King Street's Brian Higgins On Navigating Distressed Markets

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Barry Ritholtz speaks to Brian Higgins, co-founder, managing partner and co-portfolio manager of King Street. Higgins focuses on handling distressed securities, real estate investments and credit. He is chair of the Management Committee, Global Investment Committee, Real Estate Investment Committee, and is a member of the Risk Committee and Operating Committee. Before co-founding King Street in 1995, he worked at First Boston in their Special Situations Fund and the Distressed Securities Group. 

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Episode Transcript

Speaker 1 (00:02):
Bloomberg Audio Studios, Podcasts, radio News.

Speaker 2 (00:09):
This is Master's in Business with Barry red Holds on
Bloomberg Radio.

Speaker 1 (00:16):
I'm Barry Ridults. You're listening to Masters in Business on
Bloomberg Radio. This week on the podcast What Can I Say?
Brian Higgins has put together an amazing track record handling
distressed and stressed debts as well as other forms of credit,
real estate, collateralized obligations. King Street is a fascinating firm.

(00:39):
It was formed in nineteen ninety five. Over the course
of the past I don't know, twenty five years, they've
put together really an impressive track record. They have already
returned about eighty percent of the net gains they've had
to their limited partners. Really, there are a few people

(00:59):
in the world who have a better sense of distress, asset, credit,
real estate, and how to not only do the fundamental research,
but tactically trade around the positions. As an example, institutional
investors mentioned King Street in twenty twenty two, perhaps the
worst year for hedge funds since eight o nine. They

(01:23):
were down three point eight percent. Their benchmarks were down,
you know, fixed income was fifteen percent, equities was twenty
something percent. To be low single digits is really just
a testament to their performance. U there are a few
people who are more knowledgeable about fixed income, credit, real

(01:45):
estate and distressed investing than Brian Higgins. I found this
conversation to be fascinating, and I think you will also,
with no further ado, King Streets Brian Higgins.

Speaker 2 (01:58):
Well, thank you very much, Barry me.

Speaker 1 (02:00):
I appreciate you being here. I've been looking forward to
this conversation for a while. Let's jump right into it.
You get a bachelor's in business administration from Villanova University.
What was investing always the career plan?

Speaker 2 (02:13):
Well, actually I started out electrical engineering.

Speaker 1 (02:16):
Me too. That's funny you say that first first.

Speaker 2 (02:18):
Two years electrial engeering. You graduate from high school. I'm
good at math and science, and you know, I always
had an idea with go into business, but I felt
that electrical engeering would be a good foundation, and that's
what I started at. But after two years it was
sort of not very interesting, and I was intrigued by
the markets at the time. In the mid eighties, you

(02:39):
had a lot of stuff going on in terms of
the merger boom, and Wall Street was rocking, and I said, hey,
this is sort of interesting. I was probably the only
electrical engeering major that had a subscription to the Wall
Street Journal. So my roommate, who was a mechanical engineer,
said to me, what are you doing. Why don't you
just switch over to finance, which I said.

Speaker 1 (03:01):
Sure, makes makes a lot of sense. So you come
out of Villanova, you end up at First Boston in
nineteen eighty seven in the special Situations fund and distressed
securities group.

Speaker 2 (03:11):
Yeah, we started out. I started out banking the two
year banking program, which merchant banking was the group I
was in. My co founder was an analyst. He came
out of Yale. He was in the Bankruptcy Advisory group.
So we're in the analyst program together, sixty five of us.
And after two years I went down to trade distress Proprietarily,

(03:31):
I got promoted to associate without going to business school.
I had done an undergraduate business and felt that, you know, hey,
I can do this, but I want to get some
different just rather being the analyst that never left. I
want to get some markets experience, but you know, stay
in the proprietary side. So there was a proprietary trading
group that was forming and I was joined that, and

(03:53):
it was an interesting time in high yield as you know,
shortly thereafter Drexel, which goes from one day issuing commercial
paper and the next day they go bankrupt.

Speaker 1 (04:04):
So what was it like trading distress securities in the
late eighties that had to be you know, a pretty
let's call it target rich environment.

Speaker 2 (04:13):
Well, I would say it was interesting because the Marcus
sophistication that we have today in terms of really the
fluidity of capital, structures, of trading desks, et cetera, seamlessness
which you had, you had. It was interesting. You'd see
things go from say the investment grade market to the
high yield market. There was a big disconnect as they

(04:35):
move positions that started to trade wider. The buyers didn't
have the ability to go cross assets and a cross
let's say ratings as they are today. You know, mutual
funds were very siloed and now they're a bit wider mandates.
So it was yes, you had you know, ni CE
ratings changed for insurance companies post Drexel, and so there

(04:58):
was a number of less liquid markets that made for
quite wide spreads. You had a default cycle, so you
had trading with the crude and trading flat, and so
there was certainly a number of different movements, but there
was certainly downside of these things. So one had to
be very rigorous in your investing, in your analysis to

(05:23):
do the investing.

Speaker 1 (05:24):
So you're at a big bank in eighty seven, you know,
obviously there were a lot of market dislocations later that year.
What was that experience like for you? It was.

Speaker 2 (05:36):
Interesting. I mean, it certainly was indoctrination into the world
of finance. You go from you know, these big parties
during the summer as you welcome to the new analysts,
to the market crash obviously in October of eighty seven.
I think the volatility that ensued and then you know
the world's going to end, and then you know it

(05:56):
comes back. I think that just spoke to the resiliency markets,
but also the certainly the volatili and fragility of certain
sectors that one has to be mindful of. And you know,
I think ultimately there was a number of opportunities that
came out. I had no money back in eighty seven,
but certainly, you know, some of the maging directors and
other people that had some money, they made quite a

(06:19):
quite a bit of profits on some of the left
for dead Microsoft and others that were just you know,
sold to very low levels.

Speaker 1 (06:28):
So that sort of this location sounds like it was
a formative experience.

Speaker 2 (06:33):
Sure, and you know, many of these things I look at,
you know growing up, you know, gas lines in the
seventies and you know, we had real recessions back of
the seventies and eighties. These days, you know, it sounded
like an old, cranky, old guy. But when you you know,
that's the challenge of prosperity that it doesn't really prepare

(06:54):
oneself investors too, right, you know, if you always have
the FED put, if you always have you know just
QI forever, that that does have a lot of complacency.
And you see it as you've gone from active to
passive investing, people are like, well, why do I pay
you know for active investing? I could just you know,
it's easy. And now is dispersion has increased in fixed income.

(07:15):
I think it's brings back, you know, the active investing.
But you know, structurally there's there's a lot of money
that's gone into to pass investing, which we believe will
sew the seeds for the opportunity set for some time
going forward.

Speaker 1 (07:29):
And arguably, passive doesn't work nearly as well on the
fixed income side as it does on equities.

Speaker 2 (07:36):
Well, I mean again passive. You know it's nowadays if
you look at the big banks, they're doing portfolio trading
with large swaths of their institutional clients. And so someone
will say I want give me a triple B single
A exposure and these industries, and they go out and
dial it up or down in terms of exposure.

Speaker 1 (07:57):
Uh.

Speaker 2 (07:57):
That creates opportunities within the trading market. So uh for
our long short credit hedge fund, you know there's there's
this locations and opportunities to trade, uh, to make money
in those situations. But I mean, you know it's in
these these markets as we as we pivot going forward. Again,

(08:19):
if if you're saying I'm gonna earn five and change percent,
you know my cash and you know, fixed income no
problem to Fault rates are near zero. Now, fault rates
are kind of skewed a bit because you do have
perhaps in high yield. If you look at you know,
these liability management exercises and other restructurings out of court,
it doesn't default, but then there's a lesser consideration you

(08:42):
get for your your claim. Uh, so it does factor enter.
But you know, you've had a very benign default environment
as we've had a lot of money printed for quite
some time. If you look at the Fed's balance sheet,
the M two that has been printed, you know there's
there's been a great tailwind. Huh.

Speaker 1 (09:00):
Really interesting. So let's fast forward to nineteen ninety five.
What led you guys to depart and co found King Street.

Speaker 2 (09:09):
So going from you know, First Boston banking, trading, distress proprietarily,
then we started internal hedge fund at First Boston and
that was from ninety one to ninety four, so I
think about I already had started, in effect helped form
to these businesses. And so at the end of ninety four,
again many issues with First Boston, which became Credit Swiss,

(09:31):
became ubs. They've I think I had five CEOs I
worked under for the seven eight years I was there,
and so we said we could do this, and my
co founder and myself we left around a few months
apart in ninety four form King Street started trading in
ninety five. We never thought we'd start with the princely

(09:52):
sum of four million dollars, which is what we started with.
We thought, oh, we're gonna start with fifty. All these
people are like, yeah, I'll give you five, I'll get
you ten. You know, no problem in encouraging us to leave,
So be it. We started with fort One of the
first million dollars came from Jimmy Kine, who was chairman, yeah, chairman,
CEO of Bear Stearns. I had met him through another
friend of mine, Vince TC, and know him through golf

(10:15):
and got to be friendly with him, and he heard
what I was doing and he said, you know, I'm
happy to give you a million dollars of my money
to manage, and you can use my name in marketing,
and so you know, it was it was quite comical
because I have back then a list of references. Right.
It felt like I was going for a job interview

(10:36):
asking for money back then. And we were two guys
twenty nine years old, as you know. My brother called
us two guys capital and we would you go around
all the usual suspects, begging for something, and we ended up,
as I said, with four million. But you know, Jimmy
took a personal pride and he took and people say,
you mean I can call this guy he's CEO Bear

(10:56):
Stearns said, I said, yeah, yeah, call him up. So
he call him up and then immediately he'd called me opposite.
You know, how did I do you get the money yet?
So you know, it was it was, it was very humbling.
It was a very sweet, you know mentor of mine
as an Irish Catholic kid. You know, it's nice to
have a rabbi such as such as Jimmy and Vince
you know, introduced us. And also Vince was incredibly helpful

(11:18):
so having to you know, fathers of King Street, if
you will, And they asked for nothing in return except
the satisfaction that they received by seeing us grow and prosper,
which was again very very fortunate and blessed to have
that those two people in my life.

Speaker 1 (11:35):
So from four million dollars you eventually grow assets over
time to twenty six twenty seven billion dollars. That's an
incredible track record over twenty five years. And I also
can't help but notice it's been reported by places like
Institutional Investor that you guys have distributed about eighty percent

(11:57):
of those gains, which is really impressive. It tells me
that you're concerned about scaling up too large. Tell us
a little bit about why you kept the firm at
a fairly modest size in terms of capital that you're trading.

Speaker 2 (12:15):
Well, I think there's opportunities that EBB and flow, and
I think it's important to have the right structure, and
so we have a number of business lines. We have
our Cloudwise loan obligation business COLO business that is super
interesting business. It does help feed into our long short
credit business, which is our long standing business that we

(12:36):
started in nineteen ninety five. We also have a number
of drawdown businesses, drawdown meeting, drawdown credit, distress businesses, and
those have longer duration attached to them, which is commensurate
with the opportunities we're investing in. We also have a
real estate business that we so used to be. The
credit headphone business had what's called side pockets. A couple

(12:59):
of years ago. We remove them and it's just the
liquid long short credit business. And the side pockets come
in the form of these draw down fund structures. That
is something the industry has gravitated towards the last say
ten years, and.

Speaker 1 (13:12):
Meaning as each of those things mature, they get paid
out to the correct right LPs.

Speaker 2 (13:16):
Right, so you got three or three or one year
extension perhaps which three are investing through harvesting and then
payout traditional but they can vary, and so that's really
having different buckets and one has to you know, it
gets complicated because you have different investors in different buckets,
and then there are different vintages and then they say, okay,

(13:36):
I need distributions and you know which ventures you do,
and the timing they can be, oh, I don't have
money this year for next year. So there's there's a
whole planning that goes on in terms of when you
launch different funds. But it for for us in the
long shore credit business, there's lots of lots of opportunities
as a number of the people that we used to
see all the time in the markets are no longer

(13:58):
around and so that we believe has shrunk the competition,
if you will, in the long shore credit trading business
for stress to stress, and I think also it's it's
where are we in the cycle? Do we ever do
we believe that there will ever be a credit cycle?
Do we think we'll ever have defaults again? Or you know,

(14:19):
will we continue to grow? Depending on your math, we're
I have two trillion of deficits and you know, then
all these other amounts of debt around the world in
the government side that is being printed to uh support
global economies. I think at a certain point we see
this competition for capital, if you will, between you know
what the public sector, uh, the government sector, in the

(14:41):
in the private sector is trying to you know. So
I think it's gonna be hard for rates to go
low because there's still you know, a lot of depths
that's spending out there. I mean, think about the deaths
thats we have when it's pretty much full employment, economy
is still pretty strong.

Speaker 1 (14:56):
What are we one point eight trillion a year?

Speaker 2 (14:58):
I mean to some say two. You know, it always
I see different numbers all the time. So it's always
kind of like who's math, if you.

Speaker 1 (15:05):
Will, huh really interesting. And it seems like everybody and
their brother managed to refinance both household and corporations in
the twenty tens when rates were low, except Uncle Sam
couldn't couldn't get around to it.

Speaker 2 (15:20):
Yeah, and you know you say that the I joke,
the greatest asset and many people's portfolio is their thirty
year two three percent mortgage, right, And so affordability has
been problematic because of the supply, you know, we're short
whatever five million homes, but the you know, the affordability

(15:43):
is still because of that and other factors, has been difficult.
So I mean, I think they're they're you know, it's
a very it's a complicated landscape on the consumer.

Speaker 1 (15:54):
Side, to say the least. I mentioned earlier the Institutional
Investor Lifetime Achievement Award you and your co founding partner received.
Tell us what that meant to you. That is not
something that many people get tagged with. I think there
have been forty recipients of that from Institutional Investor. Tell

(16:16):
us what that meant?

Speaker 2 (16:17):
That sort of recognition, It's an incredible honor and an
honor shared by all the current and past, you know,
people that worked at King Street and so we are
some of the effort that has put forth over the
thirty years, not just the partners, but and also the

(16:40):
investors that believed in us and continue to believe in us,
and counterparties, et cetera. And it sounds tripe, but it
is very appropriate and true that, you know, we're just
beneficiaries of, you know, some amazing people that we lucky
to deem us worthy over the years. It's very humbling,

(17:02):
it's very exciting, and it also you know, it's interesting
because you know there's there's always well why now, why
are you doing these podcasts? Or why would you do that?
And I guess it's it's really we have a story
to tell and I'm very proud of King Street and
the people, and I think it's a great opportunity. And

(17:23):
it also is a sign of the times where we are.
And I think evolution personally and professionally as a firm
as an institution is so critical and I think that's
part of our staying power, is our desire to continuous improvement.
And you know, you look back and people might say, well,
why do you focus on the past? Well, you know,

(17:44):
focus on the past so that there is a future.
I think the Lifetime Achievement Award is it is kind
of I thought they give it to dead guys whatever,
But you know, we're not dead yet and don't plan
it ever being so we're we're excited about the going forward.

Speaker 1 (17:59):
Like that concept you don't know where you're going unless
you understand where you've already been. It makes a lot
of sense. Let's talk a little bit about what you
guys do you mentioned earlier stressed and distressed. I know
that they're two very different things, but there's some nuance
there help us understand the distinction between stressed assets and

(18:21):
distressed assets.

Speaker 2 (18:23):
Yeah, I think it is kind of nuance in a way.
I think, you know, distressed assets, you know, you're you're
on your way to default most times or restructuring. Stressed assets,
you know, can be out of favor assets. I think
you're splitting hairs. You know. Some would say, oh, triple
C bucket, that's all distressed, and if you look in

(18:46):
single B, double B, oh, that's stressed. You know. I
think it also depends on where we are on the
cycle what can be stressed distressed. And also if you
look at a stressed infrastructure situation, that might not be
that wide in terms of total spread. So let's say
you have you know, a thousand basis points over the

(19:09):
treasury is a say, a distress situation. And then if
you look at something that normally trades say one hundred over,
but it's trading at two hundred over and that could
be stressed. Now you would say, well, that's in high yield.
That's nothing we can see a you know, twenty fifty
hundred and two hundred spread widening or tightening, you know

(19:29):
in high yield. Now that is I'm giving a historical perspective.
It seems like the last couple of years, this is
not your father's high yield market when they you know,
high yield meant junk bonds, and these days high yield
is trying to be an investment grade market given the
security five ye these days you had the FED come

(19:51):
in and push a lot of the banks and say, hey,
you can't have a ton of leverage on the high
yield issuance, and so they kind of help create the
private credit market, if you will, or it went into
loans and so and lack of covenant protection. But the
the quality of the higher market is dramatically different than

(20:12):
you know, once I came up.

Speaker 1 (20:14):
So it sounds like it's not so much that there's
any real distinction other than a spectrum of risk of
your debt is going to have a higher yield but
greater risk that comes along with it, and stressed distressed
are just different points along that spectrum.

Speaker 2 (20:31):
Is that fair? H? I think that's fair. I mean again,
I'm sure some would have their own classification system as
it were I would, I would just liken it and
too you know, distressed as you know, real operational issues
or financial issues that as I say, inevitably preponderance of
outcomes is to a restructuring or a bankruptcy out of

(20:54):
quart or others, and so versus the stress which is
not always heading that way.

Speaker 1 (20:59):
So let's delve into not your father's high yield market.
How does the high yield market differ today than when
you begin in the nineties, and how much credit or
blame lay at the feet of the Federal Reserve.

Speaker 2 (21:14):
Well, I wouldn't say it's the Fed. I think the
markets have evolved dramatically. And if you look at markets
around the world, you know, the US capital markets or
the envy of the world, because the banks have had
less and less responsibility, if you will, meaning they're twenty
five percent banking a traditional banks and seventy five percent

(21:35):
capital markets, which would be you know, all sorts of bonds,
private and public. You go to Europe, it's seventy five
percent banks. You go to developing markets, it's ninety five
hundred percent banks. And so they're more susceptible boom and
buck bus because there's that lack of you know, cushion
and you know, and the more systemic in terms of
their issues when when the economy turns. But if you

(21:58):
go back to the question on you know, a high
yield and how it's differentiated, there was just a lot
more leverage back then. I remember doing the Allied Federated deal. Now,
granted the ristory rate was higher, but you had you know,
sixteen percent loans, seventy percent loans, You had you know,
eight times ten times leverage, right, So so you have

(22:21):
less leverage, you know, lower spread going in as they said,
higher quality and then and the greater leverage is being
found at times in some of the private credit or
or other loans. But I think this extreme leverage is
not as prevalent as it once was, and so I

(22:41):
would I would argue that, you know, the markets have
been more rational in terms of their approach to leverage
than ever before, at least you know, my almost forty
years doing this.

Speaker 1 (22:52):
So you also talked about the US markets versus you know,
Europe and emerging markets. How much credit it goes to
places like the FDIC or the SEC or is it
just the full faith and credit of the US government
standing on top of a very healthy macro economy.

Speaker 2 (23:14):
In terms of the market construct comparing us versus the
rest of the world. I think, you know, there's a
lot of credit due to the innovation, open regulation, but
also involving regulation, and also it helps having these large banks.
If you look at there hasn't been the big bang

(23:35):
in Europe as they said it was going to be. Right,
you look at the wrestling going on between you to
credit and commerce bank, and you look at the German
banks and some of the issues the stagnant aspect of
that economy. If you look at savings products over there,
there's not the full depth and breadth of products that
we have.

Speaker 1 (23:55):
Even money market you don't have money market funds to
the same degree you have in here.

Speaker 2 (23:59):
Correct. Lot of times they do it with you know, okay,
like you have japan Post, you have Italian Post, you
have Deutsche Post, you have you know, the regulatory environment
for asset management in Europe is quite onerous and is
difficult to passport. I mean, they have that these days,
but there's still the reality is there's still a lot

(24:20):
of inflexibility within the regulatory framework that and look, I
you know, I've spent a fair amount of time with
regulators and central bankers and participated in a number of
forums and meetings on the topic. It does get complicated
because Europe is Europe, but it's still a number of
different countries within that. The US having this large, deep

(24:43):
market does help. And look, I think we do have
the innovation, sophistication, and I think the beneficiarrea is the
world being able to buy sophisticated products that really are
solution providers in all way shapes of form.

Speaker 1 (25:00):
I want to delve a little deeper into what makes
King Street so unique, not just its performance, but the
way you guys approach the world. You combine a fundamental
approach with very disciplined and opportunistic trading approach, which is
you know, usually those are two totally different animals. It's

(25:21):
interesting to see, especially in credit and stressed and distressed
see those two married. Tell us a little bit about
how that set of strategies evolved and what sort of
opportunities it's created for you.

Speaker 2 (25:37):
I think going back to history, which is nineteen eighty nine, Well,
so you can go back to A seven with the crash,
seeing the importance of tactical trading, go back to A nine,
the formation of the distress the prop group, the distressed
securities group on the trading desk, but being part of
that when you had very wide bits spreads and you

(25:59):
could see that execution and entering an exit position, there
was a massive amount of differentiation and performance that could
be created if one were to be able to trade
it tactically. So for example, if things go quite wide
and spreads where they can trade ten bond points wide,

(26:19):
being able to buy on the bid side versus the
as side. If it's fifty sixty market, for example, that's
twenty percent differential. So just your entry point is massive.
And also we call ourselves short long investors.

Speaker 1 (26:33):
And people say as opposed to long short.

Speaker 2 (26:35):
Correct because many of our biggest longs start out as shorts.
And why that's important is.

Speaker 1 (26:43):
Meaning you cover the short and then go long correct
at the end of the At the end of the
short trade, it's like, oh, if it's good enough to cover,
maybe we want to completely reverse our original views.

Speaker 2 (26:54):
Right, And so initially there's always the and we could
sit there a bit of time and it could expensive
carrying shorts, so you have to be mindful of that.
It can take some time. However, it does enable us
to have done a fair amount of work in advance,
and so let's say something breaks, hopefully we've been short
it and we have a fair amount of institutional knowledge

(27:15):
about that situation, and then we can cover it or wait,
it's going to get worse, because you know, oftentimes management
comes out and they say, okay, they find some guy,
they shoot him and say that was the bad guy,
and now we're back and you're like, wait a minute,
that guy, you know was the janitor. What do you
mean or are we going to execute on this or that?

(27:36):
And you say they've tried to execute you know, for
the last three years, I have able to do it,
so it really having a bit of perspective is important,
and then you can then time it appropriately. Now we're
not market timers, but it does give us, I think,
a relative value perspective. So coupling the trading and understanding, okay,

(27:57):
a lot of sellers are coming out, there's more coming out.
Having that supply demand question answered is important as well.

Speaker 1 (28:06):
So I want to put some flesh on the bones
of what it looks like combining the tactical with the fundamental.
And I'm going to quote numbers from institutional investor because
I know as a regulated entity, I know what I
cannot say. I know you can't give specific numbers, but
I could cite what institutional investor had observed. Twenty twenty

(28:27):
two was the worst year for hedge funds since two
thousand and nine. The S and P five hundred and
down twenty percent, bonds down fourteen percent. King Street, according
to II, was down only three point eight percent, a
massive outperformance to either the SMP or the Bloomberg AG.
Tell us what it was like trading in twenty twenty two,

(28:50):
first time in forty years stocks and bonds were down
double digits together.

Speaker 2 (28:55):
I would say it's set the table going back to
say twenty twenty if you look in the pandemic when
you know world's going to end, and then you know,
a lot of equity injected, and then then we had
the vaccine news came out, everything rallied, but there was
so much stimulus being put and I think, you know,
just let's say, I don't like losing money ever, and

(29:17):
is my co founders say, you know, relative performance, but
you can't eat your relatives. So it's just important to
from our perspective, contextualize that. And so we are very disciplined.
I think one of the things that we looked to
was like, hey, let's go up in quality, up in liquidity,
and that was a concern. I think one of the

(29:38):
things took us by surprise was okay, you know how
much inflation really rooted and how quickly and how high
it went. So I'd say, you know, that was something
we missed. Again, we always try to focus on what
we did wrong and we correct those. Hopefully then the
going gets better going forward trading in twenty two, as
I said, I wouldn't say it's too differentiated, but again,

(30:01):
you know, an absence of a true distress cycle, I
think that it loses the sort of meaning. But if
you look at you know, in twenty twenty there was
a number of things that is really for me at
more signature important time.

Speaker 1 (30:14):
So I want to talk about a few specific investment
strategies that King Street does. In twenty seventeen, you launched
a collateralized loan obligation business. Tell us a little bit
about that strategy.

Speaker 2 (30:27):
So we've been investing in clos, mezzanine and opportunistically for
a number of years, equity and et cetera. We've always
had this credit expertise, and we felt that as a
compliment for our investors and to benefit our launch short
credit business. To have the CLO strategy was we think

(30:48):
a distinctive manage and so we've had a terrific growth
and successful business launch and continue to grow from strength
to strength there in both the US and Europe issues
during twenty twenty, there was a number of opportunities that
came out to rescue finance a number of the companies
we had relationships with, and so it has proven very

(31:11):
complementary to our business. We describe our business in terms
of overlapping circles, and that is that we will have
different fund strategies and there might be a bond or
a loan situation that we might see in different funds
if they meet the investment criteria liquidity duration that we

(31:32):
are looking for in that particular strategy, and so there
is real synergistic effects and ability to analyze these situations
quite rigorously.

Speaker 1 (31:43):
Let's talk about another overlapping business line, real estate. What
do you guys do in the real estate.

Speaker 2 (31:49):
So we've been doing real estate, as we mentioned, first
real estate finance and then real estate buying the equity
or buying actual properties for quite some time a number
of years ago. Go again, as I mentioned earlier, the
demise if you will, the stop doing side pockets and
you set up separate real estate funds. And so we've
set up a number of funds. We've also invested in

(32:12):
some specialties such as student housing in Europe. We've done
last mile logistics, We've done movie studios. We've also done
a number of financings as the banks have pulled back,
has created great opportunities in that. And then more recently,
we bought a data center business that specializes in AI

(32:35):
and high performance compute, which is quite an exciting business.

Speaker 1 (32:38):
That's cul of war. I was reading about that and saying, wow,
this seems to be a little off of what I
was expecting. Liquid cooled, AI, data center, liquid cooled, what's
that about?

Speaker 2 (32:53):
So to give you the history, So years ago we
started focusing on growth lending, growth financing. You know, it's
funny VC distress. There's a lot of similarities between the two.
You know, you don't know what's going to happen with
the company, is it going to make it not make it?
So for example, Airbnb in door dash and twenty twenty

(33:14):
we lent them money prior to their IPOs. Now, the
v on the LTV loan to value the value oftentimes
the disparity because when you ask a tech person what's
this company worth, generally it's it's very very high numbers,
which we don't always support from our valuation. But if

(33:34):
the loan percentage is quite small five ten percent, then
there's a margin of safety, and we have a lot
of covenants to protect ourselves. And you say, we did
some of that. We looked at GPU financing, which GPU
is the Navidia chip, that's what they produce, and so
we looked at some financings there. Couldn't get quite comfortable

(33:56):
the depreciation curve because you know, Navidia comes out of every
the other day with a new chip, and so we said,
why lend your money if every two years you're going
to have a new chip, and so worry about the
value eroding on that chip. And so even though we
over earning in terms of financing, now there'll be situations
and opportunities that will make sense to lend in that sector.

(34:17):
However that's we then you know, said, wow, this data
center business is going to have legs for quite some time.
We looked at the hyperscale business insanely competitive and said, okay,
can't make a mark or find an edge there. And
that's when we came up with colo Oar, which was
selling itself. They had been doing liquid cooling for thirteen years.

(34:38):
They started company thirteen years the company ten years ago,
operational in a co location business in Santa Clara, California,
in the heart of all these tech bohemoths, and they've
been DGX certified by Navidia for over five years. Liquid cooling,
the way we do it is it's full true liquid cooling.

Speaker 1 (34:57):
Meaning it's more efficient, more productive.

Speaker 2 (35:00):
Yeah, so just think about just the construct right, So
you have the whole data center, you have three foot
raise floors, you have an intake outtake of water that's
ambient water temperature, goes, flows around and goes to the rack.
Many will do liquid cooling to the rack, but separately,
and that's very expensive because in effect you're retrofitting. Ninety

(35:20):
five plus percent of the data centers are air cooled.
As we know, air water is three thousand times more
effective cooling than air. And so the PUE, which is
the efficiency rating that they utilize, we're like one point
three and many are one point five six, et cetera.
So it's very efficient. You can have a denser facility

(35:43):
and it can handle the AI chips. The other metrics
that people use is the killowatz per cabinet, and so
we can host up to two hundred and fifty kilowats
per cabinet, where you know five ten twenty is these
traditional data centers air cooled and so as Winning Gretzky
used to say, I skate where the puck is going
to be and the chips are all about, we need

(36:06):
liquid cooling. Also, as we look to satisfy the future
which will be inferenced versus the l M, the big
training models, there will be a need for the data center.
So we're having a number of conversations and across many
different verticals. Our real estate group is executing, plus the team.
It's super exciting and and it's again it's it's something

(36:29):
that evolved out of our overlapping circles with the financing.
You know, we we don't. There's always a method to
it that we evolve into.

Speaker 1 (36:39):
Huh, really fascinating. So let's let's start out talking about
why we're even talking. For for most of King Street's history.
You've been a quiet firm. You You quoted one of
your colleagues as saying, Hey, it's the spouting well that
gets harpoons. Tell us why we're even having this conversation now.

Speaker 2 (37:03):
Evolution is so important, self improvement, evolution. I think markets change,
and I think it's important to adapt to survive. As
the trite saying, we might say, we look at the
opportunities that we're facing, the business that we're building and
have built, and they're quite excited about it. And I

(37:23):
think it's important to communicate for our investors, for perspective,
partners and people that to attract the best and make
sure we have the best partners, to make sure our
story's out there. It's gotten incredibly noisy, if you will,
when everyone's out there. So to do nothing, I think

(37:44):
would be a disservice to the people in the business
and our and our partners. Really, as you know, the
opportunities you know come to you know, as they say,
squeaky will gets the grease and so one has to.
You know, relationships are great. However, at times people you
know would say, oh, King Street, they still in business,

(38:06):
you know, because if if you're you're not out there
with your LinkedIn presence or or I think it's just
a sign. Look we're not on Instagram, so uh, no
tiktoks from no no TikTok videos.

Speaker 1 (38:18):
You know, really really interesting. You know, there's some quotes
of yours that I really like. One of the things
you had said recently was what kills you in investing
is a full sense of bravado, I have all the answers,
I could beat this market, or that sort of approach.
We say, the work is never done and knowledge reduces risk.

Speaker 2 (38:43):
Explain, well, it's it's from our perspective fairly simple. As
investors that focus on out of favor, distress, bankruptcy, we
see failure every day, and we would be incredibly delusional

(39:04):
to think that without and and sometimes it's no fault
of the companies, right, it's it's some unforeseen act. It's
you know, some fraud was perpetrated on it, you know.
But it's incumbent upon us to be tireless in our effort,
as there's multitude of competitors out there globally that we

(39:30):
go up against every day, and if we're not grinding
it out, then you know there's there's going to be
a shortfall, and we we don't plan on having that.

Speaker 1 (39:41):
Early in your career, someone would ask you what drives you,
and your response would be paranoia and insecurity along the
same lines.

Speaker 2 (39:50):
Yeah, you know, look paranoid insecurity it's it's it's I
try to be humorous and colorful because investors come in
and to own on you know that it doesn't always
keep their attention. I think it's important to look at
you know, we also talk about probability and you know proportionality,

(40:13):
and so if you take those four things right, So
the paranoid insecurity is like, Okay, did I do enough work?
Does someone else know what can happen that I'm not seeing?
It keeps that drive to continue to ask those questions.
As we said, knowledge produces risk because you know, these
is a moving picture. This is not a still life photograph.

(40:35):
And so there's many different variables that happen through a business,
through a cycle, through you lifetime owning, investment, and markets
to change. So if you think about the number of variables,
one would be kidding oneself to think that they can
rest in their laurels. If you will, the work just
begins when that investment is made and so in the

(40:59):
paranoid it's ccurity. The only paranoid survivors, they say. And
so we have to say, did I do enough work?
Was there something I missed? Keeping one up at night
that constantly looking at it? I think if you look
at any piece of work, you know, an artist or
whomever it is, they put some work, they do some work,
they put it down, they come back, they look at

(41:19):
it from another light and oh I missed that. Let me,
let me continue to refine it. And so investments, in
our mind are are bodies of work that need to
be continually refined because the elements, if you will, continue
to challenge it. And then you look at probability and proportionality.
One has to be careful on that right because if

(41:40):
you say, well, you know this hurricane is going to happen,
you know the tragic hurricanes that we've had currently and
just recently. Okay, if you had said never going to happen,
we haven't had for a while, and if it happens,
it's it doesn't create much damage. Well, what's the probability
that that could could outcome? Now, if you look at

(42:03):
geological faults and you're buying a piece of property, and
you're building a data center, for example, and you say, well,
one in one point six million or billion years that
you know, I feel good about that, right. But if
you're down in Florida and you're saying I'm not going
to buy flood insurance now, question can you get it
these days for it? Right? But like, think about the

(42:24):
people the tragedy happened in North Carolina up and then
you know, they didn't think they'd need flood insurance.

Speaker 1 (42:28):
They were deep inland and at a fairly high elevation,
and yet they still got flooded out.

Speaker 2 (42:33):
Right. So these are things in terms of proportionality and probability,
and proportionality is okay. You can create a scenario with
any investment where you'd never make the investment. You could say, well,
that could happen, and then you could say to certain,
well it's one in a million years and it's two
percent of the business. Is that really going to cause
you to pass on that investment? So that's the constant

(42:55):
interplay that we feel is critical to arrive. You know,
the best decision you can make, and again the best
things you make today tomorrow look at it again and say,
oh I screwed up.

Speaker 1 (43:07):
You mentioned earlier you wanted to be a little public
because you want to attract and retain the best employees.
King Street has about two hundred and fifty people working
for them, seventy of whom have been with the firm
for ten or more years. That's pretty unusual in the
hedge fund world. Tell us a little bit about the
ten year club you guys created.

Speaker 2 (43:29):
Well, it really again, as I said at the outset,
it's celebrating the people that comprise King Street, as I
thought from the beginning, and talk to other people in leadership.
Remember that your greatest asset goes down the elevator every
day and you hope they come back up the next day,

(43:50):
and so one has to again celebrate the teamwork. And
that's the approach that we have a King Street talked
about the overlapping circles and the ability to work on
different aspects of the business. But it's very much a
team and we look at the what what the operation team,

(44:12):
the investment team, and the training team. There's a lot
of collaboration that is constantly occurring, and people get paid
on the well being of the overall firm, and so
it forces that teamwork and collaboration, and I think it's
important to celebrate events. You know, we we have outings,

(44:34):
we have different groups celebating our women, our diversity, our
charitable pursuits, or holiday party. We still have the old
school holiday party that we do every year. I think
the summer outings, et cetera. These are all we believe
part of the building culture. You know, everyone the month end,

(44:54):
everyone's birthday gets celebrated with you know, we had them
happen to every day. So we say, wait, we'll just
to once a month all the February birthdays you know which,
and then you get to vote on it. So the
little things that I think create the family, and you
spend a lot of time with people, and if there's
not that recognition of individuality and the effort put forth,

(45:21):
then it's a miss. We believe it's again to celebrate together.
What we've achieved is critical.

Speaker 1 (45:30):
I've heard a number of executives complain or at least
raise the issue. It was very difficult to either create
or maintain a corporate culture during the pandemic work from
home remote. How have you guys navigated that and how
important is corporate culture to a fund like yours?

Speaker 2 (45:51):
Well, culture is becomes what it becomes. It's you just
everyone hopes that they're culture is sustainable and constructive and
not toxic, and so we strive to make sure there's
that communication openness. We do a lot of surveys. We've

(46:15):
always trying to better our scores. It's self improvement we
focus on. If you go back to a pandemic, it
was hard, right because you're on zoom and so you
know holiday party on zoom or you know scavenger hunts
on zoom. It was how do we create these ties
that bind us over what It was incredibly challenging personally

(46:36):
and professionally for a lot of people. And frankly, the markets,
as we all know back in the twenty twenty as
our reference earlier, were brutal and working incredible amount of hours.
The family challenges that people had with their kids at
home were trapped in different places and so and the
sicknesses and loss of life. So those are obviously in

(47:00):
any regular time important, but we believe, you know, corporate
culture has to play its role, uh and not to replace,
but to be a part of it, to be supportive
of of people. But it's it's and also think about
like there's there's We have offices, as you've indicated in
the US and Europe and Asia Middle East. How do

(47:24):
we create that consistency, How do we create that that
fabric that runs throughout And it's a lot of times
we'll do our similar uh, you know, furniture and the like,
so they feel like, oh, this feels like a King
Street office. Things of that nature. Similar events and uh
and the swag, if you will, that binds people.

Speaker 1 (47:46):
So your your co founder and partner of Francis BEYONDI
retired a couple of years ago. Two questions about Francis
First is he is he still sitting on the Yelle
investment committee or has he fully retired from asset management?
And then second, you know, what was that transition? Like,

(48:06):
suddenly your co founder is no longer there every day?
How did you adjust to that?

Speaker 2 (48:12):
Well, I believe the website's correct. He's still at Yale.
I know I've spoken to him recently, but I know
he's got a lot of pursuits and quite busy and
with his family, and I think he's enjoying a well
deserved time. He and I had an incredible twenty five
years together. We call ourselves you know old married couple

(48:35):
or you know brothers of King Street whatever they call
us and two Guys Capital, two guys Capitol, right, so,
which is funnily enough, my brother named that. We grew
up in New Jersey and in East Brunswick and there
was a two guys which.

Speaker 1 (48:49):
Is giant Alexander Kolder on the outside of that building.
Am I remembering that correctly? In Hackensack?

Speaker 2 (48:56):
Well, well, I was from I grew up in East Buswick,
so I don't know about the Hackensack one, but in
the one it was a discount store and went bankrupt
in the eighties, which Fernado was part of the Portfolo
became then the so if it's funny history. But my
brother recently gave me a shirt you know, two Guys Capital,

(49:17):
and we've got on a website somewhere. But anyway, so
I had a saving events there, but no so, as
I said earlier, having this team and this partners with
us over thirteen years on average and having mds thirty
eight plus mds with us over ten years on average,
we've had a very deep, deep bench and fortunate to

(49:41):
have incredible depth and breadth to the organization where we
didn't miss a beat, and you know that's that's something
I think testament to the culture that fran and I
built the first twenty five years, which we hopeful we'll
continue for many, many years to come.

Speaker 1 (49:59):
Let's jump to our favorite questions that we ask all
of our guests, starting with what have you been watching
these days? What's been keeping you entertained?

Speaker 2 (50:09):
Well, I've been watching the Mets a bit lately. I
went to my first Mets game and.

Speaker 1 (50:14):
In October, which I can't remember the last time you
could watch the Mets in October having grown up online.

Speaker 2 (50:19):
Yeah, well, yeah, I mean I grew up in New
Jersey and my first Met game was nineteen sixty nine,
which when they went in the World Series. Yeah, from
a despicable like worst team ever. I think Chicago White
Sox had taken that over. But anyway, so we went,
you know there, watch some of that. Also, I'm a
Knicks fan. Is went to Villanova and they call him

(50:41):
the Nova Knicks. Funny story. Years ago, I was fortunate
enough Jay Wright, who was the coach of Villanova, invited
me to speak to the team before the start of
the season. They were in New York, and you know,
talking to the team, and I, you know, I said
to him, guys, I'm really really nervous here. You know,

(51:03):
twenty eighteen, they were reigning national champions and if you
guys don't win the championship like they're, don't look at
me and blame me. And they were kind of looking
at me quizzically. And I picked one of the young players,
young freshmen, and I sat down right across from right
up in his face, and I said, you know, look,

(51:23):
I'm really nervous. I got this big meeting and you
got to help me, you know, can you what do
you say to me? You know? And he had like
deer in the headlights. Look, he was eighteen year old kid.
He was sort of like this, you know, old guy
with supposedly you know, successful guy coming in begging me
for advice, you know. And he said like quizzically, like

(51:49):
you can do it. And I said yeah. And it
was funny watching the faces of all the older upper
class and they were laughing because they knew I was
just trying to see and I said, and I said,
it was interesting because Jay Wright had called me like
four times in advance because it was so but you
go back to leadership and culture. It was so important

(52:10):
with you want to make sure I was what message
I was going to give, And I said to the team,
I said, see, you all can be leaders. You all
can inspire. And when you're on the court and Jay
is you know fifty hundred feet away, who's going to
inspire and lead each other? And you can't just rely
on the coach. You got to look to each other
for leadership and to sponsor. And that's what when I

(52:32):
talked to my team and how do we have the culture?
How do we continually have that leadership If the partner
is not in the room, who's going to take that
mantle and who's going to push forward? And so on
the things that I ingest. I got to have a
lot of intake to have outtake, right because I got
to do a lot of meetings. So I got to
find that time to refill the tank with information. And

(52:54):
so you know, on stuff I'll watch, whether it's if
it's not sports, it will be some you know, mindless
spies things I like sort of because it's I like
to travel and see things around the world and different
cultures and understand that and history, and so that usually
wraps up and say a spy things.

Speaker 1 (53:13):
I'm gonna give you a recommendation only because I watched
this on the flight back from Europe and it's dead
center of what you're talking about. The Ministry of Ungentlemanly
Warfare is essentially Churchill's Special Teams creation as a way
of fighting Nazi submarines during World War Two. If you

(53:36):
like global spy stuff and history, this is right in
your sweet timet.

Speaker 2 (53:41):
I wrote it down and we'll put it on the
list for sure.

Speaker 1 (53:45):
Absolutely, and again we're recording this in October. I can't
remember the last time I was this excited about a
next season, Like, even injured, really distinguished themselves last year's playoffs.
You know you could see, hey, if they were full strength,
they could have gone pretty deep into uh to the finals.

Speaker 2 (54:07):
Yeah, I'm super excited for this season and and sort
of seeing what they could do as well.

Speaker 1 (54:14):
So you mentioned some of your mentors. Tell us about
the people who helped shape your career.

Speaker 2 (54:21):
Well, you know, I mentioned Jimmy Kine and Vince.

Speaker 1 (54:24):
Tc They were the Vince Tincy was where.

Speaker 2 (54:27):
Vincent tc uh is on the number of boards to
this days. He was Banking Commissioner State of New York.
He was Urban Development chair. He had been a tax lawyer,
he was the commodities trader. So he had this incredible
varied career and life and quite successful entrepreneur, and so

(54:48):
he's always a wealth information contacts and always great great
advice and perspective. And Jimmy of course ran Barons Stearns
obviously unfortunate ending to a storied career, but he was
very helpful in giving great advice.

Speaker 1 (55:04):
Right legendary CEO of Bear Stearns. Let's talk about some books.
What are your favorites? What are you reading currently?

Speaker 2 (55:12):
I would say book wise, just let's say a genre
books because I listened to them. I'm not a big
reader because I read so much in terms of research
and consultants and sell side and our own internal research,
plus the papers, et cetera. And I try to ingest
a lot there and then content deeper content on the

(55:34):
weekends and then you know, just number of emails et
cetera you go through. So I'll listen to different whether
it's leadership or let's self help type things, but it's
more about I think, the self improvement and so how
do you get the most out of life if you will?

(55:54):
There's I love hacks if you will, in terms of
health hacks or you know, efficiency hacks. I think that's
qurrically important technology to utilize to its followers. So that
that's sort of the focal point. Let's talk and bye
on that. Just sorry is I found that blinkst is

(56:14):
a great thing to utilize because the website, well, blinkest
is sort of the reader's digest version of books, because
most books they have a concept, interesting concept, and they
spend two three hundred pages saying same thing seven different ways,
you know, you know, trying to convince you that that
versus blink is like, all right, here's the concept. You're like, okay,

(56:35):
it makes sense. Interesting.

Speaker 1 (56:37):
And next, one of my partners likes to say most
books should be magazine articles, most magazine articles should be tweets,
and most tweets should be deleted. And that's his same
same sort of concepts as blinkst. So now we're down
to our final two questions. What sort of advice would
you give to a recent college grad interested in a

(57:00):
career and either stressed or distressed investing.

Speaker 2 (57:04):
Well, there's the critical importance of analytical rigor, and so
if you're recent college gradu you can't necessarily go back
and take the courses that would be helpful. And so
it's if you see some of the Ivy League kids,
they don't have the accounting background. For example. I think

(57:27):
critical thinking is important. I think having some understanding of
the legal framework as that's become has always become such
a big deal to get into let's say stress distress
out of favor. Look, there hasn't been as much interest,
frankly because the tech world has been such a you know,

(57:50):
robust world, and so it's important again, as I said,
to work in the in the credit business to understand
the those covenants, understand those companies, to get a generalist
type experience, because one never knows is it the utility sector,
is that the energy sector, Is it the TMT sector

(58:12):
that will have issues or asbestos or you know, different issues,
and then you're like, oh, I'm an expert in this.
But at the end of the day, if you understand
casual generation, you understand balance sheets, you understand legal framework accounting,
then you can kind of learn most valuations frameworks.

Speaker 1 (58:30):
Really interesting and our final question, what do you know
about the world of distressed credit today you wish you
knew back in nineteen eighty seven when you were first
getting started.

Speaker 2 (58:43):
Well, I guess having the hindsight is twenty twenty perspective
on markets in general. I think it's important, you know,
pivoting globally. Also, the let's say, the broad product suite
that we now have, I think are are are super interesting, informative.

(59:04):
I I I never would have thought that we would
rebound so easily and quickly in so many different difficult times.
And that that kind of me speaks to the resiliency,
you know, of of markets and and the resilt you know,
the commitment that the governments et cetera had to uh,

(59:25):
you know, bail us out time and time again. And
so now thirty five plus trillion debt we got, you know,
massive amount of debt and to show for it since
eight Uh you know, we'll see how it all works out.
But I think it's it's really the the sophistication UH

(59:45):
and innovative nature of let's say, security design UH has
been enabled to have the flexibility of capital that has
been transformative certainly for the US count markets and then
then finds its way into other markets. But it enables
you know, people say traffickers and tragedy. You know, it's

(01:00:08):
it's interesting. We had, you know, one of one of
the investors going to allocate ESG and he said, well,
you know, distress, it's not ESG friendly. I said, well,
we're one hundred percent of ESG. We're trying to have
companies help companies survive and you know they have Batty
is Chusco. We're trying to transform them into into productive

(01:00:28):
companies that are you know, doing better think about environment.
They might have had some spill that they had a
big liability from, or the governance was bad. That's why
they were, you know, in distress because it's some guy
who's stealing money or what have you. So you know,
there's a number of things that we've been able to
prove bon bringing new management or cleaning up environmental issues
that then the company valuation reabount it.

Speaker 1 (01:00:50):
Thank you, Brian for being so generous with your time.
We have been speaking with Brian Higgins. He is co
founder and managing partner at King Street. If you enjoy
this conversation, check out any of the past five hundred
or so discussions we've had over the past ten years.
You can find those at iTunes, Spotify, Bloomberg YouTube, wherever

(01:01:14):
you find your favorite podcast, and be sure and check
out my new podcast, At the Money, short ten minute
conversations with experts about specific topics involving your money, earning it,
spending it, and most importantly, investing it. At the Money
wherever you find your favorite podcasts or in the Masters

(01:01:35):
and Business feed. I would be remiss if I did
not thank the crack team that helps put these conversations
together each week. John Wasserman is my audio engineer. Anna
Lucas my producer. Sean Russo is my head of research.
Sage Bauman is the head of Bloomberg Podcasts. I'm Barry Retults.
You've been listening to Masters in Business on Bloomberg Radio.

Speaker 2 (01:02:00):
What Baths