The Absolute Return Revival with Tony Yoseloff

Episode Transcript
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Speaker 1 (00:02):
Bloomberg Audio Studios, podcasts, radio news. This is Master's in
Business with Barry Ritholds on Bloomberg Radio.

Speaker 2 (00:17):
This week on the podcast strap Yourself in for another
spectacular conversation. Tony Joseloff has been with Davidson Kempner pretty
much his entire career, past twenty seven years. What a
knowledgeable expert about all things. We used to call it
distressed credit, now it's opportunistic investing, much more than merely

(00:39):
being credit driven. They focus on everything from M and
A arbitrage, to real estate investing, to private equity to
public debt. A masterclass in how to think about risk,
how to think about diversification, how to put together a
portfolio of alt ernatives that is both non correlated to

(01:03):
your core portfolio but simultaneously creates a form of offset
or ballast to the volatility of equities. In addition to
being CIO and Managing partner at Davidson Kempner, he's also
chairman of the Investment Committee for the New York Public Library.

(01:25):
He's Vice chairman for the Investment Committee for New York Presbyterian,
as well as sitting on the board of Trustees and
the Investment Committee of Princeton University. I thought this conversation
was fascinating, and I think you will also with no
further ado my discussion with Davidson Kempner's Tony Yoselov.

Speaker 3 (01:48):
Thank you, Barry. I was going to say, longtime listener,
first time caller.

Speaker 2 (01:54):
So I'm kind of amazed. I'm kind of overwhelmed by
your curriculum, vitail, and the fact that you've never been
in this building, which is kind of amazing because a
lot of my guests have similar background board seats and
Dowman's investment committees, and I feel like I know everybody,

(02:15):
but I don't know everybody. There's a million people I
haven't met, and you've been on my list for a while.
So let's just start a little bit with your background,
which is really kind of interesting. Undergrad you go to
Princeton School of Public and International Affairs, and then you
get a jd MBA from Columbia, which leads to the

(02:35):
obvious question, what were your original career plans?

Speaker 3 (02:39):
You know, it's interesting. So first of all, I've got
a pretty boring background in the sense that I grew
up in central New Jersey in a town called East Brunswick,
I went to college. Sure, I went to college half
an hour from where I grew up, and then I
moved to New York City the day after I graduated
from Princeton and haven't left, and so I've lived within
a fifty mile radius my entire life. My original career plans,

(03:01):
to the extent that they were fully formed, would have
been to do a career in law or potentially public policy.
My high school happened to have a very good civics
type program. I think I was probably at the only
public high school in the United States that produced a
cabinet member for both the first Trump administration and the
Biden administration, which I thought was pretty amazing for a
suburb public high school. It was really during my time

(03:24):
at Princeton and during my time at Columbia where I
made the decision to pursue money management as a career
instead of something in public policy. The nineteen nineties were
really the heyday, I'm going to say, of mutual funds,
and it was sort of the early days of electronic
stock trading. My family is a family of academics and

(03:45):
book publishers, so it wasn't necessarily through my family background
that I interested in investing, but it was sort of
around us in the ether. I did a lot of
reading on it in high school. In college, I was
fortunate enough that I had a number of my friend's
parents were willing to take me out to coffee and
kind of educate me on the financial services business. And
really the inflection point was when I was at Columbia,

(04:09):
where I had to kind of choose a path between
going to Washington and working for a law firm that
would have gotten me in the regulatory side of things versus,
you know, working at a law firm which I did
for a couple of years as a summer associate where
the focus was private equity, and that was the path
I chose, and I sort of never never looked back.
I'm really glad I have the legal background, and I'm

(04:29):
really glad I have the public policy background. It's actually
super helpful as an investor. But it wasn't like, you know,
I never set out on this path. It's just sort
of the journey found me.

Speaker 2 (04:38):
I'm kind of fascinated by the joint JDMBA. I have
a JD. And what I always appreciated about law school
was that it didn't teach you so much as what
to think as to how to think, whereas an MBA
feels more like a deep dive into the specifics of
investing theory and a lot of aitative analytics. How do

(05:01):
you find the combination that sort of left brain right
brain JDNBA works for you as a as an investor.

Speaker 3 (05:08):
Well, it's super helpful. So first of all, I also
went to law school with the same idea that you did,
that law school was an amazing education and that good
things would come out of it, whether I was interested
in pursuing law or not. I was very fortunate. I
actually finished all my coursework at Princeton in three years,
and I had a chance to start Columbia Law School

(05:30):
during my fourth year at Princeton, which was a program
that Princeton and Columbia have with each other at the time,
but very few students did, so I kind of had
a free look at law school. I enjoyed my time
at law school. My time working in law just sort
of made it seem like it wasn't for me ultimately,
but I think it's a great field that would highly
recommend it to others. The business school side initially started

(05:55):
out as a path to getting a job I actually
found it. You know, it's sort of hard to think today,
but it wasn't so easy for someone with a law
degree and no work experience to go work on Wall
Street in the nineteen nineties. In fact, I had a
few hr folks. I'd make it pretty far along and
my recruiting process at different places, and they'd say to me,
how do we know what you're going to wake up

(06:15):
caring about finance? How do we know you're going to
read the Wall Street Journal every day? And so questions
that kind of seems silly with the benefit of hindsight,
But you know, I had no financial services background there.
Once I went to Business School Boom, I had the
financial services background there. But the courses I took at
Columbia were exceptional, Like I really enjoyed taking courses, particularly
the ones that were taught by adjunct professors where they

(06:36):
had real world experience and so you could learn, you know,
derivatives from someone who's trading derivatives every day at JP Morgan,
or I learned about the retail business from someone who
was a former CEO of a mid sized regional retailer
department store with a lot of department sportes that period
of time, and they bring in a different CEO every
week to talk to you, and that stuff just fascinated me.
And so if I think about like my Columbia Business

(06:58):
School education, like, there was a lot of good things
took from that, and so the combination proved to be
very powerful for me.

Speaker 2 (07:04):
Huh, really interesting. The data point that always sticks out
in my head is something like, seven years after graduation,
fifty percent of JD holders are no longer practicing a law.
It's like a big feeder for other fields.

Speaker 3 (07:19):
Yeah, and I believe that. I mean, look, I'm very
fortunate that I went to law school with some folks
who are literally among the leaders of their field in
the United States as attorneys. And I also went to
law school with a number of folks whore no longer attorneys,
some of whom found that journey immediately like me, some
of whom found it many years into the future. There's
no controlling the fact that it's a great education and
it's a great way to learn how to think, and

(07:40):
especially for the types of investing we do, it's been
super helpful.

Speaker 2 (07:42):
So let's talk about some of the investing you do.
You joined Davidson Kempner in nineteen ninety nine, pretty much
the peak of the dot com boom. We were at
that point, you know, a couple of quarters away from
everything peaking and heading south. Tell us about your experience
at the tail end of the dot com situation and

(08:04):
how did that affect how you looked at the world
of investment.

Speaker 3 (08:07):
You know, it's really interesting, right, So I didn't necessarily
seek out to do the type of investing that we
do with Davidson Kepner, which is a combination of opportunistic
credit and event driven investing. But it actually goes back
a year earlier to nineteen ninety eight. I was looking
for summer jobs for the last summer of my JDMBA program,

(08:29):
and so I applied to a number of the banks.
I applied to some of the investment shops, and I
found Davidson Kepner because they posted at Columbia for a
full time merger arbitrage analyst, and so I didn't really
know any better. So I sent in a resume and
I got a call from them and they said, well,
we think your background is actually really good for then
what would have been called distress debt and why don't

(08:51):
you come in and talk to us and work for
us for summer. So I literally met three partners. They
offered me a job, and I said, these folks have
about a billion dollars under management and there's about fifteen
people working here. That seems like a pretty good ratio
in terms of number of people to dollars under management.
And I knew a little bit about distressed at investing,

(09:12):
just because I had taken a bankruptcy course in law
school and there was maybe like half of one class
was devoted to what this was. It was really a
pretty nascent industry. And so I said, Okay, I can
go be one of one hundred or two hundred people
or whatever at a bank training program for the summer,
or I could be the only person who is doing this.
And they had hired an intern in the year before,

(09:33):
so I spoke to him on the phone. His name
is Dan Zwern. He went on to founding money management
firm that ultimately didn't work out and now runs Arena Partners.
And it seemed like a pretty good ratio in terms
of opportunity. And I got there and it just spoke
to me, and it spoke to me because I liked
the fact that I could do a form of investing
that used both my legal background and my financial background,

(09:55):
and I felt like there were many areas I might
spend time on that might do one or the other,
but wouldn't do both of them. So the joke of
it is, I'm literally the only person who applied for
this job. They literally got one resume, and that probably
speaks as much to the time as it does to
anyone else. I mean, so, if you weren't doing a
dot com startup in the late nineteen nineties from Columbia,

(10:17):
you were going to work in investment banking, or you
were going to work in consulting. They were like a
handful of people who were going to work in money
management at all, Right, that really was not a big area,
despite the fact you had a big value investing program there.
At a time, these would have been the more popular
career paths, and obviously non financial services career paths as well,
And to me that was kind of fun, Like I
don't know, I mean, so the first two years of

(10:38):
my career, Davidson Kaepner, I hated most of what I
was looking at as an investor, and I kept saying
no to things. And what I didn't know is that
was actually the right answer, right. You know, when you
get to an investing job, you want to put, you know,
investments on the book, and that makes you feel like
you're accomplishing things. Most of the companies that were in
trouble in the late nineteen nineties deserve to be and
it was because it was sort of a peak of

(10:59):
financial markets. The really good opportunities probably started three to
four years into my career. So I felt very proud
of the fact afterwards that I didn't like anything. But
at the time I was like, are they just tossing
me the bad stuff that I'm looking at all these
investments and not wanting to do them. But it turned
out no, that was actually what most of the opportunity
set was in our world.

Speaker 2 (11:17):
In the late night, were you getting guns from senior
partners or other people who have lived through other distress
cycles saying, hey, you're doing the right thing. You're looking
for a diamond in the rough, but most of the
stuff is too risky relative to the potential upside.

Speaker 3 (11:31):
Yeah, I mean, look, we obviously would try to steer
our time towards things that were actionable. I definitely was
getting support. I mean my senior partners. There was two.
There was Tom, Tom Kaptain or Michael Lefel. I mean,
those are the only two folks who really were doing distressed.

Speaker 2 (11:44):
No.

Speaker 3 (11:44):
Davidson, Marvin Davidson was still running the firm at the
very end of his career, but he really deferred to
Tom and Michael in terms of running the debt portfolios
that we had at the time. So we found things
ultimately that would call like solid singles, you know, things
where like you could, you know, buy bond in the
mid nineties and there was a takeout at one on
one and you don't coupon. It wasn't things you were

(12:04):
going to earn giant amounts of money, but you're gonna
earn very good IRRs on them. And so I cut
my teeth doing things where you could put relatively small
amounts of money to work. And keep in mind we
had a billion dollars at the time, so you know,
ten million dollar investment was a one percent investment in
the fund. It was it was still meaningful to what
we were doing.

Speaker 2 (12:20):
I'm intrigued that they get one application for an one
open opening. You got the job and you've been there
for twenty five years. It kind of talks to how
we never know what the future holds, and how completely
random sometimes these things feel. Had you not applied there,

(12:41):
how might your career have been completely different?

Speaker 3 (12:44):
You have those what if moments in life. I do
believe in fate to some degree, and I got very
fortunate with how it all worked out. And look, I
liked what I was doing, and I liked who I
was doing it with, And I would say, probably those
are two of the most important factors that you have
in choosing a career, is what are you doing and
who are you doing it with? And so I never

(13:06):
felt the need to leave. The other thing I would
say is, you know, Davidson Kamptner is an old school
Wall Street style partnership where we make new partners every
couple of years. When partners leave our firm, they get
an earn out of their shares, and the shares are
ultimately effectively acquired by the ongoing partners in the firm.
And that structure existed in the nineteen nineties. We've made

(13:26):
some changes over the years to it, but a lot
of it's still substantially similar to what things look like.
And that's because if you look at the founding of
Davidson Kamptnor, you know, Marvin Davidson had been a senior
executive at Bear Stearns and Tom Kaepner was a junior
person at Goldman Sachs, but knew the Goldman Sacks structure
quite well, and they didn't know each other when they
formed the partnership in the mid nineteen eighties, and so

(13:48):
they came up with an arms length agreement that took
the best of what they knew from Bear and Goldman,
and that structure stuck and it sticks today. And so
what I knew for me was if I did a
good job, there could be a career for me at
Davidson Kepner. And so not only did I have like
people that I liked and a thing I liked doing
with my time, but I knew if I put my

(14:09):
head down and did a good job, there was like
a future there for me. And so that was just
very very powerful. I mean, I will say, like you
look back, I mean from when I started for the summer,
it's almost twenty seven years ago. It does feel like
a long time, but it never felt that way along
the way, you know, I mean, you know, with any career,
there's always good in bad, but overall I've had an
amazing experience.

Speaker 2 (14:28):
The days are long and the decades are short. You know,
it's funny you mentioned that Davidson Kepner is a partnership.
There was a lot of I don't want to say criticism,
but when a lot of the big Wall Street partnerships
went public, there was a little bit of pushback and
some questions, what is this going to do to risk management?

(14:49):
And when not that much long after we have the
financial crisis, the companies that were partnerships still with their
joint in several line ability somehow managed to not get
into trouble. I guess they were highly focused on putting
everything at risk. The agency problem with companies that had

(15:10):
become public where the partners no longer have joined several
They look at every company that ran into trouble, none
of them were partnerships. It's kind of fascinating how that
turns out.

Speaker 3 (15:22):
Yeah. No, I hadn't thought about it that way, but
I agree with you in terms of your conclusion. And
you know, look, there's basic building blocks of what you're
doing in as an investor, as a firm, and who
you're doing it for you know, So I take like
the basic building blocks of Davidson Kepner today, which by
the way, we're similar to what they were twenty seven
years ago. We're primarily an investing firm, We're not an

(15:45):
asset gathering firm, and so for us to offer an
investing fund, my partners and I we want to invest
our own money side by side with our LPs. We're
by far the largest single investor collectively in our five
and so if an investing product is not a good idea,
we're not going to offer it, even if we have

(16:05):
clients who would want it, because we can't put our
you know, imprompt centuur or whatever behind it.

Speaker 2 (16:11):
Or your own money, your own money, and so I think.

Speaker 3 (16:13):
That speaks very powerfully. We require all of our partners
to reinvest a substantial majority of their networks back into
the funds every year. We all invest paripes too, across
our funds, so you can't cherry pick which funds you
want the partnership straight across.

Speaker 2 (16:28):
Collectively, if you offer it to clients, the partners and
employees of the firm are the largest investors.

Speaker 3 (16:34):
Yeah, not necessarily in any individual fund, but collectively across
the funds we are. In any individual fund, we're can
put a meaningful amount of money relative to the size
of the fund.

Speaker 2 (16:42):
So you eat your own cooking.

Speaker 3 (16:44):
Yeah, and that's that's the first test to me. I mean,
you know, in investing, how much money do you have
in the product? How a skin do you have in
the game. You know, we obviously use operating partners sometimes
in our private market investments. That's the first question I ask,
how much money does the operating partner having the investment?
And isn't meaningful to them? Right, So sometimes it's not
just the quantum of money, it's how meaningful it is
to the person who's who's involved. And again, having a

(17:07):
being a private firm, you know, we're one hundred percent
owned by our current and retired partners, with our retired
partners in an earn out, so they eventually don't own
shares of the firm anymore. And so you're beholden to
two constituencies. You're beholden to your LPs and you're beholden
to yourself and your employees. And you know, that's really
how we run our business, and so you know, it
kind of keeps you out of trouble. It also keeps

(17:27):
you very focused when things are going payd right. You know,
we have lived through a lot of crises. I lived
to the Global financial crisis. I lived to the COVID crisis.
COVID was probably even harder in a way because Tom
Kaepner had just retired a few months before that, and
I joke that he left me a playbook for a
financial crisis, but he didn't leave me a playbook for
a pandemic. And so some of the hr things we

(17:48):
all had to deal with, and getting people out of
the office and getting people back in the office, we
had to kind of invent along the way. It really
focuses the mind when you've got your money with your mouth.

Speaker 2 (17:57):
I had to say to say the very least. So
you brought something up that's really intriguing, And I don't
know if there's an answer to this, but I just
want to get your take on it. So over the
past twenty seven years, we've had a repeated one hundred
year flood every five or seven years, which, while not
statistically impossible, certainly seems unlikely. So we have the dot

(18:19):
com implosion, and then after that nine to eleven, and
then we have the financial crisis, and then in the
twenty tens we have Brexit and the threat of Grexit,
and we have the flash crash, ultimately leading a few
years later to the pandemic. Does it feel like we
have these situations, these credit crises, which must be great

(18:43):
for an opportunistic credit investor, But does it seem like
they're coming along more frequently than historically? Like my recollection
is growing up is the SNL crisis and then we
really didn't have like a major problem until the dot
com crisis. Are we getting these more frequently or does
it just feel that way?

Speaker 3 (19:01):
Well, you know, I would maybe say a couple of
things for that. So, first of all, I think the
pandemic was an exception compared to some of the other crises,
because I would suggest that the dot com bubble or
the GFC, or maybe some of the European crises in
the mid twenty tens were very predictable, like if you
looked at where share prices were in the nineteen nineties
for tech stocks, or how levered banks were with a

(19:24):
couple with the subprime crisis that was going on in
the mid two thousands, or you know, some of the
issues with you know, the sovereign credit in Europe in
the mid twenty tens, Like those were all with the
benefit of hindsight, like, oh yeah, of course that was
going to happen.

Speaker 2 (19:37):
Predictable but not well predicted.

Speaker 3 (19:39):
Predictable but not well predicted. I mean, hindsight's always twenty
twenty in these things, right, But there was certainly predictable
by people who were following markets. I would differentiate the
COVID crisis from the sense that, you know, you probably
had a month or two head start if you really
followed what was going on in Wuhan, but fundamentally it
was much harder to figure that out. Like six months earlier,
no one was going to say a pandemic was going

(20:01):
to overwhelm financial markets. And so the reason I want
to flag that is, you know, we do a lot
of up down analyses in what we're doing right, and
we try to really stress test investments, and so when
you're a credit investor, there's a lot of things that
you say, well, this can happen, and that can happen,
but we're still not going to lose money on this investment, right,
because there's subordination below you one way or another. In

(20:21):
the capital structure, or there's assets that you can claw
them on too, that you can sell off, or maybe
not all those assets are markets driven. COVID created a
lot of random winners and losers. Sometimes they were winners
and losers for a year or two and ultimately made
their way back, And so I think there was some
more random noise in what happened in COVID. So I
probably would take less lessons on a going forward basis

(20:43):
from the COVID crisis than I would take from some
of these other crises. I do think that you know,
if you look at a very long period of time
twenty five years, you had twelve or thirteen of them
where you had interest rates at zero right or close
to zero and closer to fifteen when you added up,
and then the interest rates for most of the rest
of the time I am. You know, US treasury is
probably peaked around six percent, a lot of it's been
four or five percent, and so you know, these have

(21:05):
been pretty tame periods of time, and so you are
gonna have an occasional CRISI I mean you go back
over like long periods of time in finance, I do
think having the economy blow up every ten years was
a very you know, eighteen eighties eighteen nineties thing as well,
and so I think I think history does repeat itself
a lot. To me. I don't want to say it's
part of the fun of being an investor, because I

(21:27):
don't mean to be crassy. And these are people's jobs
and livelihoods.

Speaker 2 (21:30):
I know exactly what you mean by that. Yeah, because
if you identify, if you identify something that is potentially
a great investment opportunity, especially if you're one of the
few voices talking about it and everybody says, no, no, no,
that's not a big deal. When the opportunity comes along,
it's got to be deeply satisfying that you sussed out

(21:53):
something that the rest of the investment community missed well.

Speaker 3 (21:56):
I mean, one of the fun things about doing opportunistic
credit is that you need to be a little contrarian, right,
because you are looking at opportunities that other people have
turned down. Right. So you know, there's this idea in
credit or an op credit of good company, bad balance sheet, right,
and those exist sometimes but not often. And the reality

(22:16):
is that the market's efficient enough that many people will
figure out quickly it's a good company with a bad
balance sheet, and so it's not going to price the
way it probably would have priced twenty five or thirty
years ago. But there are a lot of businesses that
just go through cycles, right, and they may appear to
be bad businesses today, but they're actually going to be
great businesses again tomorrow. And it's more of like a
temporary thing that happens to the business and not a

(22:37):
permanent thing. And you know, that's where I get really excited.
I mean, it's interesting. You have to be a little
bit contrarian to do what we do, but you have
to also actually be a little bit optimistic when other
people aren't optimistic. And so you take a bad situation
and you say, hey, this is how we're going to
make it good. And sometimes we're actually you know, especially
in our private market investments, we're applying the elbow grease.
We're making the management changes to make it better. In

(22:59):
our public market investments, we're serving on creditors committees and
often bringing in a new management team to do that.
Repositioning a business sometimes selling off subsidiaries it don't make
sense for them to have, or they can't afford to
have any more. And so yeah, it does feel satisfying,
you know, three to five years later to look at
that and say, see how this is perceived today compared
to how it was perceived when we got involved in it.

(23:21):
You know, we were among the only people who you know,
figured this out at the time, or we figured it
out first or whatever it is, so that you know,
I sort of you know, as I just said, like,
that's part of the like enjoyable part of this job.
Some of the psychic benefit is being first or among
the first to figure these things out.

Speaker 2 (23:38):
So so last crisis questions, and it might have predated
you because you probably were still in school during this,
but before the dot com implosion in the late nineties,
we had a series of credit problems. First was the
Asian contagion with the tie Bot crisis. Then we had
the Russian rubled fault, and then long term capital management

(24:02):
was the direct result of the Russian default. What was
your experience during those periods or is that really early
history to you?

Speaker 3 (24:11):
Yeah, I mean it's literally right when I started, right,
So I started at Davidson Kaepner as a summer intern
in May of nineteen ninety eight. And so the Russia
crisis and the long term capital crisis were August or
September of nineteen ninety eight. By the way, thank goodness,
they liked me at Davidson Kaepnor, and we're willing to
give me a job because it was a very tough
job market in the fall ninety four dealing with those

(24:32):
particular things. The Asia contasion I think was more ninety seven,
and so I saw parts of it. I mean that
was also a learning lesson. People made a fortune in Asia,
we just weren't equipped to do it at Decay. We
looked at a few things, and what we figured out,
which was right, was we couldn't invest there unless we
had boots on the ground and a real knowledge base,
and so we didn't. And so folks like Allman Sachs

(24:52):
made a fortune in that era. Those are lessons I
corrected later on, where we sort of boots on the
ground in places around the world, advantage of opportunities as
they emerged. But I learned that from Asia in terms
of what we weren't doing. But look, I mean I
was on a trading desk when the world was falling
apart in August of nineteen ninety eight, And you know,
I've told this to some of our younger people over time,

(25:13):
Like the best time to be on a trading desk
is when you have no responsibility, right, so it's not
your fault that things are going bad, and you just
learned from it and you watch the people around you.
And I remember how cool and calm and collected everyone
was in the face of you know, dramatic adversity. And
you know that was super helpful to me when I
was dealing with O seven or eight or things that

(25:34):
happened after the fact, and so you know, I quite
enjoyed having that opportunity. Huh.

Speaker 2 (25:39):
Really really interesting. So let's talk a little bit about
a piece that you and the firm put out titled
the Party is Just Getting Started discuss.

Speaker 3 (25:52):
Sure, Well, you know it's interesting. This is something that
I reflected on last year, and so the general subject
of the Party is Just Getting Stile, which is a
white paper that we put out recently, is about the
role of absolute return in a portfolio. And the reason
I reflected on this is if you go back to
the start of my career, so the nineteen nineties and

(26:12):
the two thousands, you would have relied upon absolute return
strategies to be a volist in your portfolio and a
diversifier in your portfolio, but you also would have relied
upon them to get you home in terms of the
overall portfolio objectives. Right. So if you look at a
typical allocator, right, they've got a five percent spend rate
and they want to earn something plus inflation over that.

(26:33):
So many allocators are shooting for kind of higher single
digit rate return seven or nine percent, depending upon the
institution and the needs. And in the two thousands, when
I started my career was a first partner at Davidson Keepner,
that would have been the expectation of absolute return was
that you were going to earn high single or lower
double digit rates of return in the strategy NBA diversifier

(26:54):
and have low volatility. There were other strategies within abbsolute
return that might have had higher return higher volatility expectations,
but that would have been the base expectation. So what happened, right,
You had a period of time with fifteen years roughly
of zero percent interest rates. The longer that period went on,
the more and more returns got reduced in the area.

(27:15):
I would say by twenty twenty, when the pandemic hit
an allocators expectations for appsort return strategies would have just
been to be a ballast against their portfolios. And what
I mean by that is we need a ballast, we
need a volatility dampner. We're going to use absolte return
for that. But we expect to earn our quote unquote
real returns off of our equity strategy. So whether that's
public equities or private equities, or maybe if you're a

(27:37):
little bit more adventurous growth equity or venture capital, and
you pair those two things together and you'd have a
great portfolio. So you fast forward to twenty twenty four,
I think things are very different today, and we wanted
to figure out why. I mean, absolute return strategies collectively
had their best year at a very long time last year.
I think they're off to a very good twenty twenty
five as well. So why is this happening? So is

(27:59):
it just rates? And so you're unquestionably in a period
of higher rates today versus what you were in the
two thousand and tens. But it's not just rates, it's
actually dispersion. And so what we did is we looked
over long periods of time and there's a high correlation
between dispersion and markets and higher rates, and so not
only do you get the benefit of a interest rate
premium today compared to what you had four years ago,

(28:21):
but you actually get about fifty percent it's a touch
more than that expectation of return above the risk free
rate today because of where a dispersion is in markets,
and that dispersion exists in both credit markets and equity markets,
so it's in both those strategies, and that's why you're
getting better performance than absolute return. We think the rate

(28:42):
story is here to stay. But even if it's not
for a period of time, even if you have the
short term rate go down, ultimately we think that dispersion
is going to last for a long time, which is
kind of what happened in the two thousands as well.
And so again you have a whole generation of allocators
who are trained for absolute return to serve one role
in their portfolios, and we actually think it serves a

(29:02):
second role in their portfolios as well, which is a
return driver. And so you take those two things together,
we think it's a really powerful asset class. And I
wrote this paper because I just don't think there's been
a lot of work that's out there on it. You know,
you see headlines about people are getting more interested in
apps or return our hedge funds. Again, you see other
headlines that there's not a lot of capital available for
the strategy because many allocators are over allocated to private

(29:24):
equity or growth equity or venture capital and they don't
have the liquid capacity for it. But I think for
those who do, who are interested in it, they're getting
rewarded for it right now. And so that's the root
of the paper.

Speaker 2 (29:34):
So I'm fascinated by so many aspects of that. One
is you brought up ballast, and when I think of
what's typically been the ballast to offset volatility of public equities,
it historically has been bonds. But once yields went down
to practically nothing, the question was what's going to take

(29:55):
up that role. I know a lot of people just said,
all right, those seventy th the equity will make up
for the performance, but not for that offsetting diversified ballast.
Is it distress credit, is it absolute returns? What is
filling that role going forward? And then we'll talk about

(30:17):
how the higher rates have changed the calculus somewhat later,
But what is the new ballast today that used to
be bonds.

Speaker 3 (30:25):
Well, I mean again, i'd start out with like, I
think absolute return can play that role. So opportunistic credit
can be part of a absolute return strategy, whether it's
accessed in public format or private format. Some people put
opartistic credit in larger what they would call private credit
buckets as well. But I do actually think that absolute

(30:46):
return will eliminate the rate risk portion of things. You know,
I mean, bonds are a ballist except if they're not. Right,
So you go back to two twenty two in twenty
twenty two was certainly the worst year for fixed income
in one hundred years. It may have arguably been the
worst year for fixed income in the history of the
United States. If you go back over very long periods

(31:08):
of time and performance of bonds, you're basically down mid
teens depending upon what you own, whether it was treasuries
or investment great or high yield of things along those lines.
Twenty twenty was not a great year for the equity
markets either, right, So that was a year where people
started to seriously question the sixty forty or seventy thirty
model with where things were. If you were an absolute

(31:29):
return type strategies, you did much better that year, if
you were not opt just a credit strategies, you did
much better that you protected capital I think at a
minimum in those strategies, and that gave you more of
a chance to take advantage of upside in twenty twenty three,
in two thousand and twenty four. I mean opportunistic credit
has the additional advantage that it tends to be pretty

(31:51):
inversely correlated in terms of when it does well to
strategies like growth equity and venture capital. So again, those
are like perfectly good strategies. I'm not like put polling
the I'm just saying they're very cyclical in terms of
making investments in those strategies, and so they actually pair
very well with opportunistic credit in portfolio is because typically
oportistic credit is doing well when those strategies are not
doing well, and sometimes vice first.

Speaker 2 (32:13):
Right, And to put a little meat on that worst
year in fixed income in twenty twenty two, the last
time you had both stocks and bonds down double digits,
I want to say was nineteen eighty one, about forty
forty one years earlier. So these things don't come along
very often, but when they do, I would imagine event
driven opportunistic credit is a perfect offset.

Speaker 3 (32:35):
We completely agree with that. And also, you know, I
think that it's tough to just do a simple sixty
forty or seventy thirty portfolio. I mean maybe for very
smaller institutions that make sense, but once you have some
degree of sophistication that you can bring into your portfolio,
it makes sense to have some alternatives of different sorts
to balance out that risk.

Speaker 2 (32:57):
So you mentioned higher rates as an ongoing issue. It
certainly looks like higher for longer is the Fed's posture,
which raises the question our higher rates a tailwind for
absolute return strategies, especially opportunistic credit or are they a headwind?

Speaker 3 (33:15):
Well, I always say a couple of things. So first
of all, we're in an environment of higher rates, it
doesn't mean that we're in an environment of high rates, right.
And so if you look at the hundred the nice
thing about interest rates is you have hundreds of years
of history you can actually look at in these things.
And so if you look at the one hundred year
history of interest rates in the United States, I believe
the ten years between four and five percent, right, So

(33:35):
that's about where it is today. So you don't have
a high ten year today. You only have a high
ten year today compared to what people got used to
from the late two thousands until two thousand and twenty
one in terms of rates of return. So, first of all,
I do think that higher rates is a tailwind for
absolute return strategies in general. So that would include opportunistic

(33:57):
credit strategies, that would include a vent driven strategies, which
we do. It also include relative value strategy, so we've
got some of that in our portfolio, but it's not
the dominant strategy that we have because of the dispersion
you have in markets in that period of time. I
also think it's a really good tailwind for opportunistic credit specifically,
but I give a little bit more of a nuanced
answer to that, and an opportunistic credit I think you

(34:19):
need to go back to how we got here, right.
So it's not the absolute rate of return in fixed
income today that's interesting. It's the sixteen months that it
took from early twenty twenty two for the base rate
to go from zero went to the five and obviously
it's come off of that a little bit since then.
So most capital structures that are in the market place

(34:42):
today were set entirely or in some cases partially but meaningfully.
Prior to twenty twenty two, when the base rate was zero,
and when you're close to fifteen years into a base
rate of zero, companies were assuming, or people who owned
assets were levering them, were assuming, and probably rightfully so,
that the base rate would stay zero forever. And in fact,

(35:03):
you know, it's one of those things where it's so
easy to foresee with the inflation we had in twenty
twenty in twenty twenty one, that the base rate was
going to rise, but it still came as a shock
to the markets where it actually rose. And so you're
now in the middle of this I think several year
period of time where owners of assets are like, hey,
I got to actually raise money in my capital structure

(35:25):
to de lever I mean, some assets are going to
be you know, need to be just fully restructured because
they aren't worth what the debt is worth anymore. But
there are many other asset owners who have assets who
have equity value, maybe not as much equity value as
they had previously, and they look at their capital structures
and you probably need to raise twenty to forty dollars
of equity for every one hundred dollars a debt that
you had before to delever your capital structure. And that's

(35:49):
super interesting because there's a lot of different ways companies
can do that. They can do liability management exercises to
try to whittle down the debt. They can sell assets
off to you know, get their house in order, in
direct corporate lending land, private credit land. They can just pick.
They could say, hey, we're not gonna pay you interest
for a year or two, so just tack it onto
the principle and let's sort of try to fix the
ship that way. There's a lot of different ways this

(36:11):
can get solved for and that's like the theme an
opportunistic credit that we've been living in the last couple
of years, and it's a theme I think we're gonna
be living the next couple of years. And so I
think it's super interesting because unless you believe that rates
are gonna rise materially, like, there's no bailing out of
this situation of these companies. It's just math in terms
of where these are. And if you're an asset owner,

(36:31):
you're gonna play out your lower interest rate coupon to
the very end. It's an asset. It's an asset that
burns off, and so you're either going to try to
be opportunistic and use that to get something from your creditors,
or you're gonna say, hey, we're just gonna pay a
little rates for a while and we'll see what things
happen closer to maturity. Huh.

Speaker 2 (36:46):
Really really interesting. Who knew the mantra move fast and
break things would be adopted by the Fed?

Speaker 3 (36:52):
Yeah?

Speaker 2 (36:52):
Right, that's more more Silicon Valley. So I'm fascinated by
the concept of opportunistic credit. You've been with Davidson Kapner
for twenty seven years, twenty six years something like that.
How has the DNA of the firm when it comes
to event driven investing evolved over that time. It can't

(37:14):
be the same today as it was in the nineteen nineties.

Speaker 3 (37:16):
No, I mean so, first of all, you know, I'm
a believer in some of the truism of markets, which
is that capital chases returns and returns become effishent overtime. Like,
there's no getting away from that. If you have an
asset class and people are doing well and it, other
people will show up in your asset class, and eventually
change the dynamic, right, that is what it is. We
had a couple of strategic inflection points, and I think

(37:38):
we're very helpful in our business. So the first of
which was opening our international offices. So you know, I
mentioned earlier the fact that we kind of missed the
opportunity set in Asia in the late nineteen nineties because
we just weren't staff to do it. I'm a big
believer here, if you're going to invest in markets outside
the US, you want local people with local relationships and
local language skills doing that, right. You don't want it

(38:00):
to be a bunch of smart people in the room
doing it from New York or London. We opened our
London office, I don't know, at the end of two
thousand and two thousand and one, something along those lines,
and we really invested it in that in that office.
I mean, the story I like to tell is we
had a pretty good sized office in London. I make
a point of going, you know, four or five times
a year. I showed up in early January two thousand

(38:22):
and nine, which I remember because I remember seeing all
the Herod's holiday ornaments for sale in the gift shop
at the Heathrow Airport on my way home and I
go to see the old Merrils. Right, So Merrill Lynch
had been merged into Bank of America at this point,
but they were still there and they said, we just
want you to know you're the first American who's come
to our office in four months. Wow. And I said,
oh my god, how is that possible? And they said, well,

(38:44):
you know a lot going on in the US. This
was right past fall two thousand and eight, right, And
I said, you know what, there's an opportunity here. So
we did a massive hiring spree in London over the
next three or four years. And I said, okay, London,
because you know, all the stuff in the US had
cracked and in London it hadn't cracked in the same
in the same way. And so the European opportunities came
a few years later, but they came in big droves.

(39:07):
And you know, we followed the same playbook in Asia
as well. We opened an office in Hong Kong in
twenty ten. We now have smaller offices in Mumbai and
Shinzen as well to access the China and India markets.
And you know, that was a fantastic decision. Those markets
are less efficient than the US is some of that structural.
Some of that there's just fewer people trying to access

(39:29):
those opportunities. You need to have local people, you need relationships.
It's much more relationship driven. That was like one change
that we made and I think set us up for,
you know, continuing to grow and survive and thrive as
a firm. The second one i'd reference is our entry
more seriously into private markets. And so you know, if
you go back prior to twenty ten, all the capital

(39:52):
we had was sort of hedge fund structure capital where
it was reasonably liquid, maybe had the small ability to
do a side pocket. We generally didn't do that, and
she had to mostly stick to liquid securities in what
you were doing. We thought there was going to be
a really good opportunity in buying less liquid, longer duration opportunities.

(40:13):
We might own assets for four to six years, let's say,
versus things that were marked to market on a daily basis,
and we thought there were things that you could do
to those assets to improve them over time. This was
sort of the first wave of bank selling that probably
came to the US in the two thousand and eight
to twenty eleven timeline. And probably came to Europe in
the two thousand twelve to twenty fifteen timeline. So we

(40:33):
had our first you know, sort of private equity style
strategy due to Operatness to credit, which launched in twenty eleven.
And even though the opportunity to buy from the banks
ultimately dissipated, what we discovered was as private markets grew,
this just became a bigger and bigger opportunity. And so
this has really been a substantial portion of the growth

(40:53):
of our business in the last fifteen years, as being
in private markets and being an opportunistic credit in private
markets a lot us ultimately to be an asset back
lending led us to be in real estate as well,
which is a big strategy for us with operatistic credit,
and I think it is really important to have both
tools in your toolkit. You know, there's this term for
technology investors which is crossover tech investors, which is basically

(41:15):
investing firms like co To or Tiger Global that have
both big public market and private market businesses. I wanted
to be a crossover credit firm, and by that I
didn't mean between high yield and IJ What I meant
was between public markets and private markets, because I think
you learn a lot being in private markets that's helpful
for public markets, and I think you'll learn a lot
as a public markets an investor that's helpful for private

(41:37):
markets as well. So it's very complementary. And especially if
you can have both pools of capital in one place
and you can kind of toggle how you spend your
resources to between public and private markets. It's just super helpful.
And so those are maybe two of the bigger things
that we've done as a firm in the last twenty
five years to really, you know, help us to thrive

(41:57):
where the world is in twenty twenty five versus where
in twenty fifteen or two thousand and five. Huh.

Speaker 2 (42:02):
Really really interesting. Leads to a question. You're the perfect
person to ask this because whenever we talk about what's
going on in Europe and the UK, especially Brexit, you
sort of get an academic answer from a distance. You
have a major presence in London, you've been there for
the past you know, decade and a half. Tell us

(42:25):
a little bit about the opportunities you see on the
continent and in the UK and how much has the
Brexit affected the dynamic not just London in the UK,
but in Europe overall.

Speaker 3 (42:39):
Yeah, I think there's a lot of different things going
on in Europe. So, first of all, you know, Europe
tends to be a lower growth economy structurally than the US.
I think there's a couple of reasons for that. One
is regulatory, but the second one really is the country
by country nature and how things operate. I mean, overall,
it's a giant market, but when you break it down
and you've got Italian cupmpanies and French companies in German companies,

(43:02):
that's just much of a less efficient approach. Obviously are
some multinational companies in Europe, but it's maybe a smaller
part of how things work over there. And so while
I'm not sure i'd want to be a tech investor
in Europe, I'm super happy to be an opportunistic credit
or an advent driven investor there because these are really
very deep value markets in terms of where you're investing,

(43:25):
in terms of the specific impacts of bregsit. I mean, so,
first of all, it's not been great for the UK
in terms of where things are. I keep thinking they're
going to turn it around at some point, but it's
been a tough seven or eight years there in terms
of the economy and the need really for the human
capital that they've lost and maybe have a harder time
attracting as a result of where bregsit is in the

(43:48):
continental market. It's really a country by country scenario, and
so I look at markets like Greece or Portugal or Italy,
and they've actually proven to be really strong markets for US.
And those are markets that folks, particularly a pond away,
often shy away from because it's complex to be there.

(44:09):
They don't know how business is done. They have certain
assumptions about the markets that maybe aren't always true, and
then people have assumptions about the northern European markets that
also aren't trilling. Germany's in a very hard spot right now,
there's no getting around that. Again. I've got confidence it
will turn around over time, but I do expect there'll
be a lot of opportunities there between now and now
and then. And there's definitely a big macro lens over

(44:32):
Europe as well in terms of what can happen in
Europe over the next five years, which is not just
related to Brexit, but maybe related to some of the
geopolitical forces that are in play in two thousand and
twenty five as well. We like complexity, like we seek
out complexity, like when there's very few buyers of assets
or people willing to lend, because you know, you have

(44:54):
to sort through a lot of stuff, like even just
the complexity of understanding how different restructuring law as are
in Spain versus Portugal, right, Like, that's super helpful for
US in our strategies. The fewer people who can be
involved in assets, the better it is for US. And
Europe creates those opportunities, and so it continues to be
a fruitfall area for US. But if folks in the

(45:15):
United States don't want to look at it, that's okay.

Speaker 2 (45:18):
I totally get that. It's funny because on the equity side,
I don't know if the past five years, maybe even
longer ten years, people have been saying US is pricedy,
Europe is cheap. Now's the time to move money from
the US at public equity to Europe, and that trade
hasn't worked. You Arguably, European stocks are cheap for a

(45:41):
reason and US stocks are expensive for a reason. What
do you see on the credit side, what do you
see on the private side? Do you run into similar
valuation issues or the math is the math, and when
the opportunities arise, it doesn't matter.

Speaker 3 (45:55):
Yeah. I mean, look, I don't necessarily expect evaluation premium
for europe get it right. So I think we can
earn more money on our comparable European opportunities than we
can on US opportunities. And maybe some of that's getting
paid for the complexity and the things that we're speaking
about in terms of how we do that. I do
wonder in the in the equity side, if you take
out tech, if there's really such a valuation gap. I mean,

(46:17):
it's something like half the market cap in the US
and tech at this point when you look at the
S and P. That's not to say I'm in Europe right,
there's very little tech industry. So I do think the
tech separation is a big part of the US versus
European separation. For better or for worse, you don't do
a lot of technology related investing in opportunities to credit,
you get some chances. Sometimes tech companies are not often
great for opetusity to credit. Perhaps software will be different.

(46:39):
If there's often if there's ultimately a crack in the
software world, excuse me, but I would say that, you know,
in the sectors that we invest in, which is basically
everything else, you know, we are getting paid a premium
to invest in Europe for the reasons that we that
we said.

Speaker 2 (46:56):
So you've recently transitioned to become executive managing member. That
goes back to the pandemic after was it Davidson or
it was Kampnor who retired.

Speaker 3 (47:07):
Yeah, I became our executive managing member with Tom in
twenty eighteen, and then Tom formally retired on January one,
twenty twenty, so I became the sole head of the
firm at that point.

Speaker 2 (47:17):
What was that transition like? Because your chief investment officer,
I got to imagine thirty five plus billion dollars and
how many employees do you guys?

Speaker 3 (47:26):
About five hundred?

Speaker 2 (47:27):
I mean, that's no small task to run. How do
you balance the two? What was that transition like?

Speaker 3 (47:34):
Well, you know, I'm very fortunate in the sense that
the transition with Tom and I took place over many years,
and so I'm actually the third managing partner of Davidson kemptainer.
Marvin Davidson was the first, and Marvin Davidson Randy Kay
for about twenty years before Tom took over, and then
Tom Randy k for about fifteen years. I was there
for the last five years of Marvin's running the firm,

(47:55):
and so I got to actually see two models. I
got to see Marvin's model and Tom's model, which were
very different from each other. And then I was the
deputy managing partner for several years before becoming the cohed
with Tom for two years. You know, Tom was very
focused on succession and leaving the place in better shape
than he got there with, so to speak, and that's
super helpful. I got a lot of calls because we're

(48:17):
now third generation and running the business about how you
do this. And my first thing I say to people,
which is sort of a joke, but it really isn't,
is the person in front of you have to want
to retire. Like that's step one. You know, transitions don't
go well if the person who's leaving doesn't actually want
to retire. I was very fortunate Tom actually wanted to do.

Speaker 2 (48:34):
That's what the chairman emeritith.

Speaker 3 (48:36):
Tom actually wanted to retire and do other things. I mean,
there's things you learn along the way. I mean again,
I wouldn't have wished a pandemic upon anybody. But it
was sort of sink or swim, right, because you know,
it was two months in the markets were falling apart.
No one wanted to be in the office in early
March of twenty twenty, right, for reasons that obviously became
pretty clear soon afterwards. And how do you make that

(48:58):
all work? How do you get every on the same page,
how do you broadcast your message out? How do you
make sure that the things that are happening in the
portfolio are happening in a way that you want them
to happen. How do you empower people when everyone's sitting
in their home or whatever. So we rode through the
pandemic and we learned a lot. But I did have,
you know, twenty plus years of training to do this.
And because I've only been at one firm in my

(49:20):
entire career, like, i didn't have the benefit of being
CEO somewhere else, but I'd the benefit of really knowing
David's and Kepner cold and that probably proved to be
the biggest advantage.

Speaker 2 (49:28):
How do you maintain a corporate culture when everybody's working
from home and you have people in how many different
cities around the world.

Speaker 3 (49:37):
So we have seven offices, although you know, two of
those offices are quite small sub ten people, and another
two of those offices are you know three, I'll still.

Speaker 2 (49:48):
Far flong different times, zoon.

Speaker 3 (49:50):
Far it's far flong. So first of all, like when
you go from fifteen people to five hundred people, you
have to understand there's parts of your culture that you're
going to maintain and there's parts of your culture you're
not going to maintain. So, for example, when I got
to Davidson Kaptner, every time it was someone's birthday, you
get a birthday card signed by the whole office, and
you get a cake, right, And so we have kept

(50:10):
the cakes, but we got rid of the birthday cards
at some point, right. We you know, have brought in
different things over the years to speak to what our
workforce is today, not what our workforce was ten or
twenty years ago. So the example I give is when
I got to Davidson Kapner in the nineteen nineties, I
feel like our workforce mostly cared that we had clients, right,

(50:32):
and by two thousand and eight, two thousand and nine,
they didn't want too many of the clients to be
fund of funds just because fund of funds weren't doing
very well at that period of time. That was a
transition where more and more investors in apps return strategies
were investing direct and obviously there are still a few
allocators that are out there of scale in that world.
And then by the mid twenty tens, people wanted to
know not only that we had clients, but what public
good are we doing right, So we instituted a program

(50:54):
called DK pledge Right, and it was a way that
people could learn a little bit about what our clients did,
you know, so whether returns went to you know, a
lot of our clients are endawments or foundations or pension
funds or people who are doing real good and even
our high networth clients, many of them have big philanthropic
arms that are doing very good things with the returns
that we generate for them as well. But it was
also a chance for our employees to give back to charities,

(51:16):
bring charities into the organization. So we've given away like
six million dollars and I think had a thousand different organizations.
We've impacted twenty five hundred hours of volunteer time. That's
all stuff that came from like thinking about where our
workforce was today. It's not to say that our workforce
wasn't very philanthropic in the nineteen nineties and two thousands.
That actually was. It's just people did that more outside

(51:36):
the office. And by the mid twenty tens are people
wanted more of an integrated experience where they could do
things that were philanthropic while doing their day jobs. Right,
And so you have to just kind of keep a
pulse to where people are today, and I've tried to
really do that in terms of my role. You know, again,
the place is going to be exactly the same in
terms of how do you keep people in seven offices

(51:59):
like singing from the same page. There actually were really
good learning lessons from that in the pandemic, and by
the way, I did my best to get people back
in the office as soon as humanly possible. We returned
to the office, I think well before many of our
peers did. That was important to me in terms of
continuity of the teams and keeping the culture. But I
started doing a bi weekly email to the entire firm

(52:21):
during the pandemic, and I did that because that was
the best way to communicate with people. We did some
videos and things like that too, but I wanted something
in writing, and it was a combination of PEP talk,
firm news, sometimes some market insights and not sure I've
got amazing market insights every two weeks. But over time
I certainly do right, and when I really had something
to say, I would say it. And we've kept doing

(52:41):
those even through today. It's become like a hallmark of
our firm. We get very good internal feedback on that
because it was important to me. That's the way everyone
knows they're going to hear from me every couple weeks,
no matter what. Huh.

Speaker 2 (52:51):
Really interesting last DK question, So you've been there for
twenty seven years. Kind of unusual these days. Not many
people have that sort of longevity with one firm. Tell
us what's kept you at Davidson Kampner this whole time?

Speaker 3 (53:06):
Well, I'm very fortunate, you know, I sort of joke
I show up at my college reunions, right, and if
I'm not the only person who's been at one from
the entire time, it's virtually virtually the only person who's
done that. I got very fortunate, right, and I got
very fortunate that I happened to find people that I
really wanted to work with in an industry that I
really liked that was growing, right, And so I think

(53:29):
if you hadn't had any one of those three factors aligned,
like you know, possibly could I could have stayed. But
if there wasn't going to be a growth in the industry,
I wanted there at least to be growth for me, right.
I just wanted to be doing different things at a
more senior level twenty seven years in than I where
I started that. But fortunately all three of those things
did align. Look, there's real human capital you get by

(53:50):
being at a place for a long time, right, I mean,
you know't you don't want to be somewhere for a
long time just because of that, But the reality is
there are switching costs that you have when you leave
our roles. And so I was very fortunate that I
was able to grow with the organization, and I'm very
fortunate that I enjoy what I do.

Speaker 2 (54:06):
Huh, really really interesting. Talk a little bit about the
rise of alternatives and why this has become one of
the hottest parts of the investing world for really more
than a decade. Certainly since the FED took rates down
to zero, people started looking around DKY has a variety

(54:27):
of different strategies. Let's start with distressed investments. Tell us
a little bit about the work Decay does in distressed
investments and why do you think this space has such legs?

Speaker 3 (54:39):
You know, I would say a couple of things on
you know, we could call it distressed investments, we can
call it opportistic credit. It's probably some combination of the
two things. And so for Davidson Kaepner, you know, we're
actively investing in both public and private markets in terms
of distress data or optimistic credit. So we're buying public
securities that have declined in price or with the people

(55:00):
questions to whether the companies can mature their debt. There
can be all sorts of different reasons that things are
trading down, and that's one strategy. We also have a
very active strategy where we've got more private equity style
capital where we can basically take control of assets, fix them,
sell off divisions, add things, you know, et cetera. Those
are typically more like four to six year type of investments,

(55:21):
and we're able to do this, you know, across different
asset types. So we've got a big business buying real estate.
We've got a big corporate business, you find a lot
of things like liquidations that don't necessarily fit into any
one nique category. Occasionally sovereign debts not a big part
of our book, but every once in a while we've
got a big evolvement with a sovereign as well. And
I would say a couple of things about that strategy

(55:42):
and why people are attracted to it. So, number one,
the outright rates of return that you can earn on
strategies like that, I think are compelling compared to many
things in the market over time. But they also are
very good diversifiers in portfolios, And so like, why are
these strategies attractive to allocators? They're attractive to allocators because
you can achieve your overall objectives just being in the

(56:02):
strategy most people or not obviously, but you can also
do it in a way to diversify your overall portfolio.
And not only does it diversify your overall portfolio in
terms of when your earn rates of return, ie, the
strategies tend to do better when other strategies aren't doing well.
It's sometimes when capitals return to you too. So you know,
we did some work a couple of years ago We

(56:23):
actually published a white paper on this in twenty twenty three.
What there's actually an inverse correlation between when opportunistsic credit
funds return capital to their LPs versus when growth equity
and venture capital funds return capital to their LPs. And
that kind of makes sense intellectually. So if you're you know,
an allocator, you probably don't want to only have growth

(56:44):
equity and venture capital funds in your portfolio. I think
the allocators who had too many of those have some
of them have learned that the hard way in the
last couple of years. So those are strategies that manifest
themselves over a very long period of time. But if
you've had a mixture of both strategies in your portfolio,
that's a much more power powerful way to earn returns them.

Speaker 2 (57:01):
And when you talk about distressed assets with sovereign nations,
I'm imagining that it's not so much the sovereign that's
distressed as whatever investing fund is the holder of that
debt Or am I misreading that?

Speaker 3 (57:17):
Well? Look, I mean, you know these are all public names,
whether it's you know, Greece or Argentina or Puerto Rico.
There's a number of different sovereigns that have gone through
restructurings of different sorts over the last several years. There
are certainly times when holders of debt that's at least
linked to municipalities, you know, may want to sell, and
there's sort of force selling because of that. But I'd

(57:39):
say more, you know, credits are credits, right, There's only
so much that any one person can borrow, anyone entity
can borrow, and so you know, there have been reasons
you've had to restructure. Greece has been an incredibly successful restructuring.
The Greek economy's booming right now, right, So that would
be an example of one. And they don't come very often.
It's not a very big part of our business, but
they're out there in terms of things that people have
invested in it.

Speaker 2 (57:59):
And you may public securities, I'm curious, are you buying
equity in distressed companies or are you buying the debt
or some combination. When we're talking about publicly traded.

Speaker 3 (58:10):
From it's a combination. I would say the super majority
of what we're doing, certainly in the public markets is
credit and it's not equities. But there are occasionally times
where credit will lead us to the equities. Another strategy
I will use sometimes is I may put a tale
of equity onto a larger position in credit. You know,

(58:30):
often the credit and the equity move the same way.
Not always the case, but it happens frequently enough, And
so if you like a credit, you know a tale
of equity. My theory is, if it doesn't work, you've
just spent some of your coupon on sort of equity optionality.
If it does work, you can really juice your return.
So again, not something we do in every time, in
all the situations, many of the companies we invest in

(58:51):
public credit actually are private companies, so there's no opportunity
to do that in those obviously, But every once in
a while, a credit opportunity will lead us to an
equity opportunity.

Speaker 2 (59:00):
And you've mentioned also that you're expecting some form of
an M and A revival. Let's talk about that. Is
this structural because we've gone through such a long period
of low rates, not a lot of M and A activity,
and some administrative hostility to big mergers. Is this the

(59:21):
politics of the moment or is it just, Hey, it's
been so long since it's been consolidation and we're due.

Speaker 3 (59:27):
Well, I put it into two categories. And so I've
now been at David and Kapner long enough that I
was at Decay for multiple Democratic and Republican administrations prior
to the Biden administration, and in most administrations, the people
who are setting the anti trust policy are career professionals.
It's a science, right, There's a lot of math behind
the science it's been. I studied in law school. I'm

(59:48):
sure you studied in law school as well, and so
my take was that the decisions would mostly be the
same whether a Republican or Democratic administration, and then a
couple times in administration they make a case in something
that they really thought they wanted to go after. So
you know, there were some prominent cases, and both the
first Trump administration and the Obama administration in that regard.

(01:00:09):
The by administration tried to change the anti trust laws
and they tried to use the laws as deterrence in
terms of people doing mergers, and it was actually very
effective in that regard, because you know, if you're a
corporate CEO or you're a board and you think you're
gonna get stuck in eighteen to twenty four months of
litigation and your merger may not go through. You might
just choose not to do the merger, right, And so
you fast forward to twenty twenty five. It's not totally

(01:00:32):
clear what the new anti trust regime is going to be,
but all signs are it's going to be much more
accommodating to mergers. Maybe not in every industry. I'm not
sure this is true in big tech, but in many
other industries as well. And so you've got a number
of management teams and boards that we think have been
sitting on the sideline. And then you know, people need
to find growth, right and M and A is sometimes
an easy way for people to find growth in their businesses.

(01:00:55):
There are a lot of businesses that deserve to be
consolidated or should be consolidated, and you know, the fancy
markets I think are very amenable to it, right. A
lot of pent up demand, a lot of pent up demand,
a lot of demand for new debt to finance acquisitions
for sure, because there's you know, a huge amount of
demand for performing debt in general right now. So you know,

(01:01:15):
in my mind, this is probably a US centric story
first and foremost. You may see some in Europe, but I
think you're going to see a lot more in the US.
I don't know if it's two months into the administration
or ten months into the administration, but I think it's coming.
And these things tend to have positive effects, Like the
more M and A you get, the more M and
A you'll have because all of a sudden, if you're
in an industry and two of your competitors have done

(01:01:36):
a deal and you haven't, you're behind and it can
actually endanger your franchise. And so you know, it tends
to be there's a reason why the M and A
comes in buckets in terms of like specific industries. Sure,
and so once that like flywheel effect happens, I think
you'll see a lot more of it. So that that's
my viewpoint on where m ANDA is heading in twenty
twenty five.

Speaker 2 (01:01:53):
So let's talk about real estate. It's certainly been tumultuous
and you've mentioned dispersion earlier in equity and credit, wide
range of different real estate opportunities. How are you looking
at the space? What are you seeing in terms of
credit and especially distressed and opportunistic credit.

Speaker 3 (01:02:12):
Yeah, so I would say a couple of things. First
of all, we take a very opportunistic approach into how
we invest in real estate, and so we don't limit
ourselves by geography. We primarily invest in the US and Europe,
but we're willing to invest across those two areas, and
we don't limit ourselves in product type. And so we're
happy to invest in self storage or industrial or data

(01:02:33):
centers or residential or whatever it is that we think
provides the best risk return in a given country. Many
real estate investors don't invest that way. Many real state
investors specialize in a country, or they specialize in a sector.
I think that's hard. I mean, if you look at
the last fifteen years, right, and you were to go back,
you know, I don't know twenty ten, right, So I

(01:02:54):
think retail assets and office assets would have been perceived
much better in twenty ten. I think that data center
assets and industrial assets would have been perceived much worse
in twenty ten. Right. So just like there's I don't
have a mathematical answer for this, but just like there's
substantial dispersion and performance and equity and credit markets, I
think there's actually substantial dispersion in performance in real estate

(01:03:17):
markets as well. And geography too. By the way, there's
geographies that have been big winners and geographies that have
been big losers, And so you could have been the
best office fund manager for the last fifteen years, and
it's been a really hard place to make money, right,
And so we try to take that out by investing
across these areas. So the benefit of doing opportunistic real
estate investing, and I don't just mean across geography or
product type within real estate, but I mean buying into

(01:03:39):
assets that other people don't want to own, is real
estate markets have gotten hit much harder by the rise
of interest rates, even that corporate markets have, you know,
corporates at least there's been some growth, right, So real
estate much less growth in terms of rents in most
of these areas. Data centers and industrial would be an
exception to that. And the covenants in real estate debt
are much less for giving than they are in corporate debt,

(01:04:02):
and the term of the debt is much shorter in
real estate debt than it is in corporate debt. And
so the crisis in real estate is like here and
coming very quickly compared to maybe corporates, where companies in
some cases have a little bit more duration, a little
bit more time to try to solve their problems. And
so you know, for us, real estate's a very interesting
asset class. It's an asset class many people avoided in
the twenty tens with rates where they were. I think

(01:04:23):
there's a lot more alligat or interest in it than
there was previously. There's different approaches, there's different ways to
win in it, but we think it's very worthy of
our attention.

Speaker 2 (01:04:32):
You mentioned it has been fun to be a manager
of investments in office space outside of the super A's.
Everybody else seems to be struggling. You look over at
Hudson Yards, a giant layout of capital. Generally speaking, the
castle carts wipe tracking is still showing with fifty sixty

(01:04:56):
seventy percent back to return to office. I remember after
nine to eleven all of Lower Manhattan was it was
just a boom in converting office space to residential. Seems
like you kill two birds with one stone if we
do that in Manhattan and elsewhere, is that a viable

(01:05:16):
opportunistic space in real estate or is it just building
by building case by case.

Speaker 3 (01:05:22):
It's it's building by a building, case by case. There
have been some issues in New York. I think actually
we're in among the best positions of any of the
cities in the US in terms.

Speaker 2 (01:05:30):
Of really, oh yeah, that was not the general consent.

Speaker 3 (01:05:33):
You go to Chicago, or you go to San Francisco,
some of these places, it's it's still a ghost town.
You know, we have many more people come into the
office here because it is a vibrancy in New York
that New York has. You know, every time every.

Speaker 2 (01:05:45):
Time someone tells me New York City is dead, I'm like,
have you been here recently? It's you can't get rest reservations.
Broadway plays are sold out. Torstan Slock actually tracks Broadway.
It's back to above pre pandemic levels. Like, every time
I hear about the death in New York, it's always
from people who haven't visited in a decade.

Speaker 3 (01:06:05):
Yeah. No, I'm very fortunate that I get to go
to most of the major cities in the US on
a regular basis, and so I get to see it
with my own eyes, and I agree with you one
hundred percent. Look, it's building by building because office conversion
to residential is not so.

Speaker 2 (01:06:18):
Easy, especially some of the sixties and seventies buildings where
there's no windows.

Speaker 3 (01:06:24):
That's what I was gonna say as a starting point, right,
So a lot of office buildings are square and a
lot of residential buildings are rectangle. And it's because there's
this rule that we have in New York City where
I think every livable room has to have a window
in it, right, And so very hard to put a
window in all the square floor plan rooms, right. You

(01:06:44):
want up with a huge amount of a square footage
in the middle of the building that potentially becomes unusable, right,
And then it's a huge cost to retrofit.

Speaker 2 (01:06:51):
Right.

Speaker 3 (01:06:51):
So in many cases you're actually better just tearing the
thing down and starting over. But if you look at
the price that loans trade at, most of them don't
assume you're doing that, right, So you're not buying them
for land value or things along those lines. Maybe occasionally
at the opportunity, but it's not regular, so you have
to kind of pick your spots. It's not to say
there aren't conversions that that makes sense. There definitely are
some of those, but I don't think it's the majority

(01:07:13):
of situations, And so you know, you do, and it
really is the sixties and seventies buildings that are the
ones that are in trouble. Because you know, I think
about like Midtown East where we are right now, it
actually isn't so easy to get space in mid ten
East right now because guess what the Plaza district, which
is what it's widely called, it is like a super
popular place to be. Not everyone wants to be in

(01:07:33):
huts and yards no offense. And so if you want
to be in this area and you want office space,
there's only so much of it, right And by the way,
because rates are high and people are down on office,
they're not building a lot more of it. And it's
super expensive to build more of it. I mean, the
cost of what JP Morgan's doing on Park Avenue in
the forties is astronomical, right, and so not everyone could
afford to do that or wants to invest in that.
And so if you want to be in the area,

(01:07:55):
actually people are rapid or running out of space. That's
not true for Class B buildings, right, all the things
you can can't give away in terms of my spaces,
and so you know, you may have you know, eventually
the market will come to equilibrium, right, but it has
you brought something.

Speaker 2 (01:08:08):
Up that I'm kind of intrigued by. The market has
yet to price out a lot of these buildings as
only worth land value. They're still valuing as if hey,
we're going to have a seventy five percent occupancy rate
for the next thirty years. What's it going to take
for that mispricing to get more in line with what's

(01:08:28):
going on on the ground.

Speaker 3 (01:08:30):
You know, my experience with private assets in general is
eventually buyers and sellers find each other, right, and essentially,
you know, that usually is more pain for the sellers,
and usually buyers get a little bit more realistic about
how cheaply they're gonna buy things. And by the way,
it's also banks and owners of assets, right. So you know.
The other thing is institutions don't like to sell assets
at a discount where they're marked at them right, And

(01:08:52):
so the first place is for marks to get correct, right. So,
whether it's real estate funds and their marks or whether
it's banks and their marks. You know, once things are
marked down at they can sell alone at a profit.
They're much more likely to get sold. And that just
takes time. I mean, that could take years in terms
of word.

Speaker 2 (01:09:05):
That's really wow, that's that's quite amazing. So we've covered
opportunistic credit, we've covered m and A, we've covered real estate.
I have to get into the world of acronyms. You
have to explain to me what are lmees and piks.
I don't know how you pronounce either.

Speaker 3 (01:09:23):
So lmes or liability management exercises liability.

Speaker 2 (01:09:29):
So if you're an insurance company or more likely a
pension funds and you know you're going to owe out
X ten, fifteen, twenty years from.

Speaker 3 (01:09:36):
Now is now. These are corporate issuers. So basically, if
you look at corporate debt, right, so ninety percent of
the debt that gets issued in leverage loan markets in
public markets has fairly like covenants in it. And so
what that allows companies to do is basically have carve
outs of baskets where they can offer to creditors a
chance to exchange their debt for a smaller amount of

(01:09:59):
debt that might rank ahead of you in the capital structure. Right,
So if you own a bunch of unsecured debt and
they come to you and they say, well, you're owed
a one hundred cents, but we're going to offer you
seventy five cents of you know, debt that's got a
higher coupon and it's higher in the capital structure than
where you were, and so you almost are co opted
into having to take that agreement because if everyone else

(01:10:19):
takes it and you don't take it, all of a sudden,
you've been primed by everyone else in your capital structure,
even if it's only seventy five percent of the amount.
And so that's a very active exercise that's going on
in public markets right now. Some of the companies have
to do this because they don't have any other chance
to right size their capital structures. Other companies are trying

(01:10:40):
to do an opportunistically. They say, Hey, if we can
get something from the creditors for nothing, why don't we
do that.

Speaker 2 (01:10:45):
What's the flip side of that? It sounds like the
creditors are right, they're getting secured where they might not
have been earlier, but they wanted the higher yield and
they're taking a big hit. Are they unhappy about this
or is this just Hey, it's a risk.

Speaker 3 (01:10:59):
It depends on the creditors. So the term that gets
used a lot, which I don't think is great, is
creditor on credit or violence.

Speaker 1 (01:11:05):
Right.

Speaker 3 (01:11:06):
So there's some of it that's driven by the companies,
and there's some of it that's driven by creditors, and
the creditors may say, hey, we're gonna put some some
new money in alongside with that seventy five percent, and
we're gonna make sure we're first in line for that
seventy five cents, so we're gonna get paid first. And
the other you know, usually less than fifty percent of
the capital structure that's not along with us. They're gonna

(01:11:26):
get less, and then we're gonna look even better than
they look because we've gotten a better return on the
same that's creditor creditor. It's just a perfect violence there. Well,
you all may have invented it. I didn't invent I No, I've.

Speaker 2 (01:11:37):
Never heard it before. But it's both perfect and a music.

Speaker 3 (01:11:41):
So you know, that's that's one of the big themes
that's going on in the public markets. In the private markets,
more people are doing what's called so p i K
is often called picking. It's payment in kind and so
you know, if you're a direct corporate lender and there's
you know, there might be five people in your group,
and there might be twenty people in your group. They
usually try to work together on things. Although I think

(01:12:01):
even the fabric of that is starting to fray a bit,
and they may say, okay, company, you can't pay your debt,
we're gonna stay marked at park. So we're gonna keep
the debt at par, but we're not going to make
you pay interest for the next year or two while
you right size your business, and we're going to tack
that onto the principle. So if it's ten percent coupon
a year, you're not going to it's one hundred. You know,
it's one hundred and twenty of principle, and during that

(01:12:22):
coupon holiday, you're going to fix your business. So the
business is magically worth one hundred and twenty at ten
uh huh.

Speaker 2 (01:12:27):
So in other words, that they waive their payment stream
for that period, but they're not just taking that payment
stream and attacking it on at the end. They're taking
that payment stream plus. And it sounds like there's a
little market.

Speaker 3 (01:12:41):
There's usually there's usually an additional amount of interest that
you might get for picking versus paying cash pay, but
fundamentally that lender is marking it at par usually or
some high nineties price because they're saying, hey, we're not
getting this cash currently, but we're going to get it
in the future, and so it's just part of the loan.
And that's a different way of sort of achieving in
private markets. What is happening in public markets with liability

(01:13:03):
management exercises, but it's been being done in a way
where there's no mark to market. That only works if
the loan is worth par at the end at the
new amount. Right, So if the loan is worth one
hundred and twenty cents at the end of this, that's
when that works. If the company isn't worth more, and
often the companies might be worth less to the end
of this process, you wind up with a loan that's
got less value. If the company was worth ninety cents

(01:13:24):
to begin with, instead of being ninety out of one hundred,
you're ninety out of one hundred and twenty. So all
of a sudden, what's left is worth seventy five cents.
And so it's a way to postpone problems for a
few years. It doesn't always solve problems. Liability management exercises
are a way to postpone problems for a few years.
They also often don't solve problems.

Speaker 2 (01:13:42):
You guys manage a lot of different types of assets
both geographically, risk wise, strategy wise, public private equity debt.
How do you manage your risk across all these diverse strategies.

Speaker 3 (01:14:00):
We have a framework where we look at individual strategies,
and so there might be a different framework and how
we manage risk and our convertible arbitrage strategy for example,
then how we manage risk and an opportunistic credit strategy,
And then we try to look across at risk across strategies,
and risk across strategies is harder to measure than risk
in individual strategies. I mean, some of it's obvious, right

(01:14:21):
If you have the same q SIPs or positions in
a public markets fund that happened to be in different areas,
that's an obvious area that you're going to find risk.
You know, industry concentration will be the second most obvious
area that you're going to find risk. You know, things
like how are each of our books going to perform
during a COVID type crisis or a GFC crisis. You
stress test, but ultimately you don't know, right because you

(01:14:43):
know there are different markets that do better than you
think in different markets and worse than you think in
different markets, And so you know, it goes down to
my basics. You know, the thing we have a risk
arbitrage business is it allows you to think about risk
reasonably simply. You know, the risk arbitise mantras. What can
you make if if your deal closes, and that's a
pretty defined amount of money. What do you lose if

(01:15:04):
your deal doesn't close? And we're pretty good at calculating that,
what's the probability of success? And then what's the probability
that the market is implying with its price to success?
And if you can get those four things right, it's
basically like poker, you can underwrite everything right. And ultimately,
if you know your odds every time, you can win
consistently over time. You know, you try to take that
mantra and you apply it everywhere else. Unfortunately, most other

(01:15:26):
parts of our portfolio, there's several different scenarios things can
go down, So I go back and credit in particular.
You know, one of the questions we like to ask
is what are all the bad things that can happen
to us where we still get our money back? Right?
And that's sort of how I sort of this trading risk.
And there's ultimate downside risk and I like investments where
you could really really stress it and you're still going
to get most of all your money.

Speaker 2 (01:15:46):
All right, So let me throw you one curve ball
before we jump into our favorite questions. And that's your
chairman of the New York Public Library Investment Committee, your
vice chair of the investment committee at New York Presbyterian,
and you also sit on the committee for Princeton's endowment.
These are three very distinct sort of endowments. That has

(01:16:07):
to be a fascinating set of experiences. Tell us a
little bit about all three of those entities that you
are either sitting on today or have worked on in
the past.

Speaker 3 (01:16:16):
Yeah, So, first of all, I'm very fortunate to be
involved with all three great institutions. I serve on all
of their boards of trustees. There are all institutions that
are very near and dear to my heart for different reasons.
The super majority of my wife and my philanthropy is
in the education space. My wife served for a long
time on the board of trustees of Herama Mater Birdmar College.

(01:16:36):
I'm very fortunate that I can serve these institutions in
a way that they find helpful. They've allly asked me
to serve on their investment committees, which is why I've
done so. New York Presbyterian is newer. I got involved
in that in twenty twenty one, and that was a
situation where I felt like the city needed me in
the healthcare organization in the city needed me. I had
a very close relationship with that institution, so it wasn't random,

(01:16:58):
but it was one where kind of came to it
later on. And in terms of the endowments, they're all
very different. I mean, New York Presbyterian is in the
low double digit billions, New York Public Library is between
one and a half and two billion, and Princeton is
in the thirties. In terms of what they are, they
require different things. In terms of being a trustee. You know,

(01:17:19):
at a smaller institution, you typically have a board driven model,
with the board at least formally is approving investments. We're fortunately,
I've got really really strong teams in all three places,
so we've got great, great investment professionals that work at
each of those institutions. But you know, smaller endowments tend
to be board driven models and larger endowments tend to
be staff driven models, where your role as being a
trustee or on an investment committee is more guard rails

(01:17:42):
than anything else. Each of those committee is kind of
as a different approach and how they want to run
their portfolios and manage their portfolios. And you know, I
like to think I contribute to the meetings. I also
learn a lot while while I'm there. Right, I'm certainly
a subject matter expert in each of the areas that
we invest in. I think I'm reasonably knowledgeable about all

(01:18:02):
the areas that all the endowments invest in, but I'm
not a subject matter expert in venture capital or things
along those lines. And so it's been a fantastic experience
and a good way to give back. But you know,
when you're at a smaller endowment, and I don't view
too belion is small in the real world. But like
when you're at a smaller endowment, you have to think
about things differently. You're gonna have less staffing, you can
cover less number of managers. Your institution's needs with respect

(01:18:23):
to your cash flow might be different. At a larger institution.
You have to put each of them in framework in
terms of what you're trying to achieve, and you have
to make sure this's buy into that model up and
down the organization. So the investment commit needs to buy
into what the staff is doing, which needs to buy in.
There needs to be buy in from what the management
of the organization is doing. There needs to be buying
from the full board. When you get all four of

(01:18:44):
those things right, you can do really powerful things.

Speaker 2 (01:18:46):
So we really don't hear much about the Princeton endowment,
which is probably a good thing because when you look,
especially in the IVS, at some of the endowments that
have been in the public eye, it's rarely because us
they're shooting the lights out. Harvard went through a whole
transition when they got rid of the people running a

(01:19:08):
Harvard management company, and then they persistently wildly underperformed for
a decade plus. And then obviously the Yale model under
David Swinson was unique, and once Swinson began thinking about
retiring that no longer was putting up the sort of
numbers they had in prior decades. What is Princeton doing

(01:19:34):
other than just keeping their head down and quietly doing
what they're doing.

Speaker 3 (01:19:38):
Yeah, I mean, without maybe speaking specifically about what's going
on underneath the hood at Princeton I'll just repeat a
couple of things that have been out there in the
public market. So first of all, you know, we had
our longtime CIO Andy Golden, retire during the middle of
twenty twenty four. Andy was a decipher of David Swinston.
It worked him for a few years earlier in his career,

(01:19:58):
had a spectacular almost thirty year run running Princo, and
he's been replaced by a brand new CIO, Vince Tuwey,
who came from MIT and had a very long career there.
Mit has been among the best performing endowments as well,
and the head of its endowment, Seth Alexander, is also
a disciple of David Swinson. The second thing, which was
came out in our recent President's Letter, which he publishes annually,

(01:20:22):
is that you do have to look that endowment returns
have come down over long periods of time, and that's
something to do with Princeton or Yale or any of
these August institutions. It has to do with you know
what I mentioned earlier, capital chases returns and market's become
efficient over time, and things that David or Andy were
doing that were completely visionary in nineteen eighties nineteen nineties

(01:20:42):
today are commonplace.

Speaker 2 (01:20:44):
Right, white space was wide open then and now it's
well trust.

Speaker 3 (01:20:48):
Someone asked me, So I asked Tom Kepner. I said, Tom,
is it true that David Swinson invented the term absolute return?
And he said to me, it's completely true. And it
was in the middle of the nineteen eighties, and David
decided that was a much more gust word to use
to describe strategies that people used to call as hedge
fund strategies in that period of time. And so that

(01:21:09):
literally just came from David Swinson's head, that term that
we all used deerically today. I can't substantiate it, but
I take Tom's word for it in terms of being
a thing. And so you look at what these institutions
created and now the incredible industry that's come from it,
it's pretty staggering.

Speaker 2 (01:21:25):
Huh, really really amazing. All Right, I only have you
for a limited amount of time. Let's jump to our
favorite questions, starting with what are you doing to stay
entertained when you're not at work? What are you watching
or listening?

Speaker 3 (01:21:39):
So you know, I don't watch a lot of streamed
content because I find when I'm at home. I want
to vege, and so the good ways to do that
are either watching sports or watching the news. Honestly, news
is less good for vegging than sports. Probably. Two things
I am looking forward to, though, are season three of
White Lotus, which is just in the process of being out,

(01:21:59):
and season three of Gilded Age, which I believe is
going to come out this fall. Gilded Age, so Gilded
Age is an HBO show, and it's basically about life
in the eighteen eighties or eighteen nineties, so hence the
Gilded Age of the United States. And there are characters
that are based on Cornelius Vanderbilt or Jay Gould or
some of the leading lights of the era. It's always

(01:22:20):
an era. I found it very historically fascinating, and I
think they've done a great job with the show. It's
a great period piece. I mean, if you look around,
there's more buildings left here or Newport or Albany from
that era than you would think, so that the don
a very good job of integrating a cgi with some
of the older historic buildings. You know.

Speaker 2 (01:22:37):
I love the first season of Lotus. The second season
was a little frustrating, especially with the way they wrapped
it up I'm curious to see the direction they go
in season three. I'm going to check out guilded Age.
I'm assuming you've seen The Crown.

Speaker 3 (01:22:55):
My wife watched this, so I've seen portions of it.

Speaker 2 (01:22:57):
So I'll tell you it's just so good every episode.
If you want that sort of historical run up, no
stone left unturned their production. Like I am not a
historical TV fan, and I got sucked into that. It
really it's just spectacular from start to finish. Let's jump

(01:23:21):
to your career and your mentors who helped shape your career.
I have a feeling I have I know the names
of a few of them.

Speaker 3 (01:23:30):
Yeah, you know, I go back further than the obvious,
you know, Tom and Marvin in terms of starting. I mean,
first of all, I'm very fortunate to come from a
family where I had a few mentors as well. We
had a family business which was started and founded by
my grandfather and my father ultimately ran. It was book publishing,
and like I mentioned before, I come from a family
of book publishers and academics, and so it was good

(01:23:53):
to sort of learn over the dinner table when I
was a kid what was working and what wasn't working.
My mother was very volunteer work when I was younger,
and when I was thirteen, she said, you don't need
me anymore, I'm gonna go back to work and had
a twenty five year career as a senior administrator at
our local community college. So that was very influential on
me as well. Growing up. You know, I ran track
both in high school and in college. I ran like

(01:24:16):
half mile and cross country.

Speaker 2 (01:24:17):
Who was the half mile is the top? I ran
the half mile in high school and the two mile
relay and then we would do the three mile coast
Why not? But the half mile is brutal.

Speaker 3 (01:24:29):
Because it's it's a sprint, right, So you're sprinting for
two laps, right. But I had some great track coaches
along the way that really helped me out as well.
You know, I mentioned earlier that we had this amazing
civics program at East Brunswick High School with his legendary
teacher named John Kalamano, who was super helpful for me
in that as well. And then in the working world.
You know, I was very fortunate, like I learned a

(01:24:51):
lot from both Tom and Marvin. They had very different
styles and how they did things. But I also found
people out there who's investing style I admired. I would
try to figure out what they were doing and reverse
engineer it, and so that's super helpful. I mean, some
of that you can do just by reading. But there's
other portions of it, like when you see the trades
and you see the investments and like you're involved in them,
and you see how someone did it better, and then

(01:25:12):
you can figure out after the fact, like what you
could do next time better. Like I just found that
like super helpful. I'm a little bit further removed from
that today. This is probably a little bit harder for
me to do that, but that's some of the ways
I really taught myself to invest over time.

Speaker 2 (01:25:25):
Really interesting. Let's talk about books. What are some of
your favorites. What are you reading right now?

Speaker 3 (01:25:30):
Well, I'll start with the ones I'm reading right now,
and then maybe i'll talk about some of the ones
historically that I've quite enjoyed. So I'm rereading only The
Paranoid Survive by Andy Grove. So you know, I mentioned
earlier that I think our business in general is that
a strategic inflection point in terms of what's going on
and alternative asset management One of the main things he
speaks about in that book is strategic inflection points and

(01:25:51):
businesses and how you deal with that. I'm also part
of the way through a book called Gambling, ma'am, which
is about Masayoshi sun And by Lionel Barber, and that's
a book where he's a fascinating character. I think a
lot of people know about, you know, the last ten
or fifteen years of Massa's career. I don't think that
many people know about how he got there, all the

(01:26:13):
times he had near misses with the whole thing could
have blown up, or things along those lines. So that's
very interesting to me. You know, early in my investing career,
there are a number of books that are classics that
I read. It's actually not The Intelligent Investor by Ben Graham.
It's obviously a great book, but it's books like Extraordinary
Popular Delusions in the Madness of Crowds by Charles McKay,

(01:26:35):
or Reminiscence of a Stock Market Operator by Edlin Lefevre,
which was a pseudonym for Jesse Livermore, who was a
famous trader in the nineteen twenties and nineteen thirties, or
Where Are the Customer Yachts by Fred Sweed, you know,
very early in my career, Like, that's how I learned,
even before I started a decay. That's how I learned
was reading these books. And so even though other books

(01:26:56):
maybe I haven't read in a little while, like they're
all classics, I stole readily recommend.

Speaker 2 (01:27:01):
You know, it's funny. Bill Bernstein, who wrote The Four
Pillars of Investing, has a new book out on the
Delusions of Crowds. That's he's both an investor and a
retired neurologist slash physician, and so he takes a very
i want to say, almost medical evolutionary approach to looking

(01:27:22):
at why people go mad in crowds. If you haven't
seen that, it's kind of fascinating.

Speaker 3 (01:27:26):
I'll definitely check it out.

Speaker 2 (01:27:27):
I suspect you'd really appreciate that. Our final two questions,
what sort of advice would you give to a recent
college grad interested in a career in either opportunistic credit
or investing generally.

Speaker 3 (01:27:41):
Well, I think both pieces of advice would apply to ball.
So I'll share two. The first of which is I'm
gonna share advice I got from a law professor I
had of mine named John Quigley, who had been at
Nasau Capital, which was Princeton's in house private equity organization
in the nineteen ninety. So here's my professor in law school.
When I was considering going to work at Davidson Kapner.
What he said to me was the best way to

(01:28:03):
learn how to invest is to actually invest. And so
if you get a chance to go into an investment firm,
take it. Don't worry about not having the training for it.
Don't worry about having to do other things first. You know,
I was torn early in my career or I got
work on the cell side first and learn some stuff
before I go into investing. And it was great advice.
I mean, you know, we do hire a handful of
people at a college every year at DK, and I

(01:28:24):
think it's super great if you can start doing it
as soon as you want to. If you know what
you want to do, you should go do it right.
And so that's piece of advice number one. Piece of
advice number two I got from my post college roommate's mother,
and my post college roomate ultimately followed the same advice,
but it took them fifteen years. And the advice I
got was, and I'm going to use the Goldman Sachs
for this because what she said at the time, but

(01:28:45):
you could apply a number of other firms to it.
Today she said, don't go work at Goldman Sachs. Goldman
Sachs is going to be a rat race to the
top all the top smart people want to go work
at Goldman Sacks. Figure out what's going to be the
next Goldman Sacks and getting on the ground floor there instead.
And I sort of got lucky and sort of felt
like I did that with David Sinon Keouner.

Speaker 2 (01:29:02):
That's really really good advice. And our final question, what
do you know about the world of fill in the
blank distressed investing, alternatives private credit today? That might have
been helpful twenty seven years or so ago when you
first got started.

Speaker 3 (01:29:17):
Well, you know, looks. It's when you start a career
at investing. I think by definition you start pretty broad
and then you get no hour and hour like. You
start with the premise that you want to invest, and
then you ultimately find a firm and the firm usually
has you in a strategy, and if you do a
good job, you learn that strategy cold over a longer
period of time, and what I'd say today. And this

(01:29:37):
is you know, also colored by my experience on investment committees,
but it's also just being a Davidson keptner. Is that
you know, investing is a very broad universe. Things are interlinked.
So for example, if you don't know what's going on
with technology investing, you may not understand what's going on
with oppetistic credit. Even though there are different things and
you know you need different expertise to do well in
each of them. And so it was something I didn't
really think about early in my career. I started broad

(01:29:59):
and then I got really narrow, and I've probably gotten
broader as both I've gotten more senior and I've gotten
more different types of experience in the investing world in general.
But to some degree, you should always stay broad even
if you're going narrow. So you know you're gonna have
to go narrow to be successful in your career. There's
very a few people who can do everything as an
investor and be successful. But as you go narrow, like,
don't lose sight of other asset classes and what's going

(01:30:19):
on in the world, because you can get blinded to
bigger trends if you did that.

Speaker 2 (01:30:23):
Really really really interesting. Tony, Thank you for being so
generous with your time. We have been speaking with Tony Joseloff.
He's Chief investment Officer and managing partner at Davidson Kempner,
overseeing over thirty five billion dollars in assets. If you
enjoy this conversation, check out any of the five hundred
plus we've done over the past eleven years. You can

(01:30:47):
find those at iTunes, Spotify, YouTube, wherever you get your
favorite podcasts. And be sure and check out my new
book coming March eighteenth, How Not to Invest the bad ideas, numbers,
and behaviors that destroy wealth. I would be remiss if
I did not thank the Cracked team that helps put
these conversations together each week. John Wasserman is my audio engineer.

(01:31:11):
Anna Luke is my producer. Sean Russo is my researcher.
Sage Bauman is the head of podcasts at Bloomberg. I'm
Barry Retolts. You've been listening to Master's in Business on
Bloomberg Radio.

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