This is Master's in Business with Barry Ridholds on Bloomberg Radio.
This week on the podcast, I have an extra special guest. Matthew Chebron is the co founder of TKO Capital, a Paris based alternative asset manager. They run over forty billion dollars worth of assets. I found this to be really a fascinating conversation about approaching the world of investing from a different angle, being creative, thinking out of the box, looking to not just imitate what other people do, but create new opportunities by just thinking about the world differently.
The conversation was really informative and quite fascinating. I thought it was great and I think you will also with no further ado my conversation with TKO Capitals.
Matthew Chebron, Thank you, Baron.
I forgot to mention you have received the Chevalier de l'Ordre de la legend Anna by the President of the French Republic in January twenty twenty two. We'll circle back to that at some other point. I don't know how relevant that is to asset management, but let's talk a little bit about what you were doing before you were being lauded by the French president. You went to school in Paris, but you began your career in London at Maryland Deutsche Bank. Tell us a little bit about that background.
Yeah, no, that's right, Barry. You know, it's that's one thing you know.
In Europe where.
London was and actually think still remain, you know, the one place where you know you want to get exposure when you join financial services. So I was lucky to get this summer internship at Marylynch back in the late nineties. I met Antoine effectively my co founding partner, So that was you know, a while back, but nonetheless, you know, if it was love at first sight, but we got to get along, you know, pretty well, and after a few years working for investment banks, he then joined Goldman Sacks.
I joined effectively Dutch Bank. We decided, you know, to try to have a go on our own. We were twenty eight thirty respectively, and looking backwards as much as investment banking, even with banks that no longer there was great. You know, that was a great training. I think it was a great training. I think you know, we learned a lot. The exposure you know, you get in investment banking.
I was a leverage finance banker by background, and so late nineties that the emergence of the high yield market in Europe. You would print deals, you know, like never before. You get this exposure. You're a young analyst associate. You get to go on the road show with management teams. You know, I look backwards, that was a hell of for training. You know, in terms of the exposure.
I can imagine was the plan when you were going to school in Paris ways to go into finance or were you originally leaning another direction?
In a prior to joining a business school in Paris, I studied political sciences in my native Provence, you know, in excellent province, and there was no hint at the time, you know that I would be heading into into finance. And so when I then got the exposure and getting to learn with the great teachers, by the way, what and again went back in you know, in the late nineties.
But then you start reading books and I'm not talking about the theoretical books, but you know some experience, you know, the people I remember these books, you know, reading the you know Lias Poker from Michael Lewis, you know, reading a Predator's Ball, you know about the milk and junk bond and that's where you know, the excitement started and you're like, you know, I have to get exposure to that. So no, there was nothing written, but it was a great step.
So fast forward to today. You now work in a large European firm in the USA, but really you began your career at big American firms in London.
That's right.
What are the cultural differences, like a US firm in Europe versus European firm in the US.
Yeah, well it's an interesting, interesting question looking from the US. But you know, at times, you know, Europe you know, may may be an easy concept, but it's a very complex reality. And so doing business in Europe is obviously you know, it's all about being local because Italy is not Spain, France is not you know, Germany. You know, at times people in London think that they cover in the whole European playfield. But again it's a complex reality.
So having met people back then, you know, Americans working for these US banks, you know, now they understand that and the one successful and even some of for you know peers competitors friends American franchise who are competing and tackling the European market. Very often the one successful and very SUCCESSFU are the one who've been, you know, spending a lot of time you know, on the ground, and then on the contrary, hopefully having worked for US franchise,
having spent time with the people and great mentors. You know, for me, I now can hopefully understand better, you know, the cultural difference, you know, as we expand here and as I'm sure you know you would appreciate, you know, being here in New York is a very different reality than the rest of the the Americas, partly when it comes down to visiting new clients. You know, in the Midwest, you know there are you know, the part you know
of the of the US. So hopefully there's a bit of convergence here, you know, to make it worthwhile.
I love the old spoiling great quote. I don't live in America. I live in a small island off the east coast of America. Because to your point, New York is in Kansas City, and Kansas City is in Miami.
But New York is definitely its own creature.
It is for sure, and you know, for us at TIKO, it's been an important step to to open and expand here in North America.
You know, just background.
When I moved here five years ago this year in twenty eighteen, you know, we had barely know relationships in North America. We had made a few investments relationship from a client standpoint, I mean fromn lpea standpoint.
And fast forward.
You know today is close to ten percent of houra a um that we have raised here. You know, we launch new initiatives, We try not to be differentiating, and obviously it's a long term game and you have to be definitely long term greedy when you set up a business, you know, in the in the US, but in the business we're in today, in the alternative asset management space as competitive it can be.
But you know, the.
Structural opportunity now is such that the commitment as a eure open that you have to make here has to be long term. I made the commitment, you know, personally, and I can see the path, you know, because there is room to expand the business.
So let's talk about what led to the decision to launch TKO Capital back in two thousand and four. Your Deutsche Bank, your colleague ant One is a Goldman Sachs. What made you say, hey, let's get the band back together again.
Well, you know what, it's actually back to what I was, you know, just saying, we were watching all these franchise being launched, and obviously at the top of them, you know, all the one you can think of, who are you know, leading the industry today, But back then they were you know, managing you a few tens of billions of dollars, which was you know, enormous back then, based only a fraction
of what they are today. And we were seeing all these American franchise, you know, launching in in Europe, you know, out of London, and we're like, you know, why don't we give you a go?
I mean, we.
Learned leverage finance, we learned you know, real estate that we knew, how yield we knew, you know, opportunittic investment, and we're like, it's never too late, it's never too early, and we decided to go with you know, a huge four million aum that we had gathered from friends and family. So you can appreciate, you know, the challenge back then, but you have to start somewhere.
Right that that's walking around cash back back then. So let's talk about not too late, not too early. You launch right after the dot com enplosure, correct, but a few years before the Great Financial Crisis?
Right?
What was that period like? What was that lull like between those two giant volatility events.
It was an experience because you know, the dot com bubble. I remember being a young associate at Merrill Lynch and all the investment bank they had to reinvent themselves, you know, to make sure they could remember this retain talent, you know that we've been hearing, you know lately again, you know, And so they were creating some cool working space and you would no longer you know, wear a tie and all that, which was all form of a substance. And
as if there was a shift. And then you have this ramp up from effective VO four when we launched to the GFC and we're three years, four years into business, you know at TKO, and I remember, you know, we feel extremely proud because then we were banking, you know, with Beochtern. So we're banking with Lehman Brothers. And that
was you know a step in the entrepreneurial development. And then all of a sudden, over the weekend, those banks are gone, and so you're like a young entrepreneur leaving this nearness experience despite thinking that you were close to certainty because you were working with the best institution and counter party you can think of. And then all of a sudden, it's all about how you see and look at the world. Never take anything for granted, always be,
you know, in the world of challenging everything. So it's not good for your stomach pain, you know, every morning, but only the paranoid survive. And I think that was a great learning experience.
So let's talk about what took place post bear Stearns and post Liman From a business perspective, bear Stearns gets absorbed into JP Morgan Chase, so your contacts at bear Stearns are still in business. The best parts of Liman brother get absorbed into Barclay. So I got to imagine a lot of the folks you were doing business with at those places landed on their feet and you still had some relationship or am I being too sanguine about no?
No, there was a bit of all of the above. But more importantly for us, you know in Aura, you know development, As I said, it was about you know, never taking anything for granting and granted because you know, Lehman Brothers. Is what a single a rated bank on the Friday night and it's defaulted, you know, on.
The Monday morning.
And even if I'm sketching a bit, you know, from there on at the time where eight hundred million a UM, I guess we have a team of twenty twenty five people, most of them still being with us today, by the way. And it's great when you've been to work together, if you allow me, because then you know, you just have to look at someone in the eyes and you know exactly how they're going to be eight because we've been
through that, you know, together. And so for us, you know, beyond the people and beyond the institution, it was the beginning of a second phase of the journey. I like to say, maybe not less naive about you know, how easy all these things are, because they're not easy. Steve Schwartzman wrote his book called What it Takes, you know, And so for us, that was every single being equal, the beginning of the second phase of the journey, where it was no longer the teasing part. You were effectively
like into the real stuff. Now on the positive and the civil lining was that this whole situation started you know, putting a lot of light on let's say, the alternative market private debt. Private credit was unheard of in Europe until the banks effectively went into this massive liquidity squeeze and all those asset managers had to you know, step in and feel this void.
Great opportunity for US.
Private equity at the time was only about buyout an LBO only if you had heard about, you know, the growth equity part where you need to strengthen an entrepreneurial companies in a balance sheet, because it's not you know, she's not trying to sell the business. It's just about you know, making sure you find the right partners, you know, to strengthen the balance sheet, and so so and so. You know, we started a new period. Adding on top
of that, you know this very accommuniting military policy. Well that was the beginning of a new chapter for private markets and we were lucky, you know, to effectively embark on this journey at this time.
So let me.
Follow up on the financial crisis the period afterwards. Clearly it was highly disruptive, lots of damage done, lots of people lost their jobs, lots of businesses went out. But it sounds like a lot of opportunities were created in what came after.
It was certainly the case for us again, you know, many challenges, but with the hard work and with people who could see, you know, the opportunity, and publicly with the European approach, thinking that, yes, you can develop a very multi local footprint organization in Europe, be an alternative to global investment tours to clients, to the to the
one established you know mainly you know, mainly Americans. You know, I must admit that was very exciting, you know, it was very exciting to get into that and to a certain extent, you know, we had been looking forward for the day where we could face another of those crises, and we all know they're all different, but better prepared, better prepared, you know, with more resources, with the more powerful platform, with a bigger footprint and living you know,
COVID aside living you know, I don't know Brexit aside leaving all these little steps. Over the past ten years, twelve years, we've been you know, getting better prepared, you know, for when the cycle changed and we may have entered you know, this new this new chapter of this new cycle raising interest rates started you know a year ago where of the view that it's no, it's not getting lower anytime soon, and so we go back to the basics of what our job should be risk on the
writing risk assessment. Asset prices are different from asset valuation. I mean the valuation in the future cash flow discounted at the risk cre rate perscualisk premium. Well, guess what the risk cree rate now is five percent is no longer zero, and the risk premium is closer to five percent than.
It is from two.
And so all of a sudden, the whole merits of our job gets back into the center of the pitch, and that makes our drop much more exciting. You know, we've never been more excited that we've been for the past twelve months to invest today.
So let's talk about what brought TKO to the US. Clearly, you guys were very successful in Europe. You now have thirteen offices around the world. Is it just the size of the US market?
What was the attraction here?
Well, I mean size is definitely you know a reason, But I would add we had just gone public at the time, you know, twenty seventeen, and for us, the leasting maybe way before it became more preyed you know, in the recent years was the main objective of the listing barrier was really to promote the brand, the franchise. We never saw the single share on the occasion of this.
You guys only allowed a small piece to go.
Public, right, that's right, and all our historical backers, shareholders, they actually you know, kept on supporting the business.
You know.
We tapped these here market twice and they all you know, reinforced their ownership. So unlike many IPOs which are away, you know, to monetize the business, for us, it was about really about rationalizing the platform. We had just come out of thirteen fourteen years of very entrepreneurial development during a period as you mentioned, which was pretty bumpy, and so it was a great way to rationalize the platform. Come with one brand, one name, getting the name out there.
So that was in twenty seventeen when public on Neuron next Paris and coming to the US. Was there was no other alternity than coming to the US, you know, at some point, and we thought the timing was right both because we had now we are then you know,
twenty billion aum. We've been in in Asia for a few years and it had been extremely promising and so I decided, you know, to come here, you know, to promote this brand, to convert into a commercial relationship, raising more capital towards US investors, which to your point is one of the deepest market in the world. And then also you know, start deploying capital here in the US. Not that there is a shortage of capital you know, by no means, but as we like to say, you know,
create not compete. And so we started initially like secondary private credit, you know, private debt was a mainstream developed strategy here I mean globally and here in the US. I think we're one of the first one to move into secondary private credit. You know, fast forward a couple of fields. Three years now we can demonstrate the merits of the strategy, the track record of the strategy. We
started expanding into a mid market infrastructure. That was right before the you know, the Biden election and all the focusing on infrastructure, when we were not active in infrastructure in Europe. So we try to find some play that could differentiate ourselves. Not only is a v you know, European and Asian investors, but also here in the US to be able to tell a different story to LPs.
With one key differentiating factor is the skin in the game that we have, you know, as a structure and as founders into the organization.
So a lot of companies that go public then have a valuable currency they can use for acquisitions. How did that plag into the thinking.
Yeah, that's right, and we you know, we use that a couple of times very selectively since going up public Infras you know, was one of them.
Another one in a.
Real estate you know, in Europe, and I mean they were very selective bolt on acquisition, you know, an acquisition in our businesses is always a big bet, right It's we're in the people business, and you need the chemistry, I mean, you need the culture you know, to work out. But you know, looking forward, it's certainly we're in a better position today to come to your acquisition than we
were in a few years ago. So as the market and the industry restructure, you know, we will certainly be very very opportunistic.
It's kind of interesting the thought of Bolton as opposed to within the same space, there's a long history of financial acquisitions that didn't really work out all that well because of the chemistry as most of the cultural issues. But something you said earlier really stood out to me. You want to create, not compete. So let's talk a little bit about how you guys at TKO think differently.
Tell us or a Steve Jobs term think different tell us how you approach the world differently than a lot of your competitors.
You know, when we studied, as they told you, extremely extremely modest, there were plenty of franchise out there. And you know, even if you talk to private investors, high networth family offices can be a bit more nimble in the way. You know, they approach their asset a location. They need to see a reason why they would go, you know, with what was back then a tk who more than a TKO, you know, and find you know, and and find a reason why you know, they would
allocate there back then. You know, in Europe back in the day when we start doing you know, private credit direct lending today is very much mainstream. I can tell you that that that back then it was not you know, at the time, they even called it shadow banking. You know, in Europe it's been quite a wild since you know, I last read about shadow banking be so it's become so mainstream and structural. You know today that it's really
part of the year. So we've always tried to effectively be a little bit I don't know how it comes across, and it's not the underdog, but you know, coming with something that is different so that you can slay. Yeah, so that you can make you know, a name for yourself, and then you know, use these adjacencies at the business then to scale and make them very mainstream. I was saying the secondary private credit that we launched a couple of years ago. Now here in New York, it's becoming
a bit more mainstream. Every day I would see one of the large Belch bracket banks, you know, launching or speaking about the INSUAD. But like, well, maybe that was a good idea we had, and competition is good, by the way, you know, nothing wrong about competition, but at least you've established, you know, a name for yourself and obviously got the track record and you can, you know,
you can showcase that. So that's step one. The second thing, bar if I may, is you know, in our industry, what should make the biggest difference is the skin in the game that the managers you know, put into their business. I like to say that in our industry, you come across a lot of people who are willing to make money with someone else money. You came across less people
willing to make some money with the kids money. Any entrepreneur, you know is you know, is taking risks by you know, borrowing some capital and investing into his.
Business, whatever the business is.
And in our industry at times, I think that there's been a little bit of.
Irony, not to.
Say hypocrisy in the way that we showcase the skin in the game. I don't think carried interest is a great alignment of interest. The only alignment of interest in the amount of capital that any given manager firm is putting into its fund. You when you read that, okay, well, you know we put you know, one percent of the fund, you know, as commitment from the GP. The fund is
a billion, you know, we put ten million. It's a lot of money, yes, but you're charging two percent for the next ten years, so the option cost is not that high.
When you're putting.
Ten percent twenty percent of your balance sheet capital side by side with your LP. You can do a basic Excel spreadsheet and you'll see, you know, what is at stake and that effectively, yes, you're going to make some money on the management fees on the performance field of the carried interest, but you know what you have at stake side by side with your client is a totally different magnitude. And I think this is where the industry
should be heading. And many or for you know, peers, competitors, they all have different models, but the one with significant skin in the game from the GP, from the partners, from the balance sheet and going public by the way, bar it was a great way for us to strengthen this equity base, which is you know, partner zone and control and management own to effectively create what has been so far, certainly in Europe, a second to none skin in the game model.
I like the way that sounds. Let's talk a little bit about Europe. If we look at the past few decades, Europe out performed the US and the two thousands. While we were going through dot com and financial crisis in the twenty tens, the US markets were just on fire and really did very well. Twenty twenties things started out a little shaky.
How do you.
Compare the investment environment in Europe over the past few decades versus the US.
Well, both of them were obviously driven by interest rates, and they moved you know, the same direction, but in different patterns. And when we first got into negative interest rates in Europe a few years ago on the back of the euro crisis, you know, and post the GFC first with the sovereigns, but then you know, with the IG market, with the investment grade market, you had corporates basically borrowing you know, one hundred and being asked, you know,
to give back ninety eight. And today, you know, when you look backwards and with no back trading, you're like, you know, okay, what you know, what were we thinking about, you know, back then, because for what we do, and I mean, you know, the business Barry like risk underwriting is about effectively scaling the risk, you know, the return, and we were in a very awkward environment. And so that's why I was surprised to see so many people surprised.
You know, a year ago May twenty two, you know, interest rates started rising and all of a sudden, the whole software were bugged. I mean, what we do is not rocket science, and it all come down to the value of liquidity and the cost of credit. And then we can start, you know, doing what we are supposed to be doing. You know risk and the writing, and so Europe US went into different patterns on the way
down and very different on the way up. I mean here in the US, obviously you were much more reactive, you know, in raising rates. Rightly, so in my view, maybe Europe is lagging a bit that time around. You know, they were actually faster at reducing interest rates even so
into negative territory. But there is a little bit of the coupling you know, going on right now, and for us it's a great way partly, you know, a tico where we are, you know, we are very exposed to the yield play credit in FRA real estate, be spoke credit and so all that's are the starting point of this risk underwriting.
So let's talk a little bit about the difference between the twenty tens and the twenty twenties. Starting with Hey, it's pretty arguable that by the time the FED began raising rates here in the United States, they were already behind the curve. Their two percent target had been hit a year earlier, and CPI kept going higher. So if the FED was behind the curve, how much further behind the curve of the central banks in Europe in terms of dealing with their inflation issues.
The you know, central banks in the US and in Europe they may have a different mandate, you know, one might be more political, you know than the others. And at times, you know, when you have to effectively finance you know, all the deficiats, you know, you have to be mindful that you need to be able, you know, to issue, you know, to issue and you pay down
this debt. I think that you know, right now, and without getting into too many political details, I mean, Europe is probably is not in a good place relative to where they were in reacting to COVID for example, or reacting to the euro crisis you know, ten years ago. I mean, the political situation in Europe has created indirectly some effect maybe on the on the ECB and as much you know, I mean, Christian Legards has been doing a terrific job after a Mario drug you know there.
But the institution you know.
Maybe should be a bit a boulder, you know, in the way you're tackling this, this inflation issue, because we all know that period of very low interest rates create massive inequality, inequality you know, between people having access to credit and the people who don't have access to credit, and as in people, it's individual, it's corporate, its states, and so ironically, you know, you save a system, but you make it to be more inequal in the way people came out of this period.
So that's really interesting. During the post financial crisis era of very low rates, anything priced in credit, real estate equities, bonds did really well. Certainly that helps the top ten percent in the United States. During COVID, rather than just a monetary response, we saw a massive fiscal response which seemed to have really helped across the entire economic strata,
especially the middle class. So what do our experiences post financial crisis, post COVID tell us about the need for balance between monetary and fiscal stimulus.
Yeah, you're absolutely right. But by the same token, we know that right now. I'm not an economist, but you know, in the US, in Europe, you know, the inflation, the structural inflation, people might have a different view about that is certainly hurting, you know, the one with the less you know resources, you know obviously food, energy, housing, and not even talking about you know, school, healthcare. And obviously in Europe we have a totally different different you know,
environment and about this this matter. So's it's a tricky situation. And where I think, as SAT managers have a role to play is in making sure that whenever someone is saving a dollar or investing a billion dollar, you know, be a private investor or large insitual investors, is that there is the appropriate risk return associated with the strategy
that is being implemented. That was very complicated to do in the zero interest rates environment because everyone through the dices and it was a double six because you can only make it right when money is free. Because when
money is free, investment has no merits, you know. And now that we are in a situation where money are some value, then you can be discriminating and that should benefit again the one individual saving a dollar or the one institutional investing a billion, and that in that respect, regardless of this macro situation.
If I can come.
Back to our role, as I said, managers, that's where we have a role to play.
So let's talk a little bit about valuations relative to risk and reward. Arguably, the United States, both the public markets and the private markets are not cheap today. They're not crazy dot com expensive, but they're certainly not inexpensive. How does Europe and the rest of the world compare on evaluation basis to the US.
Maybe because I come from a leverage finance backgrounds, As I told you, I tend always to focus on the downside. But I also learned along the way that you rarely die I mean as a company from your from your P and L or from your assets, but you always
die from your liabilities. And I think that effectively, this excess in very cheap money, this success in leverage, this success in thinking that you could access unlimited for an indefinite period of time of cheap to free capital, may have created some the wrong asset allocation pattern in some places. So I think we've now entered a period where we have to swallow this whole mispriced over leveled assets out there.
Corporate create was one obviously the bonds, I mean the sovereign bond market, and we remember the SVB story.
It's about you know, t.
Builds, and then you obviously the real estate. You know, many areas that were over leveled at the wrong cost, and that could be painful because someone will have to take the pain, even if you know, unlike two thousand and eight, where the risk was concentrated, you know on banks boundary today is much more spread across let's say, you know, asset managers, but you have to find a way to dry up all this excess of liquidity which was necessary on the one hand, but maybe mispriced on
the other hand. And so today I think that part of the IG fixed rate corporate bond market obviously you know, part of the real estate and you know, we've been talking at length about that we'll have to to suffer some of the pain or lossits in some where, shape or form. As always on the other side of this trade that we'll create, you know, great opportunities for people liquid, nimble, who don't have to carry age, you know, in ventories.
You know, if I, if I may say, I have the impression that the US will.
Be more.
Realistic in the way they approach that, you know, in terms of you know, taking the heat, taking the pain starting again in Europe, maybe there's a little bit of preten and extent game, but it's always better, you know, to you know, what has to be done ultimately, you know, should be done immediately.
As they had a band aid off.
Exactly, and that's what we should do when it comes to financial risk and financial pricing.
So you mentioned the access liquidly is causing accesses and the locations have higher fed rates and other around the world higher interest rates, taking some of that out of the system and combined, what is the impact of the regional banks that have gone value up? A handful of them, but it certainly has put the fear of God into a lot of small banking shops. What does that do to all the access liquidity that's out there.
You know, on the regional bank rather not common. I'm not an expert, and it came in as if you has a surprise how quickly large, very large institution you know, could get into some liquidity liquidity stress. Coming back to my comment again, you know it's your liability side, and there's been a plenty of comment there. What I see is that once again for asset managers, it's a very interesting structural opportunity because it creates a bit of void, you know, in terms of the market that we can
fill in in some way, shape or form. So I think that on the positive side, investors allocators today they can effectively allocate capital into strategies which will create a compounding effect to their portfolio because what was I don't know, three four percent in some strategies two years ago now
can be eight to ten. And so when you start, you know, compounding your new allocation into these type of strategies that can make up for the part of your portfolio which itself you know, could be a little bit underwater as a consequence of those rising interest rates you know again, credit, you know, real estate.
What have you.
So that's the positive. You have to be able to do that, right, So how do you do that? I mean, if you have effectively the denominator's effect that people have been you know talking about, or you know, more liquidity constraint because cash is not coming back as quickly as you had anticipated, because your managers cannot sell their portfolio.
Something the secondary market.
Has been developing like crazy on the private equity for example, as I said, private credit, you know, is another one. Real estate will be an obvious one, you know, given
the amount of capital out there. And so it's about being prepared to say, Okay, I've been making you know, five six seven percent on this strategy, maybe I will you know, exit the strategy, albeit at a discount, you know, the lowest possible, but the proceeds will be able to be gener reinvested into strategy that will generate a higher return which over a short medium time frame, can make up you know, for this cash flow requirement that I need for my pensioneers or you know what I have.
You So, I'm actually very optimistic that all asset owners, asset locators, the one can be nimble.
You know. It's a very exciting time I heard.
Let's talk a little bit about how TKO champions impact investing. Obviously, the goal is to get to some sort of sustainable future. What your investment these is there?
Yeah, I think we were relatively early in what has become a very mainstream strategy, you know, right rightly so, and that was really you know, a combination of many factors. We launched our very first growth equity growth private equity strategy in twenty seventeen, twenty eighteen, way before you know it has as I said, you know, become you know, a must have strategy for many managers and for many allocators. We started doing that because in Europe we've been investing
alongside entrepreneurs, families. As I said, well, not the buyout shop. You know, we don't take control, you know, we don't level up company. We're trying to, you know, in our role of the middleman between the asset owners you know, and the companies to allocate where we see the financial play,
but an impactful financial play. So when we started the strategy in seventeen eighteen and started allocating capital investing in entrepreneurs who had a solution that had to be massify because when you want to meet this target and these goals, you know, in terms of a climate of CEO two, you know, reduction, it's great to be investing in what will change in twenty by twenty fifty, but it's more important to find what works today and needs to be massified,
scale up. You know, we're investing in profitable mid market companies making twenty twenty five to fifty million.
A BDA and needed capital in.
Those guys are not looking to sell the company, they need the capital in to scale. And we started doing that across lo carbon mobility, across energy efficiencies of the buildings as you know, you know it's forty percent of the green gas emission, and so we started doing that.
I would say, you know.
Naturally five years later, we now can you represent effectively the case studies? You know, obviously the truck record it matters, but people want to understand what we're talking about when we're talking about this type of fum impact investing here, it's about climate. We then launch you know, regenerative agricultural strategy because one of the key objective is how do you capture carbon and there's nothing like you know, the soil and the ground, you know, to help do that.
That's on the equity side. And then we started doing some private credit impact financing.
What does that mean?
You're a borrower, We're lending you some money at five percent, you're three times you know, a BDA. We take all the traditional credit metrics of a financial analysis, and then
we add a third dimension. If you hit certain target, certain goals, extra financial goals, then you will improve your cost of funding and your five percent coupon will go down to four if effectively you demonstrate that you're reduced by X or Y or change, you know, this production process, and all of a sudden you realize that if your cost of funding goes down as a consequence of some extra financial goals being met, well your written on equity goes up right, And so you can demonstrate that it's
not about being a philanthropy, it's about you know, making sure that we use the capital available to send it, you know, where it makes sense, and then all stakeholders, you know, a benefit from it. And so as much as five years ago it was nice to have and once again create not compete, we're trying to push that forward today.
It's not negotiable.
It's not negotiable with our LPs. It's not negotiable with our customers, with our partners, with our banks, with our clients, with our staff, Barry, I mean when we talk to some of our twenty something thirty something colleagues, professionals, it's part of their commitment to the firm because one big issue you know, in this when it comes to this impact and YESG let's say in the wider sense, at best, you can come across very opportunistic. At worst you'll come
across as fake. And in both situations it's not good. And so as you know, our colleagues are staff, you know people, and all the stakeholders, I mean there are the guardians.
Uh, they are.
The truats of us, you know, being real here. So again, now it's no longer nice to have. It's a must have, and it's uh, there's only one way.
So ESG seems to have found a lot of support in Europe. Are you a little bit surprised about how this has become politicized in the US.
It seems like.
There are a group of people who are pushing back against impact investing, sustainable investing, not because of the returns, but they just don't like the politics of it.
Yep, I'm not surprised because, you know, and again I'm an alien here, but you know, I'm I try to be an observer, you know, of the dynamic of the of the politics here in the USA, and we even experiment that ourselves, you know, with some some of our LPs very often made up of different boats, some teachers, I mean, policemen, you know, employees, you know, public public servants, employees, and whilst we were dealing with the same counterparty, the
same pension fund, some of their constituents, some of the underlying boats disagree on.
The approach to take there.
So we've experienced that firsthand that within won't given investor, you know, asset owner, there could be some divergence and very often now I can say, because there was a bit of misunderstanding of what we were trying to do and.
What others, you know, are trying to do so.
I'm hopeful that with a bit of education, you know, the science based approach, people we realize that it's not a politic It shouldn't be a political game.
I understand why. I'm not native.
I understand why, but I think the majority should prevail to understand that the asset owners today, the asset managers who can help them deploy, you know, the capitol, have an historical mission because we will be we will be judging fifty years down down the road. I mean, people will look back and say, you know, what did you do with the amount of capital that was available back then to effectively direct this capitol to to where it matters.
So I'm trying to take you know, this perspective because effectively, we've never been in an environment with so much cheap liquidity that could be used purposely.
So you talked about esg ratchets where people get better rates if they hit certain metrics, and you talked a little bit about agriculture regenera of agriculture. Explain for those of us not familiar with that, what is regenera of agriculture? What is the focus? What do you want to accomplish with? It is it just carbon capture or is it.
More it's the whole chain.
I mean, it's act that you know, soil because without saying, is a scarce resource that need to be maintained in a way to be able, you know, to keep on producing in a way that for the next generation you don't look back and you leave you know, a brand soil full of fertilizer or or others that.
Will not be able to.
Generate the same quality of product you know, for the future generation at a time where you'll have to feed you know, much more in on people. So the technique here very similar to the to the climate approach you know, we we took you know, five years ago, is really about finding entrepreneurs and the companies who have a solution for you know, soil, you know, effectively a fertility let's say.
Or some technique. You know. It's it's not really the.
Agri tech as you may you know, be used to, but some some techniques have been proven and need this capital to scale, and this capital would not be available otherwise because it's not about you know, buying land or acres of forest. It's not about the agri tech which is effectively attracting a lot of a lot of capital. But these entrepreneurs, these small cap businesses with the proven concept and profitability, and they need this capital, you know,
to scale. So you would be investing in a twenty to thirty percent taking twenty thirty percent of the company, investing this capital to effectively help scale the business to a size where then you can get to more you know, banking financing capital market which you know is not that open. So it's this old band. So it's certainly the case
in Europe. We see it more and more here in the US of this small MidCap market that doesn't have and even more so coming back to your common about the regional banks, you've got part of the financial market structure which is disappearing, and so you need the alternative source of capital. And so that's where you know, we can be a very relevant tool, and that's that for the companies and the investors also want to allocate there.
And you partnered with some really interesting companies on this access the big insurer and Unilever, the consumer products company. What's their interest in this sort of sustainable investor.
So one comment, you know, as an aside, is, you know, artic here we've always partnered with the or we try as much as we can to partner with the corporates to bring additional skill set. We did that in energy transition, for example, with Total Energies very early on you seventeen eighteen.
We did that in the aerospace cyber with a bunch of preminent European and global players such as you know Herbers that so Suffron Taless bringing you know, obviously some capital, but more importantly you know, some skill set, some knowledge, some rich So that back to my creating compete, we can tell a different, you know, a different story.
With with investors.
And as I and as you just mentioned, the last one you know with UNI Lever, you know is the same is exactly the same approach, which is bringing additional expertise alongside an asset manager, US financial investors and there's no shortage of capital, as we said, you know out there in that case, you know, one of the largest European insurance company, if not global, and having you know, together a different proposal fully aligned with some complimentary with some complimentary sourcing.
To the to the to the deal flow.
And here again you know, at first people were maybe looking at us like, you know, why you need to bring a corporate you know, there's some conflict of interest involved here, and then a few years you know, down the line, they're like, well, that's a very different proposal that we may have heard too, you know from all the managers, and there are plenty, plenty of out there.
What's the conflict of interest if you're bringing in a consumer product to try and make food on in a more efficient, productive, sustainable way.
Maybe that's my point that they should be known, and they are known, but you know, there's you know, people at times are a little bit reluctant or resistant, you know, to change. And so if that's that quo, it's really powerful, isn't it. Well I love this quote of yours. I have to ask you about this.
The longer the happy hour, the harder the hangover, explain, very very French.
Yeah, well that was you know, I think that was at Milken's at Milken Institute in May twenty two and that's when the interest rates you know, starting to raise. And I think I was telling you earlier I was surprised to see that many people in surprise because effectively the bar had been open for quite a long time with very you know, very cheap liquidity, if I may say, available, and.
Going back to the financial crisis, the entire period that followed was free those for everyone exactly.
And that's you know, that's ten years, if not if not more. And some of us, some of us, I think, had effectively lost sight that liquidity should have a price and credit, you know, has some value, and so effectively this you know, the this comment I made was that, yes, people are going to have a hangover of this mispriced, over leveled asset they may have both invested into as a consequence of this free liquidity.
So let's talk about perhaps a mispriced asset class that was relying on free liquidly. As we're recording this, there is a recent Wall Street Journal headlined company insiders made millions before the SPAC bust. What are your thoughts on the SPACs special purpose investment vehicles? How do you look at those?
So we got into Sparks two years ago, hopefully not to follow the herd, but because we saw there a very useful technology that could help some of our private companies. You know that that which is what we do, you know, belkof what we do is investing with private entrepreneurs accessing the public market with the support of experienced manager, the operating partners, you know, with the support of experience you know, financial players, and effectively, you know, we are very successfully you.
Know, unsparked.
You know some we had. We took public on NeuroNEXT Amsterdam, a great company in the TV content production business three billion turnover six hundred million a BDA. It's called you know fl Entertainment, great entrepreneurs Stefan Koby. It's a real company or spack string at I guess you know, ten bucks or around real company. So the issue was not
the Spak as a technology. The issue was, you know, the type of company that we're trying to access this market opportunistically and rightly, so in front of some capitol that had been given to Spaks promoters and managers. Remember that interest rates were negative, so you know, Spaks were used by some investors as you know, as a vault.
You know, here's you know, some.
Cash exactly, I mean, I'll make up you know, for the interest you know, shortfall, and I have the option you know, to to opt out.
So so it was a guaranteed higher yield I won't say high yields, but higher yield bonds with an equity option at the end. If you like the equity company, you can.
Stay with it.
Cyber Capitals one, a few others did the same thing. You know.
The technology itself was you know, excess of cash you know, interest rates or or get negative cash or negative interest on my cash account. So here's the cash and I may opt out. Well, we tried to do in what we did and some work. You know, although you know, we decided to give back the capitol because back to my skin in the game approach, the one we decided to return the capitol that was last you know, last month, we had you know, one hundred and fifty million plus
of our own capital committed to it. So rather than chasing you know, the cheap option with the view of hopefully making you know, the the return embeddied with the option. We're like, first and foremost, we're deplaying our capital. The opportunity is not there. You know, We're not going to deploy a capital for the sake of it.
This comes back to skin in the game. When you're a co investor with your LPs, you don't make dumb decisions because hey, we have the cash, we might as well spend it.
I think so, and So that was just I think a misuse of a new interesting technique with some investors and a misuse of interesting techniques for the wrong company.
So I read a piece recently, a research piece that said, uh, Brexit may have taken as much as five percent off the total GDP of the United Kingdom. You worked in London, you're now in New York originally from from Paris. Does that sound realistic? What was the impact of Brexit on the UK and and who has stepped into the void that brexfast teed up.
So first of all, that's a decision that was made, you know, by the by the British people, and you know, I will not comment on the on the rational. Beyond that, I read the same studios you know that you mentioned, and every day I would talk to some France entrepreneurs you in Europe telling me how challenging it has become and you know, just to move goods and things you know,
into and just your trading you know with you. The one part I can comment on was the whole debate around the future of the city of London as a prominent financial place global.
But obviously you.
Know European well, I can tell you Barry is. You know, since you know the world reopen and you can travel again. I'm actually going back more often to London than to Paris nowadays, which is my you know, the headquarter of my firm. Why that because London remains you know, a
critical business center, you know, for financial services. There are some challenging associated with from some regulation, you know, you know in the way you have to trade and white people and banks you know, had to had to open
or export some branches onto the continent. And I understand why and that, you know, technicalities, but when it comes to the cosmopolitan nature of London attracting global talents and as much as I'm French, and Paris has been doing a tremendous job attracting talents and firms, but the scale is such that I wouldn't bet against London as a financial center. So we have to cope with technical aspects, you know, regulation, cost of doing business for some has
become very punitive if you don't have the scale. And that's why, you know, if I'm a bit selfish in the approach. We were fully equipped on the continent to start with. We're now moving back more aggressively into London because we were less over exposed when many people are doing the country. You know, people are trying to reduce their investmental location to the UK, their workforce in the UK. So we're trying to be a bit contriant and taking advantage of that.
So people overreacted in one direction. It's opportunities. Maybe Europe is dealing with a war on its eastern border. What has the Russian invasion of Ukraine done in terms of energy supplies and just the entire relationship of Europe with Russia.
Well, it's it's a complicated one. It's a very sad one because I can tell you Barris sitting here in the US and and when I talked to france family over there, the perception of the war is very different from one side to the of the pont to the to the other because the reality that it's as we you know, it's two hours away from many of the Western European capital and the perception the filling with the population you know, is very you know, is very different.
So having said that, remember a year ago when the war started, obviously the concern about you know, energy independence, sustainability was was front and center. That was a I think the silver lining of the situation to put more light and focus on accelerating you know, part of the transition and in itself, you know, that's that that was an encouraging step. Looking backwards, you know you're into or
eighteen months now, you know, into this situation. It's not as bad I mean quote unquote on the energy side, which is a good news, but the whole situation, you know, which I think we are unfortunately stuck stuck with, you know, for a relatively long period of time, as creating a lot of uncertainty you know in the in the region and beyond, but also by the same token, a lot of political willingness you know, to move to move quicker.
And the response if you remember that the European government made right after the war, I mean they made more progress a matter of in a few weeks then we had on you know, in a few years. And so at times it's it's effectively when the essential is at stake that people can react constructively.
So the concern, aside from all the humanitarian tragedy of the invasion was oil prices with spike, it would eventually lead to recession in Europe. But a lot of Europe seems to have avoided that. What are your thoughts about greater Europe tipping into a recession? And pretty clear parts of Europe have slowed down dramatically because of the increased costs and dealing with the war. What does the environment in Europe look.
Like to you?
So not this similar to what we're experiencing here in the US and the reshoring you know of production capacity. We're seeing that in many countries across Europe. Re industrialization has been you know, probably the most popular world of politician you know lately, not only because you need to demonstrate less dependency you know, to outside market.
The whole de globalization you know theme.
I think it was accelerating by this whole situation, and so for politicians, you know, it's a way to show, you know, a direction for the population. It's a new paradigm, a new software and coming back to what we do for a living, you know, asset manager, it's a great frame in you know, finding ways to allocate, reallocate, working with global investors to attract more capital in certain you know, countries or for certain industries. It's not happening overnight, but
you can make it happen fairly quickly. Fairly quickly being you know, a matter of months. If you've got all these stars aligned from the political direction you know, to the to the population adhasion, and then you know.
The capital allocation.
And so if you you know, I'm hopeful and I'm optimistic that that could be, that could be the civil lining of the whole situation as dramatic, you know, the situation can be.
So you have offices in Asia. If we're deglobalizing to some degree, and China has been the big industrial driver of much of the world, what does it mean for investing in Asia generally, but more specifically China.
So what we've been doing in Asia, first out of Singapore where we were we started eight nine years ago in Singapore, and then Korea and Japan. We don't have any presence in China as a matter of fact, and the dialogue we had with these investors locally was really about attracting them to some of our existing strategies in Europe or in the US.
Asia.
Is I have the chance, you know, to go back there, you know from time to time, and each time I'm there, I found you know, local economies that have and you know transform. If you look at Singapore what it was when we first moved there and you know eight years later, I mean that's that's a global hub. Like a global hub with all the consequences you're reading every day, you know, the Bloomberg News, you know the price of real estate and the numbers of family offices who moved from Hong
Kong from part of the Middle East. You know, to open there for the very same reason that you have created, you know, a great talent hub, a very business friendly environment.
You know, you've got the.
Most sophisticated sovereign wealth funds in the world. We were lucky enough, you know, to have Temasek backing us as wely you know as twenty sixteen. I've been a great partner ever since. Great place, you know, great marketplace. And so the way we look at our single properations today.
You know, we have a headquarter Paris, and we have three global hubs New York, London, Singapore and all of these hubs, you know, then you can reach on a global basis, first investors and effective you're tracking them where we think there is an interesting investment posle and also creating investment, you know, opportunities when you've got this supply demand imbalance. Again, it all comes down to supply demand and how we can best take advantage of that.
Really interesting, So let's jump to our favorite questions that we ask all of our guests, starting with what have you been streaming these days? What's been keeping you informed and entertained? Either podcast or Netflix or whatever.
One I like and I recommend, but because that's being produced by this company we backed that we took, we helped take you know, public a few months ago. Is the Peaky Blinders. That's great entertainment, and only because I love, you know, this whole story about you know, the villain and the gangsters and all that, but more eputently because that's great.
Is that Netflix or Amazona?
It's a Netflix one. It's a Netflix one I strongly recommend and produced by our friend at fl Entertainment.
Really interesting. So who were your mentors who helped to shape your career?
So few of them are senior people I worked for when I was a young analyst, you know, an associate, because every one of them, in their own, you know, different approach, helped me challenge the fact that we are going on our own at a relatively young age, you know, for this business. Some of them telling us, well, it's either too late or too early for good or bad reasons. And on the contrary, people saying, which was less the case is in Europe than it can be the case
here in the US. There's never a good time, and you should give it a go, you know. And so many of them were finance professional most of the time in investment banking and still remained and I've still remain, you know, friends. Some of them join us by the way along the way, you know, at at TKO. And there's that's one thing that she was very valuable. When you start your own venture.
What are some of your favorite books? What are you reading right now?
So two books I've started very different. The first one I was lucky to turn one of the again Mike Milkan's you know Evan you know recently both in La and then Leon and as you know, is extremely focused on healthcare and the whole focus is putting through his
institute and the all the philanthropy around there. And the book, you know, the book is called Faster Cures Accelerating the Future of Health, you know, by Mike Milkan, is something which is fascinating because you know, in a job day to day you know, it's really you know, short term, and when you step back a bit and you look a little bit of these demographic issues. You know, we touch based on some of those issues, you know, energy and all that, but the demographic is probably the most
challenging one. And even if it's fifty seventy five from now, I think we should start factoring in you know, many of that, you know, in Today's Decision and the other book, you know, more recent I was lucky to meet a French professor in Boston who's teacher both at HBS and HKS.
She's been there for twenty years, you know.
Her name is Julie Batilana. And the last book is called Power for All, and it's all about you know, the relationship to I would say even power, but if effectively power is about having an influence on making someone else change behavior. How it's not only top down and the way we may have learned it, and how we should with the new generation in a new cycle, and the perspective of things that are you know critical to me, which are you democracy but also capitalism which is fueling
many of that. How do you reconcile you know all that, And it's worthwhile reading sounds entry.
Our last two questions, what sort of advice would you give to a recent college graduate who is interested in a career in either private equity or investing.
Well, I would Sandymno. Some of the motos were using every day at TKO Capital. Be curious, think out of the box, be on the ball, think big. You know, I will share that with them because that's one thing that doesn't change. Technology may change, but you know, interpersonal skill set and being being hungry, I think that's what matters.
Interesting And our final question, what do you know about the world of investing today you wish you knew twenty five or so years ago when you were first getting started.
Never take anything for granted.
Thank you so much for being so generous with your time, Matthew. We have been speaking with Matthew Chebron, co founder of TKO Capital. If you enjoy this conversation, well, be sure and check out any of the other five hundred or so discussions we've had over the past eight or so years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast. Sign up for my daily reading
list at Rittholts dot com. Follow me on Twitter, at rit Holts follow all of the Bloomberg Family of podcasts on Twitter at podcast I would be remiss if I did not thank the crack team that helps put the conversations together each week. My audio engineer is Sebastian Escobar. My producer is Paris walt A. Teak of val Bron is our project manager. Sean Russeau is my head of research. I'm Barry Ridholts. You've been listening to Masters in Business on Bloomberg Radio.