
01:10:04,720 --> 01:10:06,160
Speaker 3: they come to you and they say, well, you're owed

1466
01:10:06,160 --> 01:10:07,680
Speaker 3: a one hundred cents, but we're going to offer you

1467
01:10:07,680 --> 01:10:10,920
Speaker 3: seventy five cents of you know, debt that's got a

1468
01:10:11,040 --> 01:10:13,519
Speaker 3: higher coupon and it's higher in the capital structure than

1469
01:10:13,680 --> 01:10:16,719
Speaker 3: where you were, and so you almost are co opted

1470
01:10:16,760 --> 01:10:19,599
Speaker 3: into having to take that agreement because if everyone else

1471
01:10:19,640 --> 01:10:21,880
Speaker 3: takes it and you don't take it, all of a sudden,

1472
01:10:21,880 --> 01:10:24,040
Speaker 3: you've been primed by everyone else in your capital structure,

1473
01:10:24,240 --> 01:10:27,200
Speaker 3: even if it's only seventy five percent of the amount.

1474
01:10:27,280 --> 01:10:30,479
Speaker 3: And so that's a very active exercise that's going on

1475
01:10:30,760 --> 01:10:34,960
Speaker 3: in public markets right now. Some of the companies have

1476
01:10:35,040 --> 01:10:37,840
Speaker 3: to do this because they don't have any other chance

1477
01:10:37,840 --> 01:10:40,439
Speaker 3: to right size their capital structures. Other companies are trying

1478
01:10:40,479 --> 01:10:42,200
Speaker 3: to do an opportunistically. They say, Hey, if we can

1479
01:10:42,200 --> 01:10:45,200
Speaker 3: get something from the creditors for nothing, why don't we

1480
01:10:45,240 --> 01:10:45,519
Speaker 3: do that.

1481
01:10:45,680 --> 01:10:47,800
Speaker 2: What's the flip side of that? It sounds like the

1482
01:10:47,920 --> 01:10:50,720
Speaker 2: creditors are right, they're getting secured where they might not

1483
01:10:50,800 --> 01:10:54,040
Speaker 2: have been earlier, but they wanted the higher yield and

1484
01:10:54,120 --> 01:10:57,200
Speaker 2: they're taking a big hit. Are they unhappy about this

1485
01:10:57,320 --> 01:10:59,320
Speaker 2: or is this just Hey, it's a risk.

1486
01:10:59,479 --> 01:11:01,760
Speaker 3: It depends on the creditors. So the term that gets

1487
01:11:01,800 --> 01:11:03,920
Speaker 3: used a lot, which I don't think is great, is

1488
01:11:03,960 --> 01:11:05,280
Speaker 3: creditor on credit or violence.

1489
01:11:05,600 --> 01:11:05,880
Speaker 1: Right.

1490
01:11:06,040 --> 01:11:09,719
Speaker 3: So there's some of it that's driven by the companies,

1491
01:11:09,760 --> 01:11:11,519
Speaker 3: and there's some of it that's driven by creditors, and

1492
01:11:11,520 --> 01:11:14,000
Speaker 3: the creditors may say, hey, we're gonna put some some

1493
01:11:14,160 --> 01:11:17,120
Speaker 3: new money in alongside with that seventy five percent, and

1494
01:11:17,160 --> 01:11:19,200
Speaker 3: we're gonna make sure we're first in line for that

1495
01:11:19,439 --> 01:11:21,640
Speaker 3: seventy five cents, so we're gonna get paid first. And

1496
01:11:21,880 --> 01:11:23,800
Speaker 3: the other you know, usually less than fifty percent of

1497
01:11:23,840 --> 01:11:26,160
Speaker 3: the capital structure that's not along with us. They're gonna

1498
01:11:26,160 --> 01:11:27,760
Speaker 3: get less, and then we're gonna look even better than

1499
01:11:27,760 --> 01:11:29,280
Speaker 3: they look because we've gotten a better return on the

1500
01:11:29,320 --> 01:11:34,040
Speaker 3: same that's creditor creditor. It's just a perfect violence there. Well,

1501
01:11:34,880 --> 01:11:38,280
Speaker 3: you all may have invented it. I didn't invent I No, I've.

1502
01:11:37,680 --> 01:11:41,400
Speaker 2: Never heard it before. But it's both perfect and a music.

1503
01:11:41,479 --> 01:11:44,120
Speaker 3: So you know, that's that's one of the big themes

1504
01:11:44,120 --> 01:11:47,320
Speaker 3: that's going on in the public markets. In the private markets,

1505
01:11:47,400 --> 01:11:49,920
Speaker 3: more people are doing what's called so p i K

1506
01:11:50,200 --> 01:11:53,519
Speaker 3: is often called picking. It's payment in kind and so

1507
01:11:53,640 --> 01:11:56,240
Speaker 3: you know, if you're a direct corporate lender and there's

1508
01:11:56,240 --> 01:11:57,679
Speaker 3: you know, there might be five people in your group,

1509
01:11:57,680 --> 01:11:59,599
Speaker 3: and there might be twenty people in your group. They

1510
01:11:59,680 --> 01:12:01,960
Speaker 3: usually try to work together on things. Although I think

1511
01:12:01,960 --> 01:12:04,120
Speaker 3: even the fabric of that is starting to fray a bit,

1512
01:12:05,040 --> 01:12:08,599
Speaker 3: and they may say, okay, company, you can't pay your debt,

1513
01:12:08,640 --> 01:12:10,559
Speaker 3: we're gonna stay marked at park. So we're gonna keep

1514
01:12:10,600 --> 01:12:12,400
Speaker 3: the debt at par, but we're not going to make

1515
01:12:12,400 --> 01:12:13,880
Speaker 3: you pay interest for the next year or two while

1516
01:12:13,880 --> 01:12:15,920
Speaker 3: you right size your business, and we're going to tack

1517
01:12:15,960 --> 01:12:18,240
Speaker 3: that onto the principle. So if it's ten percent coupon

1518
01:12:18,280 --> 01:12:19,800
Speaker 3: a year, you're not going to it's one hundred. You know,

1519
01:12:19,960 --> 01:12:22,920
Speaker 3: it's one hundred and twenty of principle, and during that

1520
01:12:22,960 --> 01:12:24,960
Speaker 3: coupon holiday, you're going to fix your business. So the

1521
01:12:24,960 --> 01:12:26,920
Speaker 3: business is magically worth one hundred and twenty at ten

1522
01:12:27,320 --> 01:12:27,640
Speaker 3: uh huh.

1523
01:12:27,720 --> 01:12:31,080
Speaker 2: So in other words, that they waive their payment stream

1524
01:12:31,200 --> 01:12:34,080
Speaker 2: for that period, but they're not just taking that payment

1525
01:12:34,120 --> 01:12:36,639
Speaker 2: stream and attacking it on at the end. They're taking

1526
01:12:36,640 --> 01:12:40,400
Speaker 2: that payment stream plus. And it sounds like there's a

1527
01:12:40,439 --> 01:12:41,280
Speaker 2: little market.

1528
01:12:41,360 --> 01:12:44,720
Speaker 3: There's usually there's usually an additional amount of interest that

1529
01:12:44,760 --> 01:12:48,000
Speaker 3: you might get for picking versus paying cash pay, but

1530
01:12:48,120 --> 01:12:51,120
Speaker 3: fundamentally that lender is marking it at par usually or

1531
01:12:51,120 --> 01:12:53,479
Speaker 3: some high nineties price because they're saying, hey, we're not

1532
01:12:53,520 --> 01:12:55,320
Speaker 3: getting this cash currently, but we're going to get it

1533
01:12:55,320 --> 01:12:57,320
Speaker 3: in the future, and so it's just part of the loan.

1534
01:12:57,960 --> 01:12:59,840
Speaker 3: And that's a different way of sort of achieving in

1535
01:13:00,479 --> 01:13:03,879
Speaker 3: private markets. What is happening in public markets with liability

1536
01:13:03,880 --> 01:13:06,559
Speaker 3: management exercises, but it's been being done in a way

1537
01:13:06,600 --> 01:13:09,080
Speaker 3: where there's no mark to market. That only works if

1538
01:13:09,080 --> 01:13:11,400
Speaker 3: the loan is worth par at the end at the

1539
01:13:11,479 --> 01:13:13,160
Speaker 3: new amount. Right, So if the loan is worth one

1540
01:13:13,240 --> 01:13:15,479
Speaker 3: hundred and twenty cents at the end of this, that's

1541
01:13:15,520 --> 01:13:18,200
Speaker 3: when that works. If the company isn't worth more, and

1542
01:13:18,280 --> 01:13:20,240
Speaker 3: often the companies might be worth less to the end

1543
01:13:20,240 --> 01:13:21,840
Speaker 3: of this process, you wind up with a loan that's

1544
01:13:21,880 --> 01:13:24,599
Speaker 3: got less value. If the company was worth ninety cents

1545
01:13:24,600 --> 01:13:26,479
Speaker 3: to begin with, instead of being ninety out of one hundred,

1546
01:13:26,479 --> 01:13:28,200
Speaker 3: you're ninety out of one hundred and twenty. So all

1547
01:13:28,240 --> 01:13:30,080
Speaker 3: of a sudden, what's left is worth seventy five cents.

1548
01:13:30,160 --> 01:13:33,880
Speaker 3: And so it's a way to postpone problems for a

1549
01:13:33,920 --> 01:13:37,840
Speaker 3: few years. It doesn't always solve problems. Liability management exercises

1550
01:13:37,880 --> 01:13:39,920
Speaker 3: are a way to postpone problems for a few years.

1551
01:13:40,200 --> 01:13:41,879
Speaker 3: They also often don't solve problems.

1552
01:13:42,320 --> 01:13:46,800
Speaker 2: You guys manage a lot of different types of assets

1553
01:13:47,200 --> 01:13:53,920
Speaker 2: both geographically, risk wise, strategy wise, public private equity debt.

1554
01:13:54,760 --> 01:13:59,400
Speaker 2: How do you manage your risk across all these diverse strategies.

1555
01:14:00,120 --> 01:14:03,600
Speaker 3: We have a framework where we look at individual strategies,

1556
01:14:03,640 --> 01:14:05,360
Speaker 3: and so there might be a different framework and how

1557
01:14:05,360 --> 01:14:08,639
Speaker 3: we manage risk and our convertible arbitrage strategy for example,

1558
01:14:08,720 --> 01:14:12,000
Speaker 3: then how we manage risk and an opportunistic credit strategy,

1559
01:14:12,080 --> 01:14:14,600
Speaker 3: And then we try to look across at risk across strategies,

1560
01:14:14,600 --> 01:14:17,760
Speaker 3: and risk across strategies is harder to measure than risk

1561
01:14:17,960 --> 01:14:21,080
Speaker 3: in individual strategies. I mean, some of it's obvious, right

1562
01:14:21,120 --> 01:14:23,760
Speaker 3: If you have the same q SIPs or positions in

1563
01:14:23,800 --> 01:14:27,880
Speaker 3: a public markets fund that happened to be in different areas,

1564
01:14:27,920 --> 01:14:29,760
Speaker 3: that's an obvious area that you're going to find risk.

1565
01:14:30,040 --> 01:14:32,599
Speaker 3: You know, industry concentration will be the second most obvious

1566
01:14:32,640 --> 01:14:35,240
Speaker 3: area that you're going to find risk. You know, things

1567
01:14:35,320 --> 01:14:37,200
Speaker 3: like how are each of our books going to perform

1568
01:14:37,280 --> 01:14:40,400
Speaker 3: during a COVID type crisis or a GFC crisis. You

1569
01:14:40,479 --> 01:14:43,840
Speaker 3: stress test, but ultimately you don't know, right because you

1570
01:14:43,840 --> 01:14:46,160
Speaker 3: know there are different markets that do better than you

1571
01:14:46,200 --> 01:14:47,920
Speaker 3: think in different markets and worse than you think in

1572
01:14:47,960 --> 01:14:50,320
Speaker 3: different markets, And so you know, it goes down to

1573
01:14:50,360 --> 01:14:52,639
Speaker 3: my basics. You know, the thing we have a risk

1574
01:14:52,720 --> 01:14:56,200
Speaker 3: arbitrage business is it allows you to think about risk

1575
01:14:56,360 --> 01:14:59,360
Speaker 3: reasonably simply. You know, the risk arbitise mantras. What can

1576
01:14:59,400 --> 01:15:01,640
Speaker 3: you make if if your deal closes, and that's a

1577
01:15:01,640 --> 01:15:04,080
Speaker 3: pretty defined amount of money. What do you lose if

1578
01:15:04,080 --> 01:15:07,200
Speaker 3: your deal doesn't close? And we're pretty good at calculating that,

1579
01:15:07,720 --> 01:15:11,840
Speaker 3: what's the probability of success? And then what's the probability

1580
01:15:11,880 --> 01:15:14,200
Speaker 3: that the market is implying with its price to success?

1581
01:15:14,360 --> 01:15:16,120
Speaker 3: And if you can get those four things right, it's

1582
01:15:16,160 --> 01:15:18,799
Speaker 3: basically like poker, you can underwrite everything right. And ultimately,

1583
01:15:18,840 --> 01:15:20,920
Speaker 3: if you know your odds every time, you can win

1584
01:15:20,960 --> 01:15:24,040
Speaker 3: consistently over time. You know, you try to take that

1585
01:15:24,080 --> 01:15:26,639
Speaker 3: mantra and you apply it everywhere else. Unfortunately, most other

1586
01:15:26,640 --> 01:15:29,000
Speaker 3: parts of our portfolio, there's several different scenarios things can

1587
01:15:29,000 --> 01:15:31,400
Speaker 3: go down, So I go back and credit in particular.

1588
01:15:31,640 --> 01:15:33,200
Speaker 3: You know, one of the questions we like to ask

1589
01:15:33,320 --> 01:15:34,960
Speaker 3: is what are all the bad things that can happen

1590
01:15:35,000 --> 01:15:36,880
Speaker 3: to us where we still get our money back? Right?

1591
01:15:36,920 --> 01:15:38,880
Speaker 3: And that's sort of how I sort of this trading risk.

1592
01:15:38,920 --> 01:15:42,120
Speaker 3: And there's ultimate downside risk and I like investments where

1593
01:15:42,640 --> 01:15:44,760
Speaker 3: you could really really stress it and you're still going

1594
01:15:44,800 --> 01:15:45,800
Speaker 3: to get most of all your money.

1595
01:15:46,080 --> 01:15:47,840
Speaker 2: All right, So let me throw you one curve ball

1596
01:15:47,880 --> 01:15:51,360
Speaker 2: before we jump into our favorite questions. And that's your

1597
01:15:51,439 --> 01:15:54,599
Speaker 2: chairman of the New York Public Library Investment Committee, your

1598
01:15:54,800 --> 01:15:59,200
Speaker 2: vice chair of the investment committee at New York Presbyterian,

1599
01:15:59,240 --> 01:16:02,880
Speaker 2: and you also sit on the committee for Princeton's endowment.

1600
01:16:03,400 --> 01:16:07,599
Speaker 2: These are three very distinct sort of endowments. That has

1601
01:16:07,640 --> 01:16:10,320
Speaker 2: to be a fascinating set of experiences. Tell us a

1602
01:16:10,320 --> 01:16:13,120
Speaker 2: little bit about all three of those entities that you

1603
01:16:13,600 --> 01:16:15,519
Speaker 2: are either sitting on today or have worked on in

1604
01:16:15,520 --> 01:16:15,920
Speaker 2: the past.

1605
01:16:16,000 --> 01:16:18,760
Speaker 3: Yeah, So, first of all, I'm very fortunate to be

1606
01:16:18,800 --> 01:16:21,280
Speaker 3: involved with all three great institutions. I serve on all

1607
01:16:21,320 --> 01:16:24,519
Speaker 3: of their boards of trustees. There are all institutions that

1608
01:16:24,560 --> 01:16:27,240
Speaker 3: are very near and dear to my heart for different reasons.

1609
01:16:27,680 --> 01:16:30,960
Speaker 3: The super majority of my wife and my philanthropy is

1610
01:16:31,000 --> 01:16:33,439
Speaker 3: in the education space. My wife served for a long

1611
01:16:33,479 --> 01:16:36,599
Speaker 3: time on the board of trustees of Herama Mater Birdmar College.

1612
01:16:36,840 --> 01:16:40,000
Speaker 3: I'm very fortunate that I can serve these institutions in

1613
01:16:40,000 --> 01:16:41,760
Speaker 3: a way that they find helpful. They've allly asked me

1614
01:16:41,840 --> 01:16:44,840
Speaker 3: to serve on their investment committees, which is why I've

1615
01:16:44,840 --> 01:16:47,799
Speaker 3: done so. New York Presbyterian is newer. I got involved

1616
01:16:47,800 --> 01:16:49,920
Speaker 3: in that in twenty twenty one, and that was a

1617
01:16:49,960 --> 01:16:53,160
Speaker 3: situation where I felt like the city needed me in

1618
01:16:53,200 --> 01:16:55,920
Speaker 3: the healthcare organization in the city needed me. I had

1619
01:16:55,960 --> 01:16:58,719
Speaker 3: a very close relationship with that institution, so it wasn't random,

1620
01:16:58,840 --> 01:17:00,680
Speaker 3: but it was one where kind of came to it

1621
01:17:01,720 --> 01:17:03,880
Speaker 3: later on. And in terms of the endowments, they're all

1622
01:17:04,000 --> 01:17:07,479
Speaker 3: very different. I mean, New York Presbyterian is in the

1623
01:17:07,520 --> 01:17:11,759
Speaker 3: low double digit billions, New York Public Library is between

1624
01:17:11,800 --> 01:17:13,640
Speaker 3: one and a half and two billion, and Princeton is

1625
01:17:14,280 --> 01:17:16,080
Speaker 3: in the thirties. In terms of what they are, they

1626
01:17:16,120 --> 01:17:19,600
Speaker 3: require different things. In terms of being a trustee. You know,

1627
01:17:19,640 --> 01:17:22,320
Speaker 3: at a smaller institution, you typically have a board driven model,

1628
01:17:22,360 --> 01:17:26,240
Speaker 3: with the board at least formally is approving investments. We're fortunately,

1629
01:17:26,240 --> 01:17:28,639
Speaker 3: I've got really really strong teams in all three places,

1630
01:17:28,720 --> 01:17:31,280
Speaker 3: so we've got great, great investment professionals that work at

1631
01:17:31,280 --> 01:17:34,000
Speaker 3: each of those institutions. But you know, smaller endowments tend

1632
01:17:34,000 --> 01:17:36,160
Speaker 3: to be board driven models and larger endowments tend to

1633
01:17:36,160 --> 01:17:39,599
Speaker 3: be staff driven models, where your role as being a

1634
01:17:39,600 --> 01:17:41,960
Speaker 3: trustee or on an investment committee is more guard rails

1635
01:17:42,240 --> 01:17:45,240
Speaker 3: than anything else. Each of those committee is kind of

1636
01:17:45,400 --> 01:17:47,479
Speaker 3: as a different approach and how they want to run

1637
01:17:47,520 --> 01:17:51,280
Speaker 3: their portfolios and manage their portfolios. And you know, I

1638
01:17:51,360 --> 01:17:52,960
Speaker 3: like to think I contribute to the meetings. I also

1639
01:17:53,040 --> 01:17:55,400
Speaker 3: learn a lot while while I'm there. Right, I'm certainly

1640
01:17:55,439 --> 01:17:59,600
Speaker 3: a subject matter expert in each of the areas that

1641
01:17:59,640 --> 01:18:02,439
Speaker 3: we invest in. I think I'm reasonably knowledgeable about all

1642
01:18:02,439 --> 01:18:04,160
Speaker 3: the areas that all the endowments invest in, but I'm

1643
01:18:04,160 --> 01:18:06,200
Speaker 3: not a subject matter expert in venture capital or things

1644
01:18:06,200 --> 01:18:10,439
Speaker 3: along those lines. And so it's been a fantastic experience

1645
01:18:10,479 --> 01:18:12,240
Speaker 3: and a good way to give back. But you know,

1646
01:18:12,479 --> 01:18:14,720
Speaker 3: when you're at a smaller endowment, and I don't view

1647
01:18:14,800 --> 01:18:16,360
Speaker 3: too belion is small in the real world. But like

1648
01:18:16,360 --> 01:18:17,760
Speaker 3: when you're at a smaller endowment, you have to think

1649
01:18:17,800 --> 01:18:20,360
Speaker 3: about things differently. You're gonna have less staffing, you can

1650
01:18:20,400 --> 01:18:23,800
Speaker 3: cover less number of managers. Your institution's needs with respect

1651
01:18:23,840 --> 01:18:26,240
Speaker 3: to your cash flow might be different. At a larger institution.

1652
01:18:26,680 --> 01:18:28,320
Speaker 3: You have to put each of them in framework in

1653
01:18:28,400 --> 01:18:31,040
Speaker 3: terms of what you're trying to achieve, and you have

1654
01:18:31,080 --> 01:18:33,280
Speaker 3: to make sure this's buy into that model up and

1655
01:18:33,320 --> 01:18:36,320
Speaker 3: down the organization. So the investment commit needs to buy

1656
01:18:36,320 --> 01:18:38,240
Speaker 3: into what the staff is doing, which needs to buy in.

1657
01:18:38,640 --> 01:18:40,280
Speaker 3: There needs to be buy in from what the management

1658
01:18:40,320 --> 01:18:42,360
Speaker 3: of the organization is doing. There needs to be buying

1659
01:18:42,360 --> 01:18:44,080
Speaker 3: from the full board. When you get all four of

1660
01:18:44,120 --> 01:18:46,120
Speaker 3: those things right, you can do really powerful things.

1661
01:18:46,280 --> 01:18:49,400
Speaker 2: So we really don't hear much about the Princeton endowment,

1662
01:18:49,479 --> 01:18:53,280
Speaker 2: which is probably a good thing because when you look,

1663
01:18:53,400 --> 01:18:56,559
Speaker 2: especially in the IVS, at some of the endowments that

1664
01:18:56,680 --> 01:19:00,240
Speaker 2: have been in the public eye, it's rarely because us

1665
01:19:00,240 --> 01:19:03,920
Speaker 2: they're shooting the lights out. Harvard went through a whole

1666
01:19:04,960 --> 01:19:08,720
Speaker 2: transition when they got rid of the people running a

1667
01:19:08,760 --> 01:19:14,280
Speaker 2: Harvard management company, and then they persistently wildly underperformed for

1668
01:19:14,720 --> 01:19:19,800
Speaker 2: a decade plus. And then obviously the Yale model under

1669
01:19:19,840 --> 01:19:25,200
Speaker 2: David Swinson was unique, and once Swinson began thinking about

1670
01:19:25,200 --> 01:19:28,519
Speaker 2: retiring that no longer was putting up the sort of

1671
01:19:28,600 --> 01:19:33,160
Speaker 2: numbers they had in prior decades. What is Princeton doing

1672
01:19:34,080 --> 01:19:37,360
Speaker 2: other than just keeping their head down and quietly doing

1673
01:19:37,400 --> 01:19:38,040
Speaker 2: what they're doing.

1674
01:19:38,200 --> 01:19:42,720
Speaker 3: Yeah, I mean, without maybe speaking specifically about what's going

1675
01:19:42,720 --> 01:19:45,200
Speaker 3: on underneath the hood at Princeton I'll just repeat a

1676
01:19:45,200 --> 01:19:46,880
Speaker 3: couple of things that have been out there in the

1677
01:19:46,920 --> 01:19:49,360
Speaker 3: public market. So first of all, you know, we had

1678
01:19:49,400 --> 01:19:52,920
Speaker 3: our longtime CIO Andy Golden, retire during the middle of

1679
01:19:52,920 --> 01:19:56,879
Speaker 3: twenty twenty four. Andy was a decipher of David Swinston.

1680
01:19:56,920 --> 01:19:58,679
Speaker 3: It worked him for a few years earlier in his career,

1681
01:19:58,720 --> 01:20:02,760
Speaker 3: had a spectacular almost thirty year run running Princo, and

1682
01:20:02,840 --> 01:20:05,559
Speaker 3: he's been replaced by a brand new CIO, Vince Tuwey,

1683
01:20:05,600 --> 01:20:09,479
Speaker 3: who came from MIT and had a very long career there.

1684
01:20:09,640 --> 01:20:11,920
Speaker 3: Mit has been among the best performing endowments as well,

1685
01:20:12,280 --> 01:20:14,320
Speaker 3: and the head of its endowment, Seth Alexander, is also

1686
01:20:14,320 --> 01:20:17,240
Speaker 3: a disciple of David Swinson. The second thing, which was

1687
01:20:17,520 --> 01:20:21,519
Speaker 3: came out in our recent President's Letter, which he publishes annually,

1688
01:20:22,000 --> 01:20:23,839
Speaker 3: is that you do have to look that endowment returns

1689
01:20:23,840 --> 01:20:26,320
Speaker 3: have come down over long periods of time, and that's

1690
01:20:26,320 --> 01:20:28,439
Speaker 3: something to do with Princeton or Yale or any of

1691
01:20:28,439 --> 01:20:31,040
Speaker 3: these August institutions. It has to do with you know

1692
01:20:31,040 --> 01:20:33,760
Speaker 3: what I mentioned earlier, capital chases returns and market's become

1693
01:20:33,800 --> 01:20:37,320
Speaker 3: efficient over time, and things that David or Andy were

1694
01:20:37,320 --> 01:20:42,920
Speaker 3: doing that were completely visionary in nineteen eighties nineteen nineties

1695
01:20:42,960 --> 01:20:44,360
Speaker 3: today are commonplace.

1696
01:20:44,520 --> 01:20:47,840
Speaker 2: Right, white space was wide open then and now it's

1697
01:20:47,840 --> 01:20:48,760
Speaker 2: well trust.

1698
01:20:48,640 --> 01:20:52,120
Speaker 3: Someone asked me, So I asked Tom Kepner. I said, Tom,

1699
01:20:52,200 --> 01:20:56,559
Speaker 3: is it true that David Swinson invented the term absolute return?

1700
01:20:56,960 --> 01:21:00,120
Speaker 3: And he said to me, it's completely true. And it

1701
01:21:00,160 --> 01:21:02,240
Speaker 3: was in the middle of the nineteen eighties, and David

1702
01:21:02,240 --> 01:21:04,479
Speaker 3: decided that was a much more gust word to use

1703
01:21:04,560 --> 01:21:06,880
Speaker 3: to describe strategies that people used to call as hedge

1704
01:21:06,880 --> 01:21:09,120
Speaker 3: fund strategies in that period of time. And so that

1705
01:21:09,160 --> 01:21:11,120
Speaker 3: literally just came from David Swinson's head, that term that

1706
01:21:11,120 --> 01:21:15,160
Speaker 3: we all used deerically today. I can't substantiate it, but

1707
01:21:15,160 --> 01:21:17,519
Speaker 3: I take Tom's word for it in terms of being

1708
01:21:17,520 --> 01:21:20,360
Speaker 3: a thing. And so you look at what these institutions

1709
01:21:20,400 --> 01:21:24,120
Speaker 3: created and now the incredible industry that's come from it,

1710
01:21:23,240 --> 01:21:25,040
Speaker 3: it's pretty staggering.

1711
01:21:25,240 --> 01:21:27,720
Speaker 2: Huh, really really amazing. All Right, I only have you

1712
01:21:27,760 --> 01:21:29,840
Speaker 2: for a limited amount of time. Let's jump to our

1713
01:21:29,880 --> 01:21:35,160
Speaker 2: favorite questions, starting with what are you doing to stay

1714
01:21:35,479 --> 01:21:37,920
Speaker 2: entertained when you're not at work? What are you watching

1715
01:21:38,160 --> 01:21:38,839
Speaker 2: or listening?

1716
01:21:39,360 --> 01:21:43,000
Speaker 3: So you know, I don't watch a lot of streamed

1717
01:21:43,240 --> 01:21:45,840
Speaker 3: content because I find when I'm at home. I want

1718
01:21:45,840 --> 01:21:47,640
Speaker 3: to vege, and so the good ways to do that

1719
01:21:47,680 --> 01:21:50,880
Speaker 3: are either watching sports or watching the news. Honestly, news

1720
01:21:50,920 --> 01:21:53,439
Speaker 3: is less good for vegging than sports. Probably. Two things

1721
01:21:53,479 --> 01:21:56,080
Speaker 3: I am looking forward to, though, are season three of

1722
01:21:56,080 --> 01:21:59,479
Speaker 3: White Lotus, which is just in the process of being out,

1723
01:21:59,600 --> 01:22:01,960
Speaker 3: and season three of Gilded Age, which I believe is

1724
01:22:01,960 --> 01:22:04,040
Speaker 3: going to come out this fall. Gilded Age, so Gilded

1725
01:22:04,040 --> 01:22:08,240
Speaker 3: Age is an HBO show, and it's basically about life

1726
01:22:08,320 --> 01:22:10,920
Speaker 3: in the eighteen eighties or eighteen nineties, so hence the

1727
01:22:10,960 --> 01:22:13,639
Speaker 3: Gilded Age of the United States. And there are characters

1728
01:22:13,640 --> 01:22:17,680
Speaker 3: that are based on Cornelius Vanderbilt or Jay Gould or

1729
01:22:17,800 --> 01:22:20,200
Speaker 3: some of the leading lights of the era. It's always

1730
01:22:20,200 --> 01:22:23,000
Speaker 3: an era. I found it very historically fascinating, and I

1731
01:22:23,000 --> 01:22:24,760
Speaker 3: think they've done a great job with the show. It's

1732
01:22:24,800 --> 01:22:26,479
Speaker 3: a great period piece. I mean, if you look around,

1733
01:22:26,520 --> 01:22:30,400
Speaker 3: there's more buildings left here or Newport or Albany from

1734
01:22:30,400 --> 01:22:31,640
Speaker 3: that era than you would think, so that the don

1735
01:22:31,680 --> 01:22:35,559
Speaker 3: a very good job of integrating a cgi with some

1736
01:22:35,640 --> 01:22:37,519
Speaker 3: of the older historic buildings. You know.

1737
01:22:37,600 --> 01:22:41,240
Speaker 2: I love the first season of Lotus. The second season

1738
01:22:42,160 --> 01:22:45,200
Speaker 2: was a little frustrating, especially with the way they wrapped

1739
01:22:45,240 --> 01:22:47,760
Speaker 2: it up I'm curious to see the direction they go

1740
01:22:47,840 --> 01:22:51,439
Speaker 2: in season three. I'm going to check out guilded Age.

1741
01:22:51,479 --> 01:22:54,160
Speaker 2: I'm assuming you've seen The Crown.

1742
01:22:55,320 --> 01:22:57,160
Speaker 3: My wife watched this, so I've seen portions of it.

1743
01:22:57,240 --> 01:23:00,960
Speaker 2: So I'll tell you it's just so good every episode.

1744
01:23:01,520 --> 01:23:07,720
Speaker 2: If you want that sort of historical run up, no

1745
01:23:07,880 --> 01:23:12,720
Speaker 2: stone left unturned their production. Like I am not a

1746
01:23:12,920 --> 01:23:16,479
Speaker 2: historical TV fan, and I got sucked into that. It

1747
01:23:16,640 --> 01:23:21,200
Speaker 2: really it's just spectacular from start to finish. Let's jump

1748
01:23:21,240 --> 01:23:26,160
Speaker 2: to your career and your mentors who helped shape your career.

1749
01:23:26,960 --> 01:23:28,759
Speaker 2: I have a feeling I have I know the names

1750
01:23:28,800 --> 01:23:29,559
Speaker 2: of a few of them.

1751
01:23:30,000 --> 01:23:33,439
Speaker 3: Yeah, you know, I go back further than the obvious,

1752
01:23:33,880 --> 01:23:37,160
Speaker 3: you know, Tom and Marvin in terms of starting. I mean,

1753
01:23:37,200 --> 01:23:39,720
Speaker 3: first of all, I'm very fortunate to come from a

1754
01:23:39,760 --> 01:23:41,720
Speaker 3: family where I had a few mentors as well. We

1755
01:23:41,760 --> 01:23:44,240
Speaker 3: had a family business which was started and founded by

1756
01:23:44,280 --> 01:23:47,160
Speaker 3: my grandfather and my father ultimately ran. It was book publishing,

1757
01:23:47,240 --> 01:23:49,719
Speaker 3: and like I mentioned before, I come from a family

1758
01:23:49,760 --> 01:23:53,320
Speaker 3: of book publishers and academics, and so it was good

1759
01:23:53,360 --> 01:23:55,120
Speaker 3: to sort of learn over the dinner table when I

1760
01:23:55,120 --> 01:23:57,639
Speaker 3: was a kid what was working and what wasn't working.

1761
01:23:58,280 --> 01:24:01,519
Speaker 3: My mother was very volunteer work when I was younger,

1762
01:24:01,720 --> 01:24:03,479
Speaker 3: and when I was thirteen, she said, you don't need

1763
01:24:03,479 --> 01:24:05,680
Speaker 3: me anymore, I'm gonna go back to work and had

1764
01:24:05,720 --> 01:24:07,800
Speaker 3: a twenty five year career as a senior administrator at

1765
01:24:07,800 --> 01:24:10,400
Speaker 3: our local community college. So that was very influential on

1766
01:24:10,479 --> 01:24:13,040
Speaker 3: me as well. Growing up. You know, I ran track

1767
01:24:13,360 --> 01:24:16,640
Speaker 3: both in high school and in college. I ran like

1768
01:24:16,680 --> 01:24:17,840
Speaker 3: half mile and cross country.

1769
01:24:17,840 --> 01:24:20,000
Speaker 2: Who was the half mile is the top? I ran

1770
01:24:20,080 --> 01:24:22,439
Speaker 2: the half mile in high school and the two mile

1771
01:24:23,640 --> 01:24:26,439
Speaker 2: relay and then we would do the three mile coast

1772
01:24:26,520 --> 01:24:29,280
Speaker 2: Why not? But the half mile is brutal.

1773
01:24:29,640 --> 01:24:31,560
Speaker 3: Because it's it's a sprint, right, So you're sprinting for

1774
01:24:31,600 --> 01:24:34,920
Speaker 3: two laps, right. But I had some great track coaches

1775
01:24:34,920 --> 01:24:37,920
Speaker 3: along the way that really helped me out as well.

1776
01:24:38,000 --> 01:24:40,599
Speaker 3: You know, I mentioned earlier that we had this amazing

1777
01:24:40,600 --> 01:24:44,000
Speaker 3: civics program at East Brunswick High School with his legendary

1778
01:24:44,000 --> 01:24:46,680
Speaker 3: teacher named John Kalamano, who was super helpful for me

1779
01:24:47,120 --> 01:24:49,320
Speaker 3: in that as well. And then in the working world.

1780
01:24:49,360 --> 01:24:51,680
Speaker 3: You know, I was very fortunate, like I learned a

1781
01:24:51,720 --> 01:24:54,000
Speaker 3: lot from both Tom and Marvin. They had very different

1782
01:24:54,640 --> 01:24:56,920
Speaker 3: styles and how they did things. But I also found

1783
01:24:56,960 --> 01:25:00,280
Speaker 3: people out there who's investing style I admired. I would

1784
01:25:00,280 --> 01:25:01,599
Speaker 3: try to figure out what they were doing and reverse

1785
01:25:01,640 --> 01:25:03,920
Speaker 3: engineer it, and so that's super helpful. I mean, some

1786
01:25:03,960 --> 01:25:05,840
Speaker 3: of that you can do just by reading. But there's

1787
01:25:05,880 --> 01:25:08,200
Speaker 3: other portions of it, like when you see the trades

1788
01:25:08,240 --> 01:25:10,640
Speaker 3: and you see the investments and like you're involved in them,

1789
01:25:10,680 --> 01:25:12,519
Speaker 3: and you see how someone did it better, and then

1790
01:25:12,560 --> 01:25:14,320
Speaker 3: you can figure out after the fact, like what you

1791
01:25:14,360 --> 01:25:16,640
Speaker 3: could do next time better. Like I just found that

1792
01:25:16,720 --> 01:25:19,720
Speaker 3: like super helpful. I'm a little bit further removed from

1793
01:25:19,720 --> 01:25:21,439
Speaker 3: that today. This is probably a little bit harder for

1794
01:25:21,479 --> 01:25:22,800
Speaker 3: me to do that, but that's some of the ways

1795
01:25:22,840 --> 01:25:24,920
Speaker 3: I really taught myself to invest over time.

1796
01:25:25,439 --> 01:25:27,920
Speaker 2: Really interesting. Let's talk about books. What are some of

1797
01:25:28,000 --> 01:25:29,719
Speaker 2: your favorites. What are you reading right now?

1798
01:25:30,160 --> 01:25:32,840
Speaker 3: Well, I'll start with the ones I'm reading right now,

1799
01:25:32,840 --> 01:25:34,679
Speaker 3: and then maybe i'll talk about some of the ones

1800
01:25:34,760 --> 01:25:38,200
Speaker 3: historically that I've quite enjoyed. So I'm rereading only The

1801
01:25:38,200 --> 01:25:41,160
Speaker 3: Paranoid Survive by Andy Grove. So you know, I mentioned

1802
01:25:41,160 --> 01:25:43,560
Speaker 3: earlier that I think our business in general is that

1803
01:25:43,640 --> 01:25:45,840
Speaker 3: a strategic inflection point in terms of what's going on

1804
01:25:45,880 --> 01:25:48,160
Speaker 3: and alternative asset management One of the main things he

1805
01:25:48,200 --> 01:25:51,240
Speaker 3: speaks about in that book is strategic inflection points and

1806
01:25:51,280 --> 01:25:54,680
Speaker 3: businesses and how you deal with that. I'm also part

1807
01:25:54,720 --> 01:25:57,000
Speaker 3: of the way through a book called Gambling, ma'am, which

1808
01:25:57,080 --> 01:26:02,720
Speaker 3: is about Masayoshi sun And by Lionel Barber, and that's

1809
01:26:02,760 --> 01:26:05,680
Speaker 3: a book where he's a fascinating character. I think a

1810
01:26:05,680 --> 01:26:08,599
Speaker 3: lot of people know about, you know, the last ten

1811
01:26:08,640 --> 01:26:11,240
Speaker 3: or fifteen years of Massa's career. I don't think that

1812
01:26:11,280 --> 01:26:12,960
Speaker 3: many people know about how he got there, all the

1813
01:26:13,000 --> 01:26:15,040
Speaker 3: times he had near misses with the whole thing could

1814
01:26:15,040 --> 01:26:18,040
Speaker 3: have blown up, or things along those lines. So that's

1815
01:26:18,120 --> 01:26:22,000
Speaker 3: very interesting to me. You know, early in my investing career,

1816
01:26:22,479 --> 01:26:24,280
Speaker 3: there are a number of books that are classics that

1817
01:26:24,360 --> 01:26:28,240
Speaker 3: I read. It's actually not The Intelligent Investor by Ben Graham.

1818
01:26:28,280 --> 01:26:31,800
Speaker 3: It's obviously a great book, but it's books like Extraordinary

1819
01:26:31,880 --> 01:26:35,000
Speaker 3: Popular Delusions in the Madness of Crowds by Charles McKay,

1820
01:26:35,320 --> 01:26:39,479
Speaker 3: or Reminiscence of a Stock Market Operator by Edlin Lefevre,

1821
01:26:39,600 --> 01:26:43,000
Speaker 3: which was a pseudonym for Jesse Livermore, who was a

1822
01:26:43,000 --> 01:26:46,280
Speaker 3: famous trader in the nineteen twenties and nineteen thirties, or

1823
01:26:46,600 --> 01:26:49,800
Speaker 3: Where Are the Customer Yachts by Fred Sweed, you know,

1824
01:26:50,000 --> 01:26:52,000
Speaker 3: very early in my career, Like, that's how I learned,

1825
01:26:52,040 --> 01:26:54,439
Speaker 3: even before I started a decay. That's how I learned

1826
01:26:54,479 --> 01:26:56,800
Speaker 3: was reading these books. And so even though other books

1827
01:26:56,840 --> 01:26:58,479
Speaker 3: maybe I haven't read in a little while, like they're

1828
01:26:58,520 --> 01:27:00,519
Speaker 3: all classics, I stole readily recommend.

1829
01:27:01,200 --> 01:27:04,200
Speaker 2: You know, it's funny. Bill Bernstein, who wrote The Four

1830
01:27:04,240 --> 01:27:07,920
Speaker 2: Pillars of Investing, has a new book out on the

1831
01:27:07,960 --> 01:27:12,840
Speaker 2: Delusions of Crowds. That's he's both an investor and a

1832
01:27:12,880 --> 01:27:17,200
Speaker 2: retired neurologist slash physician, and so he takes a very

1833
01:27:18,880 --> 01:27:22,280
Speaker 2: i want to say, almost medical evolutionary approach to looking

1834
01:27:22,320 --> 01:27:25,080
Speaker 2: at why people go mad in crowds. If you haven't

1835
01:27:25,080 --> 01:27:26,879
Speaker 2: seen that, it's kind of fascinating.

1836
01:27:26,840 --> 01:27:27,720
Speaker 3: I'll definitely check it out.

1837
01:27:27,920 --> 01:27:31,680
Speaker 2: I suspect you'd really appreciate that. Our final two questions,

1838
01:27:32,200 --> 01:27:34,439
Speaker 2: what sort of advice would you give to a recent

1839
01:27:34,520 --> 01:27:39,679
Speaker 2: college grad interested in a career in either opportunistic credit

1840
01:27:39,920 --> 01:27:41,400
Speaker 2: or investing generally.

1841
01:27:41,760 --> 01:27:45,040
Speaker 3: Well, I think both pieces of advice would apply to ball.

1842
01:27:45,120 --> 01:27:48,439
Speaker 3: So I'll share two. The first of which is I'm

1843
01:27:48,439 --> 01:27:50,760
Speaker 3: gonna share advice I got from a law professor I

1844
01:27:50,760 --> 01:27:52,960
Speaker 3: had of mine named John Quigley, who had been at

1845
01:27:53,000 --> 01:27:56,959
Speaker 3: Nasau Capital, which was Princeton's in house private equity organization

1846
01:27:57,000 --> 01:27:59,080
Speaker 3: in the nineteen ninety. So here's my professor in law school.

1847
01:27:59,160 --> 01:28:01,240
Speaker 3: When I was considering going to work at Davidson Kapner.

1848
01:28:01,560 --> 01:28:03,840
Speaker 3: What he said to me was the best way to

1849
01:28:03,920 --> 01:28:06,240
Speaker 3: learn how to invest is to actually invest. And so

1850
01:28:06,360 --> 01:28:08,400
Speaker 3: if you get a chance to go into an investment firm,

1851
01:28:08,840 --> 01:28:10,880
Speaker 3: take it. Don't worry about not having the training for it.

1852
01:28:10,880 --> 01:28:13,400
Speaker 3: Don't worry about having to do other things first. You know,

1853
01:28:13,439 --> 01:28:14,920
Speaker 3: I was torn early in my career or I got

1854
01:28:14,960 --> 01:28:16,799
Speaker 3: work on the cell side first and learn some stuff

1855
01:28:16,800 --> 01:28:19,439
Speaker 3: before I go into investing. And it was great advice.

1856
01:28:19,520 --> 01:28:21,320
Speaker 3: I mean, you know, we do hire a handful of

1857
01:28:21,320 --> 01:28:24,280
Speaker 3: people at a college every year at DK, and I

1858
01:28:24,320 --> 01:28:26,680
Speaker 3: think it's super great if you can start doing it

1859
01:28:26,720 --> 01:28:28,000
Speaker 3: as soon as you want to. If you know what

1860
01:28:28,040 --> 01:28:29,280
Speaker 3: you want to do, you should go do it right.

1861
01:28:29,360 --> 01:28:32,120
Speaker 3: And so that's piece of advice number one. Piece of

1862
01:28:32,120 --> 01:28:36,320
Speaker 3: advice number two I got from my post college roommate's mother,

1863
01:28:36,880 --> 01:28:39,719
Speaker 3: and my post college roomate ultimately followed the same advice,

1864
01:28:39,720 --> 01:28:42,040
Speaker 3: but it took them fifteen years. And the advice I

1865
01:28:42,080 --> 01:28:44,000
Speaker 3: got was, and I'm going to use the Goldman Sachs

1866
01:28:44,080 --> 01:28:45,240
Speaker 3: for this because what she said at the time, but

1867
01:28:45,240 --> 01:28:46,680
Speaker 3: you could apply a number of other firms to it.

1868
01:28:46,680 --> 01:28:49,799
Speaker 3: Today she said, don't go work at Goldman Sachs. Goldman

1869
01:28:49,880 --> 01:28:51,400
Speaker 3: Sachs is going to be a rat race to the

1870
01:28:51,439 --> 01:28:53,400
Speaker 3: top all the top smart people want to go work

1871
01:28:53,400 --> 01:28:55,680
Speaker 3: at Goldman Sacks. Figure out what's going to be the

1872
01:28:55,720 --> 01:28:58,400
Speaker 3: next Goldman Sacks and getting on the ground floor there instead.

1873
01:28:59,000 --> 01:29:00,679
Speaker 3: And I sort of got lucky and sort of felt

1874
01:29:00,680 --> 01:29:01,840
Speaker 3: like I did that with David Sinon Keouner.

1875
01:29:02,840 --> 01:29:06,720
Speaker 2: That's really really good advice. And our final question, what

1876
01:29:06,760 --> 01:29:08,840
Speaker 2: do you know about the world of fill in the

1877
01:29:08,880 --> 01:29:13,720
Speaker 2: blank distressed investing, alternatives private credit today? That might have

1878
01:29:13,800 --> 01:29:16,120
Speaker 2: been helpful twenty seven years or so ago when you

1879
01:29:16,160 --> 01:29:17,400
Speaker 2: first got started.

1880
01:29:17,080 --> 01:29:20,519
Speaker 3: Well, you know, looks. It's when you start a career

1881
01:29:20,560 --> 01:29:23,960
Speaker 3: at investing. I think by definition you start pretty broad

1882
01:29:24,160 --> 01:29:25,880
Speaker 3: and then you get no hour and hour like. You

1883
01:29:25,880 --> 01:29:27,920
Speaker 3: start with the premise that you want to invest, and

1884
01:29:27,960 --> 01:29:30,240
Speaker 3: then you ultimately find a firm and the firm usually

1885
01:29:30,240 --> 01:29:31,800
Speaker 3: has you in a strategy, and if you do a

1886
01:29:31,800 --> 01:29:34,200
Speaker 3: good job, you learn that strategy cold over a longer

1887
01:29:34,200 --> 01:29:37,240
Speaker 3: period of time, and what I'd say today. And this

1888
01:29:37,360 --> 01:29:39,679
Speaker 3: is you know, also colored by my experience on investment committees,

1889
01:29:39,680 --> 01:29:42,040
Speaker 3: but it's also just being a Davidson keptner. Is that

1890
01:29:42,200 --> 01:29:45,280
Speaker 3: you know, investing is a very broad universe. Things are interlinked.

1891
01:29:45,560 --> 01:29:47,240
Speaker 3: So for example, if you don't know what's going on

1892
01:29:47,280 --> 01:29:49,880
Speaker 3: with technology investing, you may not understand what's going on

1893
01:29:49,880 --> 01:29:52,439
Speaker 3: with oppetistic credit. Even though there are different things and

1894
01:29:52,520 --> 01:29:54,640
Speaker 3: you know you need different expertise to do well in

1895
01:29:54,680 --> 01:29:57,120
Speaker 3: each of them. And so it was something I didn't

1896
01:29:57,160 --> 01:29:59,599
Speaker 3: really think about early in my career. I started broad

1897
01:29:59,600 --> 01:30:01,760
Speaker 3: and then I got really narrow, and I've probably gotten

1898
01:30:01,800 --> 01:30:04,240
Speaker 3: broader as both I've gotten more senior and I've gotten

1899
01:30:04,280 --> 01:30:06,799
Speaker 3: more different types of experience in the investing world in general.

1900
01:30:07,200 --> 01:30:09,639
Speaker 3: But to some degree, you should always stay broad even

1901
01:30:09,640 --> 01:30:11,560
Speaker 3: if you're going narrow. So you know you're gonna have

1902
01:30:11,600 --> 01:30:13,400
Speaker 3: to go narrow to be successful in your career. There's

1903
01:30:13,439 --> 01:30:15,400
Speaker 3: very a few people who can do everything as an

1904
01:30:15,400 --> 01:30:18,080
Speaker 3: investor and be successful. But as you go narrow, like,

1905
01:30:18,080 --> 01:30:19,960
Speaker 3: don't lose sight of other asset classes and what's going

1906
01:30:19,960 --> 01:30:21,560
Speaker 3: on in the world, because you can get blinded to

1907
01:30:21,600 --> 01:30:22,640
Speaker 3: bigger trends if you did that.

1908
01:30:23,280 --> 01:30:26,080
Speaker 2: Really really really interesting. Tony, Thank you for being so

1909
01:30:26,200 --> 01:30:29,959
Speaker 2: generous with your time. We have been speaking with Tony Joseloff.

1910
01:30:30,360 --> 01:30:34,679
Speaker 2: He's Chief investment Officer and managing partner at Davidson Kempner,

1911
01:30:35,280 --> 01:30:40,120
Speaker 2: overseeing over thirty five billion dollars in assets. If you

1912
01:30:40,280 --> 01:30:43,160
Speaker 2: enjoy this conversation, check out any of the five hundred

1913
01:30:43,200 --> 01:30:47,160
Speaker 2: plus we've done over the past eleven years. You can

1914
01:30:47,160 --> 01:30:51,439
Speaker 2: find those at iTunes, Spotify, YouTube, wherever you get your

1915
01:30:51,479 --> 01:30:54,479
Speaker 2: favorite podcasts. And be sure and check out my new

1916
01:30:54,520 --> 01:31:00,559
Speaker 2: book coming March eighteenth, How Not to Invest the bad ideas, numbers,

1917
01:31:00,600 --> 01:31:04,400
Speaker 2: and behaviors that destroy wealth. I would be remiss if

1918
01:31:04,400 --> 01:31:06,519
Speaker 2: I did not thank the Cracked team that helps put

1919
01:31:06,520 --> 01:31:11,040
Speaker 2: these conversations together each week. John Wasserman is my audio engineer.

1920
01:31:11,600 --> 01:31:15,920
Speaker 2: Anna Luke is my producer. Sean Russo is my researcher.

1921
01:31:16,320 --> 01:31:20,200
Speaker 2: Sage Bauman is the head of podcasts at Bloomberg. I'm

1922
01:31:20,240 --> 01:31:24,320
Speaker 2: Barry Retolts. You've been listening to Master's in Business on

1923
01:31:24,439 --> 01:31:29,680
Speaker 2: Bloomberg Radio.