Speaker 1: Bloomberg Audio Studios, podcasts, radio news. This is Master's in
Speaker 1: Business with Barry Ritholds on Bloomberg Radio.
Speaker 2: This week on the podcast strap Yourself in for another
Speaker 2: spectacular conversation. Tony Joseloff has been with Davidson Kempner pretty
Speaker 2: much his entire career, past twenty seven years. What a
Speaker 2: knowledgeable expert about all things. We used to call it
Speaker 2: distressed credit, now it's opportunistic investing, much more than merely
Speaker 2: being credit driven. They focus on everything from M and
Speaker 2: A arbitrage, to real estate investing, to private equity to
Speaker 2: public debt. A masterclass in how to think about risk,
Speaker 2: how to think about diversification, how to put together a
Speaker 2: portfolio of alt ernatives that is both non correlated to
Speaker 2: your core portfolio but simultaneously creates a form of offset
Speaker 2: or ballast to the volatility of equities. In addition to
Speaker 2: being CIO and Managing partner at Davidson Kempner, he's also
Speaker 2: chairman of the Investment Committee for the New York Public Library.
Speaker 2: He's Vice chairman for the Investment Committee for New York Presbyterian,
Speaker 2: as well as sitting on the board of Trustees and
Speaker 2: the Investment Committee of Princeton University. I thought this conversation
Speaker 2: was fascinating, and I think you will also with no
Speaker 2: further ado my discussion with Davidson Kempner's Tony Yoselov.
Speaker 3: Thank you, Barry. I was going to say, longtime listener,
Speaker 3: first time caller.
Speaker 2: So I'm kind of amazed. I'm kind of overwhelmed by
Speaker 2: your curriculum, vitail, and the fact that you've never been
Speaker 2: in this building, which is kind of amazing because a
Speaker 2: lot of my guests have similar background board seats and
Speaker 2: Dowman's investment committees, and I feel like I know everybody,
Speaker 2: but I don't know everybody. There's a million people I
Speaker 2: haven't met, and you've been on my list for a while.
Speaker 2: So let's just start a little bit with your background,
Speaker 2: which is really kind of interesting. Undergrad you go to
Speaker 2: Princeton School of Public and International Affairs, and then you
Speaker 2: get a jd MBA from Columbia, which leads to the
Speaker 2: obvious question, what were your original career plans?
Speaker 3: You know, it's interesting. So first of all, I've got
Speaker 3: a pretty boring background in the sense that I grew
Speaker 3: up in central New Jersey in a town called East Brunswick,
Speaker 3: I went to college. Sure, I went to college half
Speaker 3: an hour from where I grew up, and then I
Speaker 3: moved to New York City the day after I graduated
Speaker 3: from Princeton and haven't left, and so I've lived within
Speaker 3: a fifty mile radius my entire life. My original career plans,
Speaker 3: to the extent that they were fully formed, would have
Speaker 3: been to do a career in law or potentially public policy.
Speaker 3: My high school happened to have a very good civics
Speaker 3: type program. I think I was probably at the only
Speaker 3: public high school in the United States that produced a
Speaker 3: cabinet member for both the first Trump administration and the
Speaker 3: Biden administration, which I thought was pretty amazing for a
Speaker 3: suburb public high school. It was really during my time
Speaker 3: at Princeton and during my time at Columbia where I
Speaker 3: made the decision to pursue money management as a career
Speaker 3: instead of something in public policy. The nineteen nineties were
Speaker 3: really the heyday, I'm going to say, of mutual funds,
Speaker 3: and it was sort of the early days of electronic
Speaker 3: stock trading. My family is a family of academics and
Speaker 3: book publishers, so it wasn't necessarily through my family background
Speaker 3: that I interested in investing, but it was sort of
Speaker 3: around us in the ether. I did a lot of
Speaker 3: reading on it in high school. In college, I was
Speaker 3: fortunate enough that I had a number of my friend's
Speaker 3: parents were willing to take me out to coffee and
Speaker 3: kind of educate me on the financial services business. And
Speaker 3: really the inflection point was when I was at Columbia,
Speaker 3: where I had to kind of choose a path between
Speaker 3: going to Washington and working for a law firm that
Speaker 3: would have gotten me in the regulatory side of things versus,
Speaker 3: you know, working at a law firm which I did
Speaker 3: for a couple of years as a summer associate where
Speaker 3: the focus was private equity, and that was the path
Speaker 3: I chose, and I sort of never never looked back.
Speaker 3: I'm really glad I have the legal background, and I'm
Speaker 3: really glad I have the public policy background. It's actually
Speaker 3: super helpful as an investor. But it wasn't like, you know,
Speaker 3: I never set out on this path. It's just sort
Speaker 3: of the journey found me.
Speaker 2: I'm kind of fascinated by the joint JDMBA. I have
Speaker 2: a JD. And what I always appreciated about law school
Speaker 2: was that it didn't teach you so much as what
Speaker 2: to think as to how to think, whereas an MBA
Speaker 2: feels more like a deep dive into the specifics of
Speaker 2: investing theory and a lot of aitative analytics. How do
Speaker 2: you find the combination that sort of left brain right
Speaker 2: brain JDNBA works for you as a as an investor.
Speaker 3: Well, it's super helpful. So first of all, I also
Speaker 3: went to law school with the same idea that you did,
Speaker 3: that law school was an amazing education and that good
Speaker 3: things would come out of it, whether I was interested
Speaker 3: in pursuing law or not. I was very fortunate. I
Speaker 3: actually finished all my coursework at Princeton in three years,
Speaker 3: and I had a chance to start Columbia Law School
Speaker 3: during my fourth year at Princeton, which was a program
Speaker 3: that Princeton and Columbia have with each other at the time,
Speaker 3: but very few students did, so I kind of had
Speaker 3: a free look at law school. I enjoyed my time
Speaker 3: at law school. My time working in law just sort
Speaker 3: of made it seem like it wasn't for me ultimately,
Speaker 3: but I think it's a great field that would highly
Speaker 3: recommend it to others. The business school side initially started
Speaker 3: out as a path to getting a job I actually
Speaker 3: found it. You know, it's sort of hard to think today,
Speaker 3: but it wasn't so easy for someone with a law
Speaker 3: degree and no work experience to go work on Wall
Speaker 3: Street in the nineteen nineties. In fact, I had a
Speaker 3: few hr folks. I'd make it pretty far along and
Speaker 3: my recruiting process at different places, and they'd say to me,
Speaker 3: how do we know what you're going to wake up
Speaker 3: caring about finance? How do we know you're going to
Speaker 3: read the Wall Street Journal every day? And so questions
Speaker 3: that kind of seems silly with the benefit of hindsight,
Speaker 3: But you know, I had no financial services background there.
Speaker 3: Once I went to Business School Boom, I had the
Speaker 3: financial services background there. But the courses I took at
Speaker 3: Columbia were exceptional, Like I really enjoyed taking courses, particularly
Speaker 3: the ones that were taught by adjunct professors where they
Speaker 3: had real world experience and so you could learn, you know,
Speaker 3: derivatives from someone who's trading derivatives every day at JP Morgan,
Speaker 3: or I learned about the retail business from someone who
Speaker 3: was a former CEO of a mid sized regional retailer
Speaker 3: department store with a lot of department sportes that period
Speaker 3: of time, and they bring in a different CEO every
Speaker 3: week to talk to you, and that stuff just fascinated me.
Speaker 3: And so if I think about like my Columbia Business
Speaker 3: School education, like, there was a lot of good things
Speaker 3: took from that, and so the combination proved to be
Speaker 3: very powerful for me.
Speaker 2: Huh, really interesting. The data point that always sticks out
Speaker 2: in my head is something like, seven years after graduation,
Speaker 2: fifty percent of JD holders are no longer practicing a law.
Speaker 2: It's like a big feeder for other fields.
Speaker 3: Yeah, and I believe that. I mean, look, I'm very
Speaker 3: fortunate that I went to law school with some folks
Speaker 3: who are literally among the leaders of their field in
Speaker 3: the United States as attorneys. And I also went to
Speaker 3: law school with a number of folks whore no longer attorneys,
Speaker 3: some of whom found that journey immediately like me, some
Speaker 3: of whom found it many years into the future. There's
Speaker 3: no controlling the fact that it's a great education and
Speaker 3: it's a great way to learn how to think, and
Speaker 3: especially for the types of investing we do, it's been
Speaker 3: super helpful.
Speaker 2: So let's talk about some of the investing you do.
Speaker 2: You joined Davidson Kempner in nineteen ninety nine, pretty much
Speaker 2: the peak of the dot com boom. We were at
Speaker 2: that point, you know, a couple of quarters away from
Speaker 2: everything peaking and heading south. Tell us about your experience
Speaker 2: at the tail end of the dot com situation and
Speaker 2: how did that affect how you looked at the world
Speaker 2: of investment.
Speaker 3: You know, it's really interesting, right, So I didn't necessarily
Speaker 3: seek out to do the type of investing that we
Speaker 3: do with Davidson Kepner, which is a combination of opportunistic
Speaker 3: credit and event driven investing. But it actually goes back
Speaker 3: a year earlier to nineteen ninety eight. I was looking
Speaker 3: for summer jobs for the last summer of my JDMBA program,
Speaker 3: and so I applied to a number of the banks.
Speaker 3: I applied to some of the investment shops, and I
Speaker 3: found Davidson Kepner because they posted at Columbia for a
Speaker 3: full time merger arbitrage analyst, and so I didn't really
Speaker 3: know any better. So I sent in a resume and
Speaker 3: I got a call from them and they said, well,
Speaker 3: we think your background is actually really good for then
Speaker 3: what would have been called distress debt and why don't
Speaker 3: you come in and talk to us and work for
Speaker 3: us for summer. So I literally met three partners. They
Speaker 3: offered me a job, and I said, these folks have
Speaker 3: about a billion dollars under management and there's about fifteen
Speaker 3: people working here. That seems like a pretty good ratio
Speaker 3: in terms of number of people to dollars under management.
Speaker 3: And I knew a little bit about distressed at investing,
Speaker 3: just because I had taken a bankruptcy course in law
Speaker 3: school and there was maybe like half of one class
Speaker 3: was devoted to what this was. It was really a
Speaker 3: pretty nascent industry. And so I said, Okay, I can
Speaker 3: go be one of one hundred or two hundred people
Speaker 3: or whatever at a bank training program for the summer,
Speaker 3: or I could be the only person who is doing this.
Speaker 3: And they had hired an intern in the year before,
Speaker 3: so I spoke to him on the phone. His name
Speaker 3: is Dan Zwern. He went on to founding money management
Speaker 3: firm that ultimately didn't work out and now runs Arena Partners.
Speaker 3: And it seemed like a pretty good ratio in terms
Speaker 3: of opportunity. And I got there and it just spoke
Speaker 3: to me, and it spoke to me because I liked
Speaker 3: the fact that I could do a form of investing
Speaker 3: that used both my legal background and my financial background,
Speaker 3: and I felt like there were many areas I might
Speaker 3: spend time on that might do one or the other,
Speaker 3: but wouldn't do both of them. So the joke of
Speaker 3: it is, I'm literally the only person who applied for
Speaker 3: this job. They literally got one resume, and that probably
Speaker 3: speaks as much to the time as it does to
Speaker 3: anyone else. I mean, so, if you weren't doing a
Speaker 3: dot com startup in the late nineteen nineties from Columbia,
Speaker 3: you were going to work in investment banking, or you
Speaker 3: were going to work in consulting. They were like a
Speaker 3: handful of people who were going to work in money
Speaker 3: management at all, Right, that really was not a big area,
Speaker 3: despite the fact you had a big value investing program there.
Speaker 3: At a time, these would have been the more popular
Speaker 3: career paths, and obviously non financial services career paths as well,
Speaker 3: And to me that was kind of fun, Like I
Speaker 3: don't know, I mean, so the first two years of
Speaker 3: my career, Davidson Kaepner, I hated most of what I
Speaker 3: was looking at as an investor, and I kept saying
Speaker 3: no to things. And what I didn't know is that
Speaker 3: was actually the right answer, right. You know, when you
Speaker 3: get to an investing job, you want to put, you know,
Speaker 3: investments on the book, and that makes you feel like
Speaker 3: you're accomplishing things. Most of the companies that were in
Speaker 3: trouble in the late nineteen nineties deserve to be and
Speaker 3: it was because it was sort of a peak of
Speaker 3: financial markets. The really good opportunities probably started three to
Speaker 3: four years into my career. So I felt very proud
Speaker 3: of the fact afterwards that I didn't like anything. But
Speaker 3: at the time I was like, are they just tossing
Speaker 3: me the bad stuff that I'm looking at all these
Speaker 3: investments and not wanting to do them. But it turned
Speaker 3: out no, that was actually what most of the opportunity
Speaker 3: set was in our world.
Speaker 2: In the late night, were you getting guns from senior
Speaker 2: partners or other people who have lived through other distress
Speaker 2: cycles saying, hey, you're doing the right thing. You're looking
Speaker 2: for a diamond in the rough, but most of the
Speaker 2: stuff is too risky relative to the potential upside.
Speaker 3: Yeah, I mean, look, we obviously would try to steer
Speaker 3: our time towards things that were actionable. I definitely was
Speaker 3: getting support. I mean my senior partners. There was two.
Speaker 3: There was Tom, Tom Kaptain or Michael Lefel. I mean,
Speaker 3: those are the only two folks who really were doing distressed.
Speaker 2: No.
Speaker 3: Davidson, Marvin Davidson was still running the firm at the
Speaker 3: very end of his career, but he really deferred to
Speaker 3: Tom and Michael in terms of running the debt portfolios
Speaker 3: that we had at the time. So we found things
Speaker 3: ultimately that would call like solid singles, you know, things
Speaker 3: where like you could, you know, buy bond in the
Speaker 3: mid nineties and there was a takeout at one on
Speaker 3: one and you don't coupon. It wasn't things you were
Speaker 3: going to earn giant amounts of money, but you're gonna
Speaker 3: earn very good IRRs on them. And so I cut
Speaker 3: my teeth doing things where you could put relatively small
Speaker 3: amounts of money to work. And keep in mind we
Speaker 3: had a billion dollars at the time, so you know,
Speaker 3: ten million dollar investment was a one percent investment in
Speaker 3: the fund. It was it was still meaningful to what
Speaker 3: we were doing.
Speaker 2: I'm intrigued that they get one application for an one
Speaker 2: open opening. You got the job and you've been there
Speaker 2: for twenty five years. It kind of talks to how
Speaker 2: we never know what the future holds, and how completely
Speaker 2: random sometimes these things feel. Had you not applied there,
Speaker 2: how might your career have been completely different?
Speaker 3: You have those what if moments in life. I do
Speaker 3: believe in fate to some degree, and I got very
Speaker 3: fortunate with how it all worked out. And look, I
Speaker 3: liked what I was doing, and I liked who I
Speaker 3: was doing it with, And I would say, probably those
Speaker 3: are two of the most important factors that you have
Speaker 3: in choosing a career, is what are you doing and
Speaker 3: who are you doing it with? And so I never
Speaker 3: felt the need to leave. The other thing I would
Speaker 3: say is, you know, Davidson Kamptner is an old school
Speaker 3: Wall Street style partnership where we make new partners every
Speaker 3: couple of years. When partners leave our firm, they get
Speaker 3: an earn out of their shares, and the shares are
Speaker 3: ultimately effectively acquired by the ongoing partners in the firm.
Speaker 3: And that structure existed in the nineteen nineties. We've made
Speaker 3: some changes over the years to it, but a lot
Speaker 3: of it's still substantially similar to what things look like.
Speaker 3: And that's because if you look at the founding of
Speaker 3: Davidson Kamptnor, you know, Marvin Davidson had been a senior
Speaker 3: executive at Bear Stearns and Tom Kaepner was a junior
Speaker 3: person at Goldman Sachs, but knew the Goldman Sacks structure
Speaker 3: quite well, and they didn't know each other when they
Speaker 3: formed the partnership in the mid nineteen eighties, and so
Speaker 3: they came up with an arms length agreement that took
Speaker 3: the best of what they knew from Bear and Goldman,
Speaker 3: and that structure stuck and it sticks today. And so
Speaker 3: what I knew for me was if I did a
Speaker 3: good job, there could be a career for me at
Speaker 3: Davidson Kepner. And so not only did I have like
Speaker 3: people that I liked and a thing I liked doing
Speaker 3: with my time, but I knew if I put my
Speaker 3: head down and did a good job, there was like
Speaker 3: a future there for me. And so that was just
Speaker 3: very very powerful. I mean, I will say, like you
Speaker 3: look back, I mean from when I started for the summer,
Speaker 3: it's almost twenty seven years ago. It does feel like
Speaker 3: a long time, but it never felt that way along
Speaker 3: the way, you know, I mean, you know, with any career,
Speaker 3: there's always good in bad, but overall I've had an
Speaker 3: amazing experience.
Speaker 2: The days are long and the decades are short. You know,
Speaker 2: it's funny you mentioned that Davidson Kepner is a partnership.
Speaker 2: There was a lot of I don't want to say criticism,
Speaker 2: but when a lot of the big Wall Street partnerships
Speaker 2: went public, there was a little bit of pushback and
Speaker 2: some questions, what is this going to do to risk management?
Speaker 2: And when not that much long after we have the
Speaker 2: financial crisis, the companies that were partnerships still with their
Speaker 2: joint in several line ability somehow managed to not get
Speaker 2: into trouble. I guess they were highly focused on putting
Speaker 2: everything at risk. The agency problem with companies that had
Speaker 2: become public where the partners no longer have joined several
Speaker 2: They look at every company that ran into trouble, none
Speaker 2: of them were partnerships. It's kind of fascinating how that
Speaker 2: turns out.
Speaker 3: Yeah. No, I hadn't thought about it that way, but
Speaker 3: I agree with you in terms of your conclusion. And
Speaker 3: you know, look, there's basic building blocks of what you're
Speaker 3: doing in as an investor, as a firm, and who
Speaker 3: you're doing it for you know, So I take like
Speaker 3: the basic building blocks of Davidson Kepner today, which by
Speaker 3: the way, we're similar to what they were twenty seven
Speaker 3: years ago. We're primarily an investing firm, We're not an
Speaker 3: asset gathering firm, and so for us to offer an
Speaker 3: investing fund, my partners and I we want to invest
Speaker 3: our own money side by side with our LPs. We're
Speaker 3: by far the largest single investor collectively in our five
Speaker 3: and so if an investing product is not a good idea,
Speaker 3: we're not going to offer it, even if we have
Speaker 3: clients who would want it, because we can't put our
Speaker 3: you know, imprompt centuur or whatever behind it.
Speaker 2: Or your own money, your own money, and so I think.
Speaker 3: That speaks very powerfully. We require all of our partners
Speaker 3: to reinvest a substantial majority of their networks back into
Speaker 3: the funds every year. We all invest paripes too, across
Speaker 3: our funds, so you can't cherry pick which funds you
Speaker 3: want the partnership straight across.
Speaker 2: Collectively, if you offer it to clients, the partners and
Speaker 2: employees of the firm are the largest investors.
Speaker 3: Yeah, not necessarily in any individual fund, but collectively across
Speaker 3: the funds we are. In any individual fund, we're can
Speaker 3: put a meaningful amount of money relative to the size
Speaker 3: of the fund.
Speaker 2: So you eat your own cooking.
Speaker 3: Yeah, and that's that's the first test to me. I mean,
Speaker 3: you know, in investing, how much money do you have
Speaker 3: in the product? How a skin do you have in
Speaker 3: the game. You know, we obviously use operating partners sometimes
Speaker 3: in our private market investments. That's the first question I ask,
Speaker 3: how much money does the operating partner having the investment?
Speaker 3: And isn't meaningful to them? Right, So sometimes it's not
Speaker 3: just the quantum of money, it's how meaningful it is
Speaker 3: to the person who's who's involved. And again, having a
Speaker 3: being a private firm, you know, we're one hundred percent
Speaker 3: owned by our current and retired partners, with our retired
Speaker 3: partners in an earn out, so they eventually don't own
Speaker 3: shares of the firm anymore. And so you're beholden to
Speaker 3: two constituencies. You're beholden to your LPs and you're beholden
Speaker 3: to yourself and your employees. And you know, that's really
Speaker 3: how we run our business, and so you know, it
Speaker 3: kind of keeps you out of trouble. It also keeps
Speaker 3: you very focused when things are going payd right. You know,
Speaker 3: we have lived through a lot of crises. I lived
Speaker 3: to the Global financial crisis. I lived to the COVID crisis.
Speaker 3: COVID was probably even harder in a way because Tom
Speaker 3: Kaepner had just retired a few months before that, and
Speaker 3: I joke that he left me a playbook for a
Speaker 3: financial crisis, but he didn't leave me a playbook for
Speaker 3: a pandemic. And so some of the hr things we
Speaker 3: all had to deal with, and getting people out of
Speaker 3: the office and getting people back in the office, we
Speaker 3: had to kind of invent along the way. It really
Speaker 3: focuses the mind when you've got your money with your mouth.
Speaker 2: I had to say to say the very least. So
Speaker 2: you brought something up that's really intriguing, And I don't
Speaker 2: know if there's an answer to this, but I just
Speaker 2: want to get your take on it. So over the
Speaker 2: past twenty seven years, we've had a repeated one hundred
Speaker 2: year flood every five or seven years, which, while not
Speaker 2: statistically impossible, certainly seems unlikely. So we have the dot
Speaker 2: com implosion, and then after that nine to eleven, and
Speaker 2: then we have the financial crisis, and then in the
Speaker 2: twenty tens we have Brexit and the threat of Grexit,
Speaker 2: and we have the flash crash, ultimately leading a few
Speaker 2: years later to the pandemic. Does it feel like we
Speaker 2: have these situations, these credit crises, which must be great
Speaker 2: for an opportunistic credit investor, But does it seem like
Speaker 2: they're coming along more frequently than historically? Like my recollection
Speaker 2: is growing up is the SNL crisis and then we
Speaker 2: really didn't have like a major problem until the dot
Speaker 2: com crisis. Are we getting these more frequently or does
Speaker 2: it just feel that way?
Speaker 3: Well, you know, I would maybe say a couple of
Speaker 3: things for that. So, first of all, I think the
Speaker 3: pandemic was an exception compared to some of the other crises,
Speaker 3: because I would suggest that the dot com bubble or
Speaker 3: the GFC, or maybe some of the European crises in
Speaker 3: the mid twenty tens were very predictable, like if you
Speaker 3: looked at where share prices were in the nineteen nineties
Speaker 3: for tech stocks, or how levered banks were with a
Speaker 3: couple with the subprime crisis that was going on in
Speaker 3: the mid two thousands, or you know, some of the
Speaker 3: issues with you know, the sovereign credit in Europe in
Speaker 3: the mid twenty tens, Like those were all with the
Speaker 3: benefit of hindsight, like, oh yeah, of course that was
Speaker 3: going to happen.
Speaker 2: Predictable but not well predicted.
Speaker 3: Predictable but not well predicted. I mean, hindsight's always twenty
Speaker 3: twenty in these things, right, But there was certainly predictable
Speaker 3: by people who were following markets. I would differentiate the
Speaker 3: COVID crisis from the sense that, you know, you probably
Speaker 3: had a month or two head start if you really
Speaker 3: followed what was going on in Wuhan, but fundamentally it
Speaker 3: was much harder to figure that out. Like six months earlier,
Speaker 3: no one was going to say a pandemic was going
Speaker 3: to overwhelm financial markets. And so the reason I want
Speaker 3: to flag that is, you know, we do a lot
Speaker 3: of up down analyses in what we're doing right, and
Speaker 3: we try to really stress test investments, and so when
Speaker 3: you're a credit investor, there's a lot of things that
Speaker 3: you say, well, this can happen, and that can happen,
Speaker 3: but we're still not going to lose money on this investment, right,
Speaker 3: because there's subordination below you one way or another. In
Speaker 3: the capital structure, or there's assets that you can claw
Speaker 3: them on too, that you can sell off, or maybe
Speaker 3: not all those assets are markets driven. COVID created a
Speaker 3: lot of random winners and losers. Sometimes they were winners
Speaker 3: and losers for a year or two and ultimately made
Speaker 3: their way back, And so I think there was some
Speaker 3: more random noise in what happened in COVID. So I
Speaker 3: probably would take less lessons on a going forward basis
Speaker 3: from the COVID crisis than I would take from some
Speaker 3: of these other crises. I do think that you know,
Speaker 3: if you look at a very long period of time
Speaker 3: twenty five years, you had twelve or thirteen of them
Speaker 3: where you had interest rates at zero right or close
Speaker 3: to zero and closer to fifteen when you added up,
Speaker 3: and then the interest rates for most of the rest
Speaker 3: of the time I am. You know, US treasury is
Speaker 3: probably peaked around six percent, a lot of it's been
Speaker 3: four or five percent, and so you know, these have
Speaker 3: been pretty tame periods of time, and so you are
Speaker 3: gonna have an occasional CRISI I mean you go back
Speaker 3: over like long periods of time in finance, I do
Speaker 3: think having the economy blow up every ten years was
Speaker 3: a very you know, eighteen eighties eighteen nineties thing as well,
Speaker 3: and so I think I think history does repeat itself
Speaker 3: a lot. To me. I don't want to say it's
Speaker 3: part of the fun of being an investor, because I
Speaker 3: don't mean to be crassy. And these are people's jobs
Speaker 3: and livelihoods.
Speaker 2: I know exactly what you mean by that. Yeah, because
Speaker 2: if you identify, if you identify something that is potentially
Speaker 2: a great investment opportunity, especially if you're one of the
Speaker 2: few voices talking about it and everybody says, no, no, no,
Speaker 2: that's not a big deal. When the opportunity comes along,
Speaker 2: it's got to be deeply satisfying that you sussed out
Speaker 2: something that the rest of the investment community missed well.
Speaker 3: I mean, one of the fun things about doing opportunistic
Speaker 3: credit is that you need to be a little contrarian, right,
Speaker 3: because you are looking at opportunities that other people have
Speaker 3: turned down. Right. So you know, there's this idea in
Speaker 3: credit or an op credit of good company, bad balance sheet, right,
Speaker 3: and those exist sometimes but not often. And the reality
Speaker 3: is that the market's efficient enough that many people will
Speaker 3: figure out quickly it's a good company with a bad
Speaker 3: balance sheet, and so it's not going to price the
Speaker 3: way it probably would have priced twenty five or thirty
Speaker 3: years ago. But there are a lot of businesses that
Speaker 3: just go through cycles, right, and they may appear to
Speaker 3: be bad businesses today, but they're actually going to be
Speaker 3: great businesses again tomorrow. And it's more of like a
Speaker 3: temporary thing that happens to the business and not a
Speaker 3: permanent thing. And you know, that's where I get really excited.
Speaker 3: I mean, it's interesting. You have to be a little
Speaker 3: bit contrarian to do what we do, but you have
Speaker 3: to also actually be a little bit optimistic when other
Speaker 3: people aren't optimistic. And so you take a bad situation
Speaker 3: and you say, hey, this is how we're going to
Speaker 3: make it good. And sometimes we're actually you know, especially
Speaker 3: in our private market investments, we're applying the elbow grease.
Speaker 3: We're making the management changes to make it better. In
Speaker 3: our public market investments, we're serving on creditors committees and
Speaker 3: often bringing in a new management team to do that.
Speaker 3: Repositioning a business sometimes selling off subsidiaries it don't make
Speaker 3: sense for them to have, or they can't afford to
Speaker 3: have any more. And so yeah, it does feel satisfying,
Speaker 3: you know, three to five years later to look at
Speaker 3: that and say, see how this is perceived today compared
Speaker 3: to how it was perceived when we got involved in it.
Speaker 3: You know, we were among the only people who you know,
Speaker 3: figured this out at the time, or we figured it
Speaker 3: out first or whatever it is, so that you know,
Speaker 3: I sort of you know, as I just said, like,
Speaker 3: that's part of the like enjoyable part of this job.
Speaker 3: Some of the psychic benefit is being first or among
Speaker 3: the first to figure these things out.
Speaker 2: So so last crisis questions, and it might have predated
Speaker 2: you because you probably were still in school during this,
Speaker 2: but before the dot com implosion in the late nineties,
Speaker 2: we had a series of credit problems. First was the
Speaker 2: Asian contagion with the tie Bot crisis. Then we had
Speaker 2: the Russian rubled fault, and then long term capital management
Speaker 2: was the direct result of the Russian default. What was
Speaker 2: your experience during those periods or is that really early
Speaker 2: history to you?
Speaker 3: Yeah, I mean it's literally right when I started, right,
Speaker 3: So I started at Davidson Kaepner as a summer intern
Speaker 3: in May of nineteen ninety eight. And so the Russia
Speaker 3: crisis and the long term capital crisis were August or
Speaker 3: September of nineteen ninety eight. By the way, thank goodness,
Speaker 3: they liked me at Davidson Kaepnor, and we're willing to
Speaker 3: give me a job because it was a very tough
Speaker 3: job market in the fall ninety four dealing with those
Speaker 3: particular things. The Asia contasion I think was more ninety seven,
Speaker 3: and so I saw parts of it. I mean that
Speaker 3: was also a learning lesson. People made a fortune in Asia,
Speaker 3: we just weren't equipped to do it at Decay. We
Speaker 3: looked at a few things, and what we figured out,
Speaker 3: which was right, was we couldn't invest there unless we
Speaker 3: had boots on the ground and a real knowledge base,
Speaker 3: and so we didn't. And so folks like Allman Sachs
Speaker 3: made a fortune in that era. Those are lessons I
Speaker 3: corrected later on, where we sort of boots on the
Speaker 3: ground in places around the world, advantage of opportunities as
Speaker 3: they emerged. But I learned that from Asia in terms
Speaker 3: of what we weren't doing. But look, I mean I
Speaker 3: was on a trading desk when the world was falling
Speaker 3: apart in August of nineteen ninety eight, And you know,
Speaker 3: I've told this to some of our younger people over time,
Speaker 3: Like the best time to be on a trading desk
Speaker 3: is when you have no responsibility, right, so it's not
Speaker 3: your fault that things are going bad, and you just
Speaker 3: learned from it and you watch the people around you.
Speaker 3: And I remember how cool and calm and collected everyone
Speaker 3: was in the face of you know, dramatic adversity. And
Speaker 3: you know that was super helpful to me when I
Speaker 3: was dealing with O seven or eight or things that
Speaker 3: happened after the fact, and so you know, I quite
Speaker 3: enjoyed having that opportunity. Huh.
Speaker 2: Really really interesting. So let's talk a little bit about
Speaker 2: a piece that you and the firm put out titled
Speaker 2: the Party is Just Getting Started discuss.
Speaker 3: Sure, Well, you know it's interesting. This is something that
Speaker 3: I reflected on last year, and so the general subject
Speaker 3: of the Party is Just Getting Stile, which is a
Speaker 3: white paper that we put out recently, is about the
Speaker 3: role of absolute return in a portfolio. And the reason
Speaker 3: I reflected on this is if you go back to
Speaker 3: the start of my career, so the nineteen nineties and
Speaker 3: the two thousands, you would have relied upon absolute return
Speaker 3: strategies to be a volist in your portfolio and a
Speaker 3: diversifier in your portfolio, but you also would have relied
Speaker 3: upon them to get you home in terms of the
Speaker 3: overall portfolio objectives. Right. So if you look at a
Speaker 3: typical allocator, right, they've got a five percent spend rate
Speaker 3: and they want to earn something plus inflation over that.
Speaker 3: So many allocators are shooting for kind of higher single
Speaker 3: digit rate return seven or nine percent, depending upon the
Speaker 3: institution and the needs. And in the two thousands, when
Speaker 3: I started my career was a first partner at Davidson Keepner,
Speaker 3: that would have been the expectation of absolute return was
Speaker 3: that you were going to earn high single or lower
Speaker 3: double digit rates of return in the strategy NBA diversifier
Speaker 3: and have low volatility. There were other strategies within abbsolute
Speaker 3: return that might have had higher return higher volatility expectations,
Speaker 3: but that would have been the base expectation. So what happened, right,
Speaker 3: You had a period of time with fifteen years roughly
Speaker 3: of zero percent interest rates. The longer that period went on,
Speaker 3: the more and more returns got reduced in the area.
Speaker 3: I would say by twenty twenty, when the pandemic hit
Speaker 3: an allocators expectations for appsort return strategies would have just
Speaker 3: been to be a ballast against their portfolios. And what
Speaker 3: I mean by that is we need a ballast, we
Speaker 3: need a volatility dampner. We're going to use absolte return
Speaker 3: for that. But we expect to earn our quote unquote
Speaker 3: real returns off of our equity strategy. So whether that's
Speaker 3: public equities or private equities, or maybe if you're a
Speaker 3: little bit more adventurous growth equity or venture capital, and
Speaker 3: you pair those two things together and you'd have a
Speaker 3: great portfolio. So you fast forward to twenty twenty four,
Speaker 3: I think things are very different today, and we wanted
Speaker 3: to figure out why. I mean, absolute return strategies collectively
Speaker 3: had their best year at a very long time last year.
Speaker 3: I think they're off to a very good twenty twenty
Speaker 3: five as well. So why is this happening? So is
Speaker 3: it just rates? And so you're unquestionably in a period
Speaker 3: of higher rates today versus what you were in the
Speaker 3: two thousand and tens. But it's not just rates, it's
Speaker 3: actually dispersion. And so what we did is we looked
Speaker 3: over long periods of time and there's a high correlation
Speaker 3: between dispersion and markets and higher rates, and so not
Speaker 3: only do you get the benefit of a interest rate
Speaker 3: premium today compared to what you had four years ago,
Speaker 3: but you actually get about fifty percent it's a touch
Speaker 3: more than that expectation of return above the risk free
Speaker 3: rate today because of where a dispersion is in markets,
Speaker 3: and that dispersion exists in both credit markets and equity markets,
Speaker 3: so it's in both those strategies, and that's why you're
Speaker 3: getting better performance than absolute return. We think the rate
Speaker 3: story is here to stay. But even if it's not
Speaker 3: for a period of time, even if you have the
Speaker 3: short term rate go down, ultimately we think that dispersion
Speaker 3: is going to last for a long time, which is
Speaker 3: kind of what happened in the two thousands as well.
Speaker 3: And so again you have a whole generation of allocators
Speaker 3: who are trained for absolute return to serve one role
Speaker 3: in their portfolios, and we actually think it serves a
Speaker 3: second role in their portfolios as well, which is a
Speaker 3: return driver. And so you take those two things together,
Speaker 3: we think it's a really powerful asset class. And I
Speaker 3: wrote this paper because I just don't think there's been
Speaker 3: a lot of work that's out there on it. You know,
Speaker 3: you see headlines about people are getting more interested in
Speaker 3: apps or return our hedge funds. Again, you see other
Speaker 3: headlines that there's not a lot of capital available for
Speaker 3: the strategy because many allocators are over allocated to private
Speaker 3: equity or growth equity or venture capital and they don't
Speaker 3: have the liquid capacity for it. But I think for
Speaker 3: those who do, who are interested in it, they're getting
Speaker 3: rewarded for it right now. And so that's the root
Speaker 3: of the paper.
Speaker 2: So I'm fascinated by so many aspects of that. One
Speaker 2: is you brought up ballast, and when I think of
Speaker 2: what's typically been the ballast to offset volatility of public equities,
Speaker 2: it historically has been bonds. But once yields went down
Speaker 2: to practically nothing, the question was what's going to take
Speaker 2: up that role. I know a lot of people just said,
Speaker 2: all right, those seventy th the equity will make up
Speaker 2: for the performance, but not for that offsetting diversified ballast.
Speaker 2: Is it distress credit, is it absolute returns? What is
Speaker 2: filling that role going forward? And then we'll talk about
Speaker 2: how the higher rates have changed the calculus somewhat later,
Speaker 2: But what is the new ballast today that used to
Speaker 2: be bonds.
Speaker 3: Well, I mean again, i'd start out with like, I
Speaker 3: think absolute return can play that role. So opportunistic credit
Speaker 3: can be part of a absolute return strategy, whether it's
Speaker 3: accessed in public format or private format. Some people put
Speaker 3: opartistic credit in larger what they would call private credit
Speaker 3: buckets as well. But I do actually think that absolute
Speaker 3: return will eliminate the rate risk portion of things. You know,
Speaker 3: I mean, bonds are a ballist except if they're not. Right,
Speaker 3: So you go back to two twenty two in twenty
Speaker 3: twenty two was certainly the worst year for fixed income
Speaker 3: in one hundred years. It may have arguably been the
Speaker 3: worst year for fixed income in the history of the
Speaker 3: United States. If you go back over very long periods
Speaker 3: of time and performance of bonds, you're basically down mid
Speaker 3: teens depending upon what you own, whether it was treasuries
Speaker 3: or investment great or high yield of things along those lines.
Speaker 3: Twenty twenty was not a great year for the equity
Speaker 3: markets either, right, So that was a year where people
Speaker 3: started to seriously question the sixty forty or seventy thirty
Speaker 3: model with where things were. If you were an absolute
Speaker 3: return type strategies, you did much better that year, if
Speaker 3: you were not opt just a credit strategies, you did
Speaker 3: much better that you protected capital I think at a
Speaker 3: minimum in those strategies, and that gave you more of
Speaker 3: a chance to take advantage of upside in twenty twenty three,
Speaker 3: in two thousand and twenty four. I mean opportunistic credit
Speaker 3: has the additional advantage that it tends to be pretty
Speaker 3: inversely correlated in terms of when it does well to
Speaker 3: strategies like growth equity and venture capital. So again, those
Speaker 3: are like perfectly good strategies. I'm not like put polling
Speaker 3: the I'm just saying they're very cyclical in terms of
Speaker 3: making investments in those strategies, and so they actually pair
Speaker 3: very well with opportunistic credit in portfolio is because typically
Speaker 3: oportistic credit is doing well when those strategies are not
Speaker 3: doing well, and sometimes vice first.
Speaker 2: Right, And to put a little meat on that worst
Speaker 2: year in fixed income in twenty twenty two, the last
Speaker 2: time you had both stocks and bonds down double digits,
Speaker 2: I want to say was nineteen eighty one, about forty
Speaker 2: forty one years earlier. So these things don't come along
Speaker 2: very often, but when they do, I would imagine event
Speaker 2: driven opportunistic credit is a perfect offset.
Speaker 3: We completely agree with that. And also, you know, I
Speaker 3: think that it's tough to just do a simple sixty
Speaker 3: forty or seventy thirty portfolio. I mean maybe for very
Speaker 3: smaller institutions that make sense, but once you have some
Speaker 3: degree of sophistication that you can bring into your portfolio,
Speaker 3: it makes sense to have some alternatives of different sorts
Speaker 3: to balance out that risk.
Speaker 2: So you mentioned higher rates as an ongoing issue. It
Speaker 2: certainly looks like higher for longer is the Fed's posture,
Speaker 2: which raises the question our higher rates a tailwind for
Speaker 2: absolute return strategies, especially opportunistic credit or are they a headwind?
Speaker 3: Well, I always say a couple of things. So first
Speaker 3: of all, we're in an environment of higher rates, it
Speaker 3: doesn't mean that we're in an environment of high rates, right.
Speaker 3: And so if you look at the hundred the nice
Speaker 3: thing about interest rates is you have hundreds of years
Speaker 3: of history you can actually look at in these things.
Speaker 3: And so if you look at the one hundred year
Speaker 3: history of interest rates in the United States, I believe
Speaker 3: the ten years between four and five percent, right, So
Speaker 3: that's about where it is today. So you don't have
Speaker 3: a high ten year today. You only have a high
Speaker 3: ten year today compared to what people got used to
Speaker 3: from the late two thousands until two thousand and twenty
Speaker 3: one in terms of rates of return. So, first of all,
Speaker 3: I do think that higher rates is a tailwind for
Speaker 3: absolute return strategies in general. So that would include opportunistic
Speaker 3: credit strategies, that would include a vent driven strategies, which
Speaker 3: we do. It also include relative value strategy, so we've
Speaker 3: got some of that in our portfolio, but it's not
Speaker 3: the dominant strategy that we have because of the dispersion
Speaker 3: you have in markets in that period of time. I
Speaker 3: also think it's a really good tailwind for opportunistic credit specifically,
Speaker 3: but I give a little bit more of a nuanced
Speaker 3: answer to that, and an opportunistic credit I think you
Speaker 3: need to go back to how we got here, right.
Speaker 3: So it's not the absolute rate of return in fixed
Speaker 3: income today that's interesting. It's the sixteen months that it
Speaker 3: took from early twenty twenty two for the base rate
Speaker 3: to go from zero went to the five and obviously
Speaker 3: it's come off of that a little bit since then.
Speaker 3: So most capital structures that are in the market place
Speaker 3: today were set entirely or in some cases partially but meaningfully.
Speaker 3: Prior to twenty twenty two, when the base rate was zero,
Speaker 3: and when you're close to fifteen years into a base
Speaker 3: rate of zero, companies were assuming, or people who owned
Speaker 3: assets were levering them, were assuming, and probably rightfully so,
Speaker 3: that the base rate would stay zero forever. And in fact,
Speaker 3: you know, it's one of those things where it's so
Speaker 3: easy to foresee with the inflation we had in twenty
Speaker 3: twenty in twenty twenty one, that the base rate was
Speaker 3: going to rise, but it still came as a shock
Speaker 3: to the markets where it actually rose. And so you're
Speaker 3: now in the middle of this I think several year
Speaker 3: period of time where owners of assets are like, hey,
Speaker 3: I got to actually raise money in my capital structure
Speaker 3: to de lever I mean, some assets are going to
Speaker 3: be you know, need to be just fully restructured because
Speaker 3: they aren't worth what the debt is worth anymore. But
Speaker 3: there are many other asset owners who have assets who
Speaker 3: have equity value, maybe not as much equity value as
Speaker 3: they had previously, and they look at their capital structures
Speaker 3: and you probably need to raise twenty to forty dollars
Speaker 3: of equity for every one hundred dollars a debt that
Speaker 3: you had before to delever your capital structure. And that's
Speaker 3: super interesting because there's a lot of different ways companies
Speaker 3: can do that. They can do liability management exercises to
Speaker 3: try to whittle down the debt. They can sell assets
Speaker 3: off to you know, get their house in order, in
Speaker 3: direct corporate lending land, private credit land. They can just pick.
Speaker 3: They could say, hey, we're not gonna pay you interest
Speaker 3: for a year or two, so just tack it onto
Speaker 3: the principle and let's sort of try to fix the
Speaker 3: ship that way. There's a lot of different ways this
Speaker 3: can get solved for and that's like the theme an
Speaker 3: opportunistic credit that we've been living in the last couple
Speaker 3: of years, and it's a theme I think we're gonna
Speaker 3: be living the next couple of years. And so I
Speaker 3: think it's super interesting because unless you believe that rates
Speaker 3: are gonna rise materially, like, there's no bailing out of
Speaker 3: this situation of these companies. It's just math in terms
Speaker 3: of where these are. And if you're an asset owner,
Speaker 3: you're gonna play out your lower interest rate coupon to
Speaker 3: the very end. It's an asset. It's an asset that
Speaker 3: burns off, and so you're either going to try to
Speaker 3: be opportunistic and use that to get something from your creditors,
Speaker 3: or you're gonna say, hey, we're just gonna pay a
Speaker 3: little rates for a while and we'll see what things
Speaker 3: happen closer to maturity. Huh.
Speaker 2: Really really interesting. Who knew the mantra move fast and
Speaker 2: break things would be adopted by the Fed?
Speaker 3: Yeah?
Speaker 2: Right, that's more more Silicon Valley. So I'm fascinated by
Speaker 2: the concept of opportunistic credit. You've been with Davidson Kapner
Speaker 2: for twenty seven years, twenty six years something like that.
Speaker 2: How has the DNA of the firm when it comes
Speaker 2: to event driven investing evolved over that time. It can't
Speaker 2: be the same today as it was in the nineteen nineties.
Speaker 3: No, I mean so, first of all, you know, I'm
Speaker 3: a believer in some of the truism of markets, which
Speaker 3: is that capital chases returns and returns become effishent overtime. Like,
Speaker 3: there's no getting away from that. If you have an
Speaker 3: asset class and people are doing well and it, other
Speaker 3: people will show up in your asset class, and eventually
Speaker 3: change the dynamic, right, that is what it is. We
Speaker 3: had a couple of strategic inflection points, and I think
Speaker 3: we're very helpful in our business. So the first of
Speaker 3: which was opening our international offices. So you know, I
Speaker 3: mentioned earlier the fact that we kind of missed the
Speaker 3: opportunity set in Asia in the late nineteen nineties because
Speaker 3: we just weren't staff to do it. I'm a big
Speaker 3: believer here, if you're going to invest in markets outside
Speaker 3: the US, you want local people with local relationships and
Speaker 3: local language skills doing that, right. You don't want it
Speaker 3: to be a bunch of smart people in the room
Speaker 3: doing it from New York or London. We opened our
Speaker 3: London office, I don't know, at the end of two
Speaker 3: thousand and two thousand and one, something along those lines,
Speaker 3: and we really invested it in that in that office.
Speaker 3: I mean, the story I like to tell is we
Speaker 3: had a pretty good sized office in London. I make
Speaker 3: a point of going, you know, four or five times
Speaker 3: a year. I showed up in early January two thousand
Speaker 3: and nine, which I remember because I remember seeing all
Speaker 3: the Herod's holiday ornaments for sale in the gift shop
Speaker 3: at the Heathrow Airport on my way home and I
Speaker 3: go to see the old Merrils. Right, So Merrill Lynch
Speaker 3: had been merged into Bank of America at this point,
Speaker 3: but they were still there and they said, we just
Speaker 3: want you to know you're the first American who's come
Speaker 3: to our office in four months. Wow. And I said,
Speaker 3: oh my god, how is that possible? And they said, well,
Speaker 3: you know a lot going on in the US. This
Speaker 3: was right past fall two thousand and eight, right, And
Speaker 3: I said, you know what, there's an opportunity here. So
Speaker 3: we did a massive hiring spree in London over the
Speaker 3: next three or four years. And I said, okay, London,
Speaker 3: because you know, all the stuff in the US had
Speaker 3: cracked and in London it hadn't cracked in the same
Speaker 3: in the same way. And so the European opportunities came
Speaker 3: a few years later, but they came in big droves.
Speaker 3: And you know, we followed the same playbook in Asia
Speaker 3: as well. We opened an office in Hong Kong in
Speaker 3: twenty ten. We now have smaller offices in Mumbai and
Speaker 3: Shinzen as well to access the China and India markets.
Speaker 3: And you know, that was a fantastic decision. Those markets
Speaker 3: are less efficient than the US is some of that structural.
Speaker 3: Some of that there's just fewer people trying to access
Speaker 3: those opportunities. You need to have local people, you need relationships.
Speaker 3: It's much more relationship driven. That was like one change
Speaker 3: that we made and I think set us up for,
Speaker 3: you know, continuing to grow and survive and thrive as
Speaker 3: a firm. The second one i'd reference is our entry
Speaker 3: more seriously into private markets. And so you know, if
Speaker 3: you go back prior to twenty ten, all the capital
Speaker 3: we had was sort of hedge fund structure capital where
Speaker 3: it was reasonably liquid, maybe had the small ability to
Speaker 3: do a side pocket. We generally didn't do that, and
Speaker 3: she had to mostly stick to liquid securities in what
Speaker 3: you were doing. We thought there was going to be
Speaker 3: a really good opportunity in buying less liquid, longer duration opportunities.
Speaker 3: We might own assets for four to six years, let's say,
Speaker 3: versus things that were marked to market on a daily basis,
Speaker 3: and we thought there were things that you could do
Speaker 3: to those assets to improve them over time. This was
Speaker 3: sort of the first wave of bank selling that probably
Speaker 3: came to the US in the two thousand and eight
Speaker 3: to twenty eleven timeline. And probably came to Europe in
Speaker 3: the two thousand twelve to twenty fifteen timeline. So we
Speaker 3: had our first you know, sort of private equity style
Speaker 3: strategy due to Operatness to credit, which launched in twenty eleven.
Speaker 3: And even though the opportunity to buy from the banks
Speaker 3: ultimately dissipated, what we discovered was as private markets grew,
Speaker 3: this just became a bigger and bigger opportunity. And so
Speaker 3: this has really been a substantial portion of the growth
Speaker 3: of our business in the last fifteen years, as being
Speaker 3: in private markets and being an opportunistic credit in private
Speaker 3: markets a lot us ultimately to be an asset back
Speaker 3: lending led us to be in real estate as well,
Speaker 3: which is a big strategy for us with operatistic credit,
Speaker 3: and I think it is really important to have both
Speaker 3: tools in your toolkit. You know, there's this term for
Speaker 3: technology investors which is crossover tech investors, which is basically
Speaker 3: investing firms like co To or Tiger Global that have
Speaker 3: both big public market and private market businesses. I wanted
Speaker 3: to be a crossover credit firm, and by that I
Speaker 3: didn't mean between high yield and IJ What I meant
Speaker 3: was between public markets and private markets, because I think
Speaker 3: you learn a lot being in private markets that's helpful
Speaker 3: for public markets, and I think you'll learn a lot
Speaker 3: as a public markets an investor that's helpful for private
Speaker 3: markets as well. So it's very complementary. And especially if
Speaker 3: you can have both pools of capital in one place
Speaker 3: and you can kind of toggle how you spend your
Speaker 3: resources to between public and private markets. It's just super helpful.
Speaker 3: And so those are maybe two of the bigger things
Speaker 3: that we've done as a firm in the last twenty
Speaker 3: five years to really, you know, help us to thrive
Speaker 3: where the world is in twenty twenty five versus where
Speaker 3: in twenty fifteen or two thousand and five. Huh.
Speaker 2: Really really interesting. Leads to a question. You're the perfect
Speaker 2: person to ask this because whenever we talk about what's
Speaker 2: going on in Europe and the UK, especially Brexit, you
Speaker 2: sort of get an academic answer from a distance. You
Speaker 2: have a major presence in London, you've been there for
Speaker 2: the past you know, decade and a half. Tell us
Speaker 2: a little bit about the opportunities you see on the
Speaker 2: continent and in the UK and how much has the
Speaker 2: Brexit affected the dynamic not just London in the UK,
Speaker 2: but in Europe overall.
Speaker 3: Yeah, I think there's a lot of different things going
Speaker 3: on in Europe. So, first of all, you know, Europe
Speaker 3: tends to be a lower growth economy structurally than the US.
Speaker 3: I think there's a couple of reasons for that. One
Speaker 3: is regulatory, but the second one really is the country
Speaker 3: by country nature and how things operate. I mean, overall,
Speaker 3: it's a giant market, but when you break it down
Speaker 3: and you've got Italian cupmpanies and French companies in German companies,
Speaker 3: that's just much of a less efficient approach. Obviously are
Speaker 3: some multinational companies in Europe, but it's maybe a smaller
Speaker 3: part of how things work over there. And so while
Speaker 3: I'm not sure i'd want to be a tech investor
Speaker 3: in Europe, I'm super happy to be an opportunistic credit
Speaker 3: or an advent driven investor there because these are really
Speaker 3: very deep value markets in terms of where you're investing,
Speaker 3: in terms of the specific impacts of bregsit. I mean, so,
Speaker 3: first of all, it's not been great for the UK
Speaker 3: in terms of where things are. I keep thinking they're
Speaker 3: going to turn it around at some point, but it's
Speaker 3: been a tough seven or eight years there in terms
Speaker 3: of the economy and the need really for the human
Speaker 3: capital that they've lost and maybe have a harder time
Speaker 3: attracting as a result of where bregsit is in the
Speaker 3: continental market. It's really a country by country scenario, and
Speaker 3: so I look at markets like Greece or Portugal or Italy,
Speaker 3: and they've actually proven to be really strong markets for US.
Speaker 3: And those are markets that folks, particularly a pond away,
Speaker 3: often shy away from because it's complex to be there.
Speaker 3: They don't know how business is done. They have certain
Speaker 3: assumptions about the markets that maybe aren't always true, and
Speaker 3: then people have assumptions about the northern European markets that
Speaker 3: also aren't trilling. Germany's in a very hard spot right now,
Speaker 3: there's no getting around that. Again. I've got confidence it
Speaker 3: will turn around over time, but I do expect there'll
Speaker 3: be a lot of opportunities there between now and now
Speaker 3: and then. And there's definitely a big macro lens over
Speaker 3: Europe as well in terms of what can happen in
Speaker 3: Europe over the next five years, which is not just
Speaker 3: related to Brexit, but maybe related to some of the
Speaker 3: geopolitical forces that are in play in two thousand and
Speaker 3: twenty five as well. We like complexity, like we seek
Speaker 3: out complexity, like when there's very few buyers of assets
Speaker 3: or people willing to lend, because you know, you have
Speaker 3: to sort through a lot of stuff, like even just
Speaker 3: the complexity of understanding how different restructuring law as are
Speaker 3: in Spain versus Portugal, right, Like, that's super helpful for
Speaker 3: US in our strategies. The fewer people who can be
Speaker 3: involved in assets, the better it is for US. And
Speaker 3: Europe creates those opportunities, and so it continues to be
Speaker 3: a fruitfall area for US. But if folks in the
Speaker 3: United States don't want to look at it, that's okay.
Speaker 2: I totally get that. It's funny because on the equity side,
Speaker 2: I don't know if the past five years, maybe even
Speaker 2: longer ten years, people have been saying US is pricedy,
Speaker 2: Europe is cheap. Now's the time to move money from
Speaker 2: the US at public equity to Europe, and that trade
Speaker 2: hasn't worked. You Arguably, European stocks are cheap for a
Speaker 2: reason and US stocks are expensive for a reason. What
Speaker 2: do you see on the credit side, what do you
Speaker 2: see on the private side? Do you run into similar
Speaker 2: valuation issues or the math is the math, and when
Speaker 2: the opportunities arise, it doesn't matter.
Speaker 3: Yeah. I mean, look, I don't necessarily expect evaluation premium
Speaker 3: for europe get it right. So I think we can
Speaker 3: earn more money on our comparable European opportunities than we
Speaker 3: can on US opportunities. And maybe some of that's getting
Speaker 3: paid for the complexity and the things that we're speaking
Speaker 3: about in terms of how we do that. I do
Speaker 3: wonder in the in the equity side, if you take
Speaker 3: out tech, if there's really such a valuation gap. I mean,
Speaker 3: it's something like half the market cap in the US
Speaker 3: and tech at this point when you look at the
Speaker 3: S and P. That's not to say I'm in Europe right,
Speaker 3: there's very little tech industry. So I do think the
Speaker 3: tech separation is a big part of the US versus
Speaker 3: European separation. For better or for worse, you don't do
Speaker 3: a lot of technology related investing in opportunities to credit,
Speaker 3: you get some chances. Sometimes tech companies are not often
Speaker 3: great for opetusity to credit. Perhaps software will be different.
Speaker 3: If there's often if there's ultimately a crack in the
Speaker 3: software world, excuse me, but I would say that, you know,
Speaker 3: in the sectors that we invest in, which is basically
Speaker 3: everything else, you know, we are getting paid a premium
Speaker 3: to invest in Europe for the reasons that we that
Speaker 3: we said.
Speaker 2: So you've recently transitioned to become executive managing member. That
Speaker 2: goes back to the pandemic after was it Davidson or
Speaker 2: it was Kampnor who retired.
Speaker 3: Yeah, I became our executive managing member with Tom in
Speaker 3: twenty eighteen, and then Tom formally retired on January one,
Speaker 3: twenty twenty, so I became the sole head of the
Speaker 3: firm at that point.
Speaker 2: What was that transition like? Because your chief investment officer,
Speaker 2: I got to imagine thirty five plus billion dollars and
Speaker 2: how many employees do you guys?
Speaker 3: About five hundred?
Speaker 2: I mean, that's no small task to run. How do
Speaker 2: you balance the two? What was that transition like?
Speaker 3: Well, you know, I'm very fortunate in the sense that
Speaker 3: the transition with Tom and I took place over many years,
Speaker 3: and so I'm actually the third managing partner of Davidson kemptainer.
Speaker 3: Marvin Davidson was the first, and Marvin Davidson Randy Kay
Speaker 3: for about twenty years before Tom took over, and then
Speaker 3: Tom Randy k for about fifteen years. I was there
Speaker 3: for the last five years of Marvin's running the firm,
Speaker 3: and so I got to actually see two models. I
Speaker 3: got to see Marvin's model and Tom's model, which were
Speaker 3: very different from each other. And then I was the
Speaker 3: deputy managing partner for several years before becoming the cohed
Speaker 3: with Tom for two years. You know, Tom was very
Speaker 3: focused on succession and leaving the place in better shape
Speaker 3: than he got there with, so to speak, and that's
Speaker 3: super helpful. I got a lot of calls because we're
Speaker 3: now third generation and running the business about how you
Speaker 3: do this. And my first thing I say to people,
Speaker 3: which is sort of a joke, but it really isn't,
Speaker 3: is the person in front of you have to want
Speaker 3: to retire. Like that's step one. You know, transitions don't
Speaker 3: go well if the person who's leaving doesn't actually want
Speaker 3: to retire. I was very fortunate Tom actually wanted to do.
Speaker 2: That's what the chairman emeritith.
Speaker 3: Tom actually wanted to retire and do other things. I mean,
Speaker 3: there's things you learn along the way. I mean again,
Speaker 3: I wouldn't have wished a pandemic upon anybody. But it
Speaker 3: was sort of sink or swim, right, because you know,
Speaker 3: it was two months in the markets were falling apart.
Speaker 3: No one wanted to be in the office in early
Speaker 3: March of twenty twenty, right, for reasons that obviously became
Speaker 3: pretty clear soon afterwards. And how do you make that
Speaker 3: all work? How do you get every on the same page,
Speaker 3: how do you broadcast your message out? How do you
Speaker 3: make sure that the things that are happening in the
Speaker 3: portfolio are happening in a way that you want them
Speaker 3: to happen. How do you empower people when everyone's sitting
Speaker 3: in their home or whatever. So we rode through the
Speaker 3: pandemic and we learned a lot. But I did have,
Speaker 3: you know, twenty plus years of training to do this.
Speaker 3: And because I've only been at one firm in my
Speaker 3: entire career, like, i didn't have the benefit of being
Speaker 3: CEO somewhere else, but I'd the benefit of really knowing
Speaker 3: David's and Kepner cold and that probably proved to be
Speaker 3: the biggest advantage.
Speaker 2: How do you maintain a corporate culture when everybody's working
Speaker 2: from home and you have people in how many different
Speaker 2: cities around the world.
Speaker 3: So we have seven offices, although you know, two of
Speaker 3: those offices are quite small sub ten people, and another
Speaker 3: two of those offices are you know three, I'll still.
Speaker 2: Far flong different times, zoon.
Speaker 3: Far it's far flong. So first of all, like when
Speaker 3: you go from fifteen people to five hundred people, you
Speaker 3: have to understand there's parts of your culture that you're
Speaker 3: going to maintain and there's parts of your culture you're
Speaker 3: not going to maintain. So, for example, when I got
Speaker 3: to Davidson Kaptner, every time it was someone's birthday, you
Speaker 3: get a birthday card signed by the whole office, and
Speaker 3: you get a cake, right, And so we have kept
Speaker 3: the cakes, but we got rid of the birthday cards
Speaker 3: at some point, right. We you know, have brought in
Speaker 3: different things over the years to speak to what our
Speaker 3: workforce is today, not what our workforce was ten or
Speaker 3: twenty years ago. So the example I give is when
Speaker 3: I got to Davidson Kapner in the nineteen nineties, I
Speaker 3: feel like our workforce mostly cared that we had clients, right,
Speaker 3: and by two thousand and eight, two thousand and nine,
Speaker 3: they didn't want too many of the clients to be
Speaker 3: fund of funds just because fund of funds weren't doing
Speaker 3: very well at that period of time. That was a
Speaker 3: transition where more and more investors in apps return strategies
Speaker 3: were investing direct and obviously there are still a few
Speaker 3: allocators that are out there of scale in that world.
Speaker 3: And then by the mid twenty tens, people wanted to
Speaker 3: know not only that we had clients, but what public
Speaker 3: good are we doing right, So we instituted a program
Speaker 3: called DK pledge Right, and it was a way that
Speaker 3: people could learn a little bit about what our clients did,
Speaker 3: you know, so whether returns went to you know, a
Speaker 3: lot of our clients are endawments or foundations or pension
Speaker 3: funds or people who are doing real good and even
Speaker 3: our high networth clients, many of them have big philanthropic
Speaker 3: arms that are doing very good things with the returns
Speaker 3: that we generate for them as well. But it was
Speaker 3: also a chance for our employees to give back to charities,
Speaker 3: bring charities into the organization. So we've given away like
Speaker 3: six million dollars and I think had a thousand different organizations.
Speaker 3: We've impacted twenty five hundred hours of volunteer time. That's
Speaker 3: all stuff that came from like thinking about where our
Speaker 3: workforce was today. It's not to say that our workforce
Speaker 3: wasn't very philanthropic in the nineteen nineties and two thousands.
Speaker 3: That actually was. It's just people did that more outside
Speaker 3: the office. And by the mid twenty tens are people
Speaker 3: wanted more of an integrated experience where they could do
Speaker 3: things that were philanthropic while doing their day jobs. Right,
Speaker 3: And so you have to just kind of keep a
Speaker 3: pulse to where people are today, and I've tried to
Speaker 3: really do that in terms of my role. You know, again,
Speaker 3: the place is going to be exactly the same in
Speaker 3: terms of how do you keep people in seven offices
Speaker 3: like singing from the same page. There actually were really
Speaker 3: good learning lessons from that in the pandemic, and by
Speaker 3: the way, I did my best to get people back
Speaker 3: in the office as soon as humanly possible. We returned
Speaker 3: to the office, I think well before many of our
Speaker 3: peers did. That was important to me in terms of
Speaker 3: continuity of the teams and keeping the culture. But I
Speaker 3: started doing a bi weekly email to the entire firm
Speaker 3: during the pandemic, and I did that because that was
Speaker 3: the best way to communicate with people. We did some
Speaker 3: videos and things like that too, but I wanted something
Speaker 3: in writing, and it was a combination of PEP talk,
Speaker 3: firm news, sometimes some market insights and not sure I've
Speaker 3: got amazing market insights every two weeks. But over time
Speaker 3: I certainly do right, and when I really had something
Speaker 3: to say, I would say it. And we've kept doing
Speaker 3: those even through today. It's become like a hallmark of
Speaker 3: our firm. We get very good internal feedback on that
Speaker 3: because it was important to me. That's the way everyone
Speaker 3: knows they're going to hear from me every couple weeks,
Speaker 3: no matter what. Huh.
Speaker 2: Really interesting last DK question, So you've been there for
Speaker 2: twenty seven years. Kind of unusual these days. Not many
Speaker 2: people have that sort of longevity with one firm. Tell
Speaker 2: us what's kept you at Davidson Kampner this whole time?
Speaker 3: Well, I'm very fortunate, you know, I sort of joke
Speaker 3: I show up at my college reunions, right, and if
Speaker 3: I'm not the only person who's been at one from
Speaker 3: the entire time, it's virtually virtually the only person who's
Speaker 3: done that. I got very fortunate, right, and I got
Speaker 3: very fortunate that I happened to find people that I
Speaker 3: really wanted to work with in an industry that I
Speaker 3: really liked that was growing, right, And so I think
Speaker 3: if you hadn't had any one of those three factors aligned,
Speaker 3: like you know, possibly could I could have stayed. But
Speaker 3: if there wasn't going to be a growth in the industry,
Speaker 3: I wanted there at least to be growth for me, right.
Speaker 3: I just wanted to be doing different things at a
Speaker 3: more senior level twenty seven years in than I where
Speaker 3: I started that. But fortunately all three of those things
Speaker 3: did align. Look, there's real human capital you get by
Speaker 3: being at a place for a long time, right, I mean,
Speaker 3: you know't you don't want to be somewhere for a
Speaker 3: long time just because of that, But the reality is
Speaker 3: there are switching costs that you have when you leave
Speaker 3: our roles. And so I was very fortunate that I
Speaker 3: was able to grow with the organization, and I'm very
Speaker 3: fortunate that I enjoy what I do.
Speaker 2: Huh, really really interesting. Talk a little bit about the
Speaker 2: rise of alternatives and why this has become one of
Speaker 2: the hottest parts of the investing world for really more
Speaker 2: than a decade. Certainly since the FED took rates down
Speaker 2: to zero, people started looking around DKY has a variety
Speaker 2: of different strategies. Let's start with distressed investments. Tell us
Speaker 2: a little bit about the work Decay does in distressed
Speaker 2: investments and why do you think this space has such legs?
Speaker 3: You know, I would say a couple of things on
Speaker 3: you know, we could call it distressed investments, we can
Speaker 3: call it opportistic credit. It's probably some combination of the
Speaker 3: two things. And so for Davidson Kaepner, you know, we're
Speaker 3: actively investing in both public and private markets in terms
Speaker 3: of distress data or optimistic credit. So we're buying public
Speaker 3: securities that have declined in price or with the people
Speaker 3: questions to whether the companies can mature their debt. There
Speaker 3: can be all sorts of different reasons that things are
Speaker 3: trading down, and that's one strategy. We also have a
Speaker 3: very active strategy where we've got more private equity style
Speaker 3: capital where we can basically take control of assets, fix them,
Speaker 3: sell off divisions, add things, you know, et cetera. Those
Speaker 3: are typically more like four to six year type of investments,
Speaker 3: and we're able to do this, you know, across different
Speaker 3: asset types. So we've got a big business buying real estate.
Speaker 3: We've got a big corporate business, you find a lot
Speaker 3: of things like liquidations that don't necessarily fit into any
Speaker 3: one nique category. Occasionally sovereign debts not a big part
Speaker 3: of our book, but every once in a while we've
Speaker 3: got a big evolvement with a sovereign as well. And
Speaker 3: I would say a couple of things about that strategy
Speaker 3: and why people are attracted to it. So, number one,
Speaker 3: the outright rates of return that you can earn on
Speaker 3: strategies like that, I think are compelling compared to many
Speaker 3: things in the market over time. But they also are
Speaker 3: very good diversifiers in portfolios, And so like, why are
Speaker 3: these strategies attractive to allocators? They're attractive to allocators because
Speaker 3: you can achieve your overall objectives just being in the
Speaker 3: strategy most people or not obviously, but you can also
Speaker 3: do it in a way to diversify your overall portfolio.
Speaker 3: And not only does it diversify your overall portfolio in
Speaker 3: terms of when your earn rates of return, ie, the
Speaker 3: strategies tend to do better when other strategies aren't doing well.
Speaker 3: It's sometimes when capitals return to you too. So you know,
Speaker 3: we did some work a couple of years ago We
Speaker 3: actually published a white paper on this in twenty twenty three.
Speaker 3: What there's actually an inverse correlation between when opportunistsic credit
Speaker 3: funds return capital to their LPs versus when growth equity
Speaker 3: and venture capital funds return capital to their LPs. And
Speaker 3: that kind of makes sense intellectually. So if you're you know,
Speaker 3: an allocator, you probably don't want to only have growth
Speaker 3: equity and venture capital funds in your portfolio. I think
Speaker 3: the allocators who had too many of those have some
Speaker 3: of them have learned that the hard way in the
Speaker 3: last couple of years. So those are strategies that manifest
Speaker 3: themselves over a very long period of time. But if
Speaker 3: you've had a mixture of both strategies in your portfolio,
Speaker 3: that's a much more power powerful way to earn returns them.
Speaker 2: And when you talk about distressed assets with sovereign nations,
Speaker 2: I'm imagining that it's not so much the sovereign that's
Speaker 2: distressed as whatever investing fund is the holder of that
Speaker 2: debt Or am I misreading that?
Speaker 3: Well? Look, I mean, you know these are all public names,
Speaker 3: whether it's you know, Greece or Argentina or Puerto Rico.
Speaker 3: There's a number of different sovereigns that have gone through
Speaker 3: restructurings of different sorts over the last several years. There
Speaker 3: are certainly times when holders of debt that's at least
Speaker 3: linked to municipalities, you know, may want to sell, and
Speaker 3: there's sort of force selling because of that. But I'd
Speaker 3: say more, you know, credits are credits, right, There's only
Speaker 3: so much that any one person can borrow, anyone entity
Speaker 3: can borrow, and so you know, there have been reasons
Speaker 3: you've had to restructure. Greece has been an incredibly successful restructuring.
Speaker 3: The Greek economy's booming right now, right, So that would
Speaker 3: be an example of one. And they don't come very often.
Speaker 3: It's not a very big part of our business, but
Speaker 3: they're out there in terms of things that people have
Speaker 3: invested in it.
Speaker 2: And you may public securities, I'm curious, are you buying
Speaker 2: equity in distressed companies or are you buying the debt
Speaker 2: or some combination. When we're talking about publicly traded.
Speaker 3: From it's a combination. I would say the super majority
Speaker 3: of what we're doing, certainly in the public markets is
Speaker 3: credit and it's not equities. But there are occasionally times
Speaker 3: where credit will lead us to the equities. Another strategy
Speaker 3: I will use sometimes is I may put a tale
Speaker 3: of equity onto a larger position in credit. You know,
Speaker 3: often the credit and the equity move the same way.
Speaker 3: Not always the case, but it happens frequently enough, And
Speaker 3: so if you like a credit, you know a tale
Speaker 3: of equity. My theory is, if it doesn't work, you've
Speaker 3: just spent some of your coupon on sort of equity optionality.
Speaker 3: If it does work, you can really juice your return.
Speaker 3: So again, not something we do in every time, in
Speaker 3: all the situations, many of the companies we invest in
Speaker 3: public credit actually are private companies, so there's no opportunity
Speaker 3: to do that in those obviously, But every once in
Speaker 3: a while, a credit opportunity will lead us to an
Speaker 3: equity opportunity.
Speaker 2: And you've mentioned also that you're expecting some form of
Speaker 2: an M and A revival. Let's talk about that. Is
Speaker 2: this structural because we've gone through such a long period
Speaker 2: of low rates, not a lot of M and A activity,
Speaker 2: and some administrative hostility to big mergers. Is this the
Speaker 2: politics of the moment or is it just, Hey, it's
Speaker 2: been so long since it's been consolidation and we're due.
Speaker 3: Well, I put it into two categories. And so I've
Speaker 3: now been at David and Kapner long enough that I
Speaker 3: was at Decay for multiple Democratic and Republican administrations prior
Speaker 3: to the Biden administration, and in most administrations, the people
Speaker 3: who are setting the anti trust policy are career professionals.
Speaker 3: It's a science, right, There's a lot of math behind
Speaker 3: the science it's been. I studied in law school. I'm
Speaker 3: sure you studied in law school as well, and so
Speaker 3: my take was that the decisions would mostly be the
Speaker 3: same whether a Republican or Democratic administration, and then a
Speaker 3: couple times in administration they make a case in something
Speaker 3: that they really thought they wanted to go after. So
Speaker 3: you know, there were some prominent cases, and both the
Speaker 3: first Trump administration and the Obama administration in that regard.
Speaker 3: The by administration tried to change the anti trust laws
Speaker 3: and they tried to use the laws as deterrence in
Speaker 3: terms of people doing mergers, and it was actually very
Speaker 3: effective in that regard, because you know, if you're a
Speaker 3: corporate CEO or you're a board and you think you're
Speaker 3: gonna get stuck in eighteen to twenty four months of
Speaker 3: litigation and your merger may not go through. You might
Speaker 3: just choose not to do the merger, right, And so
Speaker 3: you fast forward to twenty twenty five. It's not totally
Speaker 3: clear what the new anti trust regime is going to be,
Speaker 3: but all signs are it's going to be much more
Speaker 3: accommodating to mergers. Maybe not in every industry. I'm not
Speaker 3: sure this is true in big tech, but in many
Speaker 3: other industries as well. And so you've got a number
Speaker 3: of management teams and boards that we think have been
Speaker 3: sitting on the sideline. And then you know, people need
Speaker 3: to find growth, right and M and A is sometimes
Speaker 3: an easy way for people to find growth in their businesses.
Speaker 3: There are a lot of businesses that deserve to be
Speaker 3: consolidated or should be consolidated, and you know, the fancy
Speaker 3: markets I think are very amenable to it, right. A
Speaker 3: lot of pent up demand, a lot of pent up demand,
Speaker 3: a lot of demand for new debt to finance acquisitions
Speaker 3: for sure, because there's you know, a huge amount of
Speaker 3: demand for performing debt in general right now. So you know,
Speaker 3: in my mind, this is probably a US centric story
Speaker 3: first and foremost. You may see some in Europe, but I
Speaker 3: think you're going to see a lot more in the US.
Speaker 3: I don't know if it's two months into the administration
Speaker 3: or ten months into the administration, but I think it's coming.
Speaker 3: And these things tend to have positive effects, Like the
Speaker 3: more M and A you get, the more M and
Speaker 3: A you'll have because all of a sudden, if you're
Speaker 3: in an industry and two of your competitors have done
Speaker 3: a deal and you haven't, you're behind and it can
Speaker 3: actually endanger your franchise. And so you know, it tends
Speaker 3: to be there's a reason why the M and A
Speaker 3: comes in buckets in terms of like specific industries. Sure,
Speaker 3: and so once that like flywheel effect happens, I think
Speaker 3: you'll see a lot more of it. So that that's
Speaker 3: my viewpoint on where m ANDA is heading in twenty
Speaker 3: twenty five.
Speaker 2: So let's talk about real estate. It's certainly been tumultuous
Speaker 2: and you've mentioned dispersion earlier in equity and credit, wide
Speaker 2: range of different real estate opportunities. How are you looking
Speaker 2: at the space? What are you seeing in terms of
Speaker 2: credit and especially distressed and opportunistic credit.
Speaker 3: Yeah, so I would say a couple of things. First
Speaker 3: of all, we take a very opportunistic approach into how
Speaker 3: we invest in real estate, and so we don't limit
Speaker 3: ourselves by geography. We primarily invest in the US and Europe,
Speaker 3: but we're willing to invest across those two areas, and
Speaker 3: we don't limit ourselves in product type. And so we're
Speaker 3: happy to invest in self storage or industrial or data
Speaker 3: centers or residential or whatever it is that we think
Speaker 3: provides the best risk return in a given country. Many
Speaker 3: real estate investors don't invest that way. Many real state
Speaker 3: investors specialize in a country, or they specialize in a sector.
Speaker 3: I think that's hard. I mean, if you look at
Speaker 3: the last fifteen years, right, and you were to go back,
Speaker 3: you know, I don't know twenty ten, right, So I
Speaker 3: think retail assets and office assets would have been perceived
Speaker 3: much better in twenty ten. I think that data center
Speaker 3: assets and industrial assets would have been perceived much worse
Speaker 3: in twenty ten. Right. So just like there's I don't
Speaker 3: have a mathematical answer for this, but just like there's
Speaker 3: substantial dispersion and performance and equity and credit markets, I
Speaker 3: think there's actually substantial dispersion in performance in real estate
Speaker 3: markets as well. And geography too. By the way, there's
Speaker 3: geographies that have been big winners and geographies that have
Speaker 3: been big losers, And so you could have been the
Speaker 3: best office fund manager for the last fifteen years, and
Speaker 3: it's been a really hard place to make money, right,
Speaker 3: And so we try to take that out by investing
Speaker 3: across these areas. So the benefit of doing opportunistic real
Speaker 3: estate investing, and I don't just mean across geography or
Speaker 3: product type within real estate, but I mean buying into
Speaker 3: assets that other people don't want to own, is real
Speaker 3: estate markets have gotten hit much harder by the rise
Speaker 3: of interest rates, even that corporate markets have, you know,
Speaker 3: corporates at least there's been some growth, right, So real
Speaker 3: estate much less growth in terms of rents in most
Speaker 3: of these areas. Data centers and industrial would be an
Speaker 3: exception to that. And the covenants in real estate debt
Speaker 3: are much less for giving than they are in corporate debt,
Speaker 3: and the term of the debt is much shorter in
Speaker 3: real estate debt than it is in corporate debt. And
Speaker 3: so the crisis in real estate is like here and
Speaker 3: coming very quickly compared to maybe corporates, where companies in
Speaker 3: some cases have a little bit more duration, a little
Speaker 3: bit more time to try to solve their problems. And
Speaker 3: so you know, for us, real estate's a very interesting
Speaker 3: asset class. It's an asset class many people avoided in
Speaker 3: the twenty tens with rates where they were. I think
Speaker 3: there's a lot more alligat or interest in it than
Speaker 3: there was previously. There's different approaches, there's different ways to
Speaker 3: win in it, but we think it's very worthy of
Speaker 3: our attention.
Speaker 2: You mentioned it has been fun to be a manager
Speaker 2: of investments in office space outside of the super A's.
Speaker 2: Everybody else seems to be struggling. You look over at
Speaker 2: Hudson Yards, a giant layout of capital. Generally speaking, the
Speaker 2: castle carts wipe tracking is still showing with fifty sixty
Speaker 2: seventy percent back to return to office. I remember after
Speaker 2: nine to eleven all of Lower Manhattan was it was
Speaker 2: just a boom in converting office space to residential. Seems
Speaker 2: like you kill two birds with one stone if we
Speaker 2: do that in Manhattan and elsewhere, is that a viable
Speaker 2: opportunistic space in real estate or is it just building
Speaker 2: by building case by case.
Speaker 3: It's it's building by a building, case by case. There
Speaker 3: have been some issues in New York. I think actually
Speaker 3: we're in among the best positions of any of the
Speaker 3: cities in the US in terms.
Speaker 2: Of really, oh yeah, that was not the general consent.
Speaker 3: You go to Chicago, or you go to San Francisco,
Speaker 3: some of these places, it's it's still a ghost town.
Speaker 3: You know, we have many more people come into the
Speaker 3: office here because it is a vibrancy in New York
Speaker 3: that New York has. You know, every time every.
Speaker 2: Time someone tells me New York City is dead, I'm like,
Speaker 2: have you been here recently? It's you can't get rest reservations.
Speaker 2: Broadway plays are sold out. Torstan Slock actually tracks Broadway.
Speaker 2: It's back to above pre pandemic levels. Like, every time
Speaker 2: I hear about the death in New York, it's always
Speaker 2: from people who haven't visited in a decade.
Speaker 3: Yeah. No, I'm very fortunate that I get to go
Speaker 3: to most of the major cities in the US on
Speaker 3: a regular basis, and so I get to see it
Speaker 3: with my own eyes, and I agree with you one
Speaker 3: hundred percent. Look, it's building by building because office conversion
Speaker 3: to residential is not so.
Speaker 2: Easy, especially some of the sixties and seventies buildings where
Speaker 2: there's no windows.
Speaker 3: That's what I was gonna say as a starting point, right,
Speaker 3: So a lot of office buildings are square and a
Speaker 3: lot of residential buildings are rectangle. And it's because there's
Speaker 3: this rule that we have in New York City where
Speaker 3: I think every livable room has to have a window
Speaker 3: in it, right, And so very hard to put a
Speaker 3: window in all the square floor plan rooms, right. You
Speaker 3: want up with a huge amount of a square footage
Speaker 3: in the middle of the building that potentially becomes unusable, right,
Speaker 3: And then it's a huge cost to retrofit.
Speaker 2: Right.
Speaker 3: So in many cases you're actually better just tearing the
Speaker 3: thing down and starting over. But if you look at
Speaker 3: the price that loans trade at, most of them don't
Speaker 3: assume you're doing that, right, So you're not buying them
Speaker 3: for land value or things along those lines. Maybe occasionally
Speaker 3: at the opportunity, but it's not regular, so you have
Speaker 3: to kind of pick your spots. It's not to say
Speaker 3: there aren't conversions that that makes sense. There definitely are
Speaker 3: some of those, but I don't think it's the majority
Speaker 3: of situations, And so you know, you do, and it
Speaker 3: really is the sixties and seventies buildings that are the
Speaker 3: ones that are in trouble. Because you know, I think
Speaker 3: about like Midtown East where we are right now, it
Speaker 3: actually isn't so easy to get space in mid ten
Speaker 3: East right now because guess what the Plaza district, which
Speaker 3: is what it's widely called, it is like a super
Speaker 3: popular place to be. Not everyone wants to be in
Speaker 3: huts and yards no offense. And so if you want
Speaker 3: to be in this area and you want office space,
Speaker 3: there's only so much of it, right And by the way,
Speaker 3: because rates are high and people are down on office,
Speaker 3: they're not building a lot more of it. And it's
Speaker 3: super expensive to build more of it. I mean, the
Speaker 3: cost of what JP Morgan's doing on Park Avenue in
Speaker 3: the forties is astronomical, right, and so not everyone could
Speaker 3: afford to do that or wants to invest in that.
Speaker 3: And so if you want to be in the area,
Speaker 3: actually people are rapid or running out of space. That's
Speaker 3: not true for Class B buildings, right, all the things
Speaker 3: you can can't give away in terms of my spaces,
Speaker 3: and so you know, you may have you know, eventually
Speaker 3: the market will come to equilibrium, right, but it has
Speaker 3: you brought something.
Speaker 2: Up that I'm kind of intrigued by. The market has
Speaker 2: yet to price out a lot of these buildings as
Speaker 2: only worth land value. They're still valuing as if hey,
Speaker 2: we're going to have a seventy five percent occupancy rate
Speaker 2: for the next thirty years. What's it going to take
Speaker 2: for that mispricing to get more in line with what's
Speaker 2: going on on the ground.
Speaker 3: You know, my experience with private assets in general is
Speaker 3: eventually buyers and sellers find each other, right, and essentially,
Speaker 3: you know, that usually is more pain for the sellers,
Speaker 3: and usually buyers get a little bit more realistic about
Speaker 3: how cheaply they're gonna buy things. And by the way,
Speaker 3: it's also banks and owners of assets, right. So you know.
Speaker 3: The other thing is institutions don't like to sell assets
Speaker 3: at a discount where they're marked at them right, And
Speaker 3: so the first place is for marks to get correct, right. So,
Speaker 3: whether it's real estate funds and their marks or whether
Speaker 3: it's banks and their marks. You know, once things are
Speaker 3: marked down at they can sell alone at a profit.
Speaker 3: They're much more likely to get sold. And that just
Speaker 3: takes time. I mean, that could take years in terms
Speaker 3: of word.
Speaker 2: That's really wow, that's that's quite amazing. So we've covered
Speaker 2: opportunistic credit, we've covered m and A, we've covered real estate.
Speaker 2: I have to get into the world of acronyms. You
Speaker 2: have to explain to me what are lmees and piks.
Speaker 2: I don't know how you pronounce either.
Speaker 3: So lmes or liability management exercises liability.
Speaker 2: So if you're an insurance company or more likely a
Speaker 2: pension funds and you know you're going to owe out
Speaker 2: X ten, fifteen, twenty years from.
Speaker 3: Now is now. These are corporate issuers. So basically, if
Speaker 3: you look at corporate debt, right, so ninety percent of
Speaker 3: the debt that gets issued in leverage loan markets in
Speaker 3: public markets has fairly like covenants in it. And so
Speaker 3: what that allows companies to do is basically have carve
Speaker 3: outs of baskets where they can offer to creditors a
Speaker 3: chance to exchange their debt for a smaller amount of
Speaker 3: debt that might rank ahead of you in the capital structure. Right,
Speaker 3: So if you own a bunch of unsecured debt and
Speaker 3: they come to you and they say, well, you're owed
Speaker 3: a one hundred cents, but we're going to offer you
Speaker 3: seventy five cents of you know, debt that's got a
Speaker 3: higher coupon and it's higher in the capital structure than
Speaker 3: where you were, and so you almost are co opted
Speaker 3: into having to take that agreement because if everyone else
Speaker 3: takes it and you don't take it, all of a sudden,
Speaker 3: you've been primed by everyone else in your capital structure,
Speaker 3: even if it's only seventy five percent of the amount.
Speaker 3: And so that's a very active exercise that's going on
Speaker 3: in public markets right now. Some of the companies have
Speaker 3: to do this because they don't have any other chance
Speaker 3: to right size their capital structures. Other companies are trying
Speaker 3: to do an opportunistically. They say, Hey, if we can
Speaker 3: get something from the creditors for nothing, why don't we
Speaker 3: do that.
Speaker 2: What's the flip side of that? It sounds like the
Speaker 2: creditors are right, they're getting secured where they might not
Speaker 2: have been earlier, but they wanted the higher yield and
Speaker 2: they're taking a big hit. Are they unhappy about this
Speaker 2: or is this just Hey, it's a risk.
Speaker 3: It depends on the creditors. So the term that gets
Speaker 3: used a lot, which I don't think is great, is
Speaker 3: creditor on credit or violence.
Speaker 1: Right.
Speaker 3: So there's some of it that's driven by the companies,
Speaker 3: and there's some of it that's driven by creditors, and
Speaker 3: the creditors may say, hey, we're gonna put some some
Speaker 3: new money in alongside with that seventy five percent, and
Speaker 3: we're gonna make sure we're first in line for that
Speaker 3: seventy five cents, so we're gonna get paid first. And
Speaker 3: the other you know, usually less than fifty percent of
Speaker 3: the capital structure that's not along with us. They're gonna
Speaker 3: get less, and then we're gonna look even better than
Speaker 3: they look because we've gotten a better return on the
Speaker 3: same that's creditor creditor. It's just a perfect violence there. Well,
Speaker 3: you all may have invented it. I didn't invent I No, I've.
Speaker 2: Never heard it before. But it's both perfect and a music.
Speaker 3: So you know, that's that's one of the big themes
Speaker 3: that's going on in the public markets. In the private markets,
Speaker 3: more people are doing what's called so p i K
Speaker 3: is often called picking. It's payment in kind and so
Speaker 3: you know, if you're a direct corporate lender and there's
Speaker 3: you know, there might be five people in your group,
Speaker 3: and there might be twenty people in your group. They
Speaker 3: usually try to work together on things. Although I think
Speaker 3: even the fabric of that is starting to fray a bit,
Speaker 3: and they may say, okay, company, you can't pay your debt,
Speaker 3: we're gonna stay marked at park. So we're gonna keep
Speaker 3: the debt at par, but we're not going to make
Speaker 3: you pay interest for the next year or two while
Speaker 3: you right size your business, and we're going to tack
Speaker 3: that onto the principle. So if it's ten percent coupon
Speaker 3: a year, you're not going to it's one hundred. You know,
Speaker 3: it's one hundred and twenty of principle, and during that
Speaker 3: coupon holiday, you're going to fix your business. So the
Speaker 3: business is magically worth one hundred and twenty at ten
Speaker 3: uh huh.
Speaker 2: So in other words, that they waive their payment stream
Speaker 2: for that period, but they're not just taking that payment
Speaker 2: stream and attacking it on at the end. They're taking
Speaker 2: that payment stream plus. And it sounds like there's a
Speaker 2: little market.
Speaker 3: There's usually there's usually an additional amount of interest that
Speaker 3: you might get for picking versus paying cash pay, but
Speaker 3: fundamentally that lender is marking it at par usually or
Speaker 3: some high nineties price because they're saying, hey, we're not
Speaker 3: getting this cash currently, but we're going to get it
Speaker 3: in the future, and so it's just part of the loan.
Speaker 3: And that's a different way of sort of achieving in
Speaker 3: private markets. What is happening in public markets with liability
Speaker 3: management exercises, but it's been being done in a way
Speaker 3: where there's no mark to market. That only works if
Speaker 3: the loan is worth par at the end at the
Speaker 3: new amount. Right, So if the loan is worth one
Speaker 3: hundred and twenty cents at the end of this, that's
Speaker 3: when that works. If the company isn't worth more, and
Speaker 3: often the companies might be worth less to the end
Speaker 3: of this process, you wind up with a loan that's
Speaker 3: got less value. If the company was worth ninety cents
Speaker 3: to begin with, instead of being ninety out of one hundred,
Speaker 3: you're ninety out of one hundred and twenty. So all
Speaker 3: of a sudden, what's left is worth seventy five cents.
Speaker 3: And so it's a way to postpone problems for a
Speaker 3: few years. It doesn't always solve problems. Liability management exercises
Speaker 3: are a way to postpone problems for a few years.
Speaker 3: They also often don't solve problems.
Speaker 2: You guys manage a lot of different types of assets
Speaker 2: both geographically, risk wise, strategy wise, public private equity debt.
Speaker 2: How do you manage your risk across all these diverse strategies.
Speaker 3: We have a framework where we look at individual strategies,
Speaker 3: and so there might be a different framework and how
Speaker 3: we manage risk and our convertible arbitrage strategy for example,
Speaker 3: then how we manage risk and an opportunistic credit strategy,
Speaker 3: And then we try to look across at risk across strategies,
Speaker 3: and risk across strategies is harder to measure than risk
Speaker 3: in individual strategies. I mean, some of it's obvious, right
Speaker 3: If you have the same q SIPs or positions in
Speaker 3: a public markets fund that happened to be in different areas,
Speaker 3: that's an obvious area that you're going to find risk.
Speaker 3: You know, industry concentration will be the second most obvious
Speaker 3: area that you're going to find risk. You know, things
Speaker 3: like how are each of our books going to perform
Speaker 3: during a COVID type crisis or a GFC crisis. You
Speaker 3: stress test, but ultimately you don't know, right because you
Speaker 3: know there are different markets that do better than you
Speaker 3: think in different markets and worse than you think in
Speaker 3: different markets, And so you know, it goes down to
Speaker 3: my basics. You know, the thing we have a risk
Speaker 3: arbitrage business is it allows you to think about risk
Speaker 3: reasonably simply. You know, the risk arbitise mantras. What can
Speaker 3: you make if if your deal closes, and that's a
Speaker 3: pretty defined amount of money. What do you lose if
Speaker 3: your deal doesn't close? And we're pretty good at calculating that,
Speaker 3: what's the probability of success? And then what's the probability
Speaker 3: that the market is implying with its price to success?
Speaker 3: And if you can get those four things right, it's
Speaker 3: basically like poker, you can underwrite everything right. And ultimately,
Speaker 3: if you know your odds every time, you can win
Speaker 3: consistently over time. You know, you try to take that
Speaker 3: mantra and you apply it everywhere else. Unfortunately, most other
Speaker 3: parts of our portfolio, there's several different scenarios things can
Speaker 3: go down, So I go back and credit in particular.
Speaker 3: You know, one of the questions we like to ask
Speaker 3: is what are all the bad things that can happen
Speaker 3: to us where we still get our money back? Right?
Speaker 3: And that's sort of how I sort of this trading risk.
Speaker 3: And there's ultimate downside risk and I like investments where
Speaker 3: you could really really stress it and you're still going
Speaker 3: to get most of all your money.
Speaker 2: All right, So let me throw you one curve ball
Speaker 2: before we jump into our favorite questions. And that's your
Speaker 2: chairman of the New York Public Library Investment Committee, your
Speaker 2: vice chair of the investment committee at New York Presbyterian,
Speaker 2: and you also sit on the committee for Princeton's endowment.
Speaker 2: These are three very distinct sort of endowments. That has
Speaker 2: to be a fascinating set of experiences. Tell us a
Speaker 2: little bit about all three of those entities that you
Speaker 2: are either sitting on today or have worked on in
Speaker 2: the past.
Speaker 3: Yeah, So, first of all, I'm very fortunate to be
Speaker 3: involved with all three great institutions. I serve on all
Speaker 3: of their boards of trustees. There are all institutions that
Speaker 3: are very near and dear to my heart for different reasons.
Speaker 3: The super majority of my wife and my philanthropy is
Speaker 3: in the education space. My wife served for a long
Speaker 3: time on the board of trustees of Herama Mater Birdmar College.
Speaker 3: I'm very fortunate that I can serve these institutions in
Speaker 3: a way that they find helpful. They've allly asked me
Speaker 3: to serve on their investment committees, which is why I've
Speaker 3: done so. New York Presbyterian is newer. I got involved
Speaker 3: in that in twenty twenty one, and that was a
Speaker 3: situation where I felt like the city needed me in
Speaker 3: the healthcare organization in the city needed me. I had
Speaker 3: a very close relationship with that institution, so it wasn't random,
Speaker 3: but it was one where kind of came to it
Speaker 3: later on. And in terms of the endowments, they're all
Speaker 3: very different. I mean, New York Presbyterian is in the
Speaker 3: low double digit billions, New York Public Library is between
Speaker 3: one and a half and two billion, and Princeton is
Speaker 3: in the thirties. In terms of what they are, they
Speaker 3: require different things. In terms of being a trustee. You know,
Speaker 3: at a smaller institution, you typically have a board driven model,
Speaker 3: with the board at least formally is approving investments. We're fortunately,
Speaker 3: I've got really really strong teams in all three places,
Speaker 3: so we've got great, great investment professionals that work at
Speaker 3: each of those institutions. But you know, smaller endowments tend
Speaker 3: to be board driven models and larger endowments tend to
Speaker 3: be staff driven models, where your role as being a
Speaker 3: trustee or on an investment committee is more guard rails
Speaker 3: than anything else. Each of those committee is kind of
Speaker 3: as a different approach and how they want to run
Speaker 3: their portfolios and manage their portfolios. And you know, I
Speaker 3: like to think I contribute to the meetings. I also
Speaker 3: learn a lot while while I'm there. Right, I'm certainly
Speaker 3: a subject matter expert in each of the areas that
Speaker 3: we invest in. I think I'm reasonably knowledgeable about all
Speaker 3: the areas that all the endowments invest in, but I'm
Speaker 3: not a subject matter expert in venture capital or things
Speaker 3: along those lines. And so it's been a fantastic experience
Speaker 3: and a good way to give back. But you know,
Speaker 3: when you're at a smaller endowment, and I don't view
Speaker 3: too belion is small in the real world. But like
Speaker 3: when you're at a smaller endowment, you have to think
Speaker 3: about things differently. You're gonna have less staffing, you can
Speaker 3: cover less number of managers. Your institution's needs with respect
Speaker 3: to your cash flow might be different. At a larger institution.
Speaker 3: You have to put each of them in framework in
Speaker 3: terms of what you're trying to achieve, and you have
Speaker 3: to make sure this's buy into that model up and
Speaker 3: down the organization. So the investment commit needs to buy
Speaker 3: into what the staff is doing, which needs to buy in.
Speaker 3: There needs to be buy in from what the management
Speaker 3: of the organization is doing. There needs to be buying
Speaker 3: from the full board. When you get all four of
Speaker 3: those things right, you can do really powerful things.
Speaker 2: So we really don't hear much about the Princeton endowment,
Speaker 2: which is probably a good thing because when you look,
Speaker 2: especially in the IVS, at some of the endowments that
Speaker 2: have been in the public eye, it's rarely because us
Speaker 2: they're shooting the lights out. Harvard went through a whole
Speaker 2: transition when they got rid of the people running a
Speaker 2: Harvard management company, and then they persistently wildly underperformed for
Speaker 2: a decade plus. And then obviously the Yale model under
Speaker 2: David Swinson was unique, and once Swinson began thinking about
Speaker 2: retiring that no longer was putting up the sort of
Speaker 2: numbers they had in prior decades. What is Princeton doing
Speaker 2: other than just keeping their head down and quietly doing
Speaker 2: what they're doing.
Speaker 3: Yeah, I mean, without maybe speaking specifically about what's going
Speaker 3: on underneath the hood at Princeton I'll just repeat a
Speaker 3: couple of things that have been out there in the
Speaker 3: public market. So first of all, you know, we had
Speaker 3: our longtime CIO Andy Golden, retire during the middle of
Speaker 3: twenty twenty four. Andy was a decipher of David Swinston.
Speaker 3: It worked him for a few years earlier in his career,
Speaker 3: had a spectacular almost thirty year run running Princo, and
Speaker 3: he's been replaced by a brand new CIO, Vince Tuwey,
Speaker 3: who came from MIT and had a very long career there.
Speaker 3: Mit has been among the best performing endowments as well,
Speaker 3: and the head of its endowment, Seth Alexander, is also
Speaker 3: a disciple of David Swinson. The second thing, which was
Speaker 3: came out in our recent President's Letter, which he publishes annually,
Speaker 3: is that you do have to look that endowment returns
Speaker 3: have come down over long periods of time, and that's
Speaker 3: something to do with Princeton or Yale or any of
Speaker 3: these August institutions. It has to do with you know
Speaker 3: what I mentioned earlier, capital chases returns and market's become
Speaker 3: efficient over time, and things that David or Andy were
Speaker 3: doing that were completely visionary in nineteen eighties nineteen nineties
Speaker 3: today are commonplace.
Speaker 2: Right, white space was wide open then and now it's
Speaker 2: well trust.
Speaker 3: Someone asked me, So I asked Tom Kepner. I said, Tom,
Speaker 3: is it true that David Swinson invented the term absolute return?
Speaker 3: And he said to me, it's completely true. And it
Speaker 3: was in the middle of the nineteen eighties, and David
Speaker 3: decided that was a much more gust word to use
Speaker 3: to describe strategies that people used to call as hedge
Speaker 3: fund strategies in that period of time. And so that
Speaker 3: literally just came from David Swinson's head, that term that
Speaker 3: we all used deerically today. I can't substantiate it, but
Speaker 3: I take Tom's word for it in terms of being
Speaker 3: a thing. And so you look at what these institutions
Speaker 3: created and now the incredible industry that's come from it,
Speaker 3: it's pretty staggering.
Speaker 2: Huh, really really amazing. All Right, I only have you
Speaker 2: for a limited amount of time. Let's jump to our
Speaker 2: favorite questions, starting with what are you doing to stay
Speaker 2: entertained when you're not at work? What are you watching
Speaker 2: or listening?
Speaker 3: So you know, I don't watch a lot of streamed
Speaker 3: content because I find when I'm at home. I want
Speaker 3: to vege, and so the good ways to do that
Speaker 3: are either watching sports or watching the news. Honestly, news
Speaker 3: is less good for vegging than sports. Probably. Two things
Speaker 3: I am looking forward to, though, are season three of
Speaker 3: White Lotus, which is just in the process of being out,
Speaker 3: and season three of Gilded Age, which I believe is
Speaker 3: going to come out this fall. Gilded Age, so Gilded
Speaker 3: Age is an HBO show, and it's basically about life
Speaker 3: in the eighteen eighties or eighteen nineties, so hence the
Speaker 3: Gilded Age of the United States. And there are characters
Speaker 3: that are based on Cornelius Vanderbilt or Jay Gould or
Speaker 3: some of the leading lights of the era. It's always
Speaker 3: an era. I found it very historically fascinating, and I
Speaker 3: think they've done a great job with the show. It's
Speaker 3: a great period piece. I mean, if you look around,
Speaker 3: there's more buildings left here or Newport or Albany from
Speaker 3: that era than you would think, so that the don
Speaker 3: a very good job of integrating a cgi with some
Speaker 3: of the older historic buildings. You know.
Speaker 2: I love the first season of Lotus. The second season
Speaker 2: was a little frustrating, especially with the way they wrapped
Speaker 2: it up I'm curious to see the direction they go
Speaker 2: in season three. I'm going to check out guilded Age.
Speaker 2: I'm assuming you've seen The Crown.
Speaker 3: My wife watched this, so I've seen portions of it.
Speaker 2: So I'll tell you it's just so good every episode.
Speaker 2: If you want that sort of historical run up, no
Speaker 2: stone left unturned their production. Like I am not a
Speaker 2: historical TV fan, and I got sucked into that. It
Speaker 2: really it's just spectacular from start to finish. Let's jump
Speaker 2: to your career and your mentors who helped shape your career.
Speaker 2: I have a feeling I have I know the names
Speaker 2: of a few of them.
Speaker 3: Yeah, you know, I go back further than the obvious,
Speaker 3: you know, Tom and Marvin in terms of starting. I mean,
Speaker 3: first of all, I'm very fortunate to come from a
Speaker 3: family where I had a few mentors as well. We
Speaker 3: had a family business which was started and founded by
Speaker 3: my grandfather and my father ultimately ran. It was book publishing,
Speaker 3: and like I mentioned before, I come from a family
Speaker 3: of book publishers and academics, and so it was good
Speaker 3: to sort of learn over the dinner table when I
Speaker 3: was a kid what was working and what wasn't working.
Speaker 3: My mother was very volunteer work when I was younger,
Speaker 3: and when I was thirteen, she said, you don't need
Speaker 3: me anymore, I'm gonna go back to work and had
Speaker 3: a twenty five year career as a senior administrator at
Speaker 3: our local community college. So that was very influential on
Speaker 3: me as well. Growing up. You know, I ran track
Speaker 3: both in high school and in college. I ran like
Speaker 3: half mile and cross country.
Speaker 2: Who was the half mile is the top? I ran
Speaker 2: the half mile in high school and the two mile
Speaker 2: relay and then we would do the three mile coast
Speaker 2: Why not? But the half mile is brutal.
Speaker 3: Because it's it's a sprint, right, So you're sprinting for
Speaker 3: two laps, right. But I had some great track coaches
Speaker 3: along the way that really helped me out as well.
Speaker 3: You know, I mentioned earlier that we had this amazing
Speaker 3: civics program at East Brunswick High School with his legendary
Speaker 3: teacher named John Kalamano, who was super helpful for me
Speaker 3: in that as well. And then in the working world.
Speaker 3: You know, I was very fortunate, like I learned a
Speaker 3: lot from both Tom and Marvin. They had very different
Speaker 3: styles and how they did things. But I also found
Speaker 3: people out there who's investing style I admired. I would
Speaker 3: try to figure out what they were doing and reverse
Speaker 3: engineer it, and so that's super helpful. I mean, some
Speaker 3: of that you can do just by reading. But there's
Speaker 3: other portions of it, like when you see the trades
Speaker 3: and you see the investments and like you're involved in them,
Speaker 3: and you see how someone did it better, and then
Speaker 3: you can figure out after the fact, like what you
Speaker 3: could do next time better. Like I just found that
Speaker 3: like super helpful. I'm a little bit further removed from
Speaker 3: that today. This is probably a little bit harder for
Speaker 3: me to do that, but that's some of the ways
Speaker 3: I really taught myself to invest over time.
Speaker 2: Really interesting. Let's talk about books. What are some of
Speaker 2: your favorites. What are you reading right now?
Speaker 3: Well, I'll start with the ones I'm reading right now,
Speaker 3: and then maybe i'll talk about some of the ones
Speaker 3: historically that I've quite enjoyed. So I'm rereading only The
Speaker 3: Paranoid Survive by Andy Grove. So you know, I mentioned
Speaker 3: earlier that I think our business in general is that
Speaker 3: a strategic inflection point in terms of what's going on
Speaker 3: and alternative asset management One of the main things he
Speaker 3: speaks about in that book is strategic inflection points and
Speaker 3: businesses and how you deal with that. I'm also part
Speaker 3: of the way through a book called Gambling, ma'am, which
Speaker 3: is about Masayoshi sun And by Lionel Barber, and that's
Speaker 3: a book where he's a fascinating character. I think a
Speaker 3: lot of people know about, you know, the last ten
Speaker 3: or fifteen years of Massa's career. I don't think that
Speaker 3: many people know about how he got there, all the
Speaker 3: times he had near misses with the whole thing could
Speaker 3: have blown up, or things along those lines. So that's
Speaker 3: very interesting to me. You know, early in my investing career,
Speaker 3: there are a number of books that are classics that
Speaker 3: I read. It's actually not The Intelligent Investor by Ben Graham.
Speaker 3: It's obviously a great book, but it's books like Extraordinary
Speaker 3: Popular Delusions in the Madness of Crowds by Charles McKay,
Speaker 3: or Reminiscence of a Stock Market Operator by Edlin Lefevre,
Speaker 3: which was a pseudonym for Jesse Livermore, who was a
Speaker 3: famous trader in the nineteen twenties and nineteen thirties, or
Speaker 3: Where Are the Customer Yachts by Fred Sweed, you know,
Speaker 3: very early in my career, Like, that's how I learned,
Speaker 3: even before I started a decay. That's how I learned
Speaker 3: was reading these books. And so even though other books
Speaker 3: maybe I haven't read in a little while, like they're
Speaker 3: all classics, I stole readily recommend.
Speaker 2: You know, it's funny. Bill Bernstein, who wrote The Four
Speaker 2: Pillars of Investing, has a new book out on the
Speaker 2: Delusions of Crowds. That's he's both an investor and a
Speaker 2: retired neurologist slash physician, and so he takes a very
Speaker 2: i want to say, almost medical evolutionary approach to looking
Speaker 2: at why people go mad in crowds. If you haven't
Speaker 2: seen that, it's kind of fascinating.
Speaker 3: I'll definitely check it out.
Speaker 2: I suspect you'd really appreciate that. Our final two questions,
Speaker 2: what sort of advice would you give to a recent
Speaker 2: college grad interested in a career in either opportunistic credit
Speaker 2: or investing generally.
Speaker 3: Well, I think both pieces of advice would apply to ball.
Speaker 3: So I'll share two. The first of which is I'm
Speaker 3: gonna share advice I got from a law professor I
Speaker 3: had of mine named John Quigley, who had been at
Speaker 3: Nasau Capital, which was Princeton's in house private equity organization
Speaker 3: in the nineteen ninety. So here's my professor in law school.
Speaker 3: When I was considering going to work at Davidson Kapner.
Speaker 3: What he said to me was the best way to
Speaker 3: learn how to invest is to actually invest. And so
Speaker 3: if you get a chance to go into an investment firm,
Speaker 3: take it. Don't worry about not having the training for it.
Speaker 3: Don't worry about having to do other things first. You know,
Speaker 3: I was torn early in my career or I got
Speaker 3: work on the cell side first and learn some stuff
Speaker 3: before I go into investing. And it was great advice.
Speaker 3: I mean, you know, we do hire a handful of
Speaker 3: people at a college every year at DK, and I
Speaker 3: think it's super great if you can start doing it
Speaker 3: as soon as you want to. If you know what
Speaker 3: you want to do, you should go do it right.
Speaker 3: And so that's piece of advice number one. Piece of
Speaker 3: advice number two I got from my post college roommate's mother,
Speaker 3: and my post college roomate ultimately followed the same advice,
Speaker 3: but it took them fifteen years. And the advice I
Speaker 3: got was, and I'm going to use the Goldman Sachs
Speaker 3: for this because what she said at the time, but
Speaker 3: you could apply a number of other firms to it.
Speaker 3: Today she said, don't go work at Goldman Sachs. Goldman
Speaker 3: Sachs is going to be a rat race to the
Speaker 3: top all the top smart people want to go work
Speaker 3: at Goldman Sacks. Figure out what's going to be the
Speaker 3: next Goldman Sacks and getting on the ground floor there instead.
Speaker 3: And I sort of got lucky and sort of felt
Speaker 3: like I did that with David Sinon Keouner.
Speaker 2: That's really really good advice. And our final question, what
Speaker 2: do you know about the world of fill in the
Speaker 2: blank distressed investing, alternatives private credit today? That might have
Speaker 2: been helpful twenty seven years or so ago when you
Speaker 2: first got started.
Speaker 3: Well, you know, looks. It's when you start a career
Speaker 3: at investing. I think by definition you start pretty broad
Speaker 3: and then you get no hour and hour like. You
Speaker 3: start with the premise that you want to invest, and
Speaker 3: then you ultimately find a firm and the firm usually
Speaker 3: has you in a strategy, and if you do a
Speaker 3: good job, you learn that strategy cold over a longer
Speaker 3: period of time, and what I'd say today. And this
Speaker 3: is you know, also colored by my experience on investment committees,
Speaker 3: but it's also just being a Davidson keptner. Is that
Speaker 3: you know, investing is a very broad universe. Things are interlinked.
Speaker 3: So for example, if you don't know what's going on
Speaker 3: with technology investing, you may not understand what's going on
Speaker 3: with oppetistic credit. Even though there are different things and
Speaker 3: you know you need different expertise to do well in
Speaker 3: each of them. And so it was something I didn't
Speaker 3: really think about early in my career. I started broad
Speaker 3: and then I got really narrow, and I've probably gotten
Speaker 3: broader as both I've gotten more senior and I've gotten
Speaker 3: more different types of experience in the investing world in general.
Speaker 3: But to some degree, you should always stay broad even
Speaker 3: if you're going narrow. So you know you're gonna have
Speaker 3: to go narrow to be successful in your career. There's
Speaker 3: very a few people who can do everything as an
Speaker 3: investor and be successful. But as you go narrow, like,
Speaker 3: don't lose sight of other asset classes and what's going
Speaker 3: on in the world, because you can get blinded to
Speaker 3: bigger trends if you did that.
Speaker 2: Really really really interesting. Tony, Thank you for being so
Speaker 2: generous with your time. We have been speaking with Tony Joseloff.
Speaker 2: He's Chief investment Officer and managing partner at Davidson Kempner,
Speaker 2: overseeing over thirty five billion dollars in assets. If you
Speaker 2: enjoy this conversation, check out any of the five hundred
Speaker 2: plus we've done over the past eleven years. You can
Speaker 2: find those at iTunes, Spotify, YouTube, wherever you get your
Speaker 2: favorite podcasts. And be sure and check out my new
Speaker 2: book coming March eighteenth, How Not to Invest the bad ideas, numbers,
Speaker 2: and behaviors that destroy wealth. I would be remiss if
Speaker 2: I did not thank the Cracked team that helps put
Speaker 2: these conversations together each week. John Wasserman is my audio engineer.
Speaker 2: Anna Luke is my producer. Sean Russo is my researcher.
Speaker 2: Sage Bauman is the head of podcasts at Bloomberg. I'm
Speaker 2: Barry Retolts. You've been listening to Master's in Business on
Speaker 2: Bloomberg Radio.