Eric's Journey into Transportation and Logistics Investing
Eric enjoys the privilege of a highly engaging career. His primary responsibility involves exploring the breadth of the investment landscape to identify attractive strategies that have the potential to enhance his clients' portfolios. As a generalist, his search extends globally.
His interest in transportation and logistics stemmed from networking and engaging in discussions with individuals who possess specialized knowledge in various sectors. He discovered that transportation and logistics represent a sector characterized by fragmentation and untapped potential for innovation. The global nature of this field, along with its connections to geopolitics and climate issues, sparked his intellectual curiosity.
To deepen his understanding of various industries, Eric actively networks with operators and sector specialists, and consults with those who have already invested within the sector, including venture capital and private equity groups. These activities support the development of a well-considered investment thesis within his firm, in collaboration with his team.
The appeal of transportation and logistics for Eric and his team lies in its fragmented and regional characteristics, the opportunity for disruption, and the vast potential for innovation. They also appreciate the sector for its potential for downside protection (depending on the specific strategy), a key consideration in their evaluation process. Some Key Points from our conversation include:
- Balancing Risk and Returns in Logistics Investment Strategies
- The Crucial Role of Logistics in Shaping History
- Targeted Investment Sourcing: Balancing In-Depth Research with Strategic Networking
- Eric's Strategic Approach to Investment Management and Time Prioritization
- Anticipating Investment Risks with Pre-Mortem Analysis
- Eric's Method for Market Success
At its core, Eric's approach involves an ongoing cycle of knowledge-building. Through deep research, insightful conversations, and strategic analysis, he aims to develop well-informed theses on promising sectors. This allows his team to confidently identify investments with attractive risk-return profiles that can generate strong performance for clients over the long run.
Most importantly, Eric stresses the importance of understanding potential downsides and preparing for unpredictable outcomes. By prioritizing intellectual honesty around risks, conducting thorough due diligence, and focusing on the asymmetry of returns, he believes his firm is well-positioned to navigate the uncertainties inherent in markets. Overall, Eric is enthusiastic about the opportunities that exist for patient investors willing to do the work required to analyze complex industries like transportation and logistics. He finds such sectors rich with opportunities for those ambitious enough to uncover them.
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Transcript
Episode Transcript
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Dr. Matt Waller (00:10):
Welcome to the Matt Waller podcast, where we
look at success at theintersection of technology,
logistics, supply chain, retailand CPG, also known as the
retail value chain.
I want to clarify that thispodcast is distinct from my
responsibilities as a professorin the Sam M Walton College of
Business.
Nonetheless, it aligns with myaspiration to provide practical
(00:31):
insights to professionals andbusiness by showcasing companies
and people that can enhanceyour ability to manage, lead and
strategize and marketeffectively and the retail value
chain.
Before we dive into today'sexciting episode, I'd like to
thank our sponsor, new RoadCapital Partners.
New Road invests in proventechnology services and products
(00:54):
that serve unmet needs in themarketplace.
They look for companies insupply chain and logistics, as
well as consumer-orientedcompanies.
For more information, go tonewroadcpcom.
I would also like to disclosethat I am a strategic advisor to
New Road.
I'd also like to recognizepodcastvideoscom for the
(01:18):
services they provide for thesepodcasts.
I'm very pleased with theirservices and now, without
further ado, let's get into theexciting episode.
You're really going to learn alot from this podcast today
about alternative investments,and we're going to be talking a
lot about alternativeinvestments in transportation
(01:40):
and logistics.
We're going to be talking aboutasymmetric risk, return
profiles and many other topics.
Eric Adams is who I'minterviewing and he is director
of Private Capital and a partnerat Johnson Financial Group.
In this role, he's immediatelyresponsible for the formation,
(02:04):
execution and oversight of thefirm's private market investment
philosophy and strategies, andhe oversees the sourcing and due
diligence of private investment, which we talk about, along
with the construction andimplementation of clients'
private capital portfolios.
He has an undergraduate degreein cell biology and an MBA,
(02:30):
which we talk about, and we talkabout how that relates to what
he's doing today.
We also talk about the factthat he's got a CFA and a CIA
and how those are relevant towhat he does and whether or not
he recommends other people getthose kinds of designations that
are in this market.
But we talk about so manyinteresting things.
(02:52):
We talk about why transportationand logistics is a great market
to invest in.
In fact, eric has authored athesis article explaining why he
is investing in transportationand logistics companies.
(03:13):
It's a terrific paper.
It's very deep.
It goes into the history oflogistics and transportation,
but it also goes into why it'ssuch an attractive area for
investment.
So I think you're really goingto like this, eric.
Thank you so much for joiningme today on the podcast.
(03:35):
I really appreciate it.
Eric, would you mind telling usa little bit about what sparked
your interest in investing intransportation and logistics
companies?
Eric Adams (03:50):
Sure.
So I have the good fortune ofhaving a very fascinating job,
which entails primarily mescouring the investable universe
and trying to find compellingstrategies that we think might
(04:12):
benefit our clients' portfolios.
And we are generalists, and sowe're looking all over the asset
class spectrum all over theworld.
And so that's what eventuallyled me to transportation and
logistics is because, justthrough my networking, my
conversations which is a hugepart of my job it's just out
(04:34):
there talking to people smarterthan myself who have expertise
within specific areas of focus,and through doing that,
identifying areas of thetransportation and logistics
which are, it's a verydisconnected, fragmented area
(04:56):
that's very ripe for disruption.
There's a lot of white spacethere for innovation.
It's global in nature.
There's a lot of there's enoughthere to keep you interested at
all times.
It's tied into geopolitics, it'stied into climate, and so, just
(05:20):
from an intellectual curiosityperspective, it's something that
really piqued my interest.
And so, after that point, thisis just how I explore all
different kinds of industriesyou start networking, you start
talking to the experts in thespace and I start talking to
other investors LPs out therethat have invested in the space
(05:43):
already, some general partners,some private equity groups, etc.
To start to formulate a bit ofa thesis internally at our firm
and working with my team toreally hash that out, and so
what attracted us totransportation and logistics is
getting kind of what I alreadytalked about.
It's very fragmented, it's veryregional in nature.
(06:12):
All over the world there'sthere's room for disruption,
there's a lot of white space forinnovation and a lot of
instances there's some verystrong downside protection
available as well, which issomething that we're always
looking at first, frankly, andall of those things and just
(06:35):
some conversations with somevery intelligent investors in
the space, got me excited.
Dr. Matt Waller (06:40):
So when you talk about protection from the
downside, how is that providedby the logistics sector?
Eric Adams (06:48):
Well, it certainly depends on the strategy.
Legibla, there are riskier,certainly, strategies within
logistics.
If you're investing in startups, if you're investing in growth
companies that are not yetprofitable, that's going to be a
little bit farther out on therisk spectrum.
However, there are and thoseare appropriate for client
(07:11):
portfolios as well, probably toa smaller extent that some of
the more downside protected butlower expected return strategies
, and some of those that we'velooked at within logistics would
be industrial real estate andwarehouses for last mile
delivery, et cetera, and sothat's real estate.
(07:33):
It's tangible.
There's tax benefits toinvesting.
Similarly, we invested inmaritime shipping and river
boats cut boats, tow boats, usriver system and, again similar
(07:56):
to real estate, those aretangible, real assets that
provide real value.
It's not going to go up in thesmoke like a startup company
could go to zero.
We think this is real value,that the very least provides
some amount of scrap value, butthere are very high demand and
there's a low supply of thesevessels and there is the tax
(08:19):
benefit to investing in them.
So there's a very strong amountof downside protection on that
specific strategy.
But again, it certainly runsthe spectrum from higher risk
but potentially higher returning, to more downside protection,
lower risk and lower returns.
(08:39):
But what we're always lookingfor is what we call and I'm kind
of rambling at this point justa touch of a tangent, but it's
really the asymmetry of the riskreturn characteristics.
And so what I mean by that isyou are overcompensated for the
(09:01):
amount of risk that you areundertaking.
Said a different way, theamount of returns that you're
able to generate there is, aboveand beyond, really, the risk
that you are undertaking.
Dr. Matt Waller (09:14):
That's really a great point, and every time
there's been a recession, I meantransportation decreases a bit,
but boy, it's always a greattime to invest in transportation
because it comes back.
Product has to move, peoplehave to survive, and I remember
(09:36):
the first time I saw that in abig way at 9-11, around that
time frame and 2008, 2009, andeven recently, which was a
really because of the pandemic.
It was an extreme example, butit just reminds us that people
(09:59):
still have to eat, they needproduct.
Products can move.
Eric Adams (10:05):
Absolutely.
Dr. Matt Waller (10:09):
And sometimes if things get too expensive or
let's say that the economy goesdown, there's some modes that do
really well, like intermodal.
People start shifting more tointermodal because it is less
expensive.
They're willing to trade offmaybe lead time or lead time
(10:32):
variability, uncertainty for alower rate.
Eric Adams (10:38):
Yeah, kind of as I was talking about earlier.
It's such a wide-ranging,global, varied space and it's
exciting in the sense that it'svolatile and it is subject to
geopolitical uncertainty andprobably seen recently about how
(11:00):
the Red Sea a lot of shippinghas basically shut down through
the Yemeni Houthi rebels and sothe Suez Canal there's extremely
low volumes right now.
The Panama Canal is alsobecause of climate.
(11:22):
There is a drought down thereand the Panama Canal cannot
handle the volumes that they useand so it kind of sounds risky
or scary potentially as aninvestor from the outside.
And you also see the volatilityand spot-frait pricing as well.
And since we're talking aboutglobal shipping, it was $20,000
(11:46):
or so to ship a box, I guess, acouple of years ago now, and now
it's $2,000, $3,000.
So a lot of volatility withinthis space.
But there are ways to approachit that are a little bit more
risk-aware, if you will, whereyou're less exposed to
spot-pricings and less exposedto some of those geopolitical
(12:10):
risks.
But there is certainly noshortage of things to pay
attention to.
Dr. Matt Waller (12:15):
I agree it is such an interesting space and if
you're engaged in it, you windup paying attention to all kinds
of global issues, as you werementioning, but you also pay
attention to financial issues,raw materials costs.
There's just so much involvedin supply chain and logistics
(12:38):
and it's also interesting.
I know you and I have talkedbefore about how logistics and
supply chain has really changedthe world in so many different
ways.
So many inventions like thecontainer and standardization of
containers.
Eric Adams (12:59):
Absolutely.
Yeah, there's a great book, theBox by Levinson, and people
under-appreciate, I think, justhow much transportation and
logistics.
Yeah, I've been intricatelyinvolved in the history of the
world and humanity, whether thatbe in the course of military
(13:24):
operations, and there's somegreat books out there that I've
read talk about the Civil Warand how a big reason for the
eventual North victory isbecause they excelled at
transportation and logisticswithin their military operations
, whether that's soldiers, menor material.
(13:49):
They excelled at that and hadfar greater capabilities in the
South and that is one of themain reasons why the North was
victorious.
And so military operations,really, since the beginning of
humanity, but also obviously,economic development too, and
(14:12):
containers and standardizationof containers for global
shipping.
And anyway, that's a topic thatcould be expounded upon for
hours on end, but it's almosttaken for granted, I would say,
by, I guess, the casual observer.
Because, yeah, sure, you've gotto get things from here to
(14:34):
there and you've got to sourcematerials and manufacture
something and ship that productsomewhere else, and that's
intuitive, it's easier to wrapyour head around, but the
complexities involved in thatentire process, I think, is
something that's probably takenfor granted by a lot of casual
(14:54):
observers out there and there'sjust a lot of investable
opportunities within that spacebecause there are so many
economic tie-looms.
Dr. Matt Waller (15:04):
So, eric, what are some methodologies or
strategies you employ toactually find companies to
invest in this space?
We've been talking about whyyou were interested in the space
at a strategic level, but andyou know, there is so much white
(15:25):
space, there's so muchopportunity.
But at some point then you'llhave to say, ok, now, which
firms do I invest in?
So how do you go about that?
Eric Adams (15:35):
Well, it starts with sourcing, obviously, and the
sourcing of these opportunitiesis twofold.
It's really research andnetworking.
I mean we're doing a lot ofresearch on R&D to really build
out these PCs, as I was talkingabout just a few minutes ago,
(15:55):
whether that's aroundtransportation and logistics, or
you know, I talked to yourecently about how we've done a
lot of research in media andentertainment recently as well,
and so there's a lot of researchon the front-ends.
But I'm going to commensuratewith that.
It's also just I mean it soundssuper basic but it's a lot of
(16:15):
networking.
It's really me and my teamgetting out there and again
meeting the experts, meeting thepeople that are smarter than we
are, that are day-to-dayintimately involved within these
areas, talking to them aboutwho are the groups we need to be
talking about that have themost compelling strategies with
(16:39):
a real edge to their investmentapproach that others are going
to have difficulty mimicking.
What are the companies outthere that are providing
children's rupture anddisruption that's a word that
has been buzzy over the last 10to 20 years but which companies
(17:02):
are providing that trueinnovation, that true disruption
that creates a mode aroundtheir business and that
competitive advantage and shouldprovide them with significant
future growth, and so a lot ofit is in that sourcing just on
the front-end, which is a lot ofrelationship building kind of
alongside research.
(17:23):
Then when we identify anopportunity, you know myself and
my team at John's FinancialGroup, we will.
We have a very highly structureddue diligence process,
four-tiered due diligenceprocess, where we're saying
about 500 to 600 deals a yearwithin the private investment
(17:44):
space, because that's where wespend a lot of our time is
within the private markets,that's across private equity and
private credit and real assets,all these different asset
classes.
And then we have a very highlystructured process of how we go
about whittling that number down500 down to 10 to 12
(18:07):
opportunities per year that weare offering to our clients.
And so, yeah, that's a full duediligence process.
I mean that's conversations andmeetings with the sponsors.
It's basically collecting allthe data we possibly can on the
pool, its background checks, itstrack record.
(18:28):
It's all the material,marketing material that they
issue, but a lot of industryresearch as well, a lot of
reference calls.
Of course, there's thefinancial modeling, both
scouring their financial modelsor creating our own internally
legal review, legal talk, reviewand it's a pretty intensive
(18:55):
process that for any givenopportunity, probably is going
to take us a few months toidentify an opportunity and then
eventually approve it for ourclients, and so it's a lot of
work.
But it's all very fascinatingbecause again in a very
fortunate position of reallyjust trying to source and
(19:17):
identify and vet the mostcompelling opportunities that we
can on behalf of our clients.
Dr. Matt Waller (19:24):
So, eric, how do you structure today, how do
you manage and prioritize youractivities regarding
investment-related activities?
Eric Adams (19:38):
That's a great question.
It's a constant battle.
The prioritization is somethingthat you have to constantly
focus on.
I just read something from aquote from Steve Jobs recently.
But our prioritization focus isparamount, and the ability to
(20:02):
say no to a lot of veryinteresting high value projects
in order to focus on what is thenumber one most important
project is a skill and adiscipline that not too many
(20:24):
have mastered, and my questionwhether or not I've mastered
that as well.
So, as far as prioritizationgoes, my day outstructured.
There's an internal meetings,you know, several per week with
my team, with the investments towhere we are identifying new
(20:45):
opportunities that we'resourcing or we are covering
where we are in the duediligence process across many
deals that we are underwritingat the time.
So there's a lot of teamwork, Iwould say at our firm.
That's something that weemphasize across all of the
different teams within thecompany and that's certainly the
case within the investmentsteam.
(21:06):
So we are there's a lot ofcollaboration, a lot of
communication and a lot of ourtime is structured underwriting
these various opportunities andtalking to the sponsors, setting
up those conversations andmeetings or just doing the dirty
work of that ground levelunderwriting, and so that's that
(21:30):
used to be a lot much largerpart of my job back when, you
know, we were really buildingthe firm and I was doing a lot
of that ground levelunderwriting myself.
But now I have a very talentedteam that helps me out and a lot
of that, and so my day isstructured more along the lines
of oversight and kind of makingsure that we're pushing the ball
(21:54):
forward on these various duediligence projects that we're
working on and staying focused.
You know, something that we'realways, you know, focusing on is
which ones are the best fitsfor our clients, you know early
on in the process and which onescan we say no to quickly so as
not to spend on due time onthose.
(22:17):
You know, but a lot of my jobwas also spent, as I said,
networking.
A lot of my day is structured,just calling on other investors,
you know in similar roles asmyself, at different firms,
talking to them about what areyou looking for 2024,?
You know, what strategies doyou think are set up nicely in
(22:39):
this economic environment tobenefit from current market
dynamics?
What specific strategies areyou looking at?
What should I be looking at?
And so a lot of my time isstructured also, which is
networking and talking to otherintelligent investors out there,
and then I also structure agood amount of my time really
(23:05):
researching, thinking andproducing.
You know what we call.
You know thought leadershippieces, and then that goes into
you know the time I've spentwith the transportation
logistics memo, which I sharedwith you, with the entertainment
media and entertainment memo Ijust completed recently, and so
there's a thought leadershipcomponent to my tie as well, not
(23:30):
to mention speaking withclients, telling them how their
previous and best words aregoing and pitching them on new
investment opportunities, andtalking to prospective clients
that really want to get a deepunderstanding of our investment
platform, our philosophy, ourapproach, etc.
So it's enough to keep me busy.
Dr. Matt Waller (23:53):
I bet.
Well, I know that, of course,I've read a couple of your
theses, but regarding yourinvestment thesis around
transportation logistics andwe've really touched on this
indirectly already a little bitbut how did you go about
(24:13):
formulating that thesis and howis it involved to fit the
current marketplace?
Eric Adams (24:22):
Sure, I laugh only because transportation and
logistics is just constantly influx.
I mean it's amazing if you lookback as I know you have on that
memo that I wrote a little overa year ago I mean how much has
changed in that time isunbelievable.
(24:43):
I talked just a few minutes agoabout how it costs $20,000 to
ship a container overseas a yearago and now it's $2,000, $3,000
, whatever the current number isright now.
So things change drastically.
And so you talk about how mythesis has evolved.
(25:08):
You know just the test thatconstantly be evolving with,
along with the marketplace.
But you know how I go about.
Formulating a thesis is just alot of research, which is
difficult.
(25:28):
You know this is all kind oftied together because you talk
about prioritization and youreally have to set aside some
time or prioritize research anddue diligence and it's pretty
easy to just answer emails allday and it's not really the
(25:50):
highest value activity butreally setting aside some time
to create a little brain spaceto do some research.
And so you know I read severaldifferent books, countless
industry reports, countlessconversations with industry
participants to make sure I wasseeing things from all angles.
(26:13):
And in asking them, who else doI need to be talking to?
Can you share with me any ofyour industry research?
And you know what companies doyou think are doing the most
exciting things within thisspace and following.
You know, tracking down thoseleads constantly, and so it
(26:34):
takes some time, some diligenceand brain space and some dogged
determination at times and itcreates, you know, certainly an
emphasis on prioritization of myday.
But that's that's what I thinkis most exciting about my job is
(26:54):
being able to spend that timekind of diving deep into
different sectors to reallyformulate these, these things,
so that we can, so that I canbuild a vision for where we need
to be focusing our time asinvestors, on behalf of our
(27:16):
client dollars.
Where do we need to be focusingour time, you know, trying to
locate those attractive riskreturn parameter opportunities
for our client portfolios, andso it's just.
It's just a.
I think it's very appropriatethat you just talking about
(27:37):
prioritization before you askthis question, because it's a
lot of time.
Prioritization because you haveto have the headspace to really
take through these, thesetopics.
Dr. Matt Waller (27:48):
Well, I could tell when I read your thesis on
logistics and transportationthat you had done a lot of
research, deep research, becauseyou looked at the history of
the industry.
You looked at inventions thathave changed the industry.
You looked at each of the modesbut I don't know how common
(28:15):
that is.
I've read lots of theses likethat, but I really liked how you
didn't use just a surface levelapproach, you actually took a
deep dive.
I would think investors wouldreally appreciate that.
Eric Adams (28:35):
That's the hope.
Hopefully, my clients gotsomething out of that and, at
the very least, took comforts,knowing that we're doing the
deep work to try to really flushout these theseses.
You know, I think a lot of whatit is again, and I know I've
(28:59):
touched on this already severaltimes, but I can't emphasize it
enough.
I oftentimes describe myself as,at times, a glorified networker
, and it's just something that Ispend a lot of time on and I
(29:21):
find a ton of value in againjust finding people that are, in
this case, transportationlogistics on a day-to-day basis
and our experts and operatorsand investors, and spent their
careers in the space.
Because I haven't I'm not goingto be an expert in not only
(29:42):
transportation logistics butother industries in which we
invest.
I'm more of a forest guy asopposed to the trees guy, but
it's incumbent upon me to knowall the smartest trees out there
.
If you will, if you'll allow meto continue this analogy but
(30:05):
and so that's what I spent a lotof my time doing that really,
really helped me with that memoin transportation logistics
space and being able to identifywhat is really important in a
way that I wouldn't have beenable to do if I just on my own,
had tried to research the space.
Dr. Matt Waller (30:26):
So, when evaluating potential investments
, what unique aspects andopportunities Within a company
are you primarily looking for?
Eric Adams (30:40):
Yeah, you know, as mentioned, we're always really
looking at the downside firstwhat's going to happen if things
don't go to plan, because Inever go to plan.
So we're stress, testingfinancial models and projections
, we're creating scenarioanalyses to understand, you know
(31:05):
, what happens if things don'tgo, don't go as planned, and so
we're always very much Focusedon the downside first, because a
really a big part of my job isI'm not gonna pick all the
winners, but we do need to avoid, you know, the losers as much
(31:25):
as we possibly can.
We need to.
You know, maybe there's someopportunities that don't make as
much money as we had hoped, butwe need to avoid those are
losing money and we have a verysolid track record of doing so,
unfortunately, and so downslideis is really where we start, and
(31:46):
Then you know after that,certainly there's your product
market fit.
There is the team and theirexperience and expertise and
their track record.
There's understanding, theunderlying technology and the
team, the, the organizationalstructure.
There is understanding,obviously, the competition
(32:09):
within the space.
You know what is the need then,excuse me, the need that their
product or services are meeting.
How are they disrupting thespace?
Or, if they're not, you knowexplicitly disrupting the space.
How are they just doing thingsbetter than others are doing it
and what advantage do they haveover their peers within the
(32:30):
industry?
You know, in the structure ofthe investment is something that
we spend a lot of time on.
You know where are we in thecapital stack, what kind of
structures or liquidationpreferences, what kind of
governance, you know, is there?
What kind of legal protectionsdo we have?
Etc, etc and then of course,all of the financial
(32:52):
underwriting and you know thegrowth of.
You know revenues and expansionof margins and you know
earnings growth, etc.
Evaluation you know valuation issomething that we're very
focused on.
You know whether that be, youknow, if it's an earlier stage
(33:14):
Opportunity, you're probablyvaluing it up revenue and maybe
it's a higher valuation but at areasonable price, is something
that we would look for.
If it's a later stage,profitable, cash-blowing company
, probably valuing it off amultiple of earnings and hoping
to find something.
You know competitions increasedall over the marketplace.
(33:38):
Valuations have gone upsignificantly over the last five
to ten years and they've comeback a little bit In this rising
interest rate environments thatwe've seen in the last couple
of years, but they haven't comedown Significantly.
Kind of depends on where you'relooking like early stage
venture.
Those valuations have certainlycome down more, but we're
(34:01):
whether or not it's a screamingdeal, we're looking for a
attractive valuation and thatthat kind of gets to.
Where we focus a lot of our time, and that's what we describe
Oftentimes, is the lower middlemarket and these are, you know,
companies that you know.
(34:22):
Maybe enterprise value of 50 to200 million or something along
those lines.
Everybody's definition of thelower middle market and we're
middle market is different.
Your earnings of perhaps youknow, 10 million, 50 million or
something all around those lines.
You know these are companiesthat are and it depends on the
(34:44):
strategy.
I mean they might not be thatbig if they're a little bit
earlier stage.
But just speaking ingeneralities here, you know
these are companies that Mayhave been around for a long time
, may have very proven businessmodels and very capable teams,
maybe or may or may not beprofitable but hopefully have
(35:08):
de-risk from a technologyperspective and but are too
small To gain the attention ofmuch larger investors in the
space.
You know we can throw out manysuch examples of Blackstone or
KKR, apollo or Carlisle or TPG,who are much larger investors in
(35:31):
the space and Are throwingaround big, big bucks that
they've raised and it just isnot worth their time to focus on
some of these smalleropportunities.
So they end up competing witheach other in the upper end of
the market and dreaming ofvaluations which then compresses
future expected returns.
So if you're looking for someBetter valuations with still
(35:55):
great companies with higherexpected future returns, where
you're going to find those is onthe low end Of the market.
So kind of a rambling oflog-winded Response.
Dr. Matt Waller (36:06):
But the trend of paint a picture here, yeah,
that's great and if you wouldn'tmind, could you give some
specific examples of investmentsand the transportation area and
Maybe elaborate a little bit onwhat led you to those
investments.
Mm-hmm, Sure well I.
Eric Adams (36:27):
Mentioned earlier, that we're invested in a
riverboat strategy and those aretow boats, tugboats and barges
on the US river system,primarily the Mississippi River
system and the Gulf intercoastalwaterway, and so these are
(36:49):
carrying essential Commodities.
I mean these are its corn andsoybeans, you know, food stuffs.
You know, obviously that'simportant for the economy but
it's important for society,obviously In the creation of
(37:10):
food and it's something thatobviously is very important to
all of us.
But also energy, refinedproducts, chemicals, really
these, these foundational piecesof food, these foundational
pieces to the economy andmanufacturing.
And so there's a lot ofdownside protection in the
(37:30):
essential nature of what thesevessels are carrying.
I mean, you know, on top ofthat, it's a really unique
Circumstance right now withinthe space because it's a really
Inbalanced supply demand dynamicwhere the supply of these
vessels is very, very low andthere's a lot of older vessels
(37:53):
On the river that are going tohave to be retired but there's
really not enough new vesselsbeing created to fill that gap
from the retired vessels.
So what you get is a shrinkingsupply, strinking inventory of
these tow boats, tugboats, butvery, very high demand still
(38:17):
because these vessels aremission critical to the
operators and again operatorsare ad companies, energy
companies, chemical companies.
They're absolutely missioncritical and Traveling.
Shipping your products overwater is a vastly more expensive
or, excuse me, vastly cheaperthan shipping my truck or
shipping by rail and and sothere's a lot of downside
(38:42):
protection to the strategy andthere's a lot of support for
Rental prices to these operatorsif you're the owner and rental
growth, it's very Inflationprotected as well in those
rental prices and it's really anincome strategy and this isn't
Really sexy venture.
Like returns.
You're not going to get a 10x,20x type return, but what you're
(39:09):
going to get is double digitincome Hitting your account if
you're an investor, you know, ona quarterly basis, and that
income comes with tax sheltersas well, because these are real
assets that have favorable taxtreatments and even though rates
have come up Significantly overthe last couple years, double
(39:31):
digit you know talking 12% typeyield is still relatively very
attractive, you know, withrising rates across other
classes and especially with thattax shelters.
So that's a great example of uslooking for that downside
protection and we feel as if weare being overcompensated for
(39:52):
the amount of risk which we areOvercompensated for the amount
of risk which we are undertaking.
So that's a that's a greatexample, you know, another
couple examples on the riskierside of the spectrum would be
investments in some of thetechnological Disruptions that
(40:14):
are going on within the space.
I mean, if that's trucking fleettechnologies or freight
logistics companies or warehousemanagement systems and, as you
know better than I do, givenyour experience in the space,
you know there's so many of theof logistics you know is still
(40:37):
handled by phone calls andspreadsheets and Handshakes.
And then there's a lot of whitespace to innovate, to create
efficiencies, to create thetechnological scalability Within
these spaces that'll createbetter experiences for carriers
(40:58):
and shoppers and eventuallyconsumers, in what has
historically been, you knowthat's fairly, you know,
fragmented kind of Area prone tohiccups and susceptible to
exogenous events and disruptions.
So we're also investing in someof those higher risk and higher
(41:21):
expected return opportunitiesas well.
Dr. Matt Waller (41:27):
So you have a Interest primarily in the middle
lower metal market.
Oh, you try to avoid earlystage startups, and You've
touched on a little bit of whythat is, but would you mind
elaborating on it just a bitsure?
Eric Adams (41:52):
it really comes down to.
You know we really focus oninvesting within the private
markets and the cats kind of outof the bag as far as investing
in the private market show.
When we started this and theircompany really the genesis of
the company is a private equitystyle holding company.
(42:13):
That you know goes back 70years and you know, back then
the private markets andalternative investments were
truly very alternative and noteverybody had exposure to.
You know private equity, realestate, even.
(42:34):
You know private credit, energy, etc.
But as the private markets haveevolved over time, there's and
then this is a good thingthere's greater access to the
market for, you know, high networth families or you know
really that kind of retailwealth client.
(42:57):
There's greater democratizationwithin the space, and that's a
good thing.
But what it has created isgreater competition and and the
reason we focus on the lowermiddle market is there is less
competition in that space.
And again, I'm not here to tellyou that there's no competition
, because there certainly is.
But when you start looking upmarket, you start running into a
(43:22):
lot of those big front Imentioned earlier that are
competing with each other anddriving up valuations and
therefore compressing futureexpected returns.
What we're looking forcompanies that are just as
strong, just as healthy, withjust of exciting growth
prospects, that are Gonna tradeat lower valuations.
And so we're doing this as away to really benefit our
(43:46):
clients In their portfolios byfinding those higher expecting
returns and out taking on a Aconvinced or a level of
increased risk.
And so really, where we'refocusing on in the lower middle
market and within differentsubsectors and different
(44:08):
industries is what areas haveReally compelling investment
fundamentals but are currentlyUndercapitalized and are
experiencing a less competitionfrom capital Than some other
spaces might be, and so that'swhere I spend a lot of my time.
(44:30):
You know where, which areas areunderbanked, which, which areas
maybe have some complexitypremium to them.
Meaning, like your commontypical investor Maybe looks at
transportation and logistics,for example, and says, well,
that seems messy and complicatedand you know, I'm maybe gonna
(44:54):
stick to investing in apartmentsor something that's a little
bit easier to run my head around.
Where is that complexitypremium?
That again keeps a lot ofcapital out, that keeps
competition for opportunitieslower, and again it all comes
back to valuation and Thereforeexpected future returns that our
(45:17):
clients can expect to achieve.
Dr. Matt Waller (45:20):
Make sense.
Now, I know that you alsoinvest alongside private equity
firms and you invest in privateequity firms funds, and when you
, when you invest alongside them, you're investing in the same
things they're investing in, andsometimes you invest in private
(45:42):
equity funds per se.
Would you mind talking a littlebit about that strategy?
Eric Adams (45:49):
Absolutely so.
You're exactly right.
We will invest in privateequity style funds, commitment
structures, drawdown vehiclesthat draw down your commitment
over a three to five yearinvestment period, and that
private equity fund styleapproach, and we will also
(46:09):
invest directly into businessesas well, and we will also invest
directly into real estate andsome other sectors and asset
classes.
Where it oftentimes starts iswe will invest in a private
equity firm and one of theirunderlying funds that they're
(46:32):
raising and you know we've beendoing this, you know long enough
out of where we have a reallystrong stable of repeat managers
that we've worked with and withus with for a long time.
But we're always out theretrying to find new relationships
as well with great groups outthere that have some really
(46:54):
interesting compellinginvestment strategies where
they've really carved out anedge.
So we're always on the lookafter new relationships too, and
so where a lot of our investingdirectly into businesses comes
from is trying to co-investingalongside these private equity
(47:15):
fund commitments that we have.
So oftentimes these privateequity funds will have a great
opportunity.
They're going to invest throughtheir fund, but the size of the
opportunity is large enough towhere they can't write the check
, the entire check out of theirfund or else they'd be running
(47:38):
up against some concentrationlimits within their fund.
So they might have someadditional capacity to invest in
an underlying company that theywill then offer out to their
limited partners, theirinvestors, and oftentimes you're
able to invest in veryfavorable economics.
Maybe, hopefully.
(47:58):
No management fee, no carriedinterest, and it's just a direct
investment on the capital stackof this underlying business.
And that's a great way toaverage down the fee burden that
you as an investor areexperiencing across the fund and
(48:18):
the co-investments when youblend the average fees all
together and also double down onthe opportunities that you as
an investor have a highestconviction.
And we're very selective.
If we're not investing in allthe co-investments that our
private equity fund sponsors areoffering us, we are selecting
(48:40):
which ones that we feel highlyconvicted about and we do want
to double down on our exposureabove and beyond what we are
getting through the initialprivate equity fund investments.
So that's been a great way tooffer some very compelling
opportunities to our clients toinvest directly into a really
(49:01):
exciting operating business.
Dr. Matt Waller (49:04):
You know earlier you mentioned that you
look for asymmetric risk returnprofiles in your investment and
that seems like a really gooddiscipline to have in thinking
about investing.
Would you mind speaking to thata little bit more?
Eric Adams (49:23):
Sure, sure, it's first and foremost getting an
understanding if things go wrongwhich they do sometimes.
Right, investing is literallyat its core.
Trying to is investing into anopportunity that is dependent
(49:45):
upon future outcomes, and noneof us know what the future holds
.
And so there, if you're makinghundreds of investments, as we
have over the years, there aregoing to be some that aren't
going to meet expectations.
Well, you know, luckily, thevast majority of ours have, but
there's going to be those.
That's a nature of investing.
Future is unpredictable and so,knowing that and being
(50:07):
intellectually honest about that, you need to be prepared for
what that downside case mightlook like and understand as best
one can.
If you aren't able, the companyis not able to meet their
targets and maybe lose his money.
(50:28):
What is the salvage value ofthis investment?
Is it a real asset?
That alluded to real assetsseveral times on this call.
Is there some salvage valueBecause it's a real property
that can be utilized forsomething that might create
(50:48):
value?
If it's an operating business,what assets do they have on
their balance sheet that couldbe sold to generate some amount
of value?
Would this company be sold atwhat valuation?
Still, if their return andearnings targets are not met and
(51:10):
really modeling those outs,creating sensitivity analyses
and really focusing on thatdownside.
And that's really where it allbegins.
So we do something that I thinkis kind of interesting within
(51:31):
our investment committee is whenwe are coming to a final vote
on an opportunity that we may ormay not take to our clients.
We ask ourselves we call it apre-mortem as opposed to a
post-mortem.
So let's look out five years inadvance, five years ahead, and
(51:54):
let's pretend that thisinvestment did not go to plan.
What are the reasons, what arethe most likely reasons why that
happens?
And that's just kind of aninteresting thought exercise to
go through.
You can use that riverboatastrology.
(52:21):
What are the things that couldcause that to go wrong?
Maybe there's some hiddensupply out there that we are not
aware of that there is a largerinflux of new supply of these
vessels that comes to market andwe were not anticipating and
that drives down rental rates orearning lower income.
(52:44):
Maybe the regulatory frameworkchanges, highly regulated
environments and the regulatoryframework could change.
Maybe the commodities thatthey're carrying corn, soybeans,
refined products maybe theyplummet in price, which then
affects the health of theoperators who are renting these
(53:04):
vessels.
Maybe they go out of businessand there's nobody left to rent
these vessels, and obviouslyyou're not earning income as the
owner.
So those are the questions we'reasking ourselves, and we just
have to get comfortable withthose if we're like, okay, we
(53:24):
can see how this is happening,we think the probability is low
enough, it's where we'recomfortable taking those risks,
and so that's where, again, thatfocus on the downside is really
paramount to our due diligenceprocess.
And then the asymmetry comes inagain, where you're being
(53:50):
overcompensated for that risk.
Again, if we can just keeptalking about the river vessel
strategy.
We understand those risks, wethink that they're non-zero
probabilities, but we think thatthe returns that we can achieve
more than compensate us forundertaking that risk, and so
(54:13):
that's really where it all comesdown to.
Dr. Matt Waller (54:17):
Eric, I'd like to shift gears just for a moment
and get a little more personalof a spin, right, but I know
that you had an interest inscience when you were younger,
and so you pursued a bachelor'sdegree in cell biology at the
(54:37):
undergraduate level and thenlater you went and got an MBA,
which is a very different field.
So I'm curious, based on mybackground, curious as to what
made you decide to get the MBA,but also in your current role,
(54:59):
does your undergraduate studiesin sciences, particularly in
biology, help you in any waytoday?
Eric Adams (55:08):
Sure, sure, I mean, if we start back at the very
beginning, not a lot of kidsgrowing up truly understand Lord
Patshwin from a young age.
And this is what I want to dofor the rest of my career.
And if you were to ask me at ayoung age what I want to do, I
(55:30):
would have wanted to playbasketball for the University of
Kansas and maybe be apaleontologist on the fossils
and rocks, and so I think it'skind of a romanticized but very
rare instance where anybodyreally knows from a young age
(55:51):
exactly what they wanted doingand go ahead and make that
happen and their career kind offalls in line.
So I was very, very much in thecamp of not really knowing what
I wanted to do.
But I had this fascination froma young age in science, all
different kinds of branches ofscience, like I said,
(56:11):
paleontology and geology, thebiology, zoology, you know, and
at an older age you know physicsand cosmology.
And I still do have those thosefascinations.
I still read, you know, reallynerdy books on black holes and
(56:32):
quasars and neutrinos and thingslike that that my wife is in
utter disbelief, that I botherreading, but it's really just a
fascination with how the worldworks around us.
You know, once I graduated, oronce I got close to graduating,
I realized I didn't want to goto med school, I didn't want to
(56:54):
be a lab researcher, I didn'twant to go into teaching and
biology, and so I had thisthought that I wanted to
transition to business.
You know, very vague well,maybe not vague but a very, you
know, all-encompassing, verybroad segment being business.
(57:17):
But that's what I decided to do.
I decided to then go tobusiness school and I really
gravitated towards finance andin my mind it probably tickles a
similar part of the brain.
You know science and numbersand math and analysis and you
know my degree, my undergraddegree was in cell biology and a
(57:41):
lot of that was digging in deepunderstanding the underlying
mechanics of a machinery ofcells and organelles and how
that builds up into the properfunction of tissues and organs
and organ systems and organismsand in a way I think that that
(58:03):
relates to investment, duediligence too.
And I think again kind oftickles a similar part of the
brain where, if I'm underwritinga company, you got to really
dig in deep under the hood andunderstand all the various
moving pieces and how thosemoving pieces contribute on up
(58:25):
to the health and thriving ofthe organism or the business in
this sense.
And so it was a very naturalevolution, if you will.
But my career, I think, reallydeveloped almost as a form of
take-ering.
You know, again, I don't thinkit's too common where you know
(58:48):
young professionals understandwhat they're going to want to do
with their career from theget-go, and I think it's very
important to try a lot ofdifferent things and you're
going to realize what you likeand what you don't like about
different areas where you mightfocus off your career.
And through that kind oftinkering, if you will, you find
(59:10):
out what it is you're trulypassionate about.
Because you know passion is.
You know it's my belief thatpassion is something that's
developed.
It's not necessarily inherent,you know.
If you don't, you know, I wouldtell college age kids or those
you know just out of college,like you don't have like a you
(59:30):
know hard and true passion rightnow, like don't fret about that
, you just need to get out there, find something that you're
good at.
More importantly, once youdevelop expertise, the passion
follows, and I think that's beenvery true for me.
I got into investing.
I developed that expertise withinvesting.
(59:52):
I kind of carved out a littlebit of niche within the private
markets and it's that satiricoverlooked underbanked
strategies.
And once I developed thatexpertise I became very
passionate about it, and sothat's kind of the long winding
(01:00:13):
road of how it ended up to whereI am.
Dr. Matt Waller (01:00:15):
You know you mentioned an interest in things
like black holes, and have you?
There's a author name and aprofessor named Lisa Randall.
She wrote a book called DarkMatter.
Eric Adams (01:00:31):
Have I read her.
Dr. Matt Waller (01:00:34):
Well, you know, I don't know much about her
books.
Eric Adams (01:00:37):
now, I know I don't think I've read any of her books
, but that sounds right on myalley.
Dr. Matt Waller (01:00:45):
Well, it's interesting because they didn't
know Dark Matter existed,because it doesn't interact with
light, yet there is a hugeamount of it out there.
Eric Adams (01:00:55):
You mean, you have more than more than ordinary
matter.
Dr. Matt Waller (01:00:57):
Yeah, exactly, and they figured it out based on
gravitational forces of it, butit is.
Eric Adams (01:01:09):
Yeah, I think it's the way that the galaxies spin.
They realized that in order tospin that that's given velocity
or momentum that there had to besomething else there that could
not be seen.
That's one way that they wereable to hone in on dark matter
(01:01:32):
as a theory, and they still haveyet to quite locate it.
Dr. Matt Waller (01:01:37):
Well, you know, I think in business sometimes
we can look at just the obviousand kind of overlook things that
aren't so obvious, kind of likedark matter.
One of my favorite quotes isculture eats strategy for
(01:01:57):
breakfast, and it's one of thosethings that you can't see it,
you know, but it has such animpact on how everything's
spinning in the company.
You know if you will, but thereis.
I noticed again in reading yourtheses that you do pay
(01:02:20):
attention to a lot of the thingsthat aren't so obvious on the
outside.
I think even your approach tothe thesis around risk return
asymmetric risk return is anexample of that.
It's challenging to figure out.
(01:02:42):
You've got to go at it from alot of different angles.
I do think sometimes scientificapproaches or an inclination
towards that opens your mind todigging in deeper from an
analytics perspective but alsolooking at things that might not
be so obvious and testinghypotheses around them.
(01:03:02):
I'm also curious, you know Inoticed you have a CFA
designation charter financialanalyst and I know that's a
challenging one to get.
You also have a CAIAdesignation.
I'm curious have those helpedyou in your career, especially
(01:03:23):
at Johnson Financial Group, andwould you recommend those kind
of designations to others?
Eric Adams (01:03:32):
Yeah.
So the CFA, yes, very difficultto attain, certainly, and for
that reason it has a little bitof a cache to it.
There's a little bit ofunderstanding that if you're
able to get that, it doesn'tnecessarily mean that you're the
smartest person in the world.
What it probably necessarilymeans is that you have the
(01:03:55):
ability to focus very intenselyand work very diligently towards
achieving a goal.
So, you know, I've done a lotof hiring in my day too, and if
I see somebody with the CFA, itat least tells me like, well,
perhaps they have a photographicmemory, but more likely they,
(01:04:16):
you know, are somebody thatworks very hard, that makes,
creates goals, that works verydiligently to achieving those
goals and really sticks to it.
And so that's a big part oflike, I think, what having a CFA
communicates, and now certainlyit communicates investment
(01:04:40):
expertise as well.
The CFA is a very broadcurriculum, and so you're
covering everything from youknow accounting to ethics, to
economics, to you know financialvaluation.
It covers a lot to currency,you know valuing, swaps and
(01:05:04):
derivatives, and there's no waythat any one career is actually
going to touch on all of those.
So chances are, if you're goingto get your CFA, you're going
to study a lot of things thatyou're never going to use.
Hopefully you study some amountthat you are going to use, and
I absolutely have used a lot ofwhat I've learned in the CFA,
(01:05:25):
but it's kind of you know, amile wide, inch deep is a good
way to describe it probably morethan an inch deep.
You know about mile wide.
You know, put the whatever youwant to, whatever you want to
say, because it does get in theweeds.
Certainly I can attest to that,but there's probably a lot in
there that any individual is notactually going to use in their
(01:05:47):
career.
But again, it communicates thatyou're really able to set goals
and work hard to achieve them.
The CAIA, or CHI it's a littlemore damn colloquially known.
That is more of a, you know, afoot wide, mile deep, where it
(01:06:10):
really does focus on alternativeinvestments, as the name
implies, and so it's hedge funds, it's real estate, it's private
equity and energy, etc.
And now that is actually thecurriculum of the CAIA is
(01:06:31):
something that I literally useevery single day when I'm
analyzing the opportunities thatwe're looking at, you know, on
behalf of our clients.
You know, when I was studyingfor that, you know, seven years
ago or so, I would be analyzinga private equity or real estate
(01:06:53):
opportunity during the day andthen I'd, at night, I'd be
studying, and I'd be studyingthe exact same topics that I was
, you know, underwriting duringwork that day.
So there was a lot of overlapin between that curriculum and
my day to day job, and so foranybody that is interested in
(01:07:14):
alternative investments, I thinkthe you know, caia does a great
job.
Cfa is a wonderful baseline forinvestment knowledge.
Caia drills down deeply intoalternative investments and for
someone such as myself, thestuff that I probably use more
frequently, I would say day today basis, I use topics that I
(01:07:38):
learned in the CAIA curriculum.
Dr. Matt Waller (01:07:41):
So one last question, Eric.
Can you shed some light on theprivate market investment
philosophy that you adoptedJohnson Financial Group in?
How does that differentiate youfrom other firms in the
industry?
Eric Adams (01:08:01):
So, as mentioned earlier, the genesis of our
company is as the single familyoffice that was started by our
CEO's grandfather to manage thewealth that he generated from
what was basically a privateequity holding company, and so
(01:08:21):
the roots of the business reallyis an alternative investments,
if you will.
And so we have that pedigree,we have that in our DNA.
Now, fast forward.
You know, the family office wasformed in the 70s, and so fast
forward 50 years all out totoday.
It really is a staple of ourinvestments philosophy and our
(01:08:45):
investment platform that weprovide to our clients.
So, and it really has to dowith access, it has to do with
expected future returns, it hasto do with efficiencies of
markets, and what I mean by allof that is now we do have our
(01:09:08):
allocations to the publicmarkets.
I mean more so than we do.
We've got more dollars in thepublic markets than we do in the
private markets.
But the way we approach that ispredominantly ETFs, mutual
funds that take a enhancedindexing, enhanced beta approach
.
It's not purely passive.
We do have some activemanagement within some of the
(01:09:35):
less efficient asset classes,like fixed income and small cap
and things like that.
But the public markets areundoubtedly and I'll never tell
you that they're perfectlyefficient, but they are
undoubtedly more efficient thanthe private markets.
What I mean by that is thatpeople all over the world have
(01:09:57):
access to a lot of the sameopportunities and a lot of the
same information.
To analyze those similaropportunities and my first job
out of my MBA program I was apublic equity large cap blue
chip stock analyst, and therewas you know I was looking at
(01:10:21):
companies like Walmart and Ciscoand Medtronic and these
companies that there are tens ofthousands of analysts across
the globe.
They're looking at the samecompanies and they're looking at
a lot of the same information.
And so what has led to myevolution of my career is the
(01:10:42):
recognition that I can providebetter value to my clients in
their portfolios.
By focusing on the privatemarkets.
I mean the big if is if you areable to tolerate a certain
amount of illiquidity, which isrequired in the private markets,
you know your money's locked up.
It's not a publicly tradedstock that you can buy and sell
(01:11:04):
every day if you want to.
If you can tolerate theilliquidity that the private
markets require, there arebetter valuations.
We were talking aboutvaluations earlier.
There is decreased access tothe same amount or the same
opportunities.
I was talking earlier about howa lot of my job was as a
(01:11:24):
glorified networker, and that'sthe reason I do that is to be
able to build out theserelationships that allow me to
access the most compellinginvestment opportunities and not
everybody out there is going tobe able to even know about.
And if they do know about it,you know I have the expertise to
underwrite it, because it's adifferentiated underwriting
(01:11:47):
skill set as well compared tothe public market.
So there's some differentconsiderations there, and so it
all comes back to how do webuild the best, most effective
portfolios for our clients thatare engineered towards achieving
whatever their goal is, if it'sgrowth, if it's income downside
(01:12:10):
protection.
You know there are thoseinvestment policy statements,
are catered to each clientindividually.
But how do I go about using allthe investment structures and
asset classes out there?
How do I construct the bestportfolio possible to meet those
(01:12:31):
client goals and objectives?
And we just believe that if youare able to tolerate a certain
amount of illiquidity, thathaving a healthy allocation to
private market opportunities isgoing to help you achieve those
goals more effectively.
Because of limited access,lower valuations, higher future
(01:12:54):
expected returns, lowerdrawdowns, lower correlation
across other asset classes,greater income potential within
the private markets relative tothe public markets, and it's
really that all encompassingphilosophy that has led us to
(01:13:14):
our current portfolioconstruction process.
Dr. Matt Waller (01:13:18):
Well, eric, I have really enjoyed this
conversation.
Your knowledge is very deep,clearly, and I've also enjoyed
just getting to know you throughour conversations and reading
your theses.
(01:13:38):
It's really commendable whatyou've accomplished there, so I
know your time is very valuable,so thank you so much for taking
time to dive into theseimportant topics with me today.
Eric Adams (01:13:52):
Thanks a lot, matt.
I appreciate it and I hope thelisteners find this interesting.
I've listened to several ofyour other podcasts that you've
recorded and I don't know howI'm going to stack up to some of
those fantastic intervieweesthat you've had on, but I did my
(01:14:13):
best and I appreciate theopportunity and thank you so
much.
Dr. Matt Waller (01:14:19):
If you're finding value in this podcast.
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We welcome any feedback orquestions related to the podcast
, as well as suggestions forfurther topics and guests.
(01:14:40):
You can leave your comments onour YouTube channel and rest
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Please also take a moment tocheck out our podcast sponsors,
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For more information onspecific topics, timestamps or
links to articles mentionedduring the podcast, head over to
(01:15:01):
mattwallerpodcastcom.
Welcome to the Matt Waller podcast, where we
look at success at theintersection of technology,
logistics, supply chain, retailand CPG, also known as the
retail value chain.
I want to clarify that thispodcast is distinct from my
responsibilities as a professorin the Sam M Walton College of
Business.
Nonetheless, it aligns with myaspiration to provide practical
(00:31):
insights to professionals andbusiness by showcasing companies
and people that can enhanceyour ability to manage, lead and
strategize and marketeffectively and the retail value
chain.
Before we dive into today'sexciting episode, I'd like to
thank our sponsor, new RoadCapital Partners.
New Road invests in proventechnology services and products
(00:54):
that serve unmet needs in themarketplace.
They look for companies insupply chain and logistics, as
well as consumer-orientedcompanies.
For more information, go tonewroadcpcom.
I would also like to disclosethat I am a strategic advisor to
New Road.
I'd also like to recognizepodcastvideoscom for the
(01:18):
services they provide for thesepodcasts.
I'm very pleased with theirservices and now, without
further ado, let's get into theexciting episode.
You're really going to learn alot from this podcast today
about alternative investments,and we're going to be talking a
lot about alternativeinvestments in transportation
(01:40):
and logistics.
We're going to be talking aboutasymmetric risk, return
profiles and many other topics.
Eric Adams is who I'minterviewing and he is director
of Private Capital and a partnerat Johnson Financial Group.
In this role, he's immediatelyresponsible for the formation,
(02:04):
execution and oversight of thefirm's private market investment
philosophy and strategies, andhe oversees the sourcing and due
diligence of private investment, which we talk about, along
with the construction andimplementation of clients'
private capital portfolios.
He has an undergraduate degreein cell biology and an MBA,
(02:30):
which we talk about, and we talkabout how that relates to what
he's doing today.
We also talk about the factthat he's got a CFA and a CIA
and how those are relevant towhat he does and whether or not
he recommends other people getthose kinds of designations that
are in this market.
But we talk about so manyinteresting things.
(02:52):
We talk about why transportationand logistics is a great market
to invest in.
In fact, eric has authored athesis article explaining why he
is investing in transportationand logistics companies.
(03:13):
It's a terrific paper.
It's very deep.
It goes into the history oflogistics and transportation,
but it also goes into why it'ssuch an attractive area for
investment.
So I think you're really goingto like this, eric.
Thank you so much for joiningme today on the podcast.
(03:35):
I really appreciate it.
Eric, would you mind telling usa little bit about what sparked
your interest in investing intransportation and logistics
companies?
Eric Adams (03:50):
Sure.
So I have the good fortune ofhaving a very fascinating job,
which entails primarily mescouring the investable universe
and trying to find compellingstrategies that we think might
(04:12):
benefit our clients' portfolios.
And we are generalists, and sowe're looking all over the asset
class spectrum all over theworld.
And so that's what eventuallyled me to transportation and
logistics is because, justthrough my networking, my
conversations which is a hugepart of my job it's just out
(04:34):
there talking to people smarterthan myself who have expertise
within specific areas of focus,and through doing that,
identifying areas of thetransportation and logistics
which are, it's a verydisconnected, fragmented area
(04:56):
that's very ripe for disruption.
There's a lot of white spacethere for innovation.
It's global in nature.
There's a lot of there's enoughthere to keep you interested at
all times.
It's tied into geopolitics, it'stied into climate, and so, just
(05:20):
from an intellectual curiosityperspective, it's something that
really piqued my interest.
And so, after that point, thisis just how I explore all
different kinds of industriesyou start networking, you start
talking to the experts in thespace and I start talking to
other investors LPs out therethat have invested in the space
(05:43):
already, some general partners,some private equity groups, etc.
To start to formulate a bit ofa thesis internally at our firm
and working with my team toreally hash that out, and so
what attracted us totransportation and logistics is
getting kind of what I alreadytalked about.
It's very fragmented, it's veryregional in nature.
(06:12):
All over the world there'sthere's room for disruption,
there's a lot of white space forinnovation and a lot of
instances there's some verystrong downside protection
available as well, which issomething that we're always
looking at first, frankly, andall of those things and just
(06:35):
some conversations with somevery intelligent investors in
the space, got me excited.
Dr. Matt Waller (06:40):
So when you talk about protection from the
downside, how is that providedby the logistics sector?
Eric Adams (06:48):
Well, it certainly depends on the strategy.
Legibla, there are riskier,certainly, strategies within
logistics.
If you're investing in startups, if you're investing in growth
companies that are not yetprofitable, that's going to be a
little bit farther out on therisk spectrum.
However, there are and thoseare appropriate for client
(07:11):
portfolios as well, probably toa smaller extent that some of
the more downside protected butlower expected return strategies
, and some of those that we'velooked at within logistics would
be industrial real estate andwarehouses for last mile
delivery, et cetera, and sothat's real estate.
(07:33):
It's tangible.
There's tax benefits toinvesting.
Similarly, we invested inmaritime shipping and river
boats cut boats, tow boats, usriver system and, again similar
(07:56):
to real estate, those aretangible, real assets that
provide real value.
It's not going to go up in thesmoke like a startup company
could go to zero.
We think this is real value,that the very least provides
some amount of scrap value, butthere are very high demand and
there's a low supply of thesevessels and there is the tax
(08:19):
benefit to investing in them.
So there's a very strong amountof downside protection on that
specific strategy.
But again, it certainly runsthe spectrum from higher risk
but potentially higher returning, to more downside protection,
lower risk and lower returns.
(08:39):
But what we're always lookingfor is what we call and I'm kind
of rambling at this point justa touch of a tangent, but it's
really the asymmetry of the riskreturn characteristics.
And so what I mean by that isyou are overcompensated for the
(09:01):
amount of risk that you areundertaking.
Said a different way, theamount of returns that you're
able to generate there is, aboveand beyond, really, the risk
that you are undertaking.
Dr. Matt Waller (09:14):
That's really a great point, and every time
there's been a recession, I meantransportation decreases a bit,
but boy, it's always a greattime to invest in transportation
because it comes back.
Product has to move, peoplehave to survive, and I remember
(09:36):
the first time I saw that in abig way at 9-11, around that
time frame and 2008, 2009, andeven recently, which was a
really because of the pandemic.
It was an extreme example, butit just reminds us that people
(09:59):
still have to eat, they needproduct.
Products can move.
Eric Adams (10:05):
Absolutely.
Dr. Matt Waller (10:09):
And sometimes if things get too expensive or
let's say that the economy goesdown, there's some modes that do
really well, like intermodal.
People start shifting more tointermodal because it is less
expensive.
They're willing to trade offmaybe lead time or lead time
(10:32):
variability, uncertainty for alower rate.
Eric Adams (10:38):
Yeah, kind of as I was talking about earlier.
It's such a wide-ranging,global, varied space and it's
exciting in the sense that it'svolatile and it is subject to
geopolitical uncertainty andprobably seen recently about how
(11:00):
the Red Sea a lot of shippinghas basically shut down through
the Yemeni Houthi rebels and sothe Suez Canal there's extremely
low volumes right now.
The Panama Canal is alsobecause of climate.
(11:22):
There is a drought down thereand the Panama Canal cannot
handle the volumes that they useand so it kind of sounds risky
or scary potentially as aninvestor from the outside.
And you also see the volatilityand spot-frait pricing as well.
And since we're talking aboutglobal shipping, it was $20,000
(11:46):
or so to ship a box, I guess, acouple of years ago now, and now
it's $2,000, $3,000.
So a lot of volatility withinthis space.
But there are ways to approachit that are a little bit more
risk-aware, if you will, whereyou're less exposed to
spot-pricings and less exposedto some of those geopolitical
(12:10):
risks.
But there is certainly noshortage of things to pay
attention to.
Dr. Matt Waller (12:15):
I agree it is such an interesting space and if
you're engaged in it, you windup paying attention to all kinds
of global issues, as you werementioning, but you also pay
attention to financial issues,raw materials costs.
There's just so much involvedin supply chain and logistics
(12:38):
and it's also interesting.
I know you and I have talkedbefore about how logistics and
supply chain has really changedthe world in so many different
ways.
So many inventions like thecontainer and standardization of
containers.
Eric Adams (12:59):
Absolutely.
Yeah, there's a great book, theBox by Levinson, and people
under-appreciate, I think, justhow much transportation and
logistics.
Yeah, I've been intricatelyinvolved in the history of the
world and humanity, whether thatbe in the course of military
(13:24):
operations, and there's somegreat books out there that I've
read talk about the Civil Warand how a big reason for the
eventual North victory isbecause they excelled at
transportation and logisticswithin their military operations
, whether that's soldiers, menor material.
(13:49):
They excelled at that and hadfar greater capabilities in the
South and that is one of themain reasons why the North was
victorious.
And so military operations,really, since the beginning of
humanity, but also obviously,economic development too, and
(14:12):
containers and standardizationof containers for global
shipping.
And anyway, that's a topic thatcould be expounded upon for
hours on end, but it's almosttaken for granted, I would say,
by, I guess, the casual observer.
Because, yeah, sure, you've gotto get things from here to
(14:34):
there and you've got to sourcematerials and manufacture
something and ship that productsomewhere else, and that's
intuitive, it's easier to wrapyour head around, but the
complexities involved in thatentire process, I think, is
something that's probably takenfor granted by a lot of casual
(14:54):
observers out there and there'sjust a lot of investable
opportunities within that spacebecause there are so many
economic tie-looms.
Dr. Matt Waller (15:04):
So, eric, what are some methodologies or
strategies you employ toactually find companies to
invest in this space?
We've been talking about whyyou were interested in the space
at a strategic level, but andyou know, there is so much white
(15:25):
space, there's so muchopportunity.
But at some point then you'llhave to say, ok, now, which
firms do I invest in?
So how do you go about that?
Eric Adams (15:35):
Well, it starts with sourcing, obviously, and the
sourcing of these opportunitiesis twofold.
It's really research andnetworking.
I mean we're doing a lot ofresearch on R&D to really build
out these PCs, as I was talkingabout just a few minutes ago,
(15:55):
whether that's aroundtransportation and logistics, or
you know, I talked to yourecently about how we've done a
lot of research in media andentertainment recently as well,
and so there's a lot of researchon the front-ends.
But I'm going to commensuratewith that.
It's also just I mean it soundssuper basic but it's a lot of
(16:15):
networking.
It's really me and my teamgetting out there and again
meeting the experts, meeting thepeople that are smarter than we
are, that are day-to-dayintimately involved within these
areas, talking to them aboutwho are the groups we need to be
talking about that have themost compelling strategies with
(16:39):
a real edge to their investmentapproach that others are going
to have difficulty mimicking.
What are the companies outthere that are providing
children's rupture anddisruption that's a word that
has been buzzy over the last 10to 20 years but which companies
(17:02):
are providing that trueinnovation, that true disruption
that creates a mode aroundtheir business and that
competitive advantage and shouldprovide them with significant
future growth, and so a lot ofit is in that sourcing just on
the front-end, which is a lot ofrelationship building kind of
alongside research.
(17:23):
Then when we identify anopportunity, you know myself and
my team at John's FinancialGroup, we will.
We have a very highly structureddue diligence process,
four-tiered due diligenceprocess, where we're saying
about 500 to 600 deals a yearwithin the private investment
(17:44):
space, because that's where wespend a lot of our time is
within the private markets,that's across private equity and
private credit and real assets,all these different asset
classes.
And then we have a very highlystructured process of how we go
about whittling that number down500 down to 10 to 12
(18:07):
opportunities per year that weare offering to our clients.
And so, yeah, that's a full duediligence process.
I mean that's conversations andmeetings with the sponsors.
It's basically collecting allthe data we possibly can on the
pool, its background checks, itstrack record.
(18:28):
It's all the material,marketing material that they
issue, but a lot of industryresearch as well, a lot of
reference calls.
Of course, there's thefinancial modeling, both
scouring their financial modelsor creating our own internally
legal review, legal talk, reviewand it's a pretty intensive
(18:55):
process that for any givenopportunity, probably is going
to take us a few months toidentify an opportunity and then
eventually approve it for ourclients, and so it's a lot of
work.
But it's all very fascinatingbecause again in a very
fortunate position of reallyjust trying to source and
(19:17):
identify and vet the mostcompelling opportunities that we
can on behalf of our clients.
Dr. Matt Waller (19:24):
So, eric, how do you structure today, how do
you manage and prioritize youractivities regarding
investment-related activities?
Eric Adams (19:38):
That's a great question.
It's a constant battle.
The prioritization is somethingthat you have to constantly
focus on.
I just read something from aquote from Steve Jobs recently.
But our prioritization focus isparamount, and the ability to
(20:02):
say no to a lot of veryinteresting high value projects
in order to focus on what is thenumber one most important
project is a skill and adiscipline that not too many
(20:24):
have mastered, and my questionwhether or not I've mastered
that as well.
So, as far as prioritizationgoes, my day outstructured.
There's an internal meetings,you know, several per week with
my team, with the investments towhere we are identifying new
(20:45):
opportunities that we'resourcing or we are covering
where we are in the duediligence process across many
deals that we are underwritingat the time.
So there's a lot of teamwork, Iwould say at our firm.
That's something that weemphasize across all of the
different teams within thecompany and that's certainly the
case within the investmentsteam.
(21:06):
So we are there's a lot ofcollaboration, a lot of
communication and a lot of ourtime is structured underwriting
these various opportunities andtalking to the sponsors, setting
up those conversations andmeetings or just doing the dirty
work of that ground levelunderwriting, and so that's that
(21:30):
used to be a lot much largerpart of my job back when, you
know, we were really buildingthe firm and I was doing a lot
of that ground levelunderwriting myself.
But now I have a very talentedteam that helps me out and a lot
of that, and so my day isstructured more along the lines
of oversight and kind of makingsure that we're pushing the ball
(21:54):
forward on these various duediligence projects that we're
working on and staying focused.
You know, something that we'realways, you know, focusing on is
which ones are the best fitsfor our clients, you know early
on in the process and which onescan we say no to quickly so as
not to spend on due time onthose.
(22:17):
You know, but a lot of my jobwas also spent, as I said,
networking.
A lot of my day is structured,just calling on other investors,
you know in similar roles asmyself, at different firms,
talking to them about what areyou looking for 2024,?
You know, what strategies doyou think are set up nicely in
(22:39):
this economic environment tobenefit from current market
dynamics?
What specific strategies areyou looking at?
What should I be looking at?
And so a lot of my time isstructured also, which is
networking and talking to otherintelligent investors out there,
and then I also structure agood amount of my time really
(23:05):
researching, thinking andproducing.
You know what we call.
You know thought leadershippieces, and then that goes into
you know the time I've spentwith the transportation
logistics memo, which I sharedwith you, with the entertainment
media and entertainment memo Ijust completed recently, and so
there's a thought leadershipcomponent to my tie as well, not
(23:30):
to mention speaking withclients, telling them how their
previous and best words aregoing and pitching them on new
investment opportunities, andtalking to prospective clients
that really want to get a deepunderstanding of our investment
platform, our philosophy, ourapproach, etc.
So it's enough to keep me busy.
Dr. Matt Waller (23:53):
I bet.
Well, I know that, of course,I've read a couple of your
theses, but regarding yourinvestment thesis around
transportation logistics andwe've really touched on this
indirectly already a little bitbut how did you go about
(24:13):
formulating that thesis and howis it involved to fit the
current marketplace?
Eric Adams (24:22):
Sure, I laugh only because transportation and
logistics is just constantly influx.
I mean it's amazing if you lookback as I know you have on that
memo that I wrote a little overa year ago I mean how much has
changed in that time isunbelievable.
(24:43):
I talked just a few minutes agoabout how it costs $20,000 to
ship a container overseas a yearago and now it's $2,000, $3,000
, whatever the current number isright now.
So things change drastically.
And so you talk about how mythesis has evolved.
(25:08):
You know just the test thatconstantly be evolving with,
along with the marketplace.
But you know how I go about.
Formulating a thesis is just alot of research, which is
difficult.
(25:28):
You know this is all kind oftied together because you talk
about prioritization and youreally have to set aside some
time or prioritize research anddue diligence and it's pretty
easy to just answer emails allday and it's not really the
(25:50):
highest value activity butreally setting aside some time
to create a little brain spaceto do some research.
And so you know I read severaldifferent books, countless
industry reports, countlessconversations with industry
participants to make sure I wasseeing things from all angles.
(26:13):
And in asking them, who else doI need to be talking to?
Can you share with me any ofyour industry research?
And you know what companies doyou think are doing the most
exciting things within thisspace and following.
You know, tracking down thoseleads constantly, and so it
(26:34):
takes some time, some diligenceand brain space and some dogged
determination at times and itcreates, you know, certainly an
emphasis on prioritization of myday.
But that's that's what I thinkis most exciting about my job is
(26:54):
being able to spend that timekind of diving deep into
different sectors to reallyformulate these, these things,
so that we can, so that I canbuild a vision for where we need
to be focusing our time asinvestors, on behalf of our
(27:16):
client dollars.
Where do we need to be focusingour time, you know, trying to
locate those attractive riskreturn parameter opportunities
for our client portfolios, andso it's just.
It's just a.
I think it's very appropriatethat you just talking about
(27:37):
prioritization before you askthis question, because it's a
lot of time.
Prioritization because you haveto have the headspace to really
take through these, thesetopics.
Dr. Matt Waller (27:48):
Well, I could tell when I read your thesis on
logistics and transportationthat you had done a lot of
research, deep research, becauseyou looked at the history of
the industry.
You looked at inventions thathave changed the industry.
You looked at each of the modesbut I don't know how common
(28:15):
that is.
I've read lots of theses likethat, but I really liked how you
didn't use just a surface levelapproach, you actually took a
deep dive.
I would think investors wouldreally appreciate that.
Eric Adams (28:35):
That's the hope.
Hopefully, my clients gotsomething out of that and, at
the very least, took comforts,knowing that we're doing the
deep work to try to really flushout these theseses.
You know, I think a lot of whatit is again, and I know I've
(28:59):
touched on this already severaltimes, but I can't emphasize it
enough.
I oftentimes describe myself as,at times, a glorified networker
, and it's just something that Ispend a lot of time on and I
(29:21):
find a ton of value in againjust finding people that are, in
this case, transportationlogistics on a day-to-day basis
and our experts and operatorsand investors, and spent their
careers in the space.
Because I haven't I'm not goingto be an expert in not only
(29:42):
transportation logistics butother industries in which we
invest.
I'm more of a forest guy asopposed to the trees guy, but
it's incumbent upon me to knowall the smartest trees out there
.
If you will, if you'll allow meto continue this analogy but
(30:05):
and so that's what I spent a lotof my time doing that really,
really helped me with that memoin transportation logistics
space and being able to identifywhat is really important in a
way that I wouldn't have beenable to do if I just on my own,
had tried to research the space.
Dr. Matt Waller (30:26):
So, when evaluating potential investments
, what unique aspects andopportunities Within a company
are you primarily looking for?
Eric Adams (30:40):
Yeah, you know, as mentioned, we're always really
looking at the downside firstwhat's going to happen if things
don't go to plan, because Inever go to plan.
So we're stress, testingfinancial models and projections
, we're creating scenarioanalyses to understand, you know
(31:05):
, what happens if things don'tgo, don't go as planned, and so
we're always very much Focusedon the downside first, because a
really a big part of my job isI'm not gonna pick all the
winners, but we do need to avoid, you know, the losers as much
(31:25):
as we possibly can.
We need to.
You know, maybe there's someopportunities that don't make as
much money as we had hoped, butwe need to avoid those are
losing money and we have a verysolid track record of doing so,
unfortunately, and so downslideis is really where we start, and
(31:46):
Then you know after that,certainly there's your product
market fit.
There is the team and theirexperience and expertise and
their track record.
There's understanding, theunderlying technology and the
team, the, the organizationalstructure.
There is understanding,obviously, the competition
(32:09):
within the space.
You know what is the need then,excuse me, the need that their
product or services are meeting.
How are they disrupting thespace?
Or, if they're not, you knowexplicitly disrupting the space.
How are they just doing thingsbetter than others are doing it
and what advantage do they haveover their peers within the
(32:30):
industry?
You know, in the structure ofthe investment is something that
we spend a lot of time on.
You know where are we in thecapital stack, what kind of
structures or liquidationpreferences, what kind of
governance, you know, is there?
What kind of legal protectionsdo we have?
Etc, etc and then of course,all of the financial
(32:52):
underwriting and you know thegrowth of.
You know revenues and expansionof margins and you know
earnings growth, etc.
Evaluation you know valuation issomething that we're very
focused on.
You know whether that be, youknow, if it's an earlier stage
(33:14):
Opportunity, you're probablyvaluing it up revenue and maybe
it's a higher valuation but at areasonable price, is something
that we would look for.
If it's a later stage,profitable, cash-blowing company
, probably valuing it off amultiple of earnings and hoping
to find something.
You know competitions increasedall over the marketplace.
(33:38):
Valuations have gone upsignificantly over the last five
to ten years and they've comeback a little bit In this rising
interest rate environments thatwe've seen in the last couple
of years, but they haven't comedown Significantly.
Kind of depends on where you'relooking like early stage
venture.
Those valuations have certainlycome down more, but we're
(34:01):
whether or not it's a screamingdeal, we're looking for a
attractive valuation and thatthat kind of gets to.
Where we focus a lot of our time, and that's what we describe
Oftentimes, is the lower middlemarket and these are, you know,
companies that you know.
(34:22):
Maybe enterprise value of 50 to200 million or something along
those lines.
Everybody's definition of thelower middle market and we're
middle market is different.
Your earnings of perhaps youknow, 10 million, 50 million or
something all around those lines.
You know these are companiesthat are and it depends on the
(34:44):
strategy.
I mean they might not be thatbig if they're a little bit
earlier stage.
But just speaking ingeneralities here, you know
these are companies that Mayhave been around for a long time
, may have very proven businessmodels and very capable teams,
maybe or may or may not beprofitable but hopefully have
(35:08):
de-risk from a technologyperspective and but are too
small To gain the attention ofmuch larger investors in the
space.
You know we can throw out manysuch examples of Blackstone or
KKR, apollo or Carlisle or TPG,who are much larger investors in
(35:31):
the space and Are throwingaround big, big bucks that
they've raised and it just isnot worth their time to focus on
some of these smalleropportunities.
So they end up competing witheach other in the upper end of
the market and dreaming ofvaluations which then compresses
future expected returns.
So if you're looking for someBetter valuations with still
(35:55):
great companies with higherexpected future returns, where
you're going to find those is onthe low end Of the market.
So kind of a rambling oflog-winded Response.
Dr. Matt Waller (36:06):
But the trend of paint a picture here, yeah,
that's great and if you wouldn'tmind, could you give some
specific examples of investmentsand the transportation area and
Maybe elaborate a little bit onwhat led you to those
investments.
Mm-hmm, Sure well I.
Eric Adams (36:27):
Mentioned earlier, that we're invested in a
riverboat strategy and those aretow boats, tugboats and barges
on the US river system,primarily the Mississippi River
system and the Gulf intercoastalwaterway, and so these are
(36:49):
carrying essential Commodities.
I mean these are its corn andsoybeans, you know, food stuffs.
You know, obviously that'simportant for the economy but
it's important for society,obviously In the creation of
(37:10):
food and it's something thatobviously is very important to
all of us.
But also energy, refinedproducts, chemicals, really
these, these foundational piecesof food, these foundational
pieces to the economy andmanufacturing.
And so there's a lot ofdownside protection in the
(37:30):
essential nature of what thesevessels are carrying.
I mean, you know, on top ofthat, it's a really unique
Circumstance right now withinthe space because it's a really
Inbalanced supply demand dynamicwhere the supply of these
vessels is very, very low andthere's a lot of older vessels
(37:53):
On the river that are going tohave to be retired but there's
really not enough new vesselsbeing created to fill that gap
from the retired vessels.
So what you get is a shrinkingsupply, strinking inventory of
these tow boats, tugboats, butvery, very high demand still
(38:17):
because these vessels aremission critical to the
operators and again operatorsare ad companies, energy
companies, chemical companies.
They're absolutely missioncritical and Traveling.
Shipping your products overwater is a vastly more expensive
or, excuse me, vastly cheaperthan shipping my truck or
shipping by rail and and sothere's a lot of downside
(38:42):
protection to the strategy andthere's a lot of support for
Rental prices to these operatorsif you're the owner and rental
growth, it's very Inflationprotected as well in those
rental prices and it's really anincome strategy and this isn't
Really sexy venture.
Like returns.
You're not going to get a 10x,20x type return, but what you're
(39:09):
going to get is double digitincome Hitting your account if
you're an investor, you know, ona quarterly basis, and that
income comes with tax sheltersas well, because these are real
assets that have favorable taxtreatments and even though rates
have come up Significantly overthe last couple years, double
(39:31):
digit you know talking 12% typeyield is still relatively very
attractive, you know, withrising rates across other
classes and especially with thattax shelters.
So that's a great example of uslooking for that downside
protection and we feel as if weare being overcompensated for
(39:52):
the amount of risk which we areOvercompensated for the amount
of risk which we are undertaking.
So that's a that's a greatexample, you know, another
couple examples on the riskierside of the spectrum would be
investments in some of thetechnological Disruptions that
(40:14):
are going on within the space.
I mean, if that's trucking fleettechnologies or freight
logistics companies or warehousemanagement systems and, as you
know better than I do, givenyour experience in the space,
you know there's so many of theof logistics you know is still
(40:37):
handled by phone calls andspreadsheets and Handshakes.
And then there's a lot of whitespace to innovate, to create
efficiencies, to create thetechnological scalability Within
these spaces that'll createbetter experiences for carriers
(40:58):
and shoppers and eventuallyconsumers, in what has
historically been, you knowthat's fairly, you know,
fragmented kind of Area prone tohiccups and susceptible to
exogenous events and disruptions.
So we're also investing in someof those higher risk and higher
(41:21):
expected return opportunitiesas well.
Dr. Matt Waller (41:27):
So you have a Interest primarily in the middle
lower metal market.
Oh, you try to avoid earlystage startups, and You've
touched on a little bit of whythat is, but would you mind
elaborating on it just a bitsure?
Eric Adams (41:52):
it really comes down to.
You know we really focus oninvesting within the private
markets and the cats kind of outof the bag as far as investing
in the private market show.
When we started this and theircompany really the genesis of
the company is a private equitystyle holding company.
(42:13):
That you know goes back 70years and you know, back then
the private markets andalternative investments were
truly very alternative and noteverybody had exposure to.
You know private equity, realestate, even.
(42:34):
You know private credit, energy, etc.
But as the private markets haveevolved over time, there's and
then this is a good thingthere's greater access to the
market for, you know, high networth families or you know
really that kind of retailwealth client.
(42:57):
There's greater democratizationwithin the space, and that's a
good thing.
But what it has created isgreater competition and and the
reason we focus on the lowermiddle market is there is less
competition in that space.
And again, I'm not here to tellyou that there's no competition
, because there certainly is.
But when you start looking upmarket, you start running into a
(43:22):
lot of those big front Imentioned earlier that are
competing with each other anddriving up valuations and
therefore compressing futureexpected returns.
What we're looking forcompanies that are just as
strong, just as healthy, withjust of exciting growth
prospects, that are Gonna tradeat lower valuations.
And so we're doing this as away to really benefit our
(43:46):
clients In their portfolios byfinding those higher expecting
returns and out taking on a Aconvinced or a level of
increased risk.
And so really, where we'refocusing on in the lower middle
market and within differentsubsectors and different
(44:08):
industries is what areas haveReally compelling investment
fundamentals but are currentlyUndercapitalized and are
experiencing a less competitionfrom capital Than some other
spaces might be, and so that'swhere I spend a lot of my time.
(44:30):
You know where, which areas areunderbanked, which, which areas
maybe have some complexitypremium to them.
Meaning, like your commontypical investor Maybe looks at
transportation and logistics,for example, and says, well,
that seems messy and complicatedand you know, I'm maybe gonna
(44:54):
stick to investing in apartmentsor something that's a little
bit easier to run my head around.
Where is that complexitypremium?
That again keeps a lot ofcapital out, that keeps
competition for opportunitieslower, and again it all comes
back to valuation and Thereforeexpected future returns that our
(45:17):
clients can expect to achieve.
Dr. Matt Waller (45:20):
Make sense.
Now, I know that you alsoinvest alongside private equity
firms and you invest in privateequity firms funds, and when you
, when you invest alongside them, you're investing in the same
things they're investing in, andsometimes you invest in private
(45:42):
equity funds per se.
Would you mind talking a littlebit about that strategy?
Eric Adams (45:49):
Absolutely so.
You're exactly right.
We will invest in privateequity style funds, commitment
structures, drawdown vehiclesthat draw down your commitment
over a three to five yearinvestment period, and that
private equity fund styleapproach, and we will also
(46:09):
invest directly into businessesas well, and we will also invest
directly into real estate andsome other sectors and asset
classes.
Where it oftentimes starts iswe will invest in a private
equity firm and one of theirunderlying funds that they're
(46:32):
raising and you know we've beendoing this, you know long enough
out of where we have a reallystrong stable of repeat managers
that we've worked with and withus with for a long time.
But we're always out theretrying to find new relationships
as well with great groups outthere that have some really
(46:54):
interesting compellinginvestment strategies where
they've really carved out anedge.
So we're always on the lookafter new relationships too, and
so where a lot of our investingdirectly into businesses comes
from is trying to co-investingalongside these private equity
(47:15):
fund commitments that we have.
So oftentimes these privateequity funds will have a great
opportunity.
They're going to invest throughtheir fund, but the size of the
opportunity is large enough towhere they can't write the check
, the entire check out of theirfund or else they'd be running
(47:38):
up against some concentrationlimits within their fund.
So they might have someadditional capacity to invest in
an underlying company that theywill then offer out to their
limited partners, theirinvestors, and oftentimes you're
able to invest in veryfavorable economics.
Maybe, hopefully.
(47:58):
No management fee, no carriedinterest, and it's just a direct
investment on the capital stackof this underlying business.
And that's a great way toaverage down the fee burden that
you as an investor areexperiencing across the fund and
(48:18):
the co-investments when youblend the average fees all
together and also double down onthe opportunities that you as
an investor have a highestconviction.
And we're very selective.
If we're not investing in allthe co-investments that our
private equity fund sponsors areoffering us, we are selecting
(48:40):
which ones that we feel highlyconvicted about and we do want
to double down on our exposureabove and beyond what we are
getting through the initialprivate equity fund investments.
So that's been a great way tooffer some very compelling
opportunities to our clients toinvest directly into a really
(49:01):
exciting operating business.
Dr. Matt Waller (49:04):
You know earlier you mentioned that you
look for asymmetric risk returnprofiles in your investment and
that seems like a really gooddiscipline to have in thinking
about investing.
Would you mind speaking to thata little bit more?
Eric Adams (49:23):
Sure, sure, it's first and foremost getting an
understanding if things go wrongwhich they do sometimes.
Right, investing is literallyat its core.
Trying to is investing into anopportunity that is dependent
(49:45):
upon future outcomes, and noneof us know what the future holds
.
And so there, if you're makinghundreds of investments, as we
have over the years, there aregoing to be some that aren't
going to meet expectations.
Well, you know, luckily, thevast majority of ours have, but
there's going to be those.
That's a nature of investing.
Future is unpredictable and so,knowing that and being
(50:07):
intellectually honest about that, you need to be prepared for
what that downside case mightlook like and understand as best
one can.
If you aren't able, the companyis not able to meet their
targets and maybe lose his money.
(50:28):
What is the salvage value ofthis investment?
Is it a real asset?
That alluded to real assetsseveral times on this call.
Is there some salvage valueBecause it's a real property
that can be utilized forsomething that might create
(50:48):
value?
If it's an operating business,what assets do they have on
their balance sheet that couldbe sold to generate some amount
of value?
Would this company be sold atwhat valuation?
Still, if their return andearnings targets are not met and
(51:10):
really modeling those outs,creating sensitivity analyses
and really focusing on thatdownside.
And that's really where it allbegins.
So we do something that I thinkis kind of interesting within
(51:31):
our investment committee is whenwe are coming to a final vote
on an opportunity that we may ormay not take to our clients.
We ask ourselves we call it apre-mortem as opposed to a
post-mortem.
So let's look out five years inadvance, five years ahead, and
(51:54):
let's pretend that thisinvestment did not go to plan.
What are the reasons, what arethe most likely reasons why that
happens?
And that's just kind of aninteresting thought exercise to
go through.
You can use that riverboatastrology.
(52:21):
What are the things that couldcause that to go wrong?
Maybe there's some hiddensupply out there that we are not
aware of that there is a largerinflux of new supply of these
vessels that comes to market andwe were not anticipating and
that drives down rental rates orearning lower income.
(52:44):
Maybe the regulatory frameworkchanges, highly regulated
environments and the regulatoryframework could change.
Maybe the commodities thatthey're carrying corn, soybeans,
refined products maybe theyplummet in price, which then
affects the health of theoperators who are renting these
(53:04):
vessels.
Maybe they go out of businessand there's nobody left to rent
these vessels, and obviouslyyou're not earning income as the
owner.
So those are the questions we'reasking ourselves, and we just
have to get comfortable withthose if we're like, okay, we
(53:24):
can see how this is happening,we think the probability is low
enough, it's where we'recomfortable taking those risks,
and so that's where, again, thatfocus on the downside is really
paramount to our due diligenceprocess.
And then the asymmetry comes inagain, where you're being
(53:50):
overcompensated for that risk.
Again, if we can just keeptalking about the river vessel
strategy.
We understand those risks, wethink that they're non-zero
probabilities, but we think thatthe returns that we can achieve
more than compensate us forundertaking that risk, and so
(54:13):
that's really where it all comesdown to.
Dr. Matt Waller (54:17):
Eric, I'd like to shift gears just for a moment
and get a little more personalof a spin, right, but I know
that you had an interest inscience when you were younger,
and so you pursued a bachelor'sdegree in cell biology at the
(54:37):
undergraduate level and thenlater you went and got an MBA,
which is a very different field.
So I'm curious, based on mybackground, curious as to what
made you decide to get the MBA,but also in your current role,
(54:59):
does your undergraduate studiesin sciences, particularly in
biology, help you in any waytoday?
Eric Adams (55:08):
Sure, sure, I mean, if we start back at the very
beginning, not a lot of kidsgrowing up truly understand Lord
Patshwin from a young age.
And this is what I want to dofor the rest of my career.
And if you were to ask me at ayoung age what I want to do, I
(55:30):
would have wanted to playbasketball for the University of
Kansas and maybe be apaleontologist on the fossils
and rocks, and so I think it'skind of a romanticized but very
rare instance where anybodyreally knows from a young age
(55:51):
exactly what they wanted doingand go ahead and make that
happen and their career kind offalls in line.
So I was very, very much in thecamp of not really knowing what
I wanted to do.
But I had this fascination froma young age in science, all
different kinds of branches ofscience, like I said,
(56:11):
paleontology and geology, thebiology, zoology, you know, and
at an older age you know physicsand cosmology.
And I still do have those thosefascinations.
I still read, you know, reallynerdy books on black holes and
(56:32):
quasars and neutrinos and thingslike that that my wife is in
utter disbelief, that I botherreading, but it's really just a
fascination with how the worldworks around us.
You know, once I graduated, oronce I got close to graduating,
I realized I didn't want to goto med school, I didn't want to
(56:54):
be a lab researcher, I didn'twant to go into teaching and
biology, and so I had thisthought that I wanted to
transition to business.
You know, very vague well,maybe not vague but a very, you
know, all-encompassing, verybroad segment being business.
(57:17):
But that's what I decided to do.
I decided to then go tobusiness school and I really
gravitated towards finance andin my mind it probably tickles a
similar part of the brain.
You know science and numbersand math and analysis and you
know my degree, my undergraddegree was in cell biology and a
(57:41):
lot of that was digging in deepunderstanding the underlying
mechanics of a machinery ofcells and organelles and how
that builds up into the properfunction of tissues and organs
and organ systems and organismsand in a way I think that that
(58:03):
relates to investment, duediligence too.
And I think again kind oftickles a similar part of the
brain where, if I'm underwritinga company, you got to really
dig in deep under the hood andunderstand all the various
moving pieces and how thosemoving pieces contribute on up
(58:25):
to the health and thriving ofthe organism or the business in
this sense.
And so it was a very naturalevolution, if you will.
But my career, I think, reallydeveloped almost as a form of
take-ering.
You know, again, I don't thinkit's too common where you know
(58:48):
young professionals understandwhat they're going to want to do
with their career from theget-go, and I think it's very
important to try a lot ofdifferent things and you're
going to realize what you likeand what you don't like about
different areas where you mightfocus off your career.
And through that kind oftinkering, if you will, you find
(59:10):
out what it is you're trulypassionate about.
Because you know passion is.
You know it's my belief thatpassion is something that's
developed.
It's not necessarily inherent,you know.
If you don't, you know, I wouldtell college age kids or those
you know just out of college,like you don't have like a you
(59:30):
know hard and true passion rightnow, like don't fret about that
, you just need to get out there, find something that you're
good at.
More importantly, once youdevelop expertise, the passion
follows, and I think that's beenvery true for me.
I got into investing.
I developed that expertise withinvesting.
(59:52):
I kind of carved out a littlebit of niche within the private
markets and it's that satiricoverlooked underbanked
strategies.
And once I developed thatexpertise I became very
passionate about it, and sothat's kind of the long winding
(01:00:13):
road of how it ended up to whereI am.
Dr. Matt Waller (01:00:15):
You know you mentioned an interest in things
like black holes, and have you?
There's a author name and aprofessor named Lisa Randall.
She wrote a book called DarkMatter.
Eric Adams (01:00:31):
Have I read her.
Dr. Matt Waller (01:00:34):
Well, you know, I don't know much about her
books.
Eric Adams (01:00:37):
now, I know I don't think I've read any of her books
, but that sounds right on myalley.
Dr. Matt Waller (01:00:45):
Well, it's interesting because they didn't
know Dark Matter existed,because it doesn't interact with
light, yet there is a hugeamount of it out there.
Eric Adams (01:00:55):
You mean, you have more than more than ordinary
matter.
Dr. Matt Waller (01:00:57):
Yeah, exactly, and they figured it out based on
gravitational forces of it, butit is.
Eric Adams (01:01:09):
Yeah, I think it's the way that the galaxies spin.
They realized that in order tospin that that's given velocity
or momentum that there had to besomething else there that could
not be seen.
That's one way that they wereable to hone in on dark matter
(01:01:32):
as a theory, and they still haveyet to quite locate it.
Dr. Matt Waller (01:01:37):
Well, you know, I think in business sometimes
we can look at just the obviousand kind of overlook things that
aren't so obvious, kind of likedark matter.
One of my favorite quotes isculture eats strategy for
(01:01:57):
breakfast, and it's one of thosethings that you can't see it,
you know, but it has such animpact on how everything's
spinning in the company.
You know if you will, but thereis.
I noticed again in reading yourtheses that you do pay
(01:02:20):
attention to a lot of the thingsthat aren't so obvious on the
outside.
I think even your approach tothe thesis around risk return
asymmetric risk return is anexample of that.
It's challenging to figure out.
(01:02:42):
You've got to go at it from alot of different angles.
I do think sometimes scientificapproaches or an inclination
towards that opens your mind todigging in deeper from an
analytics perspective but alsolooking at things that might not
be so obvious and testinghypotheses around them.
(01:03:02):
I'm also curious, you know Inoticed you have a CFA
designation charter financialanalyst and I know that's a
challenging one to get.
You also have a CAIAdesignation.
I'm curious have those helpedyou in your career, especially
(01:03:23):
at Johnson Financial Group, andwould you recommend those kind
of designations to others?
Eric Adams (01:03:32):
Yeah.
So the CFA, yes, very difficultto attain, certainly, and for
that reason it has a little bitof a cache to it.
There's a little bit ofunderstanding that if you're
able to get that, it doesn'tnecessarily mean that you're the
smartest person in the world.
What it probably necessarilymeans is that you have the
(01:03:55):
ability to focus very intenselyand work very diligently towards
achieving a goal.
So, you know, I've done a lotof hiring in my day too, and if
I see somebody with the CFA, itat least tells me like, well,
perhaps they have a photographicmemory, but more likely they,
(01:04:16):
you know, are somebody thatworks very hard, that makes,
creates goals, that works verydiligently to achieving those
goals and really sticks to it.
And so that's a big part oflike, I think, what having a CFA
communicates, and now certainlyit communicates investment
(01:04:40):
expertise as well.
The CFA is a very broadcurriculum, and so you're
covering everything from youknow accounting to ethics, to
economics, to you know financialvaluation.
It covers a lot to currency,you know valuing, swaps and
(01:05:04):
derivatives, and there's no waythat any one career is actually
going to touch on all of those.
So chances are, if you're goingto get your CFA, you're going
to study a lot of things thatyou're never going to use.
Hopefully you study some amountthat you are going to use, and
I absolutely have used a lot ofwhat I've learned in the CFA,
(01:05:25):
but it's kind of you know, amile wide, inch deep is a good
way to describe it probably morethan an inch deep.
You know about mile wide.
You know, put the whatever youwant to, whatever you want to
say, because it does get in theweeds.
Certainly I can attest to that,but there's probably a lot in
there that any individual is notactually going to use in their
(01:05:47):
career.
But again, it communicates thatyou're really able to set goals
and work hard to achieve them.
The CAIA, or CHI it's a littlemore damn colloquially known.
That is more of a, you know, afoot wide, mile deep, where it
(01:06:10):
really does focus on alternativeinvestments, as the name
implies, and so it's hedge funds, it's real estate, it's private
equity and energy, etc.
And now that is actually thecurriculum of the CAIA is
(01:06:31):
something that I literally useevery single day when I'm
analyzing the opportunities thatwe're looking at, you know, on
behalf of our clients.
You know, when I was studyingfor that, you know, seven years
ago or so, I would be analyzinga private equity or real estate
(01:06:53):
opportunity during the day andthen I'd, at night, I'd be
studying, and I'd be studyingthe exact same topics that I was
, you know, underwriting duringwork that day.
So there was a lot of overlapin between that curriculum and
my day to day job, and so foranybody that is interested in
(01:07:14):
alternative investments, I thinkthe you know, caia does a great
job.
Cfa is a wonderful baseline forinvestment knowledge.
Caia drills down deeply intoalternative investments and for
someone such as myself, thestuff that I probably use more
frequently, I would say day today basis, I use topics that I
(01:07:38):
learned in the CAIA curriculum.
Dr. Matt Waller (01:07:41):
So one last question, Eric.
Can you shed some light on theprivate market investment
philosophy that you adoptedJohnson Financial Group in?
How does that differentiate youfrom other firms in the
industry?
Eric Adams (01:08:01):
So, as mentioned earlier, the genesis of our
company is as the single familyoffice that was started by our
CEO's grandfather to manage thewealth that he generated from
what was basically a privateequity holding company, and so
(01:08:21):
the roots of the business reallyis an alternative investments,
if you will.
And so we have that pedigree,we have that in our DNA.
Now, fast forward.
You know, the family office wasformed in the 70s, and so fast
forward 50 years all out totoday.
It really is a staple of ourinvestments philosophy and our
(01:08:45):
investment platform that weprovide to our clients.
So, and it really has to dowith access, it has to do with
expected future returns, it hasto do with efficiencies of
markets, and what I mean by allof that is now we do have our
(01:09:08):
allocations to the publicmarkets.
I mean more so than we do.
We've got more dollars in thepublic markets than we do in the
private markets.
But the way we approach that ispredominantly ETFs, mutual
funds that take a enhancedindexing, enhanced beta approach
.
It's not purely passive.
We do have some activemanagement within some of the
(01:09:35):
less efficient asset classes,like fixed income and small cap
and things like that.
But the public markets areundoubtedly and I'll never tell
you that they're perfectlyefficient, but they are
undoubtedly more efficient thanthe private markets.
What I mean by that is thatpeople all over the world have
(01:09:57):
access to a lot of the sameopportunities and a lot of the
same information.
To analyze those similaropportunities and my first job
out of my MBA program I was apublic equity large cap blue
chip stock analyst, and therewas you know I was looking at
(01:10:21):
companies like Walmart and Ciscoand Medtronic and these
companies that there are tens ofthousands of analysts across
the globe.
They're looking at the samecompanies and they're looking at
a lot of the same information.
And so what has led to myevolution of my career is the
(01:10:42):
recognition that I can providebetter value to my clients in
their portfolios.
By focusing on the privatemarkets.
I mean the big if is if you areable to tolerate a certain
amount of illiquidity, which isrequired in the private markets,
you know your money's locked up.
It's not a publicly tradedstock that you can buy and sell
(01:11:04):
every day if you want to.
If you can tolerate theilliquidity that the private
markets require, there arebetter valuations.
We were talking aboutvaluations earlier.
There is decreased access tothe same amount or the same
opportunities.
I was talking earlier about howa lot of my job was as a
(01:11:24):
glorified networker, and that'sthe reason I do that is to be
able to build out theserelationships that allow me to
access the most compellinginvestment opportunities and not
everybody out there is going tobe able to even know about.
And if they do know about it,you know I have the expertise to
underwrite it, because it's adifferentiated underwriting
(01:11:47):
skill set as well compared tothe public market.
So there's some differentconsiderations there, and so it
all comes back to how do webuild the best, most effective
portfolios for our clients thatare engineered towards achieving
whatever their goal is, if it'sgrowth, if it's income downside
(01:12:10):
protection.
You know there are thoseinvestment policy statements,
are catered to each clientindividually.
But how do I go about using allthe investment structures and
asset classes out there?
How do I construct the bestportfolio possible to meet those
(01:12:31):
client goals and objectives?
And we just believe that if youare able to tolerate a certain
amount of illiquidity, thathaving a healthy allocation to
private market opportunities isgoing to help you achieve those
goals more effectively.
Because of limited access,lower valuations, higher future
(01:12:54):
expected returns, lowerdrawdowns, lower correlation
across other asset classes,greater income potential within
the private markets relative tothe public markets, and it's
really that all encompassingphilosophy that has led us to
(01:13:14):
our current portfolioconstruction process.
Dr. Matt Waller (01:13:18):
Well, eric, I have really enjoyed this
conversation.
Your knowledge is very deep,clearly, and I've also enjoyed
just getting to know you throughour conversations and reading
your theses.
(01:13:38):
It's really commendable whatyou've accomplished there, so I
know your time is very valuable,so thank you so much for taking
time to dive into theseimportant topics with me today.
Eric Adams (01:13:52):
Thanks a lot, matt.
I appreciate it and I hope thelisteners find this interesting.
I've listened to several ofyour other podcasts that you've
recorded and I don't know howI'm going to stack up to some of
those fantastic intervieweesthat you've had on, but I did my
(01:14:13):
best and I appreciate theopportunity and thank you so
much.
Dr. Matt Waller (01:14:19):
If you're finding value in this podcast.
We greatly appreciate yoursupport by subscribing to our
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Additionally, following us onApple and Spotify and leaving up
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We welcome any feedback orquestions related to the podcast
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(01:14:40):
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