September 19, 2024 • 70 mins
Barry Ritholtz speaks with Victor Khosla, Founder and CIO of Strategic Value Partners. Prior to establishing SVP in 2001, Victor served as President of Cerberus Capital and built and managed one of the top proprietary trading businesses at Merrill Lynch. He is a member of the Management Council at the University of Chicago Booth School of Business and sits on the board of Pratham USA. On this episode, Victor discusses the state of investing, 'trading' planes, and what it takes to build a leading global private credit firm.
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Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:09):
This is Master's in Business with Barry Ridholds on Bloomberg Radio.
Speaker 1 (00:16):
This week on the podcast, yet another extra special guest,
Victor Kosla, founder CIO of the nineteen billion dollar Strategic
Value Partners. Victor has had a fascinating career stood up
the distressed debt department at Citibank before doing the same
thing at Merrill Lynch a few years later. He also
(00:38):
spent time at Cerebus and More Capital before launching his
own firm in two thousand and one. They do everything
from hard assets like real estate, infrastructure, aircraft, power plants,
to private debt event driven opportunities. Europe accounts for anyway
(00:59):
between a third and a half of their investments. They
have a number of businesses that they've taken over through
the debt side of the equation fifteen businesses with over
ninety thousand employees. Really just a fascinating person who has
seen the distressed debt business from day one. He was
(01:20):
there at the creation and has taken it to all
sorts of really interesting places. I found this conversation to
be absolutely fascinating if you're at all interested in things
like hard debt and what distressed asset buying is like,
and what it's like to take over a company not
through its equity but through its default to debt. I
(01:41):
think you'll find this to be an absolutely fascinating conversation.
I know I did with no further ado my discussion
with Strategic Value Partners Victor Cosla. Victor Cosla, welcome to Bloomberg.
Speaker 2 (01:56):
Thank you, thanks for having me back.
Speaker 1 (01:57):
So I skipped over a lot of your CV. We'll
get to some more details in a little while. Let's
just start with your educational background. Bachelor of Commerce with
honors from Delhi University, a master's in Economic from Vanderbilt,
and then an MBA from the University of Chicago. So
(02:18):
is it safe to say finance was always in the
career plans?
Speaker 2 (02:22):
Oh gosh, yes, from the beginning, finance and business was
always in the career plans. Running a nineteen billion dollar
private equity opportunistic credit firm was not right. It doesn't
like that was the plan forty years.
Speaker 1 (02:40):
You just tack into what was working and continue to
build on it. Talk a little bit about your professional experience,
because I find it absolutely fascinating. You're relatively young in
your career when you're at City Bank or was it
City Group. Then I keep track and you essentially created
their stress debt department. Tell us about that experience. Was
(03:04):
that twenty five thirty years ago? Maybe more?
Speaker 2 (03:07):
It was more it was thirty years ago.
Speaker 1 (03:10):
Nineteen eighties, early.
Speaker 2 (03:13):
Nineties, right when it happened. Yes, I worked in all
the places Barry you described, right, the two places. I
think what's really interesting is I was there at the beginning,
at the creation of a loan trading business.
Speaker 1 (03:31):
Like it did not exist at City or most of
Wall Street. It did before the early nineties. It did
not great novel.
Speaker 2 (03:37):
Bloomingdale's filed for bankruptcy, SCITV filed for bankruptcy, and for
the first time, banks which owned the debt wanted to sell.
Speaker 1 (03:50):
So they're sitting they're sitting on a lot of bed paper. Yeah,
and they don't really know what it's worth. They don't
know what to do with it. How do they come
to you and City and say, hey, we're stuck with
all this paper, and you know, we like to at
least have a partial recovery.
Speaker 2 (04:06):
That was what really got it going. There was no price.
You had to kind of analyze it to come up
with a price, and at the same time there were
very few buyers more and more sellers, so the pricing
was really good where you could buy these loans.
Speaker 1 (04:25):
So was City acting as a middleman looking for buyers
of distress dead or did someone like yourself have the
insight and say, hey, you know, at one hundred cents
on the dollar, this is junk, but at fifteen twenty cents,
there's some upside.
Speaker 2 (04:39):
At City and at Merrill, I ran a proprietary trading business,
and proprietary trading is using the firm capital to kind
of buy it and also to distribute it to syndicated
more broadly at the same time. But I think if
I was to go back through my career, that moment
(05:01):
in time, you know when there is this big wave coming,
because it was the start of the high yield market.
The leverage loan market grew dramatically, you know, from two
hundred billion in the mid nineties to five trillion dollars today.
High yield and leverage loans right, and these deals which
(05:21):
never used to trade in the secondary market, they started
to change hands. I was there right at the beginning
of that big wave, and what has happened to me
career wise, is just riding that wave as it got bigger,
as it got more complicated, as it became US and Europe,
(05:44):
not just US. As it went from buying and selling
distress debt to going out and taking control of businesses,
operating them, and improving them. It was all set at
that moment of time in the early nineties.
Speaker 1 (06:01):
So let's just stay in the early nineties at City
for a few minutes. At the time, you're early in
your career, you have some experience in an MBA when
you first started hearing that from banks, that hey, we
got all this Bloomingdale debt. Tell us what went through
your mind? Did you envision, Oh, you know there's a
(06:23):
market for here and there's an opportunity. How did you
look at this? And then how did you stand up
that whole distress debt department at.
Speaker 2 (06:31):
City banks are wanting to sell. I have worked at biz,
Allen and Hamilton. I'm a strategic planning guy. I get
hired by City Bank in planning. I worked for a
really senior guy in the investment bank. This business is
just starting. I write a business plan for it.
Speaker 1 (06:52):
Like a legitimate like it like it's a freestanding entity.
Speaker 2 (06:56):
Like, you know, it's a business, we should get a startup. Yes,
it's a business. We should be bigger in, we should
grow in. And there were a couple of people inside
City Bank who were pioneers in trying to buy and
sell loans. Right, I get folded right into that group
after writing the business plan, and boy, we are off
(07:19):
to the races. Now. You know, when you look at
something like a Bloomingdale's, what you have to ask yourself
is Bloomingdale's is restructuring. It's going through a bankruptcy. It's
got the debt itself which banks want to sell. You
have to price it. And at this point in time,
the bankruptcy processes, the restructuring processes weren't that well developed. Right.
(07:45):
You had to really say, hey, it's a two year
stint in bankruptcy. We're going to cut costs. We'll make
this business much more efficient right as we do it.
And then you say what is the business worth?
Speaker 1 (07:58):
And at the time they had a good good brands,
fantastic real estate locations, so there was some assets that
were salvageable. The question was do we continue as a
going concern or do we just liquid eate. You guys
have said, hey, let's reorganize this because there's still value here.
(08:18):
It's not We're not just going to sell it off for.
Speaker 2 (08:20):
Parts exactly right. And by the way, most of the
businesses we invest in, there's much more value even like today,
there's much more value in fixing it and transforming it
and selling it for parts. But because these are really
good businesses which got levered, they got leveraged through these
(08:41):
leverage buyouts, right, But that valuation to be able to
come up with the valuation to be then able to
work in a restructuring process, bankruptcy process and say, hey,
I think at the end of this we are buying
debt at fifty cents, it could be worth eighteen ninety cents.
(09:02):
It could take two to four years to kind of
get there. That's how this business started. It was just
not well understood, even the fact that there was a
bankruptcy process which could be two years long or three
years long. Right, It was just not well understood in
the early nineties.
Speaker 1 (09:23):
So I have so many questions for you about because
this is such a The nineties was such a fascinating era.
So first, was this like a small side project at city,
or did the higher up say, oh, Victor's onto something.
Let's put some capital into this and see where it goes.
Were what was the initial reaction within city.
Speaker 2 (09:44):
And by the way, don't get me wrong place. It
wasn't just it it was It wasn't.
Speaker 1 (09:48):
Just it's the You know, anytime we talk about Merrill
or City Ubs or Morgan, we're always talking about big teams. Yes,
a number of different people leading different departments. All that said,
you wrote the business plan, So how warmly was it
embraced or was it all right? Give the kid a
couple of bucks and let's see how far this goes.
Speaker 2 (10:10):
It started out with give the kids a couple of bucks.
Speaker 1 (10:13):
Uh huh.
Speaker 2 (10:14):
And then what happened was like literally in the first
few weeks.
Speaker 1 (10:19):
So not long at all, like immediate success.
Speaker 2 (10:22):
Right, we are starting to get in the middle of
some of these secondary sales of debt. It's almost like liftoff,
right because the moment of time. You know, in those days, Barry,
a lot of debt was owned by Japanese banks.
Speaker 1 (10:39):
I recall on banks, right, remember when everyone was terrified
they were going to buy Rockefeller Center and then take
over everything. Around the late eighties, early nineties. That was
peak Japan and they spent the next thirty years wandering
in the desert.
Speaker 2 (10:53):
Well, they've had a tough few decades.
Speaker 1 (10:56):
Right, although they seemed to be very much on the
on the comeback. But so immediately this looks successful.
Speaker 2 (11:02):
Typically thirty percent of the market was owned by Japanese banks.
Speaker 1 (11:06):
Really, that's a giant number.
Speaker 2 (11:08):
In the early nineties right now. So now you have
these restructurings, you have these bankruptcies, and the Japanese banks
want to sell the debt huh, they drive it. Then
the European banks want to sell because US bankruptcy in
those days was not as well understood, right, And then boy,
(11:29):
it was almost like bankruptcy filings boom, debt for sale boom, boom,
and it just took off.
Speaker 1 (11:36):
And my recollection is that when foreign banks come into
the US and buy up a bunch of assets or
debt or whatever it is, and when they start to
run into trouble back home, there's usually a change of leadership,
and whoever the new owner of the foreign banks are,
I tend to say, Hey, I didn't buy that junk.
You guys just get rid of this whatever you can
(11:59):
get for it. Hits a bid. They're very aggressive sellers
or am am I misremembering.
Speaker 2 (12:06):
They are aggressive sellers, and foreign banks, foreign institutions tend
to be more aggressive. But there's also a very you know,
there's also very economic reason for it, right, because when
you're in a restructuring the debt you own has defaulted,
and the central bank which governs you, like the one
(12:28):
in Japan or like the one in the United States,
they make you take reserves mark it down.
Speaker 1 (12:34):
Right, so you write it down to zero, So whatever
you get for it is practically found money. You've already
taken it.
Speaker 2 (12:40):
So there's a very good economic reason why, you know, short,
they're far away, they don't quite understand what's going on.
Speaker 1 (12:49):
It's a small part of their book right now.
Speaker 2 (12:51):
So obvious reason, right, But then also the economic reason that, hey,
I have it marked down, I have all these nonfer
forming loans in my balance sheet. It's creating a drag
the way equity analysts look at my balance sheet, I
should be selling, I should be getting out right. So,
(13:13):
and by the way, it continues to today. If you have
a bankruptcy filing, you have a restructuring right, they will
sell the debt they'll sell it at a price which
is probably too low. But there's a very sound economic
reason for the banks or the clos to want to sell.
Speaker 1 (13:31):
They have a very different set of priorities than a
pure invested buyer.
Speaker 2 (13:35):
Exactly right. But so Barry, can I tell you, but
go back, go back to one thought, though, I wanted
to make sure it just came through. Early nineties was
the start of the modern high yield leverage buyout business
done at scale. It was the start of the high
(13:56):
yield business exploding dramatically in size to where it is
today and still growing, right. And it was the start
of the secondary market to kind of buy and sell
kind of pieces of debt. And what I was lucky
enough to be in the early nineties was I was
(14:17):
one of the first people in this business, right overseeing
a trading desk like I did at Merrill Lynch.
Speaker 1 (14:25):
So that was wide open white space. It was virgin snow.
It was very new. How long did you stay at
City before you left for other places?
Speaker 2 (14:35):
I was working at City Bank for a couple of years,
working on kind of the secondary prop investing trading site,
and then I was hired by Merrill to start the.
Speaker 1 (14:47):
Business Previously we were talking about your experience at the
very beginning of the distressed debt industry building the desk
at city. You join Merrill Lynch in ninety three and
start building their distressed prop trading businesses, which became wildly successful,
(15:09):
and you're there from ninety three to ninety eight, right
in the middle of the nineties. Tell us a little
bit about that experience. What was it like at Merrill
in the nineteen nineties.
Speaker 2 (15:19):
Merril never really had very much of a proprietary culture
right as a firm, It's just not. In the nineties
it was very much a brokerage house with a growing
expanding investment bank. It wasn't really a proprietary investing trading
culture right in those Yes.
Speaker 1 (15:38):
So what made them say, hey, let's go, you know,
let's go pull Victor out of city and set up
a prop desk.
Speaker 2 (15:46):
The old fashioned rationale making money?
Speaker 1 (15:50):
They so little fomo they saw city. Hey, since when
a city so big in distress debt they seem to
be doing really well. We need to have a little
bit of that for ourselves. So is it that simple?
Speaker 2 (16:01):
It was early people could see the explosive growth taking place,
and as somebody who was a well known commodity, well
known player in that business already, right, they hired me
to go run it. So when I started at Meryl,
it was one of me and they said, okay, Victor,
(16:24):
here's one hundred million dollars. Right, it's kind of where
I started in nineteen ninety three.
Speaker 1 (16:30):
Right. Was that a lot of money back then?
Speaker 2 (16:31):
Or it was it was a lot of money back then,
so in ninety Funny, I.
Speaker 1 (16:37):
Know that sounds silly because it's a little hard to
put thirty four years into context, for thirty years into context,
But like one hundred million dollars today, you know that's
a small account at a lot of shops. Back in
the early nineties, one hundred million dollars.
Speaker 2 (16:54):
Was real cash. So what they and what they did
was they encouraged me. So I had a couple of
very supportive people I worked with. You know, success begets
more success. So we ended up getting the resources to
hire a bigger and bigger team, ended up setting up
a business in London. We were literally one of the
(17:18):
first people into Europe buying and selling debt, investing in
debt in Europe, and then in ninety seven set up
a business in Japan to buy debt from Japanese banks
in Japan. Right, So for me at Merrill, from that
one hundred million and nineteen ninety three, by the time
(17:39):
I left in early ninety eight, we had about two
billion dollars of proprietary capital and I had forty people
four zero people working with me in New York, in London,
in Tokyo.
Speaker 1 (17:52):
Merrill also had an office in Hong Kong as well.
Were you buying debt out of Hong Kong also?
Speaker 2 (17:59):
I was, now I was starting to dabble in it.
This was before the Thai bot the Thigh crisis eight, right,
So it was before that I was starting to look
at it. Yeah, but it wasn't kind of the focus.
It was really US era up Japan.
Speaker 1 (18:15):
So one hundred million to two billion in five years,
that's a giant lift. That's a big expansion. Your next
couple of stops along the way were at some pretty
well regarded firms. Sarah Is Capital, you ran a joint
venture doing Japanese debt with more. Tell us a little
bit about your experiences away from the big brokerage firms
(18:38):
and some of these more nimble independent shops.
Speaker 2 (18:43):
You know, the nimble independent shops had a lot more
money than the two billion dollars.
Speaker 1 (18:49):
Really, I never would have guessed that what I.
Speaker 2 (18:52):
Was overseeing at Merrill length right, But you know what
I found was, I think it's sobers you had a
very strong, very well known brand at that time. More
Capital was much more institutional in how it worked. It
had much more of a structure and process around it.
And I and I worked with Cypress, I worked with
(19:14):
more Capital between them for a total of about four years.
It was my first foray from working in a proprietary
trading business, which is what I did at Merrill, to
working on the buy side. Just the learning what it
takes to actually raise money, what it what it means
(19:37):
to actually build a really strong infrastructure, a finance, operations,
legal team. Right, my first foray out of merrile into
the buy side and learning kind of all these different
kind of skills, and those were four incredibly growth orientedy
as for me.
Speaker 1 (19:56):
I could I can imagine it and for listeners who
may not be familiar with the distinction between buyside and
sell side. When you're at City or you're at Merrill,
you're trading on behalf of either the firms fund or
on behalf of clients. And we call that the sell
side because you have to sell that product to clients.
The buy side is Cerebrus or more have their own
(20:20):
pile of assets from their limited partners, and you are
investing in trading on behalf of the firm itself, And
so it's a little bit different in you're not dealing
with the clients at somebody else's job. You're investing the
money on behalf of of the firm. Ultimately, that leads
you to say, hey, this buyside thing seems like a
(20:43):
pretty good structure for making investments. What led you to say,
I think I could launch my own shop and stand
something up on behalf of myself instead of working for
someone else.
Speaker 2 (20:57):
It takes a lot of confidence, a little bit woodspot right.
I was never lacking in that right.
Speaker 1 (21:05):
So, but to be fair, you know, there's Kutsman, there's kutzpah.
You built a great desk at City, you built a
great desk at Merrill, you generate a lot of profits
for more and Serabis, So it wasn't a big leap
of faith. Hey can I do this? You obviously had
a great track record, so standing up your own firm
(21:28):
was why not why not be in charge? Why not
run my own ship?
Speaker 2 (21:31):
In those days, there were ten fifteen people who were
probably well known in this business, and I was one
of the ten fifteen people. Right by the way, Well,
when I think about kind of more Capital, huh, what
a great firm, by the way.
Speaker 1 (21:47):
Right, legendary founder, but just great track record.
Speaker 2 (21:52):
All that, but also just a great firm. Right. But
when I think about kind of why start something, you know,
when I really cut through it, I really wanted to
work for myself. Understandable, right, So when we started Strategic
Value Partners, More Capital gave us one hundred million dollars system.
Speaker 1 (22:10):
No, no kidding. So that's quite a vote of confidence.
You're not, you know, if Moore is giving you that much,
the same amount that you started with it at Merrill.
So so the firm is now nineteen billion dollars. When
you launched in two thousand and one, what were you
launching with Moore's one hundred plus? How much additional capital
did you raise?
Speaker 2 (22:31):
Ten million?
Speaker 1 (22:32):
Really, so they were ninety percent of what you had.
Speaker 2 (22:35):
You know, we were launching the firm and the markets
crash in one Sure you were early days of that
markets crash and as a result of that crash and
markets we think we are going to launch with three
four hundred million, and we launched with one hundred and
ten million.
Speaker 1 (22:52):
At the same time, you launch into a let's call
it a target rich field, there had to be a
lot of opportunity.
Speaker 2 (23:00):
You know. The performance numbers out returns were just kind
of really great because it was a target rich world,
and that kind of set us up when I think
about those early years, right and I think about kind
of the firm we have become today.
Speaker 1 (23:18):
So let's start with what you began with. How many
people did you launch with? How many you had two clients?
It sounds like, yes, one hundred and ten. How many
How big was the staff on you on it was
eight people, eight and today you're a little bigger than that.
Speaker 2 (23:35):
We've got over two hundred people.
Speaker 1 (23:37):
I mean, that's a substantial firm. Not only that, when
you launched it was primarily distressed debt. You've expanded into
so many different areas. Tell us a little bit about
that growth, especially the first few years, and what led
you to opening another London office in two thousand and four.
Speaker 2 (23:57):
When we started, we've focused on distressed debt and restructurings
in two thousand and one, two thousand and two, that's
kind of that was the focus.
Speaker 1 (24:06):
Well, what sort of companies was it was a lot
of the dot coms that had imploded, or was it
just generally across the economy.
Speaker 2 (24:12):
You were in. We were in the middle of a recession.
M hm. WorldCom, if you remember, had had a file
for bankruptcy as there were a couple of big energy
companies in trouble.
Speaker 1 (24:23):
And Ron and Ron.
Speaker 2 (24:24):
So you know, we were never a dot com kind
of person. And even today we're really not a tech
or a software focused firm, right. We are very much
in old economy businesses, service businesses, consumer brands. That's very
much our focus as a firm. So in two thousand
and two, when we start, it's not the dot com
(24:47):
debrivia looking through, it's the recession and all the problems
it's caused in all these old economy businesses.
Speaker 1 (24:54):
Huh. Really interesting. So you start with distressed debt, what's
the next division you, for lack of a better word,
opportunistic credit lending, money taking control. What were the next
businesses you added?
Speaker 2 (25:10):
When we did distress that we were focused on buying
debt and restructuring it into equity, being on kind of
boards of directors, trying to work with the businesses. But
we were mostly had minority equity positions because you when
you all you have is a hedge fund parry, right,
(25:31):
you need liquidity, right, you can't do private equity.
Speaker 1 (25:36):
You're not locking stuff up for forever.
Speaker 2 (25:38):
No, really, you can't write. So the early years were
very much focused on this more liquid side of the world,
the distressed debt side of the world. And by the way,
we had success that fund of We started with one
hundred and ten million dollars. By the time two thousand
and eight came around, we had about five billion dollars.
Speaker 1 (26:00):
Really, that's a big that's a big number.
Speaker 2 (26:02):
We had some really good success right in those years
doing what we do. But you know, what we found
was two thousand and eight was a really good.
Speaker 1 (26:14):
You know I talked target rich environment.
Speaker 2 (26:16):
It was in nineteen ninety one, we were there. I
was there on day one as the business of buying
and selling secondary debt, investing in secondary debt took off.
In two thousand and eight, there was another one of
those really dramatic changes. So what we told ourselves was Hey,
(26:41):
this is a really great target rich environment. Sure, but
the business has changed. Our view was, Hey, these distress
debt cycles, they only happen every two years out of ten.
It's not like a business you can do every right.
It's a super cyclical business. So as a firm in
(27:06):
two thousand and eight, we started to go down a
different path. We said, Okay, there are some really great
businesses which have had a really rough time with bankruptcies,
with restructurings. There's a lot of low hanging operational fruit.
Let's go out and buy into these businesses and take control.
Speaker 1 (27:31):
Now you're talking about doing this through debt, not.
Speaker 2 (27:34):
Equity exactly, but buying enough debt to own fifty one
percent or more of the company, becoming a private equity investor,
and then driving an operational transformation in the business.
Speaker 1 (27:49):
So it's so funny different, it's so funny you talk
about this. I vividly remember having a conversation with a
friend who was originally from Canada relocated to the Grand Caymans,
and the first time I learned that it's got to
be ten fifteen years ago of an investor taking control
(28:10):
of an asset through the debt, not the equity was
there's a giant Ritz Carlton on the Grand Cayman. Oh yes,
and the under the owner was constantly floating notes and
during the financial crisis he ran into trouble and a
lot of big banks own that paper and somebody very
cleverly picked up a lot of that debt pennies on
(28:32):
the dollar ended up taking over that whole thing. It
was eye opening, like, oh, you can control a company,
not just through equity, through debt.
Speaker 2 (28:40):
But you know, but if you just take control, you
could be the proverbial dog who chases that ice cream truck.
Speaker 1 (28:48):
What do you do when you catch it?
Speaker 2 (28:50):
Yes, you know, you need these operating skills to go
out and improve and transform these businesses. Right, So what
we start to do in two thousand and eight was
not just to take control, but to take control in
our very hands on way. Right. We strengthen management, we
(29:10):
build new business plans, we call them value creation plans
in our world, and we try and drive fundamental change
even sometimes in these businesses. So for us as a firm,
we went from buying and investing in debt after two
thousand and eight to taking control of businesses. We went
(29:33):
from a firm in two thousand and four even we said,
look there's this great growing opportunity in Europe. We set
up a London office and our London investment teams today
are almost the same size as the US teams. And
what we also did over those years was we said, hey,
(29:53):
look there are all these real assets airplanes, power plants,
real estate, toll roads. Right, these are all going through
these kind of restructurings, these kind of problems with their
capital structure. So as a firm, starting in two thousand
and eight, we went from our roots in value in
(30:15):
distress debt, right, we went into control, We went into
kind of real assets, and we started lending money to people,
not direct lending, much more the higher risk, higher return lending. Right.
But as a firm, we've gone through this journey from
two thousand and eight, that transformation.
Speaker 1 (30:35):
Huh, really quite fascinating. Let's continue talking about some of
these operating businesses. Ninety thousand employees, fifteen different businesses. This
is more than just buying the bare debt of a
company that's hit a hard time. You are pretty much
fully taking over and running and operating substantial companies. Tell
(30:59):
us how came about and how did SVP develop the
expertise to effectively become operators and managers.
Speaker 2 (31:07):
When you have a company which kind of hits a
really rough patch, you know, leverage buyouts. By definition, there's leverage.
They hit a rough patch, they have really big financial problems.
And when that happens, even really good businesses Barry Shick, right,
(31:28):
you know, some of the businesses we are invested in.
We own a toll road in Texas today, a toll
road between Austin and San Antonio. We just bought Hornblower,
which is we took operate majority control of it, which
is a ferry business, the New York City Ferries, the
(31:48):
Statue of Liberty ferry, right, it is. But all these businesses,
these are good businesses.
Speaker 1 (31:55):
But they take on a lot of debt. There's no
room for.
Speaker 2 (31:58):
Error, and things and everything shakes. You know. Often we
find some of the really good management teams they get frustrated.
Some of them leave, right because now you've got so
much leverage. You've got a good business, but so much leverage,
and you can't figure out how to how you're going
to pop your head up about the surface. Right. So
(32:20):
as a result of that, we find that when we
are investing short, we have to recapitalize it, so the
leverage numbers go down dramatically.
Speaker 1 (32:30):
So let me ask you a question about what's just
been going on over the past couple of years. If
you're a leverage company and that debt is you know,
what used to be libor plus, it's no longer libor
now it's the new measure. Central banks raise interest five
hundred and twenty five basis points. Suddenly what was a
(32:51):
manageable amount of debt might become unmanageable. How has the
past few years of rapidly rising rates acted these leverage businesses.
Speaker 2 (33:02):
It has been really tough for them, right. You know,
you borrowed money when interest rates were zero and you
were paying all in five percent. Right now you're paying
ten percent twelve percent, which is a lot of money, right,
and you are very levered. And by the way, these
(33:22):
old economy businesses they are not having that same growth
like tech or software.
Speaker 1 (33:29):
They're not AI. They're at fery businesses and toll roads.
That's steady income, but you're not looking at double digit growth.
Speaker 2 (33:37):
So you can't really grow into your capital structure. Right,
So easily you married the two things together. Growth, but
slow growth, modest growth in cash flow or EPA with
much higher interest rates, like in terms of what you
have to do. And by the way, remember some of
these businesses went through COVID where they had to take
(33:59):
on even more debt to kind of tide over COVID.
Speaker 1 (34:02):
Right, that was a double WHAMMI COVID and then the
rate increase.
Speaker 2 (34:06):
And now what is happening is there are maturities coming due.
There's a large maturity wall in twenty five, twenty six,
twenty seven. By the way, by our reckoning, there's almost
two trillion of that five trillion of high yield matures
in the next three and a half years.
Speaker 1 (34:25):
Really, so I heard an expression a debt trader used,
survive till twenty five. You're suggesting, hey, twenty five isn't
good enough. You're gonna have to get through twenty six
and twenty seven exactly. Huh.
Speaker 2 (34:38):
It's creating issues. By the way, this is not like, oh,
it's going to happen next year.
Speaker 1 (34:44):
It's happening already.
Speaker 2 (34:45):
It's been happening for the last eighteen months.
Speaker 1 (34:47):
Well. Well, given the high rates, that makes perfect sense.
Speaker 2 (34:50):
Our pace of investing has picked up substantially. Our pipeline
has almost quadrupled over the last eighteen months. This is
happening right now, Barry. Don't get the wrong idea. I'm
not trying to tell you there's some crash or something.
We don't think there is.
Speaker 1 (35:07):
You seem to be enthusiastic about the opportunities ahead of you,
not that the world is coming to an end, but rather, Hey,
this is going to be a great period of time
if you're an opportunistic distress debt investor.
Speaker 2 (35:21):
Or if you are in a special situation's private equity.
Speaker 1 (35:24):
So let's talk about that. How do you define special situations?
Speaker 2 (35:28):
You know, we are in the business of trying to
buy businesses at a good price, and then we're in
the business of trying to improve them, sometimes even transform
them operationally, right because they have been undermanaged with everything
I'd described to us, that's you know, that combination. You
(35:51):
can't really if somebody is having an auction of a
company and they have hired Goldman Sachs on the re
lane to sell it, it's very hard to buy something
at a really good price. Right, You've got to be
able to buy it either you buy it through the
debt right where you buy it through by buying debt
(36:12):
at a discount, or you buy it bi laterally in
a process without a process, right, the company has enough
issues and there's a way to just negotiate a price bilaterally.
So I think for us, the opportunity set today is
to kind of buy it well, but that is just
(36:34):
step one. The step two is to go strengthen the
management team, build a new business plan, often to inject
more capital into.
Speaker 1 (36:45):
The restructure so it's not carrying all that debt.
Speaker 2 (36:48):
Fourteen of the fifteen businesses we control have more employees
today than when we took over.
Speaker 1 (36:54):
Wow, that pretty impressive.
Speaker 2 (36:56):
But I think it's so this is not about just
cutting about kind of investing and looking to transform these
businesses which have been undermanaged, and those together is what
in our world, in our mind, constitute special situation private equity.
Speaker 1 (37:14):
Let's talk a little bit about hard assets. You mentioned
infrastructure like ferrying, toll roads. Let's talk about real estate, airplanes,
and power plants. I would think power plants would be
very tied to the cost of energy plus whatever their
costs are for modernizing and reducing pollutants and their output.
(37:41):
Tell us about what you look at when you look
at a buying a power plant.
Speaker 2 (37:46):
Yeah, you know, for us, about sixty percent of what
we do is corporate investing. So these industrial businesses, service businesses.
Speaker 1 (37:57):
Right fold, economy, stolid, yeah, you know, ready steady businesses
that have run into a little trouble.
Speaker 2 (38:04):
With generally very good market shares. Right. Four zero percent
of what we do are real assets.
Speaker 1 (38:12):
Oh really that much? That's giant. So give us some
examples of First of all, I'm fascinated by hard assets
like airplanes. How do people get into trouble owning either
a single plane or a fleet of plane?
Speaker 2 (38:28):
Can I tell you? Can we even start with infrastructure, right,
because barrye the prevailing view would be infrastructure, toll roads, ferries,
all these kind of businesses. They are really you've got
a monopoly or adopoly, right, they are. They they should
be really strong, they should be good growers, and they
(38:51):
should be steady. Eddy, And infrastructure today is bought by
sovereign funds, big pension funds with a view that it
is very steady seven eight nine percent kind of returns. Right,
that's the prevailing.
Speaker 1 (39:08):
View, assuming you're purching purchasing it at the right price.
Speaker 2 (39:11):
Right. Now, what has happened in infrastructure is there were
a couple of very aggressive people who bought infrastructure toll
roads with eighty ninety percent debt, right, not forty percent,
fifty percent, eighty ninety percent debt.
Speaker 1 (39:28):
No room for error there.
Speaker 2 (39:30):
And if you had if you hit COVID, you or
if you hit a financial recession, it's really hard to
dig yourself out of eighteen ninety percent debt. Right. So
what we saw was a whole class of toll roads,
which are supposed to be core infrastructure safe, A whole
(39:51):
class of toll roads, the ferry business I'm kind of
talking about, right, a waste of energy business in London
we in in called Cory Right. All these businesses ended
up kind of crashing. Now, for US has never been distressed, right,
(40:12):
there's no broad infrastructure distress cycle. But for us it
started about ten years ago. Right. We were one of
the first ones who started to take a part infrastructure
and say, hey, it's not like corporate Right, It's valued
very differently than how you'd value a company. There's a
(40:34):
whole what it takes to operate it is really quite different.
You need some really great government skills, by the way,
to manage the agency which regulates you.
Speaker 1 (40:44):
A lot of complexity there, not just you're not just
selling widgets.
Speaker 2 (40:48):
It's different, right, and you've got to understand it. And
we were one of the first people in our business
to really drive into it, and I think we've been
the biggest investors in our industry in infra.
Speaker 1 (41:00):
So I got to ask, who the hell is buying
a toll road with ninety percent debt. I mean, it's
one thing if you're buying your first house and you
put ten percent down in finance, then the other ninety
percent because you're gonna live there over the next thirty
years and you got to live somewhere. But who would
buy like that? Just seems kind of reckless or am I.
Speaker 2 (41:22):
You know, it was viewed in the old days. It
was viewed fifteen years ago. It was viewed as such
a safe asset class. Not only could not everybody did it? Okay,
they have a few real outliers who did a lot
of it right, and they did it with eighty five
percent debt. Eighty percent debt, ninety percent debt. And by
(41:45):
the way, most of the industry does not do this right.
Speaker 1 (41:49):
You are very much confirming my long held belief that
there's no such thing as toxic assets, only toxic prices
and toxic debt level. Yeah, it sounds like that's a
key part of how you guys have grown.
Speaker 2 (42:04):
It is it has been, right. But what's kind of
interesting also is like you know that waste to energy
business in London, right when we bought it, they had
a really great I'll tell you this, forgive me, I'll
just die digress.
Speaker 1 (42:21):
I'm fascinated.
Speaker 2 (42:22):
Right, So there's a there's a this business corry in London.
So if you go, if you're on the River Thames,
you'll see these barges taking garbage. They take garbage from
some of the richest burrows in London. They take it
to a plant called Riverside where they burn it and
(42:42):
they produce electricity for those same burrows. Right, this business
great business, by the way, Right now, what they had
done was they also had a landfill business. They also
had a garbage collection business, and those businesses got them
into real trouble. So the company itself got into a
(43:05):
pickle too much debt and with this one really great
core business and two other really troubled and so soo businesses. Right,
And what we ended up doing was when we kind
of took control of the business. Yes, we fixed and
sold the two businesses which weren't so great, but at
(43:26):
the same time, the core business we invested in it.
We hired a new chairman, we hired a new CEO
and a management team. And by the way, the business
itself had long term You know what makes infrastructure is
when you have long term contracts. They had long term
contracts for about fifty five percent of their output in Riverside.
(43:50):
We increased that to seventy percent. We started to build
a plan to expand the plant, to build a new
data center next to the plant.
Speaker 1 (44:00):
Right, And they're so energy intensive.
Speaker 2 (44:02):
It is because they produce electricity also, which so you
can create a data center kind of right next to it,
so you can see the transformational work which is going on.
It wasn't like, hey, we just bought it. It's great, right, right,
And we subsequently ended up kind of selling it three
four years later after we'd finished doing all that, and
(44:24):
it was a very successful investment. But you can buy infrastructure.
But if we just bought it and just put it
on auto control, nothing would have happened.
Speaker 1 (44:35):
This isn't a passive investment. This is active management. I'm
fascinated by some of the other hard assets. Tell us
about what you do with aircraft, Like how do people
over leverage themselves with either a jet or a fleet
of jets and have to have a distressed buyer come
in and take it over.
Speaker 2 (44:55):
We find that investing in aircraft for us two out
of ten years we really lean in. It's not a
steady state. Hey, we're going to invest ex melion every year.
It's a very cyclical business. So like so like take COVID, right,
COVID happens, flying shuts down. Right. A couple of couple
(45:21):
of really large airlines. There's one called LATINAM in Latin America,
there's Aero Mexico. A couple of large airlines end up
kind of filing for bankruptcy. Now they are in bankruptcy
and people and they have like LATINAM in those days
had a fleet of three hundred plus airplanes.
Speaker 1 (45:40):
Oh really, that's a big fleet.
Speaker 2 (45:42):
Yeah. So by the way, Latham's really it's a big airline, right.
Speaker 1 (45:46):
One of mostly South American and Central America.
Speaker 2 (45:49):
And flying to the United States. Right, they're the market
leader in South in Latin America. Right, But now they
are the people have given them the planes on these leases.
They have leases with all these kind of financial guys,
which is how they bought a lot of their airplanes.
(46:11):
They're in bankruptcy. They want to redo the lease, recut
the lease. And by the way, this is COVID. Lease
pricing has collapsed right right, So now all of a sudden,
the leases aren't the person who's lent them the money
on the lease. It's no longer worth that because lease
(46:32):
prices have collapsed and they are being reset right now
because of the bankruptcy of Latin. So for us, you know,
we ended up kind of buying. We ended up buying
twenty three of those airplanes right from some of the
leaseholders in Latin.
Speaker 1 (46:51):
For buying the planes outright buying the planes and then
what do you do with that aircraft?
Speaker 2 (46:55):
We actually bought the debt. We've foreclosed on the planes,
so now we own the planes. Most of them we
leased back to Latin. Some of them. There were actually
four very large eight three fifties right, which is which
is like a wide body large a three fifties, and
(47:18):
we sold them to Luftanza. We had to fix them.
We bought them in the desert we fixed them and
we sold them.
Speaker 1 (47:24):
They can't sit for very long though, they have to
constantly be tended. So if you're going through a bankruptcy,
you can't have a plane on the tarmac for eighteen months.
Speaker 2 (47:32):
And so what's interesting to us about the airline business
when it's really active, like in those periods, right, somebody
like us, we'll invest. We invested a few billion dollars
buying airplanes in those two three years.
Speaker 1 (47:48):
Oh really, that's a lot. That's a lot of aircraft.
Speaker 2 (47:50):
We bought the aircraft, by the way, at this point
we've sold most of them, right, But we also ended
up with a claim which became equity. So today we
are actually a very significant holder of equity in Latin
and Aero Mexico. Right. So, but this is what we
(48:11):
find is this business of investing in aircraft. It's a
it's a very cyclical business for us because we have
a very high rate of return expectation, so it's not
in every year business. And what's really helpful for us
as we do this, Barry, we own a company called Ukalion.
(48:31):
Deucalion has sixty five employees and they manage the aircraft
for us. So when we take over the planes, if
we have to park them in the desert, if we
have to fix them, lease them, finance them. Deucalion gives
us the arms and legs to kind of do it.
You don't want to do this business just as a
(48:53):
paper investor. You need those operating skills. And by the way,
Deucalion today manages one hundred and twenty five airplanes for
third parties even away from us. Right, So for us
having Deucalion, it's a big piece of kind of what
makes our airplane aircraft platform.
Speaker 1 (49:13):
Really really interesting. Last heart asset, I have to ask
you about real estate. Return to office has been, you know,
only a part way success, depending on the city you
look at. It's twenty thirty forty fifty percent vacancy rates,
and what I mean by that is fifty percent occupancy
(49:35):
rates of already lease spaces, to say nothing of the
vacancy rates that come up as leases expire and some
anchor tenants move out. How are you looking at the
world of commercial real estate these days? Given the stress
we see in the office space.
Speaker 2 (49:54):
There is a tsunami working its way through parts of
the commercial real estate sector.
Speaker 1 (50:02):
Slow motion tsunami, isn't.
Speaker 2 (50:03):
It, And it's around maturities of the debt. Right, where
people are foreclosing, title of the property is passing over
to lenders. Right, that's so round numbers. Today there's eight
trillion dollars of commercial mortgage debt in the US and Europe.
Speaker 1 (50:26):
Eight trillion US in Europe that you think is going
to eventually go How much of that goes bad?
Speaker 2 (50:32):
Twenty two percent of its office?
Speaker 1 (50:35):
Oh really? Yeah, so that's let's call that two trillion
almost two trillion, yeah, and a trillion here and a
trillion in.
Speaker 2 (50:42):
Europe exactly right, right, And to our point of view,
a third of it is going to kind of go
broke in this particular cycle away from kind of office
if there are other sectors. So, if you look at multifamily, right,
multifamily is generally a very stable asset class. But with
(51:05):
these higher rates, people were buying multifamily at a four
percent cap rate. Today public rates multifamily public rates are
six percent or so cap rates. That means that prices
have fallen fifty percent. Right if you just take the
four going to kind of six.
Speaker 1 (51:26):
If you have to sell it or if you have
to service the debt. Yes, why does it always come
back to too much debt, too much leverage invariably leads
to a bad outcome. Am I overstating that? It seems
that every one of these stories begins with and they
bought this with way too much debt. And here's what happened.
Speaker 2 (51:46):
A barrier made a career art.
Speaker 1 (51:48):
That's amazing. So I know, I only have you for
a limited amount of time before we move on from
residential from commercial real estate. A truly in the US,
a trillion in Europe about a third is going to
go bad. And it's a slow motion tsunami. In a
(52:09):
way that's almost encouraging because, not to be glib, but
three hundred billion dollars it's not the financial crisis. Not
trillions and trillions and trillions of securitized debt blowing up.
It almost sounds as if that's manageable over time.
Speaker 2 (52:28):
It's not systemic, right, So, whether it is the corporate world,
you know, when I was describing all these maturities in
a five trillion dollar pool of high yield or in
the this is not systemic. Two thousand and eight, the
banks were really levered, right, it became systemic, right, right?
(52:52):
So I think, look, I tend to economic growth is Okay,
it's it's not it's much. It's much less than okay
in the era, but in the US it's kind of okay. Right,
So I don't think I don't think one needs to
kind of say, you know, that systemic stuff which causes
shocks across the economy. Right, Look, we could be wrong,
(53:16):
but we don't think that's in the cards. What's in
the cards is just this very gnarly all these kind
of credit issues which will keep biting for the next
three years, and we'll just kind of work our way
through them.
Speaker 1 (53:30):
Right, if you're in the wrong sector, you're going to
get hurt. And if you've avoided that, it shouldn't it
shouldn't have that spillover effect like we saw with securitized
mortgage in eight oh nine, if I'm hearing you correctly.
So I also have to ask, I know you open
the London office in two thousand and four. Did you
ever expect that Europe would expand to just about half
(53:54):
your assets? That that seems to be really substantial. Tell
us a little bit about what's going going on in Europe,
both their economy and the prospects for growth there, and
what you're doing with your portfolio.
Speaker 2 (54:07):
Well, Europe is if you just think about the broad
market in high yield, seventy five percent US twenty five
percent of Europe for somebody like US, Europe is always
just a much bigger part, a third, maybe even a
half of our book.
Speaker 1 (54:26):
Why is that.
Speaker 2 (54:28):
Europe has Europe has more problems than the.
Speaker 1 (54:34):
US, right, and a lot of old industries and old
businesses that might run into trouble.
Speaker 2 (54:41):
And you know, and every two years there's a crisis
there right, right, Like the US is Fortress America. But
when you look at Europe, right, whether it is Brexit,
whether it is other Italian advisories.
Speaker 1 (54:55):
That go on, it's something every now everywhere else that's
going on.
Speaker 2 (55:00):
You have frequent crises, you have economic growth which is
much slower than the United States. Right. And by the way,
they're suffering from some of the same high rates.
Speaker 1 (55:11):
And their inflation seems to be stickier and more stubborn
than inflation rates here.
Speaker 2 (55:16):
It is, right, So you take all that kind of together,
you know what we find is Europe when I think
about it in the context of twenty years, we find
that Europe just gives us more frequent opportunity, right, just
the way it's set up. And the second thing which
makes Europe really interesting for us, we are we are
(55:40):
really I could be we are really one of the
market leaders in Europe. We are one of the acknowledged
market leaders in Europe for what we do. And it's
a world where there are much fewer people with the
skills we have. In the US, there are more people.
(56:03):
So you look at a market which is big, which
gives you constant opportunity. You look at the marketplace positioning
we have. You take that together for us, Europe is
much more interesting, which is why it always for us
is a bigger piece of our portfolio than the market.
Speaker 1 (56:24):
Huh. That's really really fascinating since we're talking about inflation
and rates. You said something about a year ago that
I very much agreed with. About a year ago, it
was last summer you said the FED was behind the curve.
Now it's twelve months later. Tell us a little bit
(56:45):
about your especially from your vantage at looking at debt
and what the distress that's out there caused in part
by five hundred and twenty five basis points of hikes
in eighteen months. Tell us a little bit about what
you see from central banks here in the United States
or elsewhere.
Speaker 2 (57:04):
You know, we are now on the other side of
the you know, we're now in the we're trying to
figure out how quickly do rates come down, how much
and how quickly, So we're not really now we're on
the other side of the mountain, right right. And I think,
and you've already seen it with Europe. Europe has already reduced.
(57:26):
So I think our point of view would be these
short term rates, the five and a quarter five and
a half percent fed funds rate, it is going to
be kind of coming down. And we can all debate
is it two cuts, three cuts, fifty basis points twenty?
We can all debate that. But I think the path
(57:47):
going forward is that what is different is just look
at the tenure, not so much the short term fed
fund rate. Right the tenier rate is three point eight
five percent, it's not the one and a half or
two percent.
Speaker 1 (58:03):
That era seems to be over.
Speaker 2 (58:05):
Yeah, that era is over. So the fact that rates
are going to be higher now over the course of
the next three five years, I think that's the part
we should all be just kind of focused.
Speaker 1 (58:17):
On higher than zero. But isn't three money and a
half kind of normal or even reasonable. I mean, how
do you contextualize the ten year briefly kissed five percent?
And then it's headed south since if we end up
at credit rates being in the three three and a
half percent range, seventy five two hundred bases points below
(58:41):
where they are, now, what does that mean for distressed
dead investing? What does that mean for the economy?
Speaker 2 (58:49):
It points to the fact that you know, I think
you were saying Barry lived till twenty twenty.
Speaker 1 (58:55):
Five, survived to twenty five.
Speaker 2 (58:58):
Survived to twenty five. You get three and a half
percent tenure rates, right, you add the usual four five
hundred basis point high yield spread. You're borrowing at eight
and a half percent.
Speaker 1 (59:13):
Which which is not twelve percent, which is not twelve
it's not.
Speaker 2 (59:17):
Four, but but it's not for So I think what
all this kind of means is, look, things will improve
slowly right as short term rates kind of come in.
But the problems which we've set up, they're here. You
have a slower old world economy, You have maturities kind
(59:43):
of coming up. You have to kind of default or
you have to do some pretty unusual things to extend
your maturities. Those problems with eight and a half percent rates,
not four or five all in cost for a lender,
for a borrower, those problems really now stay with us
for a us.
Speaker 1 (01:00:02):
So not just to talk your book, but an opportunistic
distress then investor, These look like pretty good times coming
up over the next.
Speaker 2 (01:00:11):
Fel I do think they're good times, but I think
I don't think, but they're time. I'm talking my book now.
They're really good times for somebody like us who can
operate businesses, improve businesses.
Speaker 1 (01:00:26):
It's not just paper transactions. You are more hands on than.
Speaker 2 (01:00:29):
You know the You know, most people in our industry,
in my industry, are really focused on buying debt at
fifty sixty seventy cents, trading it, having it kind of
appreciate and price, and then trading out of it.
Speaker 1 (01:00:46):
Right, that's so nineteen ninety one. You've done that already.
Speaker 2 (01:00:49):
Now, this cycle, the one we are in, is not
kind of that wholesale move down in prices. It's much
more buying into these businesses through debt, sometimes through equity,
transforming the businesses operating them. That's the opportunity, it's not
(01:01:09):
a trading opportunity in distress debt which is what we
we just don't think it's a trading opportunity now for
the next three four years.
Speaker 1 (01:01:19):
Huh really really fascinating. I only have you for a
few minutes. More So, let me jump to some of
my favorite questions that we asked well our guests, starting
with tell us, what's keeping you entertained these days? What
are you listening or watching podcasts? Netflix? What keeps you entertained?
Speaker 2 (01:01:38):
I like watching sports before I.
Speaker 1 (01:01:41):
Know you're a big tennis fan.
Speaker 2 (01:01:43):
Yeah, I like watching Breakpoint.
Speaker 1 (01:01:45):
Oh really on Netflix? On Netflix sort of to drive
to survive, but for tennis exactly, By the way, I
have that in my cue, and I haven't started yet.
Speaker 2 (01:01:54):
You know, I've been playing tennis for fifty years. Nicely,
I should be better, right.
Speaker 1 (01:02:00):
You just need a good coach, that's all.
Speaker 2 (01:02:02):
But but watching Breakpoint, at least for a while, transforms
it for me.
Speaker 1 (01:02:06):
What's the worst part of your game?
Speaker 2 (01:02:09):
Backhand?
Speaker 1 (01:02:10):
Really?
Speaker 2 (01:02:10):
By the way, everybody who knows me, they are merciless.
They hit at my backhand.
Speaker 1 (01:02:16):
Huh. I I'm a lefty, but I've always played tennis righty,
so the backhand is never done. I you know, it's
as a kid. They stick a baseball bat in your
right hand, so I right lefty, do everything else lefty.
So the serve is my weakest part. But I find
the backhand is easy because it's it's natural, right, It's
(01:02:39):
almost natural. It's so crazy. Let's talk about your mentors
who helped shape your career.
Speaker 2 (01:02:46):
I had. I had a lot of I had a
lot of support from people I worked for or worked
it right.
Speaker 1 (01:02:55):
At City and at Meryll City, starting out.
Speaker 2 (01:02:58):
At Meryl right and it more particularly right, I had
a lot of support like that. You know, a mentor.
The word mentor means I think also somebody who helps
you grow, who helps you develop, who talks to you
every few weeks or a month officially unofficially, right, Hu.
(01:03:18):
You know, what I've found is the business I chose
to be in was such a new, emerging business where
you know, I can't.
Speaker 1 (01:03:29):
There were no people with decades's experience, And.
Speaker 2 (01:03:32):
It wasn't like I had a quote mentors in the business, right,
But what I found was and by the way, every
time you do something which is new and different and
you're one of the first guys on the wave, right,
it is you learn as you go. Sure, but having
that support, right, from kind of all those different parts.
(01:03:53):
I think that's kind of what I would say, become.
Speaker 1 (01:03:55):
An approach of everybody, kind of lifting everybody else. Let's
talk about books. What are some of your favorites and
what are you reading right now?
Speaker 2 (01:04:05):
I like historical fiction. So there's a there's a guy.
There's an English author, a guy called con Igillen. I
don't know. He's written five six books about the Roman Empire,
the Caesars, right, He's written about Koklai Khan and the
(01:04:25):
Khan dynasty out of Mongolia, right, Chengiz. I love reading
that sort of historical fiction. He just came out with
a new book on Nero, the Roman Emperor, and it's
a new series. Right then, I'm reading that.
Speaker 1 (01:04:39):
Huh, sounds really interesting. Our final two questions, what sort
of advice would you give to a recent college grad
interested in a career in distress debt or credit investing?
Speaker 2 (01:04:53):
Be ready to work really hard, right? Yeah? Yeah. You know.
The typical person we hire at SVP is we have
two entry points, right, so we'll hire twenty six twenty
seven year olds. So you should have gone to undergraduate school,
couple of years at an investment bank with the eighty
(01:05:16):
hundred dollars a week two three years at a private
equity firm, right, and then you come work with us.
And then the second entry point is you're that twenty
seven year old you go to business school and then
you come work with us. Right. So those are our
two entry points. But when you look at kind of
you know, the people who are kind of coming in
(01:05:38):
by the time you are that twenty six twenty seven
year old, you know, if you were in that class
at Dartmouth or Yale or whatever, you're probably already that
one in one hundred, maybe one in five hundred kind
of person to have made it that far. Right, This
is a tough, incredibly demanding profession. Just be ready for that.
(01:06:05):
It is extraordinarily rewarding, right, and I don't mean financially right.
It's fun, you know, the people you work with, the
culture of what you have it is fun. Yeah, it's
financially good too. But to be but to position yourself
to be in this world, right, especially in a world
(01:06:27):
like ours. Look, we're not looking for people who are
just kind of you know, paper investors. We want you
to work with our portfolio companies, with our management teams.
You've got to have the EQ You've got to have
the presence and the communication skills too. Right. You look
at kind of the training we need for somebody who
(01:06:48):
can do that at age thirty or age thirty five. Right,
it is it's very much that sort of a growth
track you've got to follow.
Speaker 1 (01:06:56):
Huh. Really really quite fascinating. And our final question, what
do you know about the world of investing today that
you wish you knew in the nineteen nineties when you
were first getting started?
Speaker 2 (01:07:09):
Oh my gosh, Barry, I was. I was in when
we got started right as a firm. In two thousand
and one. Somebody asked me and said, hey, Victor, what
would you what would you consider success in five years?
(01:07:34):
And remember this is when the world was young, alts
was really young, right, And I said, boy, if I
could be running for five hundred million in five years,
wouldn't that be great? Right? We went through five hundred
million in a year and a half. Right, But I
think I think what I what I've learned about, what
(01:07:56):
I've learned about investing, because boy, when you do what
I've done, you make mistakes. What I've learned about managing
and growing people and developing people, right, it's like I
have been in this laboratory of learning. So when I
(01:08:16):
think about the person I was twenty five thirty years ago,
right running a proprietary desk at Merrill Lynch, right to
kind of the person I am today, right in so
many different ways, I couldn't I couldn't even have told
you twenty five thirty years ago. I couldn't even have
(01:08:39):
told you what it would take right to kind of
be here. And I think it's like, I think, you've
just got to constantly be ready to learn, to evolve.
You can't get stuck. And if anything, if my journey
says anything, it is you know, I've seen the evolution
in the firm, shure, I've seen the evolution in me right.
(01:09:02):
And I think if you were, if I was to
give advice to somebody who goes down this journey, it
is to have a lot of people around you who
can not just in your firm, but outside your firm,
some people you can trust, you can talk to, who
can court you, who can make you think because you
are in an evolutionary journey to grow up to be
(01:09:24):
a leader in this business.
Speaker 1 (01:09:25):
Huh really quite fascinating. Thank you, Victor for being so
generous with your time. We have been speaking with Victor Kosla,
founder and CIO of Strategic Value Partners. If you enjoy
this conversation, well check out any of the five hundred
or so discussions we've had over the past ten years.
(01:09:46):
You can find those at iTunes, Spotify, YouTube, wherever you
find your favorite podcast. Be sure and check out my
new podcast At the Money, short conversations with experts about
top related to your money, earning it, spending it, and
most importantly investing it At the Money wherever you find
(01:10:09):
your favorite podcast, or in the Masters in Business podcast feed.
I would be remiss if I do not thank the
crack staff that helps put these conversations together each week.
Meredith Frank is my audio engineer. Attika Valbron is my
project manager. Sean Russo is my researcher. Anna Luke is
(01:10:29):
my producer. Sage Bauman is the head of Podcasts at Bloomberg.
I'm Barry Retolts. You've been listening to Masters in Business
on Bloomberg Radio.
Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2 (00:09):
This is Master's in Business with Barry Ridholds on Bloomberg Radio.
Speaker 1 (00:16):
This week on the podcast, yet another extra special guest,
Victor Kosla, founder CIO of the nineteen billion dollar Strategic
Value Partners. Victor has had a fascinating career stood up
the distressed debt department at Citibank before doing the same
thing at Merrill Lynch a few years later. He also
(00:38):
spent time at Cerebus and More Capital before launching his
own firm in two thousand and one. They do everything
from hard assets like real estate, infrastructure, aircraft, power plants,
to private debt event driven opportunities. Europe accounts for anyway
(00:59):
between a third and a half of their investments. They
have a number of businesses that they've taken over through
the debt side of the equation fifteen businesses with over
ninety thousand employees. Really just a fascinating person who has
seen the distressed debt business from day one. He was
(01:20):
there at the creation and has taken it to all
sorts of really interesting places. I found this conversation to
be absolutely fascinating if you're at all interested in things
like hard debt and what distressed asset buying is like,
and what it's like to take over a company not
through its equity but through its default to debt. I
(01:41):
think you'll find this to be an absolutely fascinating conversation.
I know I did with no further ado my discussion
with Strategic Value Partners Victor Cosla. Victor Cosla, welcome to Bloomberg.
Speaker 2 (01:56):
Thank you, thanks for having me back.
Speaker 1 (01:57):
So I skipped over a lot of your CV. We'll
get to some more details in a little while. Let's
just start with your educational background. Bachelor of Commerce with
honors from Delhi University, a master's in Economic from Vanderbilt,
and then an MBA from the University of Chicago. So
(02:18):
is it safe to say finance was always in the
career plans?
Speaker 2 (02:22):
Oh gosh, yes, from the beginning, finance and business was
always in the career plans. Running a nineteen billion dollar
private equity opportunistic credit firm was not right. It doesn't
like that was the plan forty years.
Speaker 1 (02:40):
You just tack into what was working and continue to
build on it. Talk a little bit about your professional experience,
because I find it absolutely fascinating. You're relatively young in
your career when you're at City Bank or was it
City Group. Then I keep track and you essentially created
their stress debt department. Tell us about that experience. Was
(03:04):
that twenty five thirty years ago? Maybe more?
Speaker 2 (03:07):
It was more it was thirty years ago.
Speaker 1 (03:10):
Nineteen eighties, early.
Speaker 2 (03:13):
Nineties, right when it happened. Yes, I worked in all
the places Barry you described, right, the two places. I
think what's really interesting is I was there at the beginning,
at the creation of a loan trading business.
Speaker 1 (03:31):
Like it did not exist at City or most of
Wall Street. It did before the early nineties. It did
not great novel.
Speaker 2 (03:37):
Bloomingdale's filed for bankruptcy, SCITV filed for bankruptcy, and for
the first time, banks which owned the debt wanted to sell.
Speaker 1 (03:50):
So they're sitting they're sitting on a lot of bed paper. Yeah,
and they don't really know what it's worth. They don't
know what to do with it. How do they come
to you and City and say, hey, we're stuck with
all this paper, and you know, we like to at
least have a partial recovery.
Speaker 2 (04:06):
That was what really got it going. There was no price.
You had to kind of analyze it to come up
with a price, and at the same time there were
very few buyers more and more sellers, so the pricing
was really good where you could buy these loans.
Speaker 1 (04:25):
So was City acting as a middleman looking for buyers
of distress dead or did someone like yourself have the
insight and say, hey, you know, at one hundred cents
on the dollar, this is junk, but at fifteen twenty cents,
there's some upside.
Speaker 2 (04:39):
At City and at Merrill, I ran a proprietary trading business,
and proprietary trading is using the firm capital to kind
of buy it and also to distribute it to syndicated
more broadly at the same time. But I think if
I was to go back through my career, that moment
(05:01):
in time, you know when there is this big wave coming,
because it was the start of the high yield market.
The leverage loan market grew dramatically, you know, from two
hundred billion in the mid nineties to five trillion dollars today.
High yield and leverage loans right, and these deals which
(05:21):
never used to trade in the secondary market, they started
to change hands. I was there right at the beginning
of that big wave, and what has happened to me
career wise, is just riding that wave as it got bigger,
as it got more complicated, as it became US and Europe,
(05:44):
not just US. As it went from buying and selling
distress debt to going out and taking control of businesses,
operating them, and improving them. It was all set at
that moment of time in the early nineties.
Speaker 1 (06:01):
So let's just stay in the early nineties at City
for a few minutes. At the time, you're early in
your career, you have some experience in an MBA when
you first started hearing that from banks, that hey, we
got all this Bloomingdale debt. Tell us what went through
your mind? Did you envision, Oh, you know there's a
(06:23):
market for here and there's an opportunity. How did you
look at this? And then how did you stand up
that whole distress debt department at.
Speaker 2 (06:31):
City banks are wanting to sell. I have worked at biz,
Allen and Hamilton. I'm a strategic planning guy. I get
hired by City Bank in planning. I worked for a
really senior guy in the investment bank. This business is
just starting. I write a business plan for it.
Speaker 1 (06:52):
Like a legitimate like it like it's a freestanding entity.
Speaker 2 (06:56):
Like, you know, it's a business, we should get a startup. Yes,
it's a business. We should be bigger in, we should
grow in. And there were a couple of people inside
City Bank who were pioneers in trying to buy and
sell loans. Right, I get folded right into that group
after writing the business plan, and boy, we are off
(07:19):
to the races. Now. You know, when you look at
something like a Bloomingdale's, what you have to ask yourself
is Bloomingdale's is restructuring. It's going through a bankruptcy. It's
got the debt itself which banks want to sell. You
have to price it. And at this point in time,
the bankruptcy processes, the restructuring processes weren't that well developed. Right.
(07:45):
You had to really say, hey, it's a two year
stint in bankruptcy. We're going to cut costs. We'll make
this business much more efficient right as we do it.
And then you say what is the business worth?
Speaker 1 (07:58):
And at the time they had a good good brands,
fantastic real estate locations, so there was some assets that
were salvageable. The question was do we continue as a
going concern or do we just liquid eate. You guys
have said, hey, let's reorganize this because there's still value here.
(08:18):
It's not We're not just going to sell it off for.
Speaker 2 (08:20):
Parts exactly right. And by the way, most of the
businesses we invest in, there's much more value even like today,
there's much more value in fixing it and transforming it
and selling it for parts. But because these are really
good businesses which got levered, they got leveraged through these
(08:41):
leverage buyouts, right, But that valuation to be able to
come up with the valuation to be then able to
work in a restructuring process, bankruptcy process and say, hey,
I think at the end of this we are buying
debt at fifty cents, it could be worth eighteen ninety cents.
(09:02):
It could take two to four years to kind of
get there. That's how this business started. It was just
not well understood, even the fact that there was a
bankruptcy process which could be two years long or three
years long. Right, It was just not well understood in
the early nineties.
Speaker 1 (09:23):
So I have so many questions for you about because
this is such a The nineties was such a fascinating era.
So first, was this like a small side project at city,
or did the higher up say, oh, Victor's onto something.
Let's put some capital into this and see where it goes.
Were what was the initial reaction within city.
Speaker 2 (09:44):
And by the way, don't get me wrong place. It
wasn't just it it was It wasn't.
Speaker 1 (09:48):
Just it's the You know, anytime we talk about Merrill
or City Ubs or Morgan, we're always talking about big teams. Yes,
a number of different people leading different departments. All that said,
you wrote the business plan, So how warmly was it
embraced or was it all right? Give the kid a
couple of bucks and let's see how far this goes.
Speaker 2 (10:10):
It started out with give the kids a couple of bucks.
Speaker 1 (10:13):
Uh huh.
Speaker 2 (10:14):
And then what happened was like literally in the first
few weeks.
Speaker 1 (10:19):
So not long at all, like immediate success.
Speaker 2 (10:22):
Right, we are starting to get in the middle of
some of these secondary sales of debt. It's almost like liftoff,
right because the moment of time. You know, in those days, Barry,
a lot of debt was owned by Japanese banks.
Speaker 1 (10:39):
I recall on banks, right, remember when everyone was terrified
they were going to buy Rockefeller Center and then take
over everything. Around the late eighties, early nineties. That was
peak Japan and they spent the next thirty years wandering
in the desert.
Speaker 2 (10:53):
Well, they've had a tough few decades.
Speaker 1 (10:56):
Right, although they seemed to be very much on the
on the comeback. But so immediately this looks successful.
Speaker 2 (11:02):
Typically thirty percent of the market was owned by Japanese banks.
Speaker 1 (11:06):
Really, that's a giant number.
Speaker 2 (11:08):
In the early nineties right now. So now you have
these restructurings, you have these bankruptcies, and the Japanese banks
want to sell the debt huh, they drive it. Then
the European banks want to sell because US bankruptcy in
those days was not as well understood, right, And then boy,
(11:29):
it was almost like bankruptcy filings boom, debt for sale boom, boom,
and it just took off.
Speaker 1 (11:36):
And my recollection is that when foreign banks come into
the US and buy up a bunch of assets or
debt or whatever it is, and when they start to
run into trouble back home, there's usually a change of leadership,
and whoever the new owner of the foreign banks are,
I tend to say, Hey, I didn't buy that junk.
You guys just get rid of this whatever you can
(11:59):
get for it. Hits a bid. They're very aggressive sellers
or am am I misremembering.
Speaker 2 (12:06):
They are aggressive sellers, and foreign banks, foreign institutions tend
to be more aggressive. But there's also a very you know,
there's also very economic reason for it, right, because when
you're in a restructuring the debt you own has defaulted,
and the central bank which governs you, like the one
(12:28):
in Japan or like the one in the United States,
they make you take reserves mark it down.
Speaker 1 (12:34):
Right, so you write it down to zero, So whatever
you get for it is practically found money. You've already
taken it.
Speaker 2 (12:40):
So there's a very good economic reason why, you know, short,
they're far away, they don't quite understand what's going on.
Speaker 1 (12:49):
It's a small part of their book right now.
Speaker 2 (12:51):
So obvious reason, right, But then also the economic reason that, hey,
I have it marked down, I have all these nonfer
forming loans in my balance sheet. It's creating a drag
the way equity analysts look at my balance sheet, I
should be selling, I should be getting out right. So,
(13:13):
and by the way, it continues to today. If you have
a bankruptcy filing, you have a restructuring right, they will
sell the debt they'll sell it at a price which
is probably too low. But there's a very sound economic
reason for the banks or the clos to want to sell.
Speaker 1 (13:31):
They have a very different set of priorities than a
pure invested buyer.
Speaker 2 (13:35):
Exactly right. But so Barry, can I tell you, but
go back, go back to one thought, though, I wanted
to make sure it just came through. Early nineties was
the start of the modern high yield leverage buyout business
done at scale. It was the start of the high
(13:56):
yield business exploding dramatically in size to where it is
today and still growing, right. And it was the start
of the secondary market to kind of buy and sell
kind of pieces of debt. And what I was lucky
enough to be in the early nineties was I was
(14:17):
one of the first people in this business, right overseeing
a trading desk like I did at Merrill Lynch.
Speaker 1 (14:25):
So that was wide open white space. It was virgin snow.
It was very new. How long did you stay at
City before you left for other places?
Speaker 2 (14:35):
I was working at City Bank for a couple of years,
working on kind of the secondary prop investing trading site,
and then I was hired by Merrill to start the.
Speaker 1 (14:47):
Business Previously we were talking about your experience at the
very beginning of the distressed debt industry building the desk
at city. You join Merrill Lynch in ninety three and
start building their distressed prop trading businesses, which became wildly successful,
(15:09):
and you're there from ninety three to ninety eight, right
in the middle of the nineties. Tell us a little
bit about that experience. What was it like at Merrill
in the nineteen nineties.
Speaker 2 (15:19):
Merril never really had very much of a proprietary culture
right as a firm, It's just not. In the nineties
it was very much a brokerage house with a growing
expanding investment bank. It wasn't really a proprietary investing trading
culture right in those Yes.
Speaker 1 (15:38):
So what made them say, hey, let's go, you know,
let's go pull Victor out of city and set up
a prop desk.
Speaker 2 (15:46):
The old fashioned rationale making money?
Speaker 1 (15:50):
They so little fomo they saw city. Hey, since when
a city so big in distress debt they seem to
be doing really well. We need to have a little
bit of that for ourselves. So is it that simple?
Speaker 2 (16:01):
It was early people could see the explosive growth taking place,
and as somebody who was a well known commodity, well
known player in that business already, right, they hired me
to go run it. So when I started at Meryl,
it was one of me and they said, okay, Victor,
(16:24):
here's one hundred million dollars. Right, it's kind of where
I started in nineteen ninety three.
Speaker 1 (16:30):
Right. Was that a lot of money back then?
Speaker 2 (16:31):
Or it was it was a lot of money back then,
so in ninety Funny, I.
Speaker 1 (16:37):
Know that sounds silly because it's a little hard to
put thirty four years into context, for thirty years into context,
But like one hundred million dollars today, you know that's
a small account at a lot of shops. Back in
the early nineties, one hundred million dollars.
Speaker 2 (16:54):
Was real cash. So what they and what they did
was they encouraged me. So I had a couple of
very supportive people I worked with. You know, success begets
more success. So we ended up getting the resources to
hire a bigger and bigger team, ended up setting up
a business in London. We were literally one of the
(17:18):
first people into Europe buying and selling debt, investing in
debt in Europe, and then in ninety seven set up
a business in Japan to buy debt from Japanese banks
in Japan. Right, So for me at Merrill, from that
one hundred million and nineteen ninety three, by the time
(17:39):
I left in early ninety eight, we had about two
billion dollars of proprietary capital and I had forty people
four zero people working with me in New York, in London,
in Tokyo.
Speaker 1 (17:52):
Merrill also had an office in Hong Kong as well.
Were you buying debt out of Hong Kong also?
Speaker 2 (17:59):
I was, now I was starting to dabble in it.
This was before the Thai bot the Thigh crisis eight, right,
So it was before that I was starting to look
at it. Yeah, but it wasn't kind of the focus.
It was really US era up Japan.
Speaker 1 (18:15):
So one hundred million to two billion in five years,
that's a giant lift. That's a big expansion. Your next
couple of stops along the way were at some pretty
well regarded firms. Sarah Is Capital, you ran a joint
venture doing Japanese debt with more. Tell us a little
bit about your experiences away from the big brokerage firms
(18:38):
and some of these more nimble independent shops.
Speaker 2 (18:43):
You know, the nimble independent shops had a lot more
money than the two billion dollars.
Speaker 1 (18:49):
Really, I never would have guessed that what I.
Speaker 2 (18:52):
Was overseeing at Merrill length right, But you know what
I found was, I think it's sobers you had a
very strong, very well known brand at that time. More
Capital was much more institutional in how it worked. It
had much more of a structure and process around it.
And I and I worked with Cypress, I worked with
(19:14):
more Capital between them for a total of about four years.
It was my first foray from working in a proprietary
trading business, which is what I did at Merrill, to
working on the buy side. Just the learning what it
takes to actually raise money, what it what it means
(19:37):
to actually build a really strong infrastructure, a finance, operations,
legal team. Right, my first foray out of merrile into
the buy side and learning kind of all these different
kind of skills, and those were four incredibly growth orientedy
as for me.
Speaker 1 (19:56):
I could I can imagine it and for listeners who
may not be familiar with the distinction between buyside and
sell side. When you're at City or you're at Merrill,
you're trading on behalf of either the firms fund or
on behalf of clients. And we call that the sell
side because you have to sell that product to clients.
The buy side is Cerebrus or more have their own
(20:20):
pile of assets from their limited partners, and you are
investing in trading on behalf of the firm itself, And
so it's a little bit different in you're not dealing
with the clients at somebody else's job. You're investing the
money on behalf of of the firm. Ultimately, that leads
you to say, hey, this buyside thing seems like a
(20:43):
pretty good structure for making investments. What led you to say,
I think I could launch my own shop and stand
something up on behalf of myself instead of working for
someone else.
Speaker 2 (20:57):
It takes a lot of confidence, a little bit woodspot right.
I was never lacking in that right.
Speaker 1 (21:05):
So, but to be fair, you know, there's Kutsman, there's kutzpah.
You built a great desk at City, you built a
great desk at Merrill, you generate a lot of profits
for more and Serabis, So it wasn't a big leap
of faith. Hey can I do this? You obviously had
a great track record, so standing up your own firm
(21:28):
was why not why not be in charge? Why not
run my own ship?
Speaker 2 (21:31):
In those days, there were ten fifteen people who were
probably well known in this business, and I was one
of the ten fifteen people. Right by the way, Well,
when I think about kind of more Capital, huh, what
a great firm, by the way.
Speaker 1 (21:47):
Right, legendary founder, but just great track record.
Speaker 2 (21:52):
All that, but also just a great firm. Right. But
when I think about kind of why start something, you know,
when I really cut through it, I really wanted to
work for myself. Understandable, right, So when we started Strategic
Value Partners, More Capital gave us one hundred million dollars system.
Speaker 1 (22:10):
No, no kidding. So that's quite a vote of confidence.
You're not, you know, if Moore is giving you that much,
the same amount that you started with it at Merrill.
So so the firm is now nineteen billion dollars. When
you launched in two thousand and one, what were you
launching with Moore's one hundred plus? How much additional capital
did you raise?
Speaker 2 (22:31):
Ten million?
Speaker 1 (22:32):
Really, so they were ninety percent of what you had.
Speaker 2 (22:35):
You know, we were launching the firm and the markets
crash in one Sure you were early days of that
markets crash and as a result of that crash and
markets we think we are going to launch with three
four hundred million, and we launched with one hundred and
ten million.
Speaker 1 (22:52):
At the same time, you launch into a let's call
it a target rich field, there had to be a
lot of opportunity.
Speaker 2 (23:00):
You know. The performance numbers out returns were just kind
of really great because it was a target rich world,
and that kind of set us up when I think
about those early years, right and I think about kind
of the firm we have become today.
Speaker 1 (23:18):
So let's start with what you began with. How many
people did you launch with? How many you had two clients?
It sounds like, yes, one hundred and ten. How many
How big was the staff on you on it was
eight people, eight and today you're a little bigger than that.
Speaker 2 (23:35):
We've got over two hundred people.
Speaker 1 (23:37):
I mean, that's a substantial firm. Not only that, when
you launched it was primarily distressed debt. You've expanded into
so many different areas. Tell us a little bit about
that growth, especially the first few years, and what led
you to opening another London office in two thousand and four.
Speaker 2 (23:57):
When we started, we've focused on distressed debt and restructurings
in two thousand and one, two thousand and two, that's
kind of that was the focus.
Speaker 1 (24:06):
Well, what sort of companies was it was a lot
of the dot coms that had imploded, or was it
just generally across the economy.
Speaker 2 (24:12):
You were in. We were in the middle of a recession.
M hm. WorldCom, if you remember, had had a file
for bankruptcy as there were a couple of big energy
companies in trouble.
Speaker 1 (24:23):
And Ron and Ron.
Speaker 2 (24:24):
So you know, we were never a dot com kind
of person. And even today we're really not a tech
or a software focused firm, right. We are very much
in old economy businesses, service businesses, consumer brands. That's very
much our focus as a firm. So in two thousand
and two, when we start, it's not the dot com
(24:47):
debrivia looking through, it's the recession and all the problems
it's caused in all these old economy businesses.
Speaker 1 (24:54):
Huh. Really interesting. So you start with distressed debt, what's
the next division you, for lack of a better word,
opportunistic credit lending, money taking control. What were the next
businesses you added?
Speaker 2 (25:10):
When we did distress that we were focused on buying
debt and restructuring it into equity, being on kind of
boards of directors, trying to work with the businesses. But
we were mostly had minority equity positions because you when
you all you have is a hedge fund parry, right,
(25:31):
you need liquidity, right, you can't do private equity.
Speaker 1 (25:36):
You're not locking stuff up for forever.
Speaker 2 (25:38):
No, really, you can't write. So the early years were
very much focused on this more liquid side of the world,
the distressed debt side of the world. And by the way,
we had success that fund of We started with one
hundred and ten million dollars. By the time two thousand
and eight came around, we had about five billion dollars.
Speaker 1 (26:00):
Really, that's a big that's a big number.
Speaker 2 (26:02):
We had some really good success right in those years
doing what we do. But you know, what we found
was two thousand and eight was a really good.
Speaker 1 (26:14):
You know I talked target rich environment.
Speaker 2 (26:16):
It was in nineteen ninety one, we were there. I
was there on day one as the business of buying
and selling secondary debt, investing in secondary debt took off.
In two thousand and eight, there was another one of
those really dramatic changes. So what we told ourselves was Hey,
(26:41):
this is a really great target rich environment. Sure, but
the business has changed. Our view was, Hey, these distress
debt cycles, they only happen every two years out of ten.
It's not like a business you can do every right.
It's a super cyclical business. So as a firm in
(27:06):
two thousand and eight, we started to go down a
different path. We said, Okay, there are some really great
businesses which have had a really rough time with bankruptcies,
with restructurings. There's a lot of low hanging operational fruit.
Let's go out and buy into these businesses and take control.
Speaker 1 (27:31):
Now you're talking about doing this through debt, not.
Speaker 2 (27:34):
Equity exactly, but buying enough debt to own fifty one
percent or more of the company, becoming a private equity investor,
and then driving an operational transformation in the business.
Speaker 1 (27:49):
So it's so funny different, it's so funny you talk
about this. I vividly remember having a conversation with a
friend who was originally from Canada relocated to the Grand Caymans,
and the first time I learned that it's got to
be ten fifteen years ago of an investor taking control
(28:10):
of an asset through the debt, not the equity was
there's a giant Ritz Carlton on the Grand Cayman. Oh yes,
and the under the owner was constantly floating notes and
during the financial crisis he ran into trouble and a
lot of big banks own that paper and somebody very
cleverly picked up a lot of that debt pennies on
(28:32):
the dollar ended up taking over that whole thing. It
was eye opening, like, oh, you can control a company,
not just through equity, through debt.
Speaker 2 (28:40):
But you know, but if you just take control, you
could be the proverbial dog who chases that ice cream truck.
Speaker 1 (28:48):
What do you do when you catch it?
Speaker 2 (28:50):
Yes, you know, you need these operating skills to go
out and improve and transform these businesses. Right, So what
we start to do in two thousand and eight was
not just to take control, but to take control in
our very hands on way. Right. We strengthen management, we
(29:10):
build new business plans, we call them value creation plans
in our world, and we try and drive fundamental change
even sometimes in these businesses. So for us as a firm,
we went from buying and investing in debt after two
thousand and eight to taking control of businesses. We went
(29:33):
from a firm in two thousand and four even we said,
look there's this great growing opportunity in Europe. We set
up a London office and our London investment teams today
are almost the same size as the US teams. And
what we also did over those years was we said, hey,
(29:53):
look there are all these real assets airplanes, power plants,
real estate, toll roads. Right, these are all going through
these kind of restructurings, these kind of problems with their
capital structure. So as a firm, starting in two thousand
and eight, we went from our roots in value in
(30:15):
distress debt, right, we went into control, We went into
kind of real assets, and we started lending money to people,
not direct lending, much more the higher risk, higher return lending. Right.
But as a firm, we've gone through this journey from
two thousand and eight, that transformation.
Speaker 1 (30:35):
Huh, really quite fascinating. Let's continue talking about some of
these operating businesses. Ninety thousand employees, fifteen different businesses. This
is more than just buying the bare debt of a
company that's hit a hard time. You are pretty much
fully taking over and running and operating substantial companies. Tell
(30:59):
us how came about and how did SVP develop the
expertise to effectively become operators and managers.
Speaker 2 (31:07):
When you have a company which kind of hits a
really rough patch, you know, leverage buyouts. By definition, there's leverage.
They hit a rough patch, they have really big financial problems.
And when that happens, even really good businesses Barry Shick, right,
(31:28):
you know, some of the businesses we are invested in.
We own a toll road in Texas today, a toll
road between Austin and San Antonio. We just bought Hornblower,
which is we took operate majority control of it, which
is a ferry business, the New York City Ferries, the
(31:48):
Statue of Liberty ferry, right, it is. But all these businesses,
these are good businesses.
Speaker 1 (31:55):
But they take on a lot of debt. There's no
room for.
Speaker 2 (31:58):
Error, and things and everything shakes. You know. Often we
find some of the really good management teams they get frustrated.
Some of them leave, right because now you've got so
much leverage. You've got a good business, but so much leverage,
and you can't figure out how to how you're going
to pop your head up about the surface. Right. So
(32:20):
as a result of that, we find that when we
are investing short, we have to recapitalize it, so the
leverage numbers go down dramatically.
Speaker 1 (32:30):
So let me ask you a question about what's just
been going on over the past couple of years. If
you're a leverage company and that debt is you know,
what used to be libor plus, it's no longer libor
now it's the new measure. Central banks raise interest five
hundred and twenty five basis points. Suddenly what was a
(32:51):
manageable amount of debt might become unmanageable. How has the
past few years of rapidly rising rates acted these leverage businesses.
Speaker 2 (33:02):
It has been really tough for them, right. You know,
you borrowed money when interest rates were zero and you
were paying all in five percent. Right now you're paying
ten percent twelve percent, which is a lot of money, right,
and you are very levered. And by the way, these
(33:22):
old economy businesses they are not having that same growth
like tech or software.
Speaker 1 (33:29):
They're not AI. They're at fery businesses and toll roads.
That's steady income, but you're not looking at double digit growth.
Speaker 2 (33:37):
So you can't really grow into your capital structure. Right,
So easily you married the two things together. Growth, but
slow growth, modest growth in cash flow or EPA with
much higher interest rates, like in terms of what you
have to do. And by the way, remember some of
these businesses went through COVID where they had to take
(33:59):
on even more debt to kind of tide over COVID.
Speaker 1 (34:02):
Right, that was a double WHAMMI COVID and then the
rate increase.
Speaker 2 (34:06):
And now what is happening is there are maturities coming due.
There's a large maturity wall in twenty five, twenty six,
twenty seven. By the way, by our reckoning, there's almost
two trillion of that five trillion of high yield matures
in the next three and a half years.
Speaker 1 (34:25):
Really, so I heard an expression a debt trader used,
survive till twenty five. You're suggesting, hey, twenty five isn't
good enough. You're gonna have to get through twenty six
and twenty seven exactly. Huh.
Speaker 2 (34:38):
It's creating issues. By the way, this is not like, oh,
it's going to happen next year.
Speaker 1 (34:44):
It's happening already.
Speaker 2 (34:45):
It's been happening for the last eighteen months.
Speaker 1 (34:47):
Well. Well, given the high rates, that makes perfect sense.
Speaker 2 (34:50):
Our pace of investing has picked up substantially. Our pipeline
has almost quadrupled over the last eighteen months. This is
happening right now, Barry. Don't get the wrong idea. I'm
not trying to tell you there's some crash or something.
We don't think there is.
Speaker 1 (35:07):
You seem to be enthusiastic about the opportunities ahead of you,
not that the world is coming to an end, but rather, Hey,
this is going to be a great period of time
if you're an opportunistic distress debt investor.
Speaker 2 (35:21):
Or if you are in a special situation's private equity.
Speaker 1 (35:24):
So let's talk about that. How do you define special situations?
Speaker 2 (35:28):
You know, we are in the business of trying to
buy businesses at a good price, and then we're in
the business of trying to improve them, sometimes even transform
them operationally, right because they have been undermanaged with everything
I'd described to us, that's you know, that combination. You
(35:51):
can't really if somebody is having an auction of a
company and they have hired Goldman Sachs on the re
lane to sell it, it's very hard to buy something
at a really good price. Right, You've got to be
able to buy it either you buy it through the
debt right where you buy it through by buying debt
(36:12):
at a discount, or you buy it bi laterally in
a process without a process, right, the company has enough
issues and there's a way to just negotiate a price bilaterally.
So I think for us, the opportunity set today is
to kind of buy it well, but that is just
(36:34):
step one. The step two is to go strengthen the
management team, build a new business plan, often to inject
more capital into.
Speaker 1 (36:45):
The restructure so it's not carrying all that debt.
Speaker 2 (36:48):
Fourteen of the fifteen businesses we control have more employees
today than when we took over.
Speaker 1 (36:54):
Wow, that pretty impressive.
Speaker 2 (36:56):
But I think it's so this is not about just
cutting about kind of investing and looking to transform these
businesses which have been undermanaged, and those together is what
in our world, in our mind, constitute special situation private equity.
Speaker 1 (37:14):
Let's talk a little bit about hard assets. You mentioned
infrastructure like ferrying, toll roads. Let's talk about real estate, airplanes,
and power plants. I would think power plants would be
very tied to the cost of energy plus whatever their
costs are for modernizing and reducing pollutants and their output.
(37:41):
Tell us about what you look at when you look
at a buying a power plant.
Speaker 2 (37:46):
Yeah, you know, for us, about sixty percent of what
we do is corporate investing. So these industrial businesses, service businesses.
Speaker 1 (37:57):
Right fold, economy, stolid, yeah, you know, ready steady businesses
that have run into a little trouble.
Speaker 2 (38:04):
With generally very good market shares. Right. Four zero percent
of what we do are real assets.
Speaker 1 (38:12):
Oh really that much? That's giant. So give us some
examples of First of all, I'm fascinated by hard assets
like airplanes. How do people get into trouble owning either
a single plane or a fleet of plane?
Speaker 2 (38:28):
Can I tell you? Can we even start with infrastructure, right,
because barrye the prevailing view would be infrastructure, toll roads, ferries,
all these kind of businesses. They are really you've got
a monopoly or adopoly, right, they are. They they should
be really strong, they should be good growers, and they
(38:51):
should be steady. Eddy, And infrastructure today is bought by
sovereign funds, big pension funds with a view that it
is very steady seven eight nine percent kind of returns. Right,
that's the prevailing.
Speaker 1 (39:08):
View, assuming you're purching purchasing it at the right price.
Speaker 2 (39:11):
Right. Now, what has happened in infrastructure is there were
a couple of very aggressive people who bought infrastructure toll
roads with eighty ninety percent debt, right, not forty percent,
fifty percent, eighty ninety percent debt.
Speaker 1 (39:28):
No room for error there.
Speaker 2 (39:30):
And if you had if you hit COVID, you or
if you hit a financial recession, it's really hard to
dig yourself out of eighteen ninety percent debt. Right. So
what we saw was a whole class of toll roads,
which are supposed to be core infrastructure safe, A whole
(39:51):
class of toll roads, the ferry business I'm kind of
talking about, right, a waste of energy business in London
we in in called Cory Right. All these businesses ended
up kind of crashing. Now, for US has never been distressed, right,
(40:12):
there's no broad infrastructure distress cycle. But for us it
started about ten years ago. Right. We were one of
the first ones who started to take a part infrastructure
and say, hey, it's not like corporate Right, It's valued
very differently than how you'd value a company. There's a
(40:34):
whole what it takes to operate it is really quite different.
You need some really great government skills, by the way,
to manage the agency which regulates you.
Speaker 1 (40:44):
A lot of complexity there, not just you're not just
selling widgets.
Speaker 2 (40:48):
It's different, right, and you've got to understand it. And
we were one of the first people in our business
to really drive into it, and I think we've been
the biggest investors in our industry in infra.
Speaker 1 (41:00):
So I got to ask, who the hell is buying
a toll road with ninety percent debt. I mean, it's
one thing if you're buying your first house and you
put ten percent down in finance, then the other ninety
percent because you're gonna live there over the next thirty
years and you got to live somewhere. But who would
buy like that? Just seems kind of reckless or am I.
Speaker 2 (41:22):
You know, it was viewed in the old days. It
was viewed fifteen years ago. It was viewed as such
a safe asset class. Not only could not everybody did it? Okay,
they have a few real outliers who did a lot
of it right, and they did it with eighty five
percent debt. Eighty percent debt, ninety percent debt. And by
(41:45):
the way, most of the industry does not do this right.
Speaker 1 (41:49):
You are very much confirming my long held belief that
there's no such thing as toxic assets, only toxic prices
and toxic debt level. Yeah, it sounds like that's a
key part of how you guys have grown.
Speaker 2 (42:04):
It is it has been, right. But what's kind of
interesting also is like you know that waste to energy
business in London, right when we bought it, they had
a really great I'll tell you this, forgive me, I'll
just die digress.
Speaker 1 (42:21):
I'm fascinated.
Speaker 2 (42:22):
Right, So there's a there's a this business corry in London.
So if you go, if you're on the River Thames,
you'll see these barges taking garbage. They take garbage from
some of the richest burrows in London. They take it
to a plant called Riverside where they burn it and
(42:42):
they produce electricity for those same burrows. Right, this business
great business, by the way, Right now, what they had
done was they also had a landfill business. They also
had a garbage collection business, and those businesses got them
into real trouble. So the company itself got into a
(43:05):
pickle too much debt and with this one really great
core business and two other really troubled and so soo businesses. Right,
And what we ended up doing was when we kind
of took control of the business. Yes, we fixed and
sold the two businesses which weren't so great, but at
(43:26):
the same time, the core business we invested in it.
We hired a new chairman, we hired a new CEO
and a management team. And by the way, the business
itself had long term You know what makes infrastructure is
when you have long term contracts. They had long term
contracts for about fifty five percent of their output in Riverside.
(43:50):
We increased that to seventy percent. We started to build
a plan to expand the plant, to build a new
data center next to the plant.
Speaker 1 (44:00):
Right, And they're so energy intensive.
Speaker 2 (44:02):
It is because they produce electricity also, which so you
can create a data center kind of right next to it,
so you can see the transformational work which is going on.
It wasn't like, hey, we just bought it. It's great, right, right,
And we subsequently ended up kind of selling it three
four years later after we'd finished doing all that, and
(44:24):
it was a very successful investment. But you can buy infrastructure.
But if we just bought it and just put it
on auto control, nothing would have happened.
Speaker 1 (44:35):
This isn't a passive investment. This is active management. I'm
fascinated by some of the other hard assets. Tell us
about what you do with aircraft, Like how do people
over leverage themselves with either a jet or a fleet
of jets and have to have a distressed buyer come
in and take it over.
Speaker 2 (44:55):
We find that investing in aircraft for us two out
of ten years we really lean in. It's not a
steady state. Hey, we're going to invest ex melion every year.
It's a very cyclical business. So like so like take COVID, right,
COVID happens, flying shuts down. Right. A couple of couple
(45:21):
of really large airlines. There's one called LATINAM in Latin America,
there's Aero Mexico. A couple of large airlines end up
kind of filing for bankruptcy. Now they are in bankruptcy
and people and they have like LATINAM in those days
had a fleet of three hundred plus airplanes.
Speaker 1 (45:40):
Oh really, that's a big fleet.
Speaker 2 (45:42):
Yeah. So by the way, Latham's really it's a big airline, right.
Speaker 1 (45:46):
One of mostly South American and Central America.
Speaker 2 (45:49):
And flying to the United States. Right, they're the market
leader in South in Latin America. Right, But now they
are the people have given them the planes on these leases.
They have leases with all these kind of financial guys,
which is how they bought a lot of their airplanes.
(46:11):
They're in bankruptcy. They want to redo the lease, recut
the lease. And by the way, this is COVID. Lease
pricing has collapsed right right, So now all of a sudden,
the leases aren't the person who's lent them the money
on the lease. It's no longer worth that because lease
(46:32):
prices have collapsed and they are being reset right now
because of the bankruptcy of Latin. So for us, you know,
we ended up kind of buying. We ended up buying
twenty three of those airplanes right from some of the
leaseholders in Latin.
Speaker 1 (46:51):
For buying the planes outright buying the planes and then
what do you do with that aircraft?
Speaker 2 (46:55):
We actually bought the debt. We've foreclosed on the planes,
so now we own the planes. Most of them we
leased back to Latin. Some of them. There were actually
four very large eight three fifties right, which is which
is like a wide body large a three fifties, and
(47:18):
we sold them to Luftanza. We had to fix them.
We bought them in the desert we fixed them and
we sold them.
Speaker 1 (47:24):
They can't sit for very long though, they have to
constantly be tended. So if you're going through a bankruptcy,
you can't have a plane on the tarmac for eighteen months.
Speaker 2 (47:32):
And so what's interesting to us about the airline business
when it's really active, like in those periods, right, somebody
like us, we'll invest. We invested a few billion dollars
buying airplanes in those two three years.
Speaker 1 (47:48):
Oh really, that's a lot. That's a lot of aircraft.
Speaker 2 (47:50):
We bought the aircraft, by the way, at this point
we've sold most of them, right, But we also ended
up with a claim which became equity. So today we
are actually a very significant holder of equity in Latin
and Aero Mexico. Right. So, but this is what we
(48:11):
find is this business of investing in aircraft. It's a
it's a very cyclical business for us because we have
a very high rate of return expectation, so it's not
in every year business. And what's really helpful for us
as we do this, Barry, we own a company called Ukalion.
(48:31):
Deucalion has sixty five employees and they manage the aircraft
for us. So when we take over the planes, if
we have to park them in the desert, if we
have to fix them, lease them, finance them. Deucalion gives
us the arms and legs to kind of do it.
You don't want to do this business just as a
(48:53):
paper investor. You need those operating skills. And by the way,
Deucalion today manages one hundred and twenty five airplanes for
third parties even away from us. Right, So for us
having Deucalion, it's a big piece of kind of what
makes our airplane aircraft platform.
Speaker 1 (49:13):
Really really interesting. Last heart asset, I have to ask
you about real estate. Return to office has been, you know,
only a part way success, depending on the city you
look at. It's twenty thirty forty fifty percent vacancy rates,
and what I mean by that is fifty percent occupancy
(49:35):
rates of already lease spaces, to say nothing of the
vacancy rates that come up as leases expire and some
anchor tenants move out. How are you looking at the
world of commercial real estate these days? Given the stress
we see in the office space.
Speaker 2 (49:54):
There is a tsunami working its way through parts of
the commercial real estate sector.
Speaker 1 (50:02):
Slow motion tsunami, isn't.
Speaker 2 (50:03):
It, And it's around maturities of the debt. Right, where
people are foreclosing, title of the property is passing over
to lenders. Right, that's so round numbers. Today there's eight
trillion dollars of commercial mortgage debt in the US and Europe.
Speaker 1 (50:26):
Eight trillion US in Europe that you think is going
to eventually go How much of that goes bad?
Speaker 2 (50:32):
Twenty two percent of its office?
Speaker 1 (50:35):
Oh really? Yeah, so that's let's call that two trillion
almost two trillion, yeah, and a trillion here and a
trillion in.
Speaker 2 (50:42):
Europe exactly right, right, And to our point of view,
a third of it is going to kind of go
broke in this particular cycle away from kind of office
if there are other sectors. So, if you look at multifamily, right,
multifamily is generally a very stable asset class. But with
(51:05):
these higher rates, people were buying multifamily at a four
percent cap rate. Today public rates multifamily public rates are
six percent or so cap rates. That means that prices
have fallen fifty percent. Right if you just take the
four going to kind of six.
Speaker 1 (51:26):
If you have to sell it or if you have
to service the debt. Yes, why does it always come
back to too much debt, too much leverage invariably leads
to a bad outcome. Am I overstating that? It seems
that every one of these stories begins with and they
bought this with way too much debt. And here's what happened.
Speaker 2 (51:46):
A barrier made a career art.
Speaker 1 (51:48):
That's amazing. So I know, I only have you for
a limited amount of time before we move on from
residential from commercial real estate. A truly in the US,
a trillion in Europe about a third is going to
go bad. And it's a slow motion tsunami. In a
(52:09):
way that's almost encouraging because, not to be glib, but
three hundred billion dollars it's not the financial crisis. Not
trillions and trillions and trillions of securitized debt blowing up.
It almost sounds as if that's manageable over time.
Speaker 2 (52:28):
It's not systemic, right, So, whether it is the corporate world,
you know, when I was describing all these maturities in
a five trillion dollar pool of high yield or in
the this is not systemic. Two thousand and eight, the
banks were really levered, right, it became systemic, right, right?
(52:52):
So I think, look, I tend to economic growth is Okay,
it's it's not it's much. It's much less than okay
in the era, but in the US it's kind of okay. Right,
So I don't think I don't think one needs to
kind of say, you know, that systemic stuff which causes
shocks across the economy. Right, Look, we could be wrong,
(53:16):
but we don't think that's in the cards. What's in
the cards is just this very gnarly all these kind
of credit issues which will keep biting for the next
three years, and we'll just kind of work our way
through them.
Speaker 1 (53:30):
Right, if you're in the wrong sector, you're going to
get hurt. And if you've avoided that, it shouldn't it
shouldn't have that spillover effect like we saw with securitized
mortgage in eight oh nine, if I'm hearing you correctly.
So I also have to ask, I know you open
the London office in two thousand and four. Did you
ever expect that Europe would expand to just about half
(53:54):
your assets? That that seems to be really substantial. Tell
us a little bit about what's going going on in Europe,
both their economy and the prospects for growth there, and
what you're doing with your portfolio.
Speaker 2 (54:07):
Well, Europe is if you just think about the broad
market in high yield, seventy five percent US twenty five
percent of Europe for somebody like US, Europe is always
just a much bigger part, a third, maybe even a
half of our book.
Speaker 1 (54:26):
Why is that.
Speaker 2 (54:28):
Europe has Europe has more problems than the.
Speaker 1 (54:34):
US, right, and a lot of old industries and old
businesses that might run into trouble.
Speaker 2 (54:41):
And you know, and every two years there's a crisis
there right, right, Like the US is Fortress America. But
when you look at Europe, right, whether it is Brexit,
whether it is other Italian advisories.
Speaker 1 (54:55):
That go on, it's something every now everywhere else that's
going on.
Speaker 2 (55:00):
You have frequent crises, you have economic growth which is
much slower than the United States. Right. And by the way,
they're suffering from some of the same high rates.
Speaker 1 (55:11):
And their inflation seems to be stickier and more stubborn
than inflation rates here.
Speaker 2 (55:16):
It is, right, So you take all that kind of together,
you know what we find is Europe when I think
about it in the context of twenty years, we find
that Europe just gives us more frequent opportunity, right, just
the way it's set up. And the second thing which
makes Europe really interesting for us, we are we are
(55:40):
really I could be we are really one of the
market leaders in Europe. We are one of the acknowledged
market leaders in Europe for what we do. And it's
a world where there are much fewer people with the
skills we have. In the US, there are more people.
(56:03):
So you look at a market which is big, which
gives you constant opportunity. You look at the marketplace positioning
we have. You take that together for us, Europe is
much more interesting, which is why it always for us
is a bigger piece of our portfolio than the market.
Speaker 1 (56:24):
Huh. That's really really fascinating since we're talking about inflation
and rates. You said something about a year ago that
I very much agreed with. About a year ago, it
was last summer you said the FED was behind the curve.
Now it's twelve months later. Tell us a little bit
(56:45):
about your especially from your vantage at looking at debt
and what the distress that's out there caused in part
by five hundred and twenty five basis points of hikes
in eighteen months. Tell us a little bit about what
you see from central banks here in the United States
or elsewhere.
Speaker 2 (57:04):
You know, we are now on the other side of
the you know, we're now in the we're trying to
figure out how quickly do rates come down, how much
and how quickly, So we're not really now we're on
the other side of the mountain, right right. And I think,
and you've already seen it with Europe. Europe has already reduced.
(57:26):
So I think our point of view would be these
short term rates, the five and a quarter five and
a half percent fed funds rate, it is going to
be kind of coming down. And we can all debate
is it two cuts, three cuts, fifty basis points twenty?
We can all debate that. But I think the path
(57:47):
going forward is that what is different is just look
at the tenure, not so much the short term fed
fund rate. Right the tenier rate is three point eight
five percent, it's not the one and a half or
two percent.
Speaker 1 (58:03):
That era seems to be over.
Speaker 2 (58:05):
Yeah, that era is over. So the fact that rates
are going to be higher now over the course of
the next three five years, I think that's the part
we should all be just kind of focused.
Speaker 1 (58:17):
On higher than zero. But isn't three money and a
half kind of normal or even reasonable. I mean, how
do you contextualize the ten year briefly kissed five percent?
And then it's headed south since if we end up
at credit rates being in the three three and a
half percent range, seventy five two hundred bases points below
(58:41):
where they are, now, what does that mean for distressed
dead investing? What does that mean for the economy?
Speaker 2 (58:49):
It points to the fact that you know, I think
you were saying Barry lived till twenty twenty.
Speaker 1 (58:55):
Five, survived to twenty five.
Speaker 2 (58:58):
Survived to twenty five. You get three and a half
percent tenure rates, right, you add the usual four five
hundred basis point high yield spread. You're borrowing at eight
and a half percent.
Speaker 1 (59:13):
Which which is not twelve percent, which is not twelve
it's not.
Speaker 2 (59:17):
Four, but but it's not for So I think what
all this kind of means is, look, things will improve
slowly right as short term rates kind of come in.
But the problems which we've set up, they're here. You
have a slower old world economy, You have maturities kind
(59:43):
of coming up. You have to kind of default or
you have to do some pretty unusual things to extend
your maturities. Those problems with eight and a half percent rates,
not four or five all in cost for a lender,
for a borrower, those problems really now stay with us
for a us.
Speaker 1 (01:00:02):
So not just to talk your book, but an opportunistic
distress then investor, These look like pretty good times coming
up over the next.
Speaker 2 (01:00:11):
Fel I do think they're good times, but I think
I don't think, but they're time. I'm talking my book now.
They're really good times for somebody like us who can
operate businesses, improve businesses.
Speaker 1 (01:00:26):
It's not just paper transactions. You are more hands on than.
Speaker 2 (01:00:29):
You know the You know, most people in our industry,
in my industry, are really focused on buying debt at
fifty sixty seventy cents, trading it, having it kind of
appreciate and price, and then trading out of it.
Speaker 1 (01:00:46):
Right, that's so nineteen ninety one. You've done that already.
Speaker 2 (01:00:49):
Now, this cycle, the one we are in, is not
kind of that wholesale move down in prices. It's much
more buying into these businesses through debt, sometimes through equity,
transforming the businesses operating them. That's the opportunity, it's not
(01:01:09):
a trading opportunity in distress debt which is what we
we just don't think it's a trading opportunity now for
the next three four years.
Speaker 1 (01:01:19):
Huh really really fascinating. I only have you for a
few minutes. More So, let me jump to some of
my favorite questions that we asked well our guests, starting
with tell us, what's keeping you entertained these days? What
are you listening or watching podcasts? Netflix? What keeps you entertained?
Speaker 2 (01:01:38):
I like watching sports before I.
Speaker 1 (01:01:41):
Know you're a big tennis fan.
Speaker 2 (01:01:43):
Yeah, I like watching Breakpoint.
Speaker 1 (01:01:45):
Oh really on Netflix? On Netflix sort of to drive
to survive, but for tennis exactly, By the way, I
have that in my cue, and I haven't started yet.
Speaker 2 (01:01:54):
You know, I've been playing tennis for fifty years. Nicely,
I should be better, right.
Speaker 1 (01:02:00):
You just need a good coach, that's all.
Speaker 2 (01:02:02):
But but watching Breakpoint, at least for a while, transforms
it for me.
Speaker 1 (01:02:06):
What's the worst part of your game?
Speaker 2 (01:02:09):
Backhand?
Speaker 1 (01:02:10):
Really?
Speaker 2 (01:02:10):
By the way, everybody who knows me, they are merciless.
They hit at my backhand.
Speaker 1 (01:02:16):
Huh. I I'm a lefty, but I've always played tennis righty,
so the backhand is never done. I you know, it's
as a kid. They stick a baseball bat in your
right hand, so I right lefty, do everything else lefty.
So the serve is my weakest part. But I find
the backhand is easy because it's it's natural, right, It's
(01:02:39):
almost natural. It's so crazy. Let's talk about your mentors
who helped shape your career.
Speaker 2 (01:02:46):
I had. I had a lot of I had a
lot of support from people I worked for or worked
it right.
Speaker 1 (01:02:55):
At City and at Meryll City, starting out.
Speaker 2 (01:02:58):
At Meryl right and it more particularly right, I had
a lot of support like that. You know, a mentor.
The word mentor means I think also somebody who helps
you grow, who helps you develop, who talks to you
every few weeks or a month officially unofficially, right, Hu.
(01:03:18):
You know, what I've found is the business I chose
to be in was such a new, emerging business where
you know, I can't.
Speaker 1 (01:03:29):
There were no people with decades's experience, And.
Speaker 2 (01:03:32):
It wasn't like I had a quote mentors in the business, right,
But what I found was and by the way, every
time you do something which is new and different and
you're one of the first guys on the wave, right,
it is you learn as you go. Sure, but having
that support, right, from kind of all those different parts.
(01:03:53):
I think that's kind of what I would say, become.
Speaker 1 (01:03:55):
An approach of everybody, kind of lifting everybody else. Let's
talk about books. What are some of your favorites and
what are you reading right now?
Speaker 2 (01:04:05):
I like historical fiction. So there's a there's a guy.
There's an English author, a guy called con Igillen. I
don't know. He's written five six books about the Roman Empire,
the Caesars, right, He's written about Koklai Khan and the
(01:04:25):
Khan dynasty out of Mongolia, right, Chengiz. I love reading
that sort of historical fiction. He just came out with
a new book on Nero, the Roman Emperor, and it's
a new series. Right then, I'm reading that.
Speaker 1 (01:04:39):
Huh, sounds really interesting. Our final two questions, what sort
of advice would you give to a recent college grad
interested in a career in distress debt or credit investing?
Speaker 2 (01:04:53):
Be ready to work really hard, right? Yeah? Yeah. You know.
The typical person we hire at SVP is we have
two entry points, right, so we'll hire twenty six twenty
seven year olds. So you should have gone to undergraduate school,
couple of years at an investment bank with the eighty
(01:05:16):
hundred dollars a week two three years at a private
equity firm, right, and then you come work with us.
And then the second entry point is you're that twenty
seven year old you go to business school and then
you come work with us. Right. So those are our
two entry points. But when you look at kind of
you know, the people who are kind of coming in
(01:05:38):
by the time you are that twenty six twenty seven
year old, you know, if you were in that class
at Dartmouth or Yale or whatever, you're probably already that
one in one hundred, maybe one in five hundred kind
of person to have made it that far. Right, This
is a tough, incredibly demanding profession. Just be ready for that.
(01:06:05):
It is extraordinarily rewarding, right, and I don't mean financially right.
It's fun, you know, the people you work with, the
culture of what you have it is fun. Yeah, it's
financially good too. But to be but to position yourself
to be in this world, right, especially in a world
(01:06:27):
like ours. Look, we're not looking for people who are
just kind of you know, paper investors. We want you
to work with our portfolio companies, with our management teams.
You've got to have the EQ You've got to have
the presence and the communication skills too. Right. You look
at kind of the training we need for somebody who
(01:06:48):
can do that at age thirty or age thirty five. Right,
it is it's very much that sort of a growth
track you've got to follow.
Speaker 1 (01:06:56):
Huh. Really really quite fascinating. And our final question, what
do you know about the world of investing today that
you wish you knew in the nineteen nineties when you
were first getting started?
Speaker 2 (01:07:09):
Oh my gosh, Barry, I was. I was in when
we got started right as a firm. In two thousand
and one. Somebody asked me and said, hey, Victor, what
would you what would you consider success in five years?
(01:07:34):
And remember this is when the world was young, alts
was really young, right, And I said, boy, if I
could be running for five hundred million in five years,
wouldn't that be great? Right? We went through five hundred
million in a year and a half. Right, But I
think I think what I what I've learned about, what
(01:07:56):
I've learned about investing, because boy, when you do what
I've done, you make mistakes. What I've learned about managing
and growing people and developing people, right, it's like I
have been in this laboratory of learning. So when I
(01:08:16):
think about the person I was twenty five thirty years ago,
right running a proprietary desk at Merrill Lynch, right to
kind of the person I am today, right in so
many different ways, I couldn't I couldn't even have told
you twenty five thirty years ago. I couldn't even have
(01:08:39):
told you what it would take right to kind of
be here. And I think it's like, I think, you've
just got to constantly be ready to learn, to evolve.
You can't get stuck. And if anything, if my journey
says anything, it is you know, I've seen the evolution
in the firm, shure, I've seen the evolution in me right.
(01:09:02):
And I think if you were, if I was to
give advice to somebody who goes down this journey, it
is to have a lot of people around you who
can not just in your firm, but outside your firm,
some people you can trust, you can talk to, who
can court you, who can make you think because you
are in an evolutionary journey to grow up to be
(01:09:24):
a leader in this business.
Speaker 1 (01:09:25):
Huh really quite fascinating. Thank you, Victor for being so
generous with your time. We have been speaking with Victor Kosla,
founder and CIO of Strategic Value Partners. If you enjoy
this conversation, well check out any of the five hundred
or so discussions we've had over the past ten years.
(01:09:46):
You can find those at iTunes, Spotify, YouTube, wherever you
find your favorite podcast. Be sure and check out my
new podcast At the Money, short conversations with experts about
top related to your money, earning it, spending it, and
most importantly investing it At the Money wherever you find
(01:10:09):
your favorite podcast, or in the Masters in Business podcast feed.
I would be remiss if I do not thank the
crack staff that helps put these conversations together each week.
Meredith Frank is my audio engineer. Attika Valbron is my
project manager. Sean Russo is my researcher. Anna Luke is
(01:10:29):
my producer. Sage Bauman is the head of Podcasts at Bloomberg.
I'm Barry Retolts. You've been listening to Masters in Business
on Bloomberg Radio.
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