Speaker 1: This is Mesters in Business with very Results on Bloomberg Radio.
Speaker 1: This week on the podcast, I have an extra special guest.
Speaker 1: His name is Robert Koenigsberger, and he has a fascinating
Speaker 1: career in emerging market, opportunistic and distressed debt investing. Uh.
Speaker 1: He started at a small boutique before going to Marry
Speaker 1: Lynch and Lehman Brothers and ultimately launching his own shop
Speaker 1: called Grammarcy Funds Management. UH. If you're interested in what
Speaker 1: it's like investing in emerging market debt, how that part
Speaker 1: of the investment from it has changed over the decades
Speaker 1: as the world itself has changed. Uh. He began in
Speaker 1: South America and Latin America UM, before investing in places
Speaker 1: like Russia and China and Turkey. UM. Fortunately for them,
Speaker 1: they were out of Russia long before the most recent
Speaker 1: invasion of Ukraine happened. Uh. It's just a fascinating conversation
Speaker 1: about looking at the world from both bottoms up and
Speaker 1: top down, as well as thinking about what valuations are like,
Speaker 1: how likely our macro events to impact you getting not
Speaker 1: just a return on capital, but, as his famously said,
Speaker 1: in fixed income, a return of your capital. It really
Speaker 1: is a very, very different approach than what we think
Speaker 1: of as as typical equity investing, and and it not
Speaker 1: only has the advantages of uh there being inefficiency, so
Speaker 1: there's a potential to generate alpha, but if you do
Speaker 1: it right, it's pretty non correlated with probably the rest
Speaker 1: of your portfolio. I found it fascinating and I think
Speaker 1: you will also, So, with no further ado, my interview
Speaker 1: with Grammarcy Funds Managements Robert Kohonensberger, let's talk a little
Speaker 1: bit about your background. You you get an MBA in
Speaker 1: Warton and then a master's in International Studies in Latin America.
Speaker 1: Your graduate thesis was on the origins and implications of
Speaker 1: the Latin American debt crises. It seems like you were
Speaker 1: built to trade distressed em debt built and lucky quite frankly,
Speaker 1: you know. Um, I actually go back to undergrad where
Speaker 1: I did political science and history of of Latin America,
Speaker 1: and I was asked to do a similar thesis on
Speaker 1: you know, to do a thesis, and my parents told
Speaker 1: me I had to find a job at the same time,
Speaker 1: and so I try to put the thesis and the
Speaker 1: job searched together. And the only issue in Latin America,
Speaker 1: which was my major back in eighty seven was the
Speaker 1: Latin American debt crisis. So I did my study on that,
Speaker 1: and I got fortunate enough to meet a gentleman who
Speaker 1: had been the finance minister of Peru. He had been
Speaker 1: the head of Wells Fargo International. He lent it, he
Speaker 1: borrowed it, he defaulted on it, and had this he
Speaker 1: had this great boutique out in California. So um, I
Speaker 1: feel really fortunate to uh to have spent thirty five
Speaker 1: years doing the same thing in emerging markets. And you know,
Speaker 1: the gentleman I worked with was just a great professional.
Speaker 1: So late eighties, early nineties or a VP for an
Speaker 1: advisory firm that leads some sovereign debt restructurings and transactions
Speaker 1: in both South America and Central America. Tell us what
Speaker 1: that experience was like during that period. Emerging markets in
Speaker 1: the late eighties was very different than the emerging markets
Speaker 1: of two. I think it's fair to say it was
Speaker 1: a bit of the wild West. Um, you know, go back,
Speaker 1: you know the entire you know, it was the last decade, right,
Speaker 1: theties was the last decade. And in Latin America, Mexico
Speaker 1: defaults in eighty two. Virtually the entire regions in default
Speaker 1: by by the end of the decade. So what it
Speaker 1: was like was, you know, putting Humpty Dumpty back together
Speaker 1: again and dealing with countries that had defaulted debt and
Speaker 1: taking them through what's now known as the Brady debt
Speaker 1: restructuring and having these bonds that nobody really understood come
Speaker 1: out of it. And that, quite Frankie, was was the
Speaker 1: beginning of the asset class. And I remember, like, you know,
Speaker 1: even like we were doing, you have countries that that
Speaker 1: were shared borders, that couldn't talk to each other, that
Speaker 1: one of the other, and you can get in the
Speaker 1: middle and do some sort of of debt swap or
Speaker 1: a buy back or what have you. And so one
Speaker 1: of my fond memories was like Guatemala, I think it
Speaker 1: was in the nine and I didn't know what FX was,
Speaker 1: I didn't know what letters of credit were, and I
Speaker 1: had to go get a letter of credit. I had
Speaker 1: to go to Guatemala, I had to present it and
Speaker 1: then we did a buy back. But we got paid
Speaker 1: in cansalis, which was the local currency. And so my
Speaker 1: job for basically two weeks was to get up, go
Speaker 1: sell as much f X or by as many dollars
Speaker 1: as I could, and then go back to the hotel
Speaker 1: and ship by the pool. That's not a bad gig.
Speaker 1: It was great. So so you go from that onto
Speaker 1: Mother Meryl for three years where you traded distress d M.
Speaker 1: Then you're a VP of Lehman Brothers. And this was
Speaker 1: late nineties, not the Lehman Brothers we kind of a
Speaker 1: familiar with from the financial crisis. What was it like
Speaker 1: at those big shops Mery Lynch and Lehman Brothers doing
Speaker 1: distressed E M debt? Sure? I mean that, first of all,
Speaker 1: they were They were great experiences because you know, I
Speaker 1: started in a very small, boutique, boutique environment. And again
Speaker 1: I'm on political science and history major prior to to
Speaker 1: graduate school. So to actually get experience in finance, to
Speaker 1: lead the bank's efforts in investing in sovereign debt restructions,
Speaker 1: and to bring our clients along was was a great experience. Um.
Speaker 1: You know, I got to learn a lot about about
Speaker 1: how markets function or not UM and I got to
Speaker 1: get his feel for Wall Street politics, which I found
Speaker 1: out really weren't for me, and and all the conflicts
Speaker 1: of interest that one finds in Wall Street. You mentioned
Speaker 1: earlier that the late eighties early nineties were very different
Speaker 1: than the state of EM debt today. Um, how has
Speaker 1: the industry changed? How is E M distressed debt today
Speaker 1: different than it was thirty years ago? So distressed as
Speaker 1: different and EM is is different. You know, i'd start
Speaker 1: with break it down. You know when when I got
Speaker 1: to Maryland, Um, and you looked at the trade blotder
Speaker 1: of who you were trading with. It was basically banks
Speaker 1: trading with each other and every so often a client
Speaker 1: would come by. So it's a tremendous amount of proprietary trading.
Speaker 1: You know, hedge funds in the back book, a little bit,
Speaker 1: a little bit of a front look. So I would
Speaker 1: characterize it as a bit of a bazaar, unless of
Speaker 1: a market, because you know, I was at Meryl and
Speaker 1: I would call JP Morgan and I would sell something
Speaker 1: to them, and they would call Chase and they would
Speaker 1: call Naman. It was just a roundabout and then the
Speaker 1: market would drop five points or what have you. So
Speaker 1: musical chairs the last one holding got got stuck with it. Yeah,
Speaker 1: and um, so you know I tend to have create
Speaker 1: a lot of volatility. You know, if if everyone wanted
Speaker 1: to buy herself the same thing at the same thing,
Speaker 1: same time. Today the markets massively larger. You know, it
Speaker 1: was predominantly a sovereign market back then. You know, um,
Speaker 1: now it's sovereign, quasi sovereign, U S dollar local corporates,
Speaker 1: high yield, etcetera. What's quasi sovereign? Sorry, like state versus
Speaker 1: national or something and so so usually and I usually
Speaker 1: talk about quasi sovereign and sovereign adjacent. So sovereign is
Speaker 1: just the dead obligation of the country. Quasi sovereign is
Speaker 1: typically an entity owned by the state that issues GSC
Speaker 1: or like take pan X in Mexico as opposed to
Speaker 1: Mexico right, Um, and then sovereign adjacent are interesting as
Speaker 1: well because they're not explicitly owned by the state, but
Speaker 1: they're so important that there's some sort of nexus between
Speaker 1: the sovereign and that and that corporate. But you know,
Speaker 1: today the markets, you know, think about now there is
Speaker 1: a buy side e t F S four jacts. The
Speaker 1: by side is so much larger than the street. It
Speaker 1: used to be just the street street had a lot
Speaker 1: of balance sheet um. Today, if you take emerging market
Speaker 1: corporates as an example, there's go back five years, ten years.
Speaker 1: Emerging market corporates are five times larger today than they
Speaker 1: were back then. Go back to right after two thousand
Speaker 1: and eight, every bank made markets, every bank had had
Speaker 1: balance sheet. Today you have less banks, less balance sheet,
Speaker 1: less market making, and a really big buy side. So
Speaker 1: you have inelastic you know, in elastic supply when people
Speaker 1: want to buy, Like if you have a dollar there
Speaker 1: there'll be someone in emerging markets that wants to issue
Speaker 1: a bond and take that dollar from you. But when
Speaker 1: there's outflows, you don't have an elastic demand, and that's
Speaker 1: where you tend to get this this volatility and dislocations
Speaker 1: that we've seen. So let me stick with sovereign adjacent
Speaker 1: In the US, as we learned during the financial crisis,
Speaker 1: the government sponsored enterprises like Fannie Mae and Freddy Mack
Speaker 1: and by extension um Sally. May you go down the
Speaker 1: whole list of these things, the U. S. Government's full
Speaker 1: faith and credit. Even though it wasn't obligated to these
Speaker 1: quasi publicly traded, quasi private entities, the U. S. Government
Speaker 1: still ended up standing behind them for systemic reasons. So
Speaker 1: that's here in the United States. Do you have similar
Speaker 1: situations in Latin America and elsewhere or is it just
Speaker 1: country by country it's all completely different. First of all,
Speaker 1: let's unpack that. I mean, emerging markets is not this
Speaker 1: home much any asasset class. So almost anything and I
Speaker 1: could talk about it would be different. You know, there'd
Speaker 1: be dispersion of of of factors. But when you think
Speaker 1: about you know, bailouts of corporates, UH, sovereign at Jason
Speaker 1: or what have you, we've certainly seen it in emerging markets,
Speaker 1: and I would say the most you know, the greatest
Speaker 1: example right now is in China property. If you've seen
Speaker 1: what's going on there. So it started as a crisis
Speaker 1: for ever Ground, right and I think the Chinese government
Speaker 1: wanted to kind of isolate Evergrand and then insulate the
Speaker 1: rest of the sector. And now what we've seen is
Speaker 1: that it contaminated, you know, the Everground just poured over
Speaker 1: to even the best names like a country garden or
Speaker 1: what have you. And so right after the Party Congress,
Speaker 1: we've just seen massive amounts of aid. I would argue
Speaker 1: that that what we're witnessing today is the TARP program
Speaker 1: in China for for for the property sector, and you
Speaker 1: can see, you know, assets have gone. We were buying
Speaker 1: performing bonds at eight cents on the dollar. Wow, that
Speaker 1: you had to pay for a crude right, which is
Speaker 1: which is a weird concept to pay for a crew.
Speaker 1: So so it's it's a crude interest. So maybe it's
Speaker 1: got four points of interest on an eight cent bond
Speaker 1: that typically when something trades to eight, people don't think
Speaker 1: it's going to keep paying. Um. And then once the
Speaker 1: program came out this Chinese tarp, if you will, Um,
Speaker 1: all of a sudden, eight cent bonds were trading at
Speaker 1: thirty two this morning. They're like sixty Wow, just on
Speaker 1: this this this bailout notion. How do we get me
Speaker 1: some of those? That sounds very attractive and we'll talk later.
Speaker 1: So I was going to ask you what trades or
Speaker 1: deals stand out is especially memorable that seems to be
Speaker 1: fairly recent memorable Anything from the uh wild West days
Speaker 1: that sticks out is I mean, I love the idea
Speaker 1: of just going out buying dollars and then sending pool
Speaker 1: side for the rest of the day. It was, um,
Speaker 1: you know, Margarita's or whatever they the local drink was.
Speaker 1: What else really stands out? You know, if I go
Speaker 1: back to the to the late eighties or early nineties,
Speaker 1: and you know, you're asking about distress then versus distressed today.
Speaker 1: And you know, I think one of the most interesting
Speaker 1: things in distresses when people are throwing away the keys,
Speaker 1: you want to be there to catch them. And I
Speaker 1: remember one one time, and I think it was eighty
Speaker 1: nine or ninety, We're right at the end of the
Speaker 1: you know, the Lost decade and emerging markets, and all
Speaker 1: the banks are basically not all the banks, but a
Speaker 1: few of the banks are is like just getting out
Speaker 1: of Latin America and one of them just get me out.
Speaker 1: Just that's it, full capitulation, that's right. So one example
Speaker 1: that was a lot of fun, I think was eighty
Speaker 1: nine or ninety Bank of America decided they wanted to
Speaker 1: sell their branch in Lima, Peru, and they the price
Speaker 1: tag was a million dollars. I'm like five years old.
Speaker 1: My boss, as gentleman mentioned, had been the finance Minister
Speaker 1: pru He's like, I need you to go down to
Speaker 1: Prue and and take a look at the bank due
Speaker 1: to diligence, right, twenty five years old. So I don't
Speaker 1: know if you've ever been to Lima. But in in
Speaker 1: in the center of Lima and santing Cerro, there was
Speaker 1: a retort, no, like a roundabout, and one big tower.
Speaker 1: On the top of the tower it says Bank of America.
Speaker 1: We didn't have cell phones or whatever you so I
Speaker 1: got to run back to the hotel and I said,
Speaker 1: you know, Carlos, is the building included? So yes, I said,
Speaker 1: it's got to be worth a million bucks, right, So
Speaker 1: we paid a million dollars for that made three million
Speaker 1: dollars trading facts before we sold it, and it was
Speaker 1: sold for fifty million dollars three years later, and that
Speaker 1: became the beginning of one of the largest groups in
Speaker 1: in Prue today. And so fast forward after after graduate school,
Speaker 1: I'm having lunch with a friend from school and Eric
Speaker 1: says he's working for Bank of America. And I said, Eric,
Speaker 1: what do you guys? What are you guys doing? Is Oh,
Speaker 1: we're thinking of opening a branch in Lima, Peru. Oh
Speaker 1: do I have a building for you? And you know
Speaker 1: another one real quickly. You know, Russia has been so
Speaker 1: much in the news these days, and I remember the
Speaker 1: wild wild West, and Russia was the Yelts era, the nineties,
Speaker 1: the era of default. And I remember going there with
Speaker 1: a group of investors in it was nine June. Their
Speaker 1: defaulted debt was trading at six cents. And we go
Speaker 1: into this conference room at Vanessa conam Bank, which was
Speaker 1: the Thebligor, the Export Import Bank of Russia, and this
Speaker 1: trader walks in and he's completely disheveled and he goes,
Speaker 1: I want to know who's buying back my debt. You
Speaker 1: guys are getting in my way. I'm trying to buy
Speaker 1: back my debt. Greatest buy signal that any of us
Speaker 1: that I've seen the problems. We don't have cell phones, right,
Speaker 1: so it's like race back to the hotel to see
Speaker 1: who can call their training death fast enough to buy
Speaker 1: Russian And if you look on your Bloomberg screen today,
Speaker 1: on that day, the asset went from six cents to
Speaker 1: twelve cents, just on this meeting. That's amazing. I love
Speaker 1: this quote of yours, which now I understand much better.
Speaker 1: I've been doing emerging markets since before they emerged. Yeah,
Speaker 1: I mean, um, you know, that's that's oftentimes when I
Speaker 1: talk with clients about because as you know, if you
Speaker 1: go back to the nineteen eighties, um, it was. I
Speaker 1: wouldn't call it an asset class. It was a bunch
Speaker 1: of bank loans in default. Um it was submerging at
Speaker 1: the time, right, And it was, I guess, you know,
Speaker 1: unpolitely called the Third World debt crisis lesser Developed country
Speaker 1: debt crisis. But no one was thinking about putting an
Speaker 1: index around a bunch of defaulted bonds. So I was
Speaker 1: fortunate enough to be there as we transformed defaulted loans
Speaker 1: to performing bonds. And then when JP Morgan made the
Speaker 1: index in part, I think that was really the beginning
Speaker 1: of emerging markets debt as an asset class. Quite fascinating.
Speaker 1: So so let's talk a little bit about Grammarcy. What
Speaker 1: led you from big shops to launching your own firm? Um? Well,
Speaker 1: and were you always international debt focused? Yeah? A few things.
Speaker 1: I mean, Um, I started in a boutique environment, and
Speaker 1: I never really thought that I was gonna stand Wall
Speaker 1: Street for a long period of time. I always wanted
Speaker 1: to do something entrepreneurial. Obviously I wanted to stay invested
Speaker 1: and have a career in emerging market debt UM. But
Speaker 1: so you know, the factors behind starting Grammarcy were a few. Um, one,
Speaker 1: you know, I mentioned conflict of interests on Wall Street,
Speaker 1: and when you are going through a sovereign debt restructuring,
Speaker 1: that's just a negotiation. I'm sitting there representing the bank,
Speaker 1: and I'm sitting across from the senior debt negotiator from
Speaker 1: the Russian Federation or wherever it may be. And I
Speaker 1: remember at the banks, you know, on my sides would
Speaker 1: be someone from investment banking, someone from corporate relations. And
Speaker 1: so I'm just pushing to get the bank and our
Speaker 1: clients paid, and these guys are thinking about the next
Speaker 1: the next trade in Russia or whatever it may be.
Speaker 1: So one is you know, I really, I really wanted
Speaker 1: to have a conflict free, mission driven firm, and our
Speaker 1: mission is really simple. All we do is focus on
Speaker 1: investment management. We want to focus on the well being
Speaker 1: of our clients, our portfolio investments in their communities, and
Speaker 1: our team members. That's it. And that's hard to do
Speaker 1: at a big, big shop on on Wall Street. Um.
Speaker 1: You know, obviously, eat what you kill. I wanted a meritocracy,
Speaker 1: and Wall Street is quite frankly anything but a meritocracy
Speaker 1: because of all the politics and what have you. Um.
Speaker 1: I remember the day I made up my mind to
Speaker 1: start Grammarcy was at the end of the ninety seven
Speaker 1: bonus year early. Now go back to Lehman. They almost
Speaker 1: blew up in Mexico. We were basically I went to
Speaker 1: work there right after that. We had had no aspirations
Speaker 1: for p l in n very little aspirations. Is like,
Speaker 1: just don't lose money, right, that was emerging market debt
Speaker 1: for for for Lehman, and so what is it just
Speaker 1: a service for the banks that and and don't take
Speaker 1: a lot of risk and make a lot of money supposedly, right.
Speaker 1: And so I go into ninety seven. My book, the
Speaker 1: restruction book has a five million dollar what do you
Speaker 1: call it? Budget? Then they raised it to ten, then
Speaker 1: they raised it to thirty, and then they raised it
Speaker 1: to forty. So I walked into my bonus discussion in
Speaker 1: January February and it starts with, well, we almost made it, right.
Speaker 1: So they were trying to trying to basically say, since
Speaker 1: you didn't get to the forty, you know you shouldn't
Speaker 1: expect to get paid very well. So I said, well,
Speaker 1: we'll wait a minute, just stop right here, this conversation
Speaker 1: is over. I'll come back tomorrow. You put a different
Speaker 1: number on the piece of paper, and that was the
Speaker 1: moment that I said I wanted to start the firm.
Speaker 1: And you know, we're purely there for our clients, and
Speaker 1: if our clients do well, we do well, and that's
Speaker 1: all that matters. I have heard variations of that precise story.
Speaker 1: I've experienced that precise story over and over again. Sometimes
Speaker 1: the short sightedness of upper management on Wall Street is shocking. Um,
Speaker 1: you just see all of these super profitable firms with
Speaker 1: the most successful traders. I am genuinely shocked when people say, yeah,
Speaker 1: then that's just not it's just not worth it. I'll
Speaker 1: tell you another story. I remember when I when I
Speaker 1: left Mary Lynch so fed started raising rates ninety four.
Speaker 1: We've got the the tequila crisis in Mexico and I
Speaker 1: resigned and my boss has Venezuelan and the big boss
Speaker 1: is Cuban, and the Venice one was like, well, you
Speaker 1: gotta go talk to the to the Cuban. And so
Speaker 1: they start talking in Spanish in front of me, and
Speaker 1: they go, you bi lingual and bilingual. But they didn't
Speaker 1: don't know that I speak a little Turkish to it
Speaker 1: out of my wife. My wife's Turkish as well. But
Speaker 1: so I go upstairs and meet with the big boss
Speaker 1: and they start chatting in Spanish and they go, you know,
Speaker 1: you told me that there were no other jobs out
Speaker 1: there that we didn't have to pay these guys, right,
Speaker 1: So then he turns to me, he goes, Robert, you
Speaker 1: know what can I tell you? And I answered him
Speaker 1: back in Spanish, I said, I just heard everything. Thank
Speaker 1: you very much. By the way, how can you do
Speaker 1: emerging market debt? I mean, I know everybody everywhere more
Speaker 1: or less speaks English, but isn't it an enormous advantage
Speaker 1: to be able to speak in the local language. Absolutely?
Speaker 1: First of all, I mean a lot of places we go, UM,
Speaker 1: English isn't necessarily spoken well um, even at the most
Speaker 1: senior levels of government. So to be able to um speak,
Speaker 1: seek information, um persuade others in their language is is
Speaker 1: very helpful. And I'm not gonna say I do it
Speaker 1: as well in Spanish as I do in English, but
Speaker 1: that's very helpful to you know, Emerging markets is all
Speaker 1: about assessing people, right, So we have to think about
Speaker 1: credit risk like everybody else. But the end of the day,
Speaker 1: emerging markets risk is about credit culture people. How do
Speaker 1: they behave in times of durest in the past, predict
Speaker 1: how they're going to behave in the future. It's helpful
Speaker 1: to be able to assess that prediction in that in
Speaker 1: that language. So on the equity side, some people say
Speaker 1: you don't really need boots on the ground and emerging markets.
Speaker 1: I'm I don't know how true that is, but it
Speaker 1: really sounds like it's not true. On the debtor or
Speaker 1: credit side, especially a distress circumstance. Now, I mean boots
Speaker 1: on the ground is is essential, and I would say
Speaker 1: both internal boots and external boots. Right. So we have
Speaker 1: our own people, we have our own platforms. We have
Speaker 1: offices in Argentina and Turkey and Mexico and what have you.
Speaker 1: And those people are really important for sorcing. Do is
Speaker 1: doing due diligence on deals, doing due diligence on on people,
Speaker 1: you know? Quite frankly, Um, one of our biggest strengths
Speaker 1: is in in our on our website. It's it's all
Speaker 1: the relationships we've had for thirty five years with people
Speaker 1: in different countries that can give you good information on people,
Speaker 1: you know. I remember a story in Thailand a few
Speaker 1: years ago. We were getting ready to buy the debt
Speaker 1: of a country, of a company that had come out
Speaker 1: of debt restructuring. And you know, we are research guys
Speaker 1: did their work, the traders did the work. We like
Speaker 1: the value, we like the entry point. Well, then we
Speaker 1: went out to our network external lawyer who had sat
Speaker 1: in the debt restructuring conversations, and the lawyer says to me, Robert,
Speaker 1: before you invest, let me tell you what the debt
Speaker 1: restructuring looked like. It's great. So it was a patriarch,
Speaker 1: former military guy, had the discussions at his house, not
Speaker 1: a law firm. You were escorted into the conference room
Speaker 1: through three levels of security, and the gentleman starts the negotiations.
Speaker 1: He goes, um, let's have a toast. Here's to my
Speaker 1: wealth and to your health. You just have to have
Speaker 1: people on the ground to that's just that's just bad. Now.
Speaker 1: Is that a local custom or is that a subtle threat? What?
Speaker 1: What is that? I mean? I think it was. I
Speaker 1: think it was a subtle threat. And again, you know,
Speaker 1: I want I wouldn't We're not so subtle. I wouldn't
Speaker 1: make that blanket statement, you know, throughout emerging markets. But
Speaker 1: quite frankly, you know when I see some kid in
Speaker 1: their twenties or thirties started business and you know there
Speaker 1: are three or four people around their Bloomberg screens and
Speaker 1: they don't have the internal analysts, and they don't have
Speaker 1: the external network. I don't know how they think they
Speaker 1: can do it. That's really quite quite uh quite fascinating.
Speaker 1: You mentioned, um your shop, you have offices around the world, right,
Speaker 1: what countries do you have offices in? So we're based
Speaker 1: in Grenich, Connecticut, we have offices in Latin America, in Mexico, Peru, Argentina.
Speaker 1: We have a lending platform and office in Turkey, Brazil.
Speaker 1: Done some stuff in Africa as well through a lending platform.
Speaker 1: And and you know, getting back to the local presence,
Speaker 1: you know, the having having a platform, having your own
Speaker 1: team in the market, you know, has all the obvious benefits,
Speaker 1: but also it gives you the ability to get depth
Speaker 1: and breadth. And you know, our our business, you know,
Speaker 1: particularly private credit business. You know where we're doing asset
Speaker 1: back lending in a country. Um And I remember a
Speaker 1: friend who does domestic private credit told me once, you know,
Speaker 1: Robert is just as easy to do a four million
Speaker 1: dollar loan as a forty million dollar loan. And so
Speaker 1: what we're trying to do with these platforms is get
Speaker 1: depth and breadth in the different regions. So if I
Speaker 1: go to Mexico, for example, where we're lending to the
Speaker 1: suppliers to pemm X, people who lay pipes, people who
Speaker 1: build build the platforms. If you do it on a
Speaker 1: one off basis, you can't really scale it. But if
Speaker 1: you have a platform of dedicated people to that too
Speaker 1: and the controls, it gives you the ability to depth
Speaker 1: and breadth in Mexico to look at other industries not
Speaker 1: maybe we can look at real estate, but also think
Speaker 1: about the same industry in a place like Columbia or
Speaker 1: whatever it maybe. So I think I know the answer
Speaker 1: to this, but I have to ask you are long only?
Speaker 1: And I would imagine there are all sorts of opportunity
Speaker 1: knees on the short side where you could see something
Speaker 1: starting to circle the drain and make a bet to
Speaker 1: the down side. I have to ask, why long only
Speaker 1: when there's so many opportunities on the down side. Yeah,
Speaker 1: and let me clarify. We we have UM. So we
Speaker 1: have four major strategy groups within the firm. One of
Speaker 1: them is long only UM, and we do you know,
Speaker 1: four subsets there. The other is alternatives where we can
Speaker 1: do long short, alpha shorts, what have you. The third
Speaker 1: one is what we call capital solutions or private credit
Speaker 1: or asset back lending. And the last one is special situations.
Speaker 1: So I agree with you sometimes, you know, in long only,
Speaker 1: you know, the only way you can express negative view
Speaker 1: is to not have any exposure. Sit on your hands, right. Um,
Speaker 1: But when we start thinking about our our alternative group,
Speaker 1: we can think about relative value, We can think about
Speaker 1: long short, we can think about doing things with derivatives
Speaker 1: that give you kind of you know, a call on
Speaker 1: the left tail, so to speak. So is that more
Speaker 1: of a hedge or what I'm hearing is three of
Speaker 1: your four strategies seem to be primarily long and one
Speaker 1: strategy has that opportunity to go short if it you
Speaker 1: want downside. So our Special Situations group, we do a
Speaker 1: lot of litigation finance, right. So, and in litigation finance,
Speaker 1: you know, the most the most difficult thing to predict
Speaker 1: is the outcome of the litigation. Sure, right, we can
Speaker 1: actually hedge that we can actually buy insurance. Right there's
Speaker 1: insurance companies that will you know, offer you insurance for
Speaker 1: maybe you know, you know, if it's a eight hundred
Speaker 1: million dollar claim and you can buy insurance for ten
Speaker 1: million dollars to insure the ten million dollars litigation, and
Speaker 1: it costs you three million dollars um, that's pretty good
Speaker 1: asymmetry in terms of you know, if you lose, you
Speaker 1: lose the three but if you win, you're in free
Speaker 1: hundred hundred million dollars. So we use hedging, and but
Speaker 1: that's not the same as you know, just I am
Speaker 1: making a directional bet that country X is Dad is
Speaker 1: going to get cut in half. That's right. Um. And look,
Speaker 1: there's two different ways to do it and long only,
Speaker 1: and it's it's risky to do it long only, right,
Speaker 1: And so it seems like long only is the less risky.
Speaker 1: You know, you're you're going up against an index, and
Speaker 1: oftentimes these industries have very risky proxies in them. I mean,
Speaker 1: let's talk about Russia and Ukraine this year. R so, um,
Speaker 1: we you know, we had the good fortune to have
Speaker 1: no Russia, no Ukraine in February. Our analysts walked in
Speaker 1: in January said I think there's a fifty percent chance
Speaker 1: that there'll be some sort of invasion and the assets
Speaker 1: will drop a little like, well, Petar, you got the
Speaker 1: first part right, but if there's an invasion with the
Speaker 1: capital I or small eye, Ukraine has gone from eighty
Speaker 1: to twenty and Russia has gone from part of part
Speaker 1: part of fifty. That's great. We missed February. February, we're out,
Speaker 1: but it stayed in an index for two months, right,
Speaker 1: And so one of the riskiest things we had to
Speaker 1: do is sit there and watch Russian debt trade up
Speaker 1: and down while we have zero exposure. So even though
Speaker 1: you know you can't short it when you don't own
Speaker 1: in the index, um, you actually um, it's it's not riskless, right,
Speaker 1: um in our alternatives, you know, more traditional hedge funds.
Speaker 1: To your point, we can do alpha shorts. We can
Speaker 1: say and look, we were long protection against Russia in February.
Speaker 1: That was an alphabet for us. It was like, you
Speaker 1: know what, we think Russia has asymmetry, asymmetric downside, and
Speaker 1: we can express that um in that vehicle. And I
Speaker 1: assume that that worked out pretty well, worked out pretty well.
Speaker 1: So so let's stick with Russia for a second. You know,
Speaker 1: I look out and I have no idea what the
Speaker 1: endgame is here. Can can Putin ride this out? Can
Speaker 1: Russia survive with Putin? And when will that country become
Speaker 1: investable again? It seems like they're not. They haven't been
Speaker 1: for a while before the invasion. It's hard to imagine
Speaker 1: anyone wanting to put up a lot of risk capital
Speaker 1: with them. Yeah, I think you need to look back
Speaker 1: at the past, at the last time there was regime
Speaker 1: change in Russia to be able to trialogy At And
Speaker 1: what I mean is, you know, yelts part of me.
Speaker 1: Putin has been around for so long, right that you
Speaker 1: got to go back to the Yeltsin era. And I've
Speaker 1: read and heard so many times that you know, if
Speaker 1: if Putin just leaves, everything will be fine. But I
Speaker 1: have no idea what's behind Putin in Russia. And I
Speaker 1: remember being in, you know, in Russia in the late nineties,
Speaker 1: and you know, I would get a call in the
Speaker 1: middle of the night. It's like Yeltsin's in the hospital
Speaker 1: and you'd have to triage which hospital one was for cardiac,
Speaker 1: for heart attack, and the other ones he was just
Speaker 1: drunk and sanatorium. And it made it and it made
Speaker 1: a big difference, and it mattered because none of us
Speaker 1: knew what would happen if yelts in past, right, um?
Speaker 1: And so I'll take that to today. It's like if
Speaker 1: if Putin weren't here tomorrow, I can't tell you what
Speaker 1: the politics look like there. And I also, how is
Speaker 1: Russia going to be treated on the other side of this, right?
Speaker 1: Is it gonna be treated like Germany after World War One?
Speaker 1: Or Germany after World War Two? Right? Um? You know,
Speaker 1: will it be? Will will be embraced in that. You know,
Speaker 1: Putin was a bad guy who led good people astray.
Speaker 1: And let's have some sort of reconstruction of Ukraine and Russia.
Speaker 1: Or is it going to be more like Germany after
Speaker 1: World War One where that's still a prize state? Huh?
Speaker 1: Really quite fascinating. Let's talk a little bit about the
Speaker 1: state of em today. Valuations, at least on the equity side,
Speaker 1: they're the cheapest we've seen in a couple of decades.
Speaker 1: What do you see when you're looking at the debt
Speaker 1: and credit side of emerging markets? Some something similar? And
Speaker 1: you know, I think what we have observed, and again
Speaker 1: we're all credit not equity, but um is over the
Speaker 1: twenty five years we've been together for a team there's
Speaker 1: been eleven major dislocations in emerging markets around the world,
Speaker 1: different countries, eleven times, and I would even call them
Speaker 1: systemic like we've seen today, and they all have kind
Speaker 1: of looked the same, which is peak to trough. It's
Speaker 1: taken about five months, they drop about eight months later,
Speaker 1: it's up like seven and twelve to twenty four months
Speaker 1: later it's up thirty pc. So with that kind of
Speaker 1: top down historical framework, UM, it's easy to see that
Speaker 1: there's cheap valuations and emerging markets. But you know, we
Speaker 1: also have to think about where we came from, you know,
Speaker 1: like really low interest rates, a lot of liquidity, what
Speaker 1: have you. So we also have to prove out with
Speaker 1: the portfolios that we build that those same type of
Speaker 1: expected returns are there. And you know, one of the
Speaker 1: beautiful things about fixed income versus equity UM is we
Speaker 1: have contractual coupons. And so if you can pick good
Speaker 1: credits that pay their coupons that roll roll down the
Speaker 1: curve to par um, the mathematics work, right. That's why
Speaker 1: after these big dislocations, if you can pick a subset
Speaker 1: of credit that has coupon, we'll keep paying and roll
Speaker 1: down the curve towards par, then you're going to get
Speaker 1: these types of extraordinary returns. And I think we're in
Speaker 1: that type of environment today. Now, of course, um there's
Speaker 1: a lot of altility, and I think one needs to
Speaker 1: be you know, respectful of that baltiy today. But you know,
Speaker 1: I continue to think that, you know, the expected returns
Speaker 1: in the destination weren't what maybe a bumpy journey. So
Speaker 1: given those sorts of numbers, the pullbacks, recoveries, what sort
Speaker 1: of correlations are there with other types of of at
Speaker 1: be it performing or distressed equities and other asset classes.
Speaker 1: It sounds like this is a fairly non correlated group
Speaker 1: of investments. Yeah, And I think you can create lack
Speaker 1: of correlation depend on about how you construct the portfolio.
Speaker 1: And I think if you pick one return stream and
Speaker 1: emerging markets and stick with that return stream, you're going
Speaker 1: to find a lot more correlation to markets. What I
Speaker 1: really like is on top of these four return streams
Speaker 1: that we have, we kind of have a multi asset
Speaker 1: dynamic acid allocation process, and that's where you're able to
Speaker 1: create alpha, and that's where we're able to have really
Speaker 1: low UM correlation to to the markets. UM and you know,
Speaker 1: one day markets are you know, at all time highs,
Speaker 1: so not that interesting to want to buy ACCU, SIPs
Speaker 1: or public debt at that point, and then you have
Speaker 1: a dislocation. Relative value has changed. Now most folks don't
Speaker 1: have the governance, don't have the staff, et cetera to
Speaker 1: be able to make the I'm going to sell A
Speaker 1: and buy B. I remember like UM during COVID, and
Speaker 1: you know, we wrote at grammar Sy that we expected
Speaker 1: there could be a dislocation in the fourth quarter two
Speaker 1: thousand nineteen. Markets are really tightly wound and people should
Speaker 1: batten down the hatches, but get ready for the dislocation
Speaker 1: because when it comes, that's when the extraordinary opportunities come.
Speaker 1: So we call everyone in March and April. Remember we
Speaker 1: talked about this. We didn't know what was going to
Speaker 1: break the camera's back, but but it's broken, UM, and
Speaker 1: these we expect a U. You know, we don't sure
Speaker 1: if it's gonna be a V shaped recovery at W
Speaker 1: shaped recovery, but we believe they'll be a strong recovery.
Speaker 1: And we would talk to our clients and prospects and
Speaker 1: they say, well, let's see, it's March or April, um,
Speaker 1: I might be able to get you into the October
Speaker 1: board meeting, right and so sorry, we don't have that
Speaker 1: type of I need an answer by five. So that's
Speaker 1: what with our with our multi asset strategy, we wanted
Speaker 1: to solve for that problem, which is i'll call it
Speaker 1: a governance problem, you know, acid allocation. I think in
Speaker 1: emerging markets one being dynamic isn't just convenient, it's necessary.
Speaker 1: And that's how you create the lack of correlation, and
Speaker 1: that's how you create off of really really quite interesting.
Speaker 1: So so where are we in the present emerging market
Speaker 1: cycle that this seems to be lots of UM different
Speaker 1: cycles in the space. Should we be optimistic about EM
Speaker 1: here or should we be worrying about EM here? Look,
Speaker 1: I think we are cautiously optimistic UM, and we know
Speaker 1: we've had that call for for for a few months.
Speaker 1: I would probably say after a ten percent rally that
Speaker 1: we've had over the last five six weeks, maybe a
Speaker 1: little more cautious, but still optimistic in the in the
Speaker 1: medium term. The reason that you know we have this
Speaker 1: optimism goes back to the mathematics after these dislocations, right
Speaker 1: that and then this isn't a blanket statement about all
Speaker 1: emerging market debt. But if you can pick good and
Speaker 1: just like stocks, right, if you pick if you can
Speaker 1: pick stocks, well, um, you can significantly outperform and an index.
Speaker 1: And you know, if I showed you a chart of
Speaker 1: the dispersion of the returns within the Jape Morgan Emerging
Speaker 1: Market Bond Index, you wouldn't believe it. I mean, things
Speaker 1: down fifteen, things up fifteen, oil and gas and on
Speaker 1: hand and you know, importers of energy on on another hand. So, um,
Speaker 1: we're we're cautiously optimistic. We see good returns in the
Speaker 1: medium term. Uh, one has to think about how do
Speaker 1: you protect capital after a long run like this. So
Speaker 1: we're raising a little bit of cashier thinking about hedge
Speaker 1: overlays and what have you. But you know, we're somewhere
Speaker 1: closer to the bottom of the you know, of the
Speaker 1: cycle than the top. The next question is a bit obvious.
Speaker 1: We've seen a big uptick in in rates here in
Speaker 1: the US and around the world. How do you look
Speaker 1: at em based on how the central banks of the
Speaker 1: developing worlds are postured, like, I mean, I think that's
Speaker 1: that's an important question because I think historically, you know,
Speaker 1: when developed markets get sick, developing markets have gone to
Speaker 1: the hospital. And I think that's a big part of
Speaker 1: you know, I would say what's happened to emerging markets
Speaker 1: in two has been predominantly an exogenous shock coming from
Speaker 1: raising the rates around around the world. That's that hasn't
Speaker 1: always been the case in emerging markets. You know, we
Speaker 1: have things called the Kila crisis and the vodka crisis,
Speaker 1: and the Capoina crisis and the Tangle crisis. Those were
Speaker 1: indogenous crises created within emerging markets, but this one was
Speaker 1: you know, it's been about higher rates, less liquidity UM
Speaker 1: and markets. So that being said, you know, I think
Speaker 1: that the FETE has been signaling slower you know, slower
Speaker 1: pause on rates UM when we think about local rates
Speaker 1: and emerging markets. UM. You know, we felt that once
Speaker 1: the dollar's strength went away, that it might be a
Speaker 1: good time to start leaning into local rates within within
Speaker 1: emerging markets. UM. You know, we saw we were looking
Speaker 1: for three things. You know, we have a top down
Speaker 1: every month, and we said, if the twos go to
Speaker 1: four fifty, if tens go to four, and the dollar
Speaker 1: Dixie goes to one fifteen, that's a pretty good place
Speaker 1: to think about board in the flight. So check on
Speaker 1: four fifty, check on four and we hit one fourteen
Speaker 1: and three quarters about six weeks ago. UM. So you know,
Speaker 1: I think over the past couple of months that led
Speaker 1: us to kind of ad duration even though rates you
Speaker 1: were still predicted, and particularly low dollar price investment grade
Speaker 1: securities where you get a lot of convexy that if
Speaker 1: you get a snap back like we've seen in rates,
Speaker 1: that you get to enjoy that right back up. Some
Speaker 1: people have been looking at at the strong dollar of
Speaker 1: the past two quarters is just a wrecking ball, wreaking
Speaker 1: havoc everywhere. How do you put the strength of king
Speaker 1: dollar into context? UM? And I could share some interesting
Speaker 1: stories about some of the crazy things I've seen on
Speaker 1: my side of the street. How does it impact emerging
Speaker 1: markets when when the dollar is as just you know,
Speaker 1: as powerful as it's been this year and again within
Speaker 1: emerging markets, I think it's a it's a dispersion of
Speaker 1: responses based upon upon where you are. UM. But I
Speaker 1: think you know, generally, you know, higher rates, stronger dollar
Speaker 1: has been been a headwind for emerging markets. You know, interestingly, UM,
Speaker 1: emerging markets have had a lot less wiggle room than
Speaker 1: the FED and the ECB and what have you. So
Speaker 1: quite frankly, whether it's Brazil or Columbia, would have they
Speaker 1: were kind of ahead of the curve in terms of
Speaker 1: raising rates. And I think that's what made US bottoms
Speaker 1: up a bit more constructive on emerging market currencies once
Speaker 1: the dollar peaked. And again I think perhaps we we
Speaker 1: saw that at one fourteen and three quarters, Um, you know,
Speaker 1: might go back to one town on on Dixie or
Speaker 1: or what have you, Dixie being sorry the US dollar index, um,
Speaker 1: And you know, we were, you know, we were talking
Speaker 1: about potential vacations in Europe and in the summer, would
Speaker 1: have you and I think, you know, with the with
Speaker 1: the euro at at par and a hundred earlier this year,
Speaker 1: it was pretty pretty good time to preplay the hotel. Yeah. Absolutely. Um,
Speaker 1: so let's talk about some specific countries. Um, we we
Speaker 1: already discussed Russia. How do you look at places in
Speaker 1: South America like Argentina and Venezuela, both which seemed to
Speaker 1: have a crisis almost on a regular schedule. Yeah, I mean,
Speaker 1: let's start with Let's let's start with Argentina, and that
Speaker 1: is a country that has been quite cyclical and the
Speaker 1: returns have been cyclical UM as well. You know, for us,
Speaker 1: we've looked at Argentina much more on an opportunistic basis
Speaker 1: as opposed to somewhere that you want to be UM
Speaker 1: all the time. You know, if you go back when
Speaker 1: we started our business in Argentina was eighteen percent of
Speaker 1: the index, and we were talking earlier about about how
Speaker 1: risky indices can be. Right, So JP Morgan one of
Speaker 1: the stuff eighteen percent of our portfolio in Russia, part
Speaker 1: of me in Argentina right before it defaulted. Fast forward today.
Speaker 1: You know, we have an election coming up in Argentina
Speaker 1: in October three. We just had a passing of the
Speaker 1: baton from Martin Guzman to Massa. UM. I think Massa
Speaker 1: is market friendly enough. I think he's done, UM you
Speaker 1: know what he needs to do with the IMF, and
Speaker 1: you know, we expect that Massa will be able to
Speaker 1: stabilize the markets before they start to climb the wall.
Speaker 1: We're going into the presidential elections in October three. So
Speaker 1: with you know, assets trading at twenty cents performing assets now,
Speaker 1: they perform with very low coupons, but they're performing. UM.
Speaker 1: I can't really imagine a debt restructuring scenario. In the
Speaker 1: next regime, it's worth twenty cents. I can imagine training
Speaker 1: less than because of the liquidity and air pockets of
Speaker 1: of dislocation. But we're starting to focus more on you know,
Speaker 1: we think there's a light at the end of the tunnel.
Speaker 1: We think that's a you know, perhaps a change of regime,
Speaker 1: a new government that comes in with um markedly more
Speaker 1: market friendly policies that the market will like. And Venezuela.
Speaker 1: Venezuela is more complicated. You know, first of all, it's
Speaker 1: under restrictions today, right, so US Treasury, the O fact restrictions.
Speaker 1: So Venezuela is more of a theoretical conversation. Now we
Speaker 1: were talking about Russia and Ukraine before. You know, it's
Speaker 1: interesting to note that Chevron's back pumping oil. Uh that's
Speaker 1: a direct connection to Russia invading Ukraine. And I think
Speaker 1: it was within days of not weeks, that the US
Speaker 1: State Department was already in caraucas after the Russians had
Speaker 1: had had invaded, Meaning we're out looking for oil wherever
Speaker 1: we can get it to offset curtail and exports around
Speaker 1: the world. I mean, think about two images that came out.
Speaker 1: The first one was the fist pump with with Biden
Speaker 1: and NBS and then it was John Kerry shaking hands
Speaker 1: with Moduro. Right. So, um, like Venezuela has a lot
Speaker 1: of oil capacity. You know, I think at their peak
Speaker 1: they were doing three million barrels a day. Um, they
Speaker 1: are probably averaged two point four million barrels a day
Speaker 1: during the Chavez era. Today they're like seven thousand barrels.
Speaker 1: They could probably easy Yet that's it. Well, you know,
Speaker 1: the bad news is they haven't had the capex. The
Speaker 1: good news is all they asked that's still under the ground.
Speaker 1: So you know, I think there's a possibility of a thawing.
Speaker 1: You know, hopefully, UM, they'll take the path of moving
Speaker 1: towards a more democratic UM regime in the upcoming elections.
Speaker 1: And I think the U S could live with a
Speaker 1: a regime where the Chavista does win the current government, UM,
Speaker 1: if it's perceived to be democratic or at least more
Speaker 1: democratic UM. And we've seen that historically in Latin America,
Speaker 1: you know, where people that were ostracized that came in
Speaker 1: back through the democrat process. We're able to run. So
Speaker 1: I tried desperately to avoid being a macro tourist. But
Speaker 1: it sounds like, man, if there's ever a country that
Speaker 1: has immense upside, talk about asymmetrical risks, what would it
Speaker 1: take to make Venezuela really investable and for them to
Speaker 1: become a little more integrated into the global economy. They're
Speaker 1: they're potentially such a success story if they could get
Speaker 1: out of their own ways. Yeah, I remember, go back
Speaker 1: to the nine seventies, the Concord used to fly to
Speaker 1: Caracas just to just to put it in perspective. Um,
Speaker 1: and I think you're right. I mean the they have
Speaker 1: the largest proven oil reserves in the world, not not
Speaker 1: the largest outside of the Middle East, the largest are yeah,
Speaker 1: so more than Saudi Arabia. So now we know that
Speaker 1: you know, Saudi Aramco has done an I p O.
Speaker 1: It's worth a trillion dollars um. You know, could Pettibasa
Speaker 1: or viny A Ramco be worth a quarter of a
Speaker 1: billion dollars? Should be quarter billion doll hours a go
Speaker 1: long ways to being able to create capax a trillion
Speaker 1: excuse quarter of a trillion. So there's a lot of
Speaker 1: a lot of potential there um and hopefully you know,
Speaker 1: the chevron is the first step towards a thawing of
Speaker 1: relations between Venezuela and the West, the US, and that
Speaker 1: UM that will have the ability to buy. You know,
Speaker 1: it reminds me of I Rack quite frankly, so, UM,
Speaker 1: before the Marines invaded Iraq, they were doing about a
Speaker 1: million barrels a day of production. Today they're doing five million.
Speaker 1: Their GDP was twenty five billion a year. It's two
Speaker 1: hundred and fifty billion a year, ten x. That's just amazing.
Speaker 1: And we can't say that it's because it was such
Speaker 1: a politically stable place, right. So you know, we could
Speaker 1: imagine a Venezuela on the other side where the seven
Speaker 1: hundred thousand barrels goes back to two to three, and
Speaker 1: that would make a difference today, and it would make
Speaker 1: a difference not only to the market, but quite frankly, UM,
Speaker 1: the Venezuelan people who have suffered immensely under this administration
Speaker 1: and under the current UM. So. So, so let's talk
Speaker 1: a little bit about China. UM, how do you approach China?
Speaker 1: I'm I look at equity there. It's essentially flat since
Speaker 1: the early If you're an outsider, it seems like the
Speaker 1: Chinese Central Party has taken all of those gains for themselves. Um,
Speaker 1: is China investable? How do you even approach a country
Speaker 1: like that? So I think, Uh, when we think about investability,
Speaker 1: one has to think about price right, initial conditions. And
Speaker 1: so I'll start with historically in China, and for a
Speaker 1: long period of time, we've been massively underweight or no
Speaker 1: exposure because it's been asymmetric in your face. And what
Speaker 1: I mean by that is we're we're we're debt, we're
Speaker 1: debt investors, right, So debt is a contract, right, And
Speaker 1: the contracts that Chinese companies had and the off shore
Speaker 1: was basically a piece of paper, no assets, and you
Speaker 1: had to rely upon the good faith and the willingness
Speaker 1: and a bill of this corporate to pay you and
Speaker 1: then and then to pay you to first to make
Speaker 1: a dividend offshore and maybe get China to approve that dividend,
Speaker 1: and then and then to pay you. So that that
Speaker 1: sounds like a terrible setup for investment. Yeah, So for
Speaker 1: a dead investor thinking about China at par, trying to
Speaker 1: corporate a par made no sense to us. Now China
Speaker 1: property has gone from par. The home builders too, We
Speaker 1: talked about eight cents, ten cents five cents. So now
Speaker 1: now you start to think about option value. And when
Speaker 1: I look at the China property sector today, it reminds
Speaker 1: me of a lot of emerging market UM corporates and
Speaker 1: sovereigns historically, where one has to tease out distress isn't
Speaker 1: something that's just cheaper than it used to be. It's
Speaker 1: cheap relative to an outcome that we think that we
Speaker 1: can catalyze. So when we look at an eight cents security,
Speaker 1: we're not hearing from the company we're not going to
Speaker 1: pay you, and we're not seeing insolvency. We're seeing bandit center.
Speaker 1: We're seeing people FAMBI sent people frozen in in the headlight.
Speaker 1: And I remember one one CFO and China that we're talking.
Speaker 1: I remember there in lockdown, right, And so this poor
Speaker 1: um CFO is doing the conference code with us in
Speaker 1: his bathroom and the screen saver is a shower screen, right,
Speaker 1: And so what what what you're seeing as someone who
Speaker 1: doesn't know how to do a debt restruction? And I,
Speaker 1: you know, go back to I remember Argentina two thousand
Speaker 1: and nine and meeting with the finance minister who not
Speaker 1: only didn't know finance, but didn't know how to do
Speaker 1: a debt restruction. So when we look at China property
Speaker 1: at five eight ten cents today, um, and we see
Speaker 1: these people who are expressing willingness to restructure, but a
Speaker 1: lack of understanding of how to do it, the option
Speaker 1: value seems pretty cheap. That that's really really quite intriguing.
Speaker 1: We talked earlier about Russia. I've always looked askance at
Speaker 1: Russia because there's no respect for private property, for contract rights,
Speaker 1: for rule of law. Do you have the same challenges
Speaker 1: in China or are they a little more westernized in
Speaker 1: terms of if you cut a deal, they will honor it.
Speaker 1: Look at it. I don't want to talk in in
Speaker 1: large generalities or stereotypes, but you know, I think we
Speaker 1: saw the Chinese government plank as it relates to the
Speaker 1: most important sector, that the property sector. And prior to
Speaker 1: the Party Congress, you know, if you read the risk
Speaker 1: in China was that they were going to take it
Speaker 1: all that the government. You know, they were just gonna
Speaker 1: like say you forget you to the to the offshore
Speaker 1: bond holders, what have you. But I think they blinked
Speaker 1: right that this is the GDP of the country, right. Um,
Speaker 1: So to just think that you can, um, have a
Speaker 1: Lehman moment and just you know, let them go. They
Speaker 1: tried that with every grand quite frankly, like, let's just
Speaker 1: it didn't work. So, Um, I think it's a lot
Speaker 1: less risky today than it was eight weeks ago because
Speaker 1: we've seen the new government, the third has come in
Speaker 1: and we've seen that they kind of blinked as it
Speaker 1: related to this, and it's just massive support going to
Speaker 1: that sector. So does that mean I want to buy
Speaker 1: a part security in China anytime soon? No? But do
Speaker 1: we get more comfortable at ten cents with a Chinese
Speaker 1: tarp and CFOs and CEOs telling us that they want
Speaker 1: to restructure. They just want to extend. They don't want
Speaker 1: to wipe us out, they don't want to equitize, they
Speaker 1: don't want to toss the keys. I think it's a
Speaker 1: pretty good bet. What do you make at the we're
Speaker 1: recording this in the beginning of December, What do you
Speaker 1: make of the changes in the COVID policy over there
Speaker 1: and what might that mean for their economy and their
Speaker 1: DAT issues. Yeah, I mean, so there's there's a you know,
Speaker 1: there's a social element to to to that response, which is,
Speaker 1: you know, you can see that the population has been
Speaker 1: fed up. I mean I go back to you know,
Speaker 1: my kids thought, you know, three months of being locked
Speaker 1: up in the house in the second quarter was worst
Speaker 1: thing that ever happened. I mean, this has been going
Speaker 1: on China now for for nearly three years. So, um,
Speaker 1: you have large numbers of people that have been very unhappy.
Speaker 1: And I'm not surprised again to see after the Party
Speaker 1: Congress them tact or pivot, which is everybody's favorite word
Speaker 1: these days, um, and start to open up the economy.
Speaker 1: I'll take that back to you know, I think that's
Speaker 1: gonna create more what happened here, right, we had we
Speaker 1: had the big closure and then when the reopening and
Speaker 1: the reopening was slow and spotty, and now we're seeing
Speaker 1: that it's you know, the demands there and we're having
Speaker 1: difficulty with the supply side. I would expect something similar
Speaker 1: in China, but I think demand for housing is going
Speaker 1: to be there, the supports there, and that's a major,
Speaker 1: a major part of their economy. Really quite fascinating. So
Speaker 1: let's talk a little bit about market efficiency and debt.
Speaker 1: It seems that e M is more complicated, less transparent,
Speaker 1: less efficient than developed markets. Is that part of the
Speaker 1: source from whence alpha is derived. Yeah, for sure. I mean,
Speaker 1: I think the the information asymmetry means that if you
Speaker 1: can organize yourselves in order to be able to capture information,
Speaker 1: and again that's outside the firm and inside the firm.
Speaker 1: You know, we talked a little bit about having platforms
Speaker 1: that can suck up that information from the regions, but
Speaker 1: also the way that we are organized an investment team
Speaker 1: for different strategy groups, all collaborating, all meeting every morning,
Speaker 1: sitting on an investment committee, sharing like what's going on
Speaker 1: in public debt matters to private debt. You know, we
Speaker 1: talked about Venezuela earlier, like what our special situations team
Speaker 1: knows about litigation, litigation finance in Venezuela and O fact restrictions.
Speaker 1: Was helping our long onlymaging market debt team think about
Speaker 1: what it meant for Russia when those when those things
Speaker 1: came on. So a lot of opportunities in the way
Speaker 1: that we're organized to to be able to uh, to
Speaker 1: create alpha. Um. You know, the other way to pick
Speaker 1: to really create alpha and take advantage of the information
Speaker 1: asymmetry is through the dynamic acid allocation that that that
Speaker 1: we talked about UM. You know my pet peeve as
Speaker 1: an investor who picks a return stream for ten years.
Speaker 1: And you mentioned before that you know, um inequities. You
Speaker 1: could argue with Chinese equities whatever it may be that
Speaker 1: you know, maybe it's been lackluster returns. Well, UM, if
Speaker 1: you stick with something, whether it trades in a hundred,
Speaker 1: fifty or two, UM, you're just gonna get the average,
Speaker 1: you know. But if you're able to move around between
Speaker 1: value and relative value, I think there's a way to
Speaker 1: take advantage of the information asymmetry UM and create alpha.
Speaker 1: One of the things I've always wondered about the difference
Speaker 1: between emerging market and frontier markets. At first, do you
Speaker 1: look at frontier markets? And second, how do you really
Speaker 1: distinguish between the two. We really try and put the
Speaker 1: labels aside, and frontier markets a bit more of a
Speaker 1: of an equity label than a debt label. To begin
Speaker 1: with that being set up, I would say that you know,
Speaker 1: most any country that was frontier we've invested in, traded,
Speaker 1: and traveled at some point in our careers, and things
Speaker 1: often go from frontier to emerging markets, sometimes they go back.
Speaker 1: We're much more interested in kind of the bottoms up
Speaker 1: analysis and what it means. But you know, Bulgaria was frontier,
Speaker 1: it became investment grade shortly thereafter. Poland wasn't you know
Speaker 1: the same thing. It was frontier UM. So for us
Speaker 1: in the debt side, it doesn't really matter. Some frontiers
Speaker 1: have a lot of debts, some don't have any debt.
Speaker 1: How do you think about China? Are they still an
Speaker 1: emerging market or have they emerged again? I think it
Speaker 1: depends on how you define emerging markets. You know, in
Speaker 1: the in the textbook, you know, per capita GDP, it's
Speaker 1: certainly still classified as an emerging market. UM country UM,
Speaker 1: second second largest economy in the world. Do they really
Speaker 1: an emerging market anymore? Exactly? UM? And again it depends
Speaker 1: on whether you're talking about UM from a from a
Speaker 1: political economic perspective, from a GDP perspective. UM. But you know,
Speaker 1: it's certainly hard to just compare to all other emerging markets.
Speaker 1: And as you know, on the equity side, it's not
Speaker 1: only is it. You know, it's such a big component
Speaker 1: of the Emerging Market index, right, It's like when you
Speaker 1: buy when you buy the the e M equity index,
Speaker 1: you're basically buying China and a few others. Um, I'm
Speaker 1: not sure that makes a lot of sense going forward. No,
Speaker 1: I couldn't agree. More. Let's talk a little bit about
Speaker 1: your team. You're the chairman of Grammarcy is the former
Speaker 1: CEO of PIMCO, Muhammadalarian. What's it like to work with
Speaker 1: him every day? How did he end up as chairman
Speaker 1: of Grammarcy. Look, it's been Uh, it's been been phenomenal. Um.
Speaker 1: Mohammed started with us as an investor first. UM, and
Speaker 1: as he got to know us, he kind of leaned
Speaker 1: in and and and and met the team, and UM,
Speaker 1: we had a conversation about him helping us think about
Speaker 1: how do we institutionalize the top down? How do we
Speaker 1: you know, we've been very much a bottoms up you know,
Speaker 1: stock picking shop and credit if you will, credit picking shop,
Speaker 1: and we wanted to make sure that we had a
Speaker 1: good institutional framework. And quite frankly, myself as the as
Speaker 1: the c IO, I lacked the confidence to to go
Speaker 1: to other portfolio manage and say, look, my view is
Speaker 1: so strong and so right that you should get out
Speaker 1: of that country or what have you. So now with
Speaker 1: you know, Mohammed moved from an investor to an investor
Speaker 1: that UM was an advisor. He helped us really institutionalize
Speaker 1: the top down and then when COVID hit, he realized,
Speaker 1: you know what, I can have a real impact on
Speaker 1: the business. I don't have to be there every day
Speaker 1: right in person. I can be there every day on Zoom.
Speaker 1: And so he's with us most every morning on on
Speaker 1: our daily call we have this top down call. And
Speaker 1: full full credit to him. He's been a whole lot
Speaker 1: more right than wrong on everything for UM, from emerging
Speaker 1: markets to inflation to rates. He seems to be on
Speaker 1: a hot streak these days. Look, he he is a
Speaker 1: brilliant top down decoder. He's an investor, right. A lot
Speaker 1: of economists can can talk to talk, but they can't
Speaker 1: necessarily walk thetis they're not putting money. So he's brilliant
Speaker 1: as a top down decoder. He understands the investment implications
Speaker 1: of what he's just decoded, and he shares a passion
Speaker 1: for emerging markets with us. So it's it's a perfect fit.
Speaker 1: And and to your point, he was well ahead of
Speaker 1: the curve on COVID. Like I didn't know what he
Speaker 1: said to me one day, like you know, this is
Speaker 1: a sudden stop and you can't have a sudden start.
Speaker 1: Never really thought about that, right, but what are the
Speaker 1: implications of a sudden stop and a slow start? Um?
Speaker 1: Supply bottlenecks? Right, Um, still waiting for semiconductors to get
Speaker 1: to new cars, so people didn't what are something in
Speaker 1: that weight? Eighteen months? Yeah? You know he I think
Speaker 1: he's well ahead of the curve on on inflation, right,
Speaker 1: And so it's been great. It's given us a lot
Speaker 1: of confidence on the top down. Um. You know what
Speaker 1: I think differentiates us is we can take the top
Speaker 1: down that he's really helped us institutionalize and marry it
Speaker 1: with our strong bottoms up and be able to uh
Speaker 1: to differentiate. And you know, lastly, he's just he's just
Speaker 1: become a great friend. Yeah, he's really a fascinating, charming Um, gentlemen,
Speaker 1: I'm I'm I'm a big fan. Before I get to
Speaker 1: my favorite questions, let me throw a curved bowl at
Speaker 1: you a little bit. Um, tell us about Turkey. What
Speaker 1: what's your relationship to the country. How often are you there? So? Um,
Speaker 1: Turkey is a place. My my wife is Turkish. We've
Speaker 1: been married for almost thirty years now. So I've been
Speaker 1: traveling to Turkey for for that long. Um My daughters
Speaker 1: both speak Turkish, so we spent a lot of time
Speaker 1: there in the summers and so, um, you know it's
Speaker 1: in the summers, you mean every summer for the past
Speaker 1: thirty years, pretty much every summer for the last thirty years.
Speaker 1: We wanted our our daughters to learn Turkish, so we
Speaker 1: got an apartment there every summer. Uh. We love going
Speaker 1: to the beach down there, down in in in bodroom.
Speaker 1: Is beautiful water. Is that the medranean or the Asians.
Speaker 1: It's on the Agean side, so so that's spectacular, beautiful water,
Speaker 1: beautiful of great people, great hospitality, awesome food. So you know,
Speaker 1: I'm really enjoyed it. And you know, it's become an
Speaker 1: important part of our our business over the years too
Speaker 1: because I spent so much time there. Although I'm a
Speaker 1: Latin Americanist by training, I've become very comfortable in Turkey
Speaker 1: as well. Huh, really really very interesting. Let's jump to
Speaker 1: our favorite questions that we ask all our guests. And
Speaker 1: I'm gonna have to retire this question one of these
Speaker 1: days now that we're mostly reopened, but during the lockdown,
Speaker 1: tell us what you were doing to stay entertained. What
Speaker 1: were you streaming when we were all stuck in the house,
Speaker 1: So we were just talking about Turkey UM. And Netflix
Speaker 1: happens to have a great catalog of Turkish shows really
Speaker 1: so they're in Turkish with English English subtitles, really really good, UM,
Speaker 1: really good plots in drama and what have you. So
Speaker 1: it gave me the ability to learn Turkish language but
Speaker 1: also learned Turkish culture UM, and be really entertained in
Speaker 1: the process. Give us the name of the show. One
Speaker 1: of them that I just finished is called a tier
Speaker 1: in Turkish, which means the gift um. And it has
Speaker 1: a bit of h I think about twenty four episodes
Speaker 1: and it's about um kind of archaeology and Turkey and
Speaker 1: and uh, really fascinating, really good act really good actors UM,
Speaker 1: really good scripts, UM, and really good cinematography. Sounds interesting.
Speaker 1: Tell us about some of your early mentors who helped
Speaker 1: shape your career. So, in terms of mentors, I mentioned
Speaker 1: my my first boss, Carlos Arriguez Pasteur, the boutique I
Speaker 1: worked with in California. What was the name of the
Speaker 1: boutique CRP associates for for his initials um and I
Speaker 1: was very fortunate to work with Carlos. It was a
Speaker 1: very small boutique. Spent a lot of time with him
Speaker 1: on a one on one basis. Um, he had a
Speaker 1: great mind. He understood the intersection of politics and and markets. Um.
Speaker 1: You know, English was his second language, but I think
Speaker 1: he taught me English in terms of written English and
Speaker 1: business English and and what have you. Um. And I'd
Speaker 1: say the other one, quite frankly, was my stepfather, who
Speaker 1: was a pilot for United Airlines for thirty five years.
Speaker 1: And you know, he had this checklist mentality which looks
Speaker 1: a lot like risk management, right, like always thinking about
Speaker 1: what can go wrong and how to avoid the the
Speaker 1: the catastrophic mistake, um in the nonrecoverable mistake. And so
Speaker 1: I put those two together and say they were great mentors.
Speaker 1: I love the idea of checklist. It's it's pilots and
Speaker 1: surgeons want to make sure, um, that there aren't these
Speaker 1: silly little errors. It's avoiding mistakes more important than hitting
Speaker 1: the bull's eye. And maybe pilots more than surgeons because
Speaker 1: they're on the plane. That's that's the difference of pilot. UM.
Speaker 1: When a surgeon loses a patient they're sad. When a
Speaker 1: pilot loses a plane, he's dead. So it's a very
Speaker 1: different thing. Uh, tell us about some of your favorite books.
Speaker 1: What are you reading right now? Went back to Turkey.
Speaker 1: You know, we we've got an election coming up in
Speaker 1: Turkey this year as well, so I've been doing some
Speaker 1: uh some some reading on Turkey and one in particular
Speaker 1: book called Turkey under Ardwang, and it kind of just
Speaker 1: gives you sense of what Turkey has been like over
Speaker 1: the last twenty years with there to on and maybe
Speaker 1: think about, um, some of the factors that might influence
Speaker 1: the potential regime change in Turkey and later this year,
Speaker 1: what are the odds of that regime change happening? You know,
Speaker 1: they change every day and we all know that polls
Speaker 1: aren't as reliable as they never were. But when I
Speaker 1: was in Turkey this summer, I would have told you
Speaker 1: that the odds for him winning were quite low. And
Speaker 1: that's because if you spoke with you know, there's a
Speaker 1: bit of a misery index. You know, older retired people
Speaker 1: that were getting squeezed by high inflation um and and
Speaker 1: the currency devaluation, but then also young kids right that,
Speaker 1: um that just felt kind of hopeless. And so when
Speaker 1: I left there and in August, I'm like, it's going
Speaker 1: to be really difficult for him to win. Um. Now
Speaker 1: we were there, you know, we had a team there
Speaker 1: two weeks ago. You know, their calls, it's like, UM,
Speaker 1: and I think, you know, there's a there's a real
Speaker 1: dispersion of outcomes that could come from whether he stays
Speaker 1: or goes. How he stays, how he goes. So it's
Speaker 1: been interesting to to to read on that. And then
Speaker 1: of course, UM, I like the David Rubinstein books, the
Speaker 1: interviews you know, with the investors and and and and
Speaker 1: UM leadership. Yeah, he's he's a fascinating guy as well.
Speaker 1: So those are the two books you you just finished.
Speaker 1: Most recently, what sort of advice would you give to
Speaker 1: a recent college grad who was interested in a career
Speaker 1: in emerging markets? Opportunistic or distress that what's funny in
Speaker 1: the post COVID era. I would start with saying that
Speaker 1: that presence matters and that they should go to the office.
Speaker 1: And there's a lot of young kids who, you know,
Speaker 1: just think they're as as efficient at home as productive
Speaker 1: at home, but they forget that you know, God invented
Speaker 1: trading desk for a reason. They're open architectures, there's information flowing,
Speaker 1: and it's great training and great mentorship. So one, I'd
Speaker 1: say go to the office, um, and two i would say,
Speaker 1: you know, try and make your career more linear and
Speaker 1: fashion and logical. And I see a lot of young
Speaker 1: kids stays like, well, I'm gonna try and US banking
Speaker 1: and I'm gonna try tech. You know, whatever's hot. But
Speaker 1: if you're really interested in emerging markets or whatever it
Speaker 1: may be, then stick to it and evolve around that
Speaker 1: asset class. But don't hop but but but don't hop around.
Speaker 1: And then last thing I'd say with with young kids
Speaker 1: today is we don't really care where your degree is from.
Speaker 1: We don't care about pedigree. We care about who you are,
Speaker 1: what you've done, and and how you compliment the team.
Speaker 1: You don't have to emulate the team. You can. You
Speaker 1: can be different, you know, and with you know, with
Speaker 1: diversity comes you know better outcomes. So don't don't just
Speaker 1: try and be like everybody else. And our final question,
Speaker 1: what do you know about the world of emerging markets,
Speaker 1: distressed debt and investing today that you wish you knew
Speaker 1: thirty years or so ago when you were really first
Speaker 1: getting your legs under you. So when I left Lehman
Speaker 1: in uh in early you know, when you started an
Speaker 1: investment management in the emerging market debt, you know, it
Speaker 1: was basically you did a hedgephone, and you did a
Speaker 1: credit hedgephone and that and that's what we did. You know,
Speaker 1: if I could go back to today when we started gramacy,
Speaker 1: I think real long and hard about maybe we want
Speaker 1: to do private equity structures as opposed to hedge fund structures,
Speaker 1: have long locked capital as opposed to short locked capital,
Speaker 1: and be able to think about multiples of capital over
Speaker 1: the long period as opposed to volatility and I r
Speaker 1: R in the short short run meaning meaning forced the
Speaker 1: clients to be longer term investors than Yeah, And I
Speaker 1: don't want to use force, but partner with the clients
Speaker 1: and vehicles that are more. You know, over the years,
Speaker 1: we've even in our credit vehicles, we're having longer locked vehicles.
Speaker 1: That allows one. You know, if you're gonna make an
Speaker 1: asset back loan and capital solutions, you can't give ninety
Speaker 1: day liquidity, right, so it's got to be more like
Speaker 1: a quasi pe structure where you make a loan, you
Speaker 1: have three years to make the loan, you have three
Speaker 1: years to get it back and then return the capital
Speaker 1: and in six or seven years. That makes a lot
Speaker 1: more sense than you know, how do you build a
Speaker 1: portfolio not knowing where that portfolio is going to still
Speaker 1: be with you in thirty days. That's challenging. Hey, an
Speaker 1: ink cole the a liquidity premium for nothing, right. The
Speaker 1: whole idea of tying up capital for X number of
Speaker 1: years means the short term either gates or liquiditly demands
Speaker 1: aren't relevant to the investment thesis. You know, the illiquidity
Speaker 1: premium in emerging market debt. It's a really important concept
Speaker 1: because I see ce iOS, pension phones, whatever it may be,
Speaker 1: and they're like, we're gonna be three percent six percent
Speaker 1: emerging market debt forever. That's our that's our asset allocation.
Speaker 1: But they stick in liquid liquid in quotations T plus three.
Speaker 1: You know, get your money back in three days. And
Speaker 1: I'll go back to the Mexico example. You know a
Speaker 1: year ago you could get three percent for a security
Speaker 1: for pemm X, or we could lend a pemic suppliers
Speaker 1: and it wasn't that a liquid it was nine to
Speaker 1: twelve months, So if you're gonna be there for ten,
Speaker 1: why not pick up that extra thousand plus basis points?
Speaker 1: That sounds like it's worth it. Thank you, Robert for
Speaker 1: being so generous with your time. We have been speaking
Speaker 1: with Robert Koenigsberger. He is the chief investment Officer and
Speaker 1: managing partner at Grammercy Funds Management. If you enjoy this conversation, well,
Speaker 1: be sure and check out any of our prior four
Speaker 1: and fifty interviews. You can find those at iTunes, Spotify, YouTube,
Speaker 1: wherever you get your favorite podcast from. Sign up for
Speaker 1: my daily reads at Rid Halts dot com. You can
Speaker 1: follow me on Twitter at rid Halts. I would be
Speaker 1: remiss if I did not thank the crack team that
Speaker 1: helps put these conversations together each week. Justin Milner is
Speaker 1: my audio engineer. Paris Wold is my producer. Sean Russo
Speaker 1: is my head of research. Atika val Bront is my
Speaker 1: project manager. I'm Barry Hults. You've been listening to Masters
Speaker 1: in Business n Bloomberg Radio.