The Absolute Return Revival with Tony Yoseloff

public debt. A masterclass in how to think about risk, how to think about diversification, how to put together a portfolio of alt ernatives that is both non correlated to your core portfolio but simultaneously creates a form of offset or ballast to the volatility of equities. In addition to being CIO and Managing partner at Davidson Kempner, he's also chairman of the Investment Committee for the New York Public Library.

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

which is really kind of interesting. Undergrad you go to Princeton School of Public and International Affairs, and then you get a jd MBA from Columbia, which leads to the obvious question, what were your original career plans?

a fifty mile radius my entire life. My original career plans, to the extent that they were fully formed, would have been to do a career in law or potentially public policy. My high school happened to have a very good civics type program. I think I was probably at the only public high school in the United States that produced a cabinet member for both the first Trump administration and the Biden administration, which I thought was pretty amazing for a

suburb public high school. It was really during my time at Princeton and during my time at Columbia where I made the decision to pursue money management as a career instead of something in public policy. The nineteen nineties were really the heyday, I'm going to say, of mutual funds, and it was sort of the early days of electronic

stock trading. My family is a family of academics and book publishers, so it wasn't necessarily through my family background that I interested in investing, but it was sort of around us in the ether. I did a lot of reading on it in high school. In college, I was fortunate enough that I had a number of my friend's parents were willing to take me out to coffee and

kind of educate me on the financial services business. And really the inflection point was when I was at Columbia, where I had to kind of choose a path between going to Washington and working for a law firm that would have gotten me in the regulatory side of things versus, you know, working at a law firm which I did for a couple of years as a summer associate where the focus was private equity, and that was the path I chose, and I sort of never never looked back.

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

in pursuing law or not. I was very fortunate. I actually finished all my coursework at Princeton in three years, and I had a chance to start Columbia Law School during my fourth year at Princeton, which was a program that Princeton and Columbia have with each other at the time, but very few students did, so I kind of had a free look at law school. I enjoyed my time

at law school. My time working in law just sort of made it seem like it wasn't for me ultimately, but I think it's a great field that would highly recommend it to others. The business school side initially started out as a path to getting a job I actually found it. You know, it's sort of hard to think today, but it wasn't so easy for someone with a law degree and no work experience to go work on Wall Street in the nineteen nineties. In fact, I had a

few hr folks. I'd make it pretty far along and my recruiting process at different places, and they'd say to me, how do we know what you're going to wake up caring about finance? How do we know you're going to read the Wall Street Journal every day? And so questions that kind of seems silly with the benefit of hindsight, But you know, I had no financial services background there. Once I went to Business School Boom, I had the

financial services background there. But the courses I took at Columbia were exceptional, Like I really enjoyed taking courses, particularly the ones that were taught by adjunct professors where they had real world experience and so you could learn, you know, derivatives from someone who's trading derivatives every day at JP Morgan, or I learned about the retail business from someone who was a former CEO of a mid sized regional retailer

department store with a lot of department sportes that period of time, and they bring in a different CEO every week to talk to you, and that stuff just fascinated me. And so if I think about like my Columbia Business School education, like, there was a lot of good things took from that, and so the combination proved to be very powerful for me.

of whom found it many years into the future. There's no controlling the fact that it's a great education and it's a great way to learn how to think, and especially for the types of investing we do, it's been super helpful.

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

us for summer. So I literally met three partners. They offered me a job, and I said, these folks have about a billion dollars under management and there's about fifteen people working here. That seems like a pretty good ratio in terms of number of people to dollars under management. And I knew a little bit about distressed at investing, just because I had taken a bankruptcy course in law school and there was maybe like half of one class was devoted to what this was. It was really a

pretty nascent industry. And so I said, Okay, I can go be one of one hundred or two hundred people or whatever at a bank training program for the summer, or I could be the only person who is doing this. And they had hired an intern in the year before, so I spoke to him on the phone. His name is Dan Zwern. He went on to founding money management firm that ultimately didn't work out and now runs Arena Partners. And it seemed like a pretty good ratio in terms

of opportunity. And I got there and it just spoke to me, and it spoke to me because I liked the fact that I could do a form of investing that used both my legal background and my financial background, and I felt like there were many areas I might spend time on that might do one or the other, but wouldn't do both of them. So the joke of it is, I'm literally the only person who applied for this job. They literally got one resume, and that probably speaks as much to the time as it does to

anyone else. I mean, so, if you weren't doing a dot com startup in the late nineteen nineties from Columbia, you were going to work in investment banking, or you were going to work in consulting. They were like a handful of people who were going to work in money management at all, Right, that really was not a big area, despite the fact you had a big value investing program there.

At a time, these would have been the more popular career paths, and obviously non financial services career paths as well, And to me that was kind of fun, Like I don't know, I mean, so the first two years of my career, Davidson Kaepner, I hated most of what I was looking at as an investor, and I kept saying no to things. And what I didn't know is that

was actually the right answer, right. You know, when you get to an investing job, you want to put, you know, investments on the book, and that makes you feel like you're accomplishing things. Most of the companies that were in trouble in the late nineteen nineties deserve to be and it was because it was sort of a peak of financial markets. The really good opportunities probably started three to four years into my career. So I felt very proud

of the fact afterwards that I didn't like anything. But at the time I was like, are they just tossing me the bad stuff that I'm looking at all these investments and not wanting to do them. But it turned out no, that was actually what most of the opportunity set was in our world.

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

felt the need to leave. The other thing I would say is, you know, Davidson Kamptner is an old school Wall Street style partnership where we make new partners every couple of years. When partners leave our firm, they get an earn out of their shares, and the shares are ultimately effectively acquired by the ongoing partners in the firm.

And that structure existed in the nineteen nineties. We've made some changes over the years to it, but a lot of it's still substantially similar to what things look like.

And that's because if you look at the founding of Davidson Kamptnor, you know, Marvin Davidson had been a senior executive at Bear Stearns and Tom Kaepner was a junior person at Goldman Sachs, but knew the Goldman Sacks structure quite well, and they didn't know each other when they formed the partnership in the mid nineteen eighties, and so they came up with an arms length agreement that took the best of what they knew from Bear and Goldman,

and that structure stuck and it sticks today. And so what I knew for me was if I did a good job, there could be a career for me at Davidson Kepner. And so not only did I have like people that I liked and a thing I liked doing with my time, but I knew if I put my head down and did a good job, there was like a future there for me. And so that was just very very powerful. I mean, I will say, like you look back, I mean from when I started for the summer,

it's almost twenty seven years ago. It does feel like a long time, but it never felt that way along the way, you know, I mean, you know, with any career, there's always good in bad, but overall I've had an amazing experience.

And when not that much long after we have the financial crisis, the companies that were partnerships still with their joint in several line ability somehow managed to not get into trouble. I guess they were highly focused on putting everything at risk. The agency problem with companies that had become public where the partners no longer have joined several They look at every company that ran into trouble, none of them were partnerships. It's kind of fascinating how that turns out.

years ago. We're primarily an investing firm, We're not an asset gathering firm, and so for us to offer an investing fund, my partners and I we want to invest our own money side by side with our LPs. We're by far the largest single investor collectively in our five and so if an investing product is not a good idea, we're not going to offer it, even if we have clients who would want it, because we can't put our you know, imprompt centuur or whatever behind it.

to the person who's who's involved. And again, having a being a private firm, you know, we're one hundred percent owned by our current and retired partners, with our retired partners in an earn out, so they eventually don't own shares of the firm anymore. And so you're beholden to two constituencies. You're beholden to your LPs and you're beholden to yourself and your employees. And you know, that's really how we run our business, and so you know, it

kind of keeps you out of trouble. It also keeps you very focused when things are going payd right. You know, we have lived through a lot of crises. I lived to the Global financial crisis. I lived to the COVID crisis. COVID was probably even harder in a way because Tom Kaepner had just retired a few months before that, and I joke that he left me a playbook for a financial crisis, but he didn't leave me a playbook for

a pandemic. And so some of the hr things we all had to deal with, and getting people out of the office and getting people back in the office, we had to kind of invent along the way. It really focuses the mind when you've got your money with your mouth.

statistically impossible, certainly seems unlikely. So we have the dot com implosion, and then after that nine to eleven, and then we have the financial crisis, and then in the twenty tens we have Brexit and the threat of Grexit, and we have the flash crash, ultimately leading a few years later to the pandemic. Does it feel like we have these situations, these credit crises, which must be great for an opportunistic credit investor, But does it seem like

they're coming along more frequently than historically? Like my recollection is growing up is the SNL crisis and then we really didn't have like a major problem until the dot com crisis. Are we getting these more frequently or does it just feel that way?

things for that. So, first of all, I think the pandemic was an exception compared to some of the other crises, because I would suggest that the dot com bubble or the GFC, or maybe some of the European crises in the mid twenty tens were very predictable, like if you looked at where share prices were in the nineteen nineties for tech stocks, or how levered banks were with a couple with the subprime crisis that was going on in the mid two thousands, or you know, some of the

issues with you know, the sovereign credit in Europe in the mid twenty tens, Like those were all with the benefit of hindsight, like, oh yeah, of course that was going to happen.

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

because there's subordination below you one way or another. In the capital structure, or there's assets that you can claw them on too, that you can sell off, or maybe not all those assets are markets driven. COVID created a lot of random winners and losers. Sometimes they were winners and losers for a year or two and ultimately made their way back, And so I think there was some

more random noise in what happened in COVID. So I probably would take less lessons on a going forward basis from the COVID crisis than I would take from some of these other crises. I do think that you know, if you look at a very long period of time twenty five years, you had twelve or thirteen of them where you had interest rates at zero right or close to zero and closer to fifteen when you added up, and then the interest rates for most of the rest

of the time I am. You know, US treasury is probably peaked around six percent, a lot of it's been four or five percent, and so you know, these have been pretty tame periods of time, and so you are gonna have an occasional CRISI I mean you go back over like long periods of time in finance, I do think having the economy blow up every ten years was a very you know, eighteen eighties eighteen nineties thing as well, and so I think I think history does repeat itself

a lot. To me. I don't want to say it's part of the fun of being an investor, because I don't mean to be crassy. And these are people's jobs and livelihoods.

and those exist sometimes but not often. And the reality is that the market's efficient enough that many people will figure out quickly it's a good company with a bad balance sheet, and so it's not going to price the way it probably would have priced twenty five or thirty years ago. But there are a lot of businesses that just go through cycles, right, and they may appear to be bad businesses today, but they're actually going to be

great businesses again tomorrow. And it's more of like a temporary thing that happens to the business and not a permanent thing. And you know, that's where I get really excited. I mean, it's interesting. You have to be a little bit contrarian to do what we do, but you have to also actually be a little bit optimistic when other people aren't optimistic. And so you take a bad situation and you say, hey, this is how we're going to

make it good. And sometimes we're actually you know, especially in our private market investments, we're applying the elbow grease. We're making the management changes to make it better. In our public market investments, we're serving on creditors committees and often bringing in a new management team to do that. Repositioning a business sometimes selling off subsidiaries it don't make sense for them to have, or they can't afford to

have any more. And so yeah, it does feel satisfying, you know, three to five years later to look at that and say, see how this is perceived today compared to how it was perceived when we got involved in it. You know, we were among the only people who you know, figured this out at the time, or we figured it out first or whatever it is, so that you know, I sort of you know, as I just said, like, that's part of the like enjoyable part of this job.

Some of the psychic benefit is being first or among the first to figure these things out.

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

made a fortune in that era. Those are lessons I corrected later on, where we sort of boots on the ground in places around the world, advantage of opportunities as they emerged. But I learned that from Asia in terms

of what we weren't doing. But look, I mean I was on a trading desk when the world was falling apart in August of nineteen ninety eight, And you know, I've told this to some of our younger people over time, Like the best time to be on a trading desk is when you have no responsibility, right, so it's not your fault that things are going bad, and you just learned from it and you watch the people around you. And I remember how cool and calm and collected everyone

was in the face of you know, dramatic adversity. And you know that was super helpful to me when I was dealing with O seven or eight or things that happened after the fact, and so you know, I quite enjoyed having that opportunity. Huh.

role of absolute return in a portfolio. And the reason I reflected on this is if you go back to the start of my career, so the nineteen nineties and the two thousands, you would have relied upon absolute return strategies to be a volist in your portfolio and a diversifier in your portfolio, but you also would have relied upon them to get you home in terms of the

overall portfolio objectives. Right. So if you look at a typical allocator, right, they've got a five percent spend rate and they want to earn something plus inflation over that. So many allocators are shooting for kind of higher single digit rate return seven or nine percent, depending upon the

institution and the needs. And in the two thousands, when I started my career was a first partner at Davidson Keepner, that would have been the expectation of absolute return was that you were going to earn high single or lower double digit rates of return in the strategy NBA diversifier and have low volatility. There were other strategies within abbsolute return that might have had higher return higher volatility expectations,

but that would have been the base expectation. So what happened, right, You had a period of time with fifteen years roughly of zero percent interest rates. The longer that period went on, the more and more returns got reduced in the area. I would say by twenty twenty, when the pandemic hit an allocators expectations for appsort return strategies would have just been to be a ballast against their portfolios. And what I mean by that is we need a ballast, we

need a volatility dampner. We're going to use absolte return for that. But we expect to earn our quote unquote real returns off of our equity strategy. So whether that's public equities or private equities, or maybe if you're a little bit more adventurous growth equity or venture capital, and you pair those two things together and you'd have a great portfolio. So you fast forward to twenty twenty four, I think things are very different today, and we wanted

to figure out why. I mean, absolute return strategies collectively had their best year at a very long time last year. I think they're off to a very good twenty twenty five as well. So why is this happening? So is it just rates? And so you're unquestionably in a period of higher rates today versus what you were in the two thousand and tens. But it's not just rates, it's

actually dispersion. And so what we did is we looked over long periods of time and there's a high correlation between dispersion and markets and higher rates, and so not only do you get the benefit of a interest rate premium today compared to what you had four years ago, but you actually get about fifty percent it's a touch more than that expectation of return above the risk free rate today because of where a dispersion is in markets,

and that dispersion exists in both credit markets and equity markets, so it's in both those strategies, and that's why you're getting better performance than absolute return. We think the rate story is here to stay. But even if it's not for a period of time, even if you have the short term rate go down, ultimately we think that dispersion is going to last for a long time, which is kind of what happened in the two thousands as well.

And so again you have a whole generation of allocators who are trained for absolute return to serve one role in their portfolios, and we actually think it serves a second role in their portfolios as well, which is a return driver. And so you take those two things together, we think it's a really powerful asset class. And I wrote this paper because I just don't think there's been a lot of work that's out there on it. You know, you see headlines about people are getting more interested in

apps or return our hedge funds. Again, you see other headlines that there's not a lot of capital available for the strategy because many allocators are over allocated to private equity or growth equity or venture capital and they don't have the liquid capacity for it. But I think for those who do, who are interested in it, they're getting rewarded for it right now. And so that's the root of the paper.

Is it distress credit, is it absolute returns? What is filling that role going forward? And then we'll talk about how the higher rates have changed the calculus somewhat later, But what is the new ballast today that used to be bonds.

I mean, bonds are a ballist except if they're not. Right, So you go back to two twenty two in twenty twenty two was certainly the worst year for fixed income in one hundred years. It may have arguably been the worst year for fixed income in the history of the United States. If you go back over very long periods of time and performance of bonds, you're basically down mid teens depending upon what you own, whether it was treasuries or investment great or high yield of things along those lines.

Twenty twenty was not a great year for the equity markets either, right, So that was a year where people started to seriously question the sixty forty or seventy thirty model with where things were. If you were an absolute return type strategies, you did much better that year, if you were not opt just a credit strategies, you did much better that you protected capital I think at a minimum in those strategies, and that gave you more of a chance to take advantage of upside in twenty twenty three,

in two thousand and twenty four. I mean opportunistic credit has the additional advantage that it tends to be pretty inversely correlated in terms of when it does well to strategies like growth equity and venture capital. So again, those

are like perfectly good strategies. I'm not like put polling the I'm just saying they're very cyclical in terms of making investments in those strategies, and so they actually pair very well with opportunistic credit in portfolio is because typically oportistic credit is doing well when those strategies are not doing well, and sometimes vice first.

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

we do. It also include relative value strategy, so we've got some of that in our portfolio, but it's not the dominant strategy that we have because of the dispersion you have in markets in that period of time. I also think it's a really good tailwind for opportunistic credit specifically, but I give a little bit more of a nuanced answer to that, and an opportunistic credit I think you need to go back to how we got here, right. So it's not the absolute rate of return in fixed

income today that's interesting. It's the sixteen months that it took from early twenty twenty two for the base rate to go from zero went to the five and obviously it's come off of that a little bit since then. So most capital structures that are in the market place today were set entirely or in some cases partially but meaningfully.

Prior to twenty twenty two, when the base rate was zero, and when you're close to fifteen years into a base rate of zero, companies were assuming, or people who owned assets were levering them, were assuming, and probably rightfully so, that the base rate would stay zero forever. And in fact, you know, it's one of those things where it's so easy to foresee with the inflation we had in twenty twenty in twenty twenty one, that the base rate was going to rise, but it still came as a shock

to the markets where it actually rose. And so you're now in the middle of this I think several year period of time where owners of assets are like, hey, I got to actually raise money in my capital structure to de lever I mean, some assets are going to be you know, need to be just fully restructured because

they aren't worth what the debt is worth anymore. But there are many other asset owners who have assets who have equity value, maybe not as much equity value as they had previously, and they look at their capital structures and you probably need to raise twenty to forty dollars of equity for every one hundred dollars a debt that you had before to delever your capital structure. And that's super interesting because there's a lot of different ways companies

can do that. They can do liability management exercises to try to whittle down the debt. They can sell assets off to you know, get their house in order, in direct corporate lending land, private credit land. They can just pick. They could say, hey, we're not gonna pay you interest for a year or two, so just tack it onto the principle and let's sort of try to fix the

ship that way. There's a lot of different ways this can get solved for and that's like the theme an opportunistic credit that we've been living in the last couple of years, and it's a theme I think we're gonna be living the next couple of years. And so I think it's super interesting because unless you believe that rates are gonna rise materially, like, there's no bailing out of this situation of these companies. It's just math in terms

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

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

doing it from New York or London. We opened our London office, I don't know, at the end of two thousand and two thousand and one, something along those lines, and we really invested it in that in that office. I mean, the story I like to tell is we had a pretty good sized office in London. I make a point of going, you know, four or five times

a year. I showed up in early January two thousand and nine, which I remember because I remember seeing all the Herod's holiday ornaments for sale in the gift shop at the Heathrow Airport on my way home and I go to see the old Merrils. Right, So Merrill Lynch had been merged into Bank of America at this point, but they were still there and they said, we just want you to know you're the first American who's come to our office in four months. Wow. And I said,

oh my god, how is that possible? And they said, well, you know a lot going on in the US. This was right past fall two thousand and eight, right, And I said, you know what, there's an opportunity here. So we did a massive hiring spree in London over the next three or four years. And I said, okay, London, because you know, all the stuff in the US had cracked and in London it hadn't cracked in the same

in the same way. And so the European opportunities came a few years later, but they came in big droves. And you know, we followed the same playbook in Asia as well. We opened an office in Hong Kong in twenty ten. We now have smaller offices in Mumbai and Shinzen as well to access the China and India markets. And you know, that was a fantastic decision. Those markets are less efficient than the US is some of that structural. Some of that there's just fewer people trying to access

those opportunities. You need to have local people, you need relationships. It's much more relationship driven. That was like one change that we made and I think set us up for, you know, continuing to grow and survive and thrive as a firm. The second one i'd reference is our entry more seriously into private markets. And so you know, if you go back prior to twenty ten, all the capital we had was sort of hedge fund structure capital where it was reasonably liquid, maybe had the small ability to

do a side pocket. We generally didn't do that, and she had to mostly stick to liquid securities in what you were doing. We thought there was going to be a really good opportunity in buying less liquid, longer duration opportunities. We might own assets for four to six years, let's say, versus things that were marked to market on a daily basis, and we thought there were things that you could do

to those assets to improve them over time. This was sort of the first wave of bank selling that probably came to the US in the two thousand and eight to twenty eleven timeline. And probably came to Europe in the two thousand twelve to twenty fifteen timeline. So we had our first you know, sort of private equity style strategy due to Operatness to credit, which launched in twenty eleven.

And even though the opportunity to buy from the banks ultimately dissipated, what we discovered was as private markets grew,

this just became a bigger and bigger opportunity. And so this has really been a substantial portion of the growth of our business in the last fifteen years, as being in private markets and being an opportunistic credit in private markets a lot us ultimately to be an asset back lending led us to be in real estate as well, which is a big strategy for us with operatistic credit, and I think it is really important to have both

tools in your toolkit. You know, there's this term for technology investors which is crossover tech investors, which is basically investing firms like co To or Tiger Global that have

both big public market and private market businesses. I wanted to be a crossover credit firm, and by that I didn't mean between high yield and IJ What I meant was between public markets and private markets, because I think you learn a lot being in private markets that's helpful for public markets, and I think you'll learn a lot as a public markets an investor that's helpful for private

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

the past you know, decade and a half. Tell us a little bit about the opportunities you see on the continent and in the UK and how much has the Brexit affected the dynamic not just London in the UK, but in Europe overall.

that's just much of a less efficient approach. Obviously are some multinational companies in Europe, but it's maybe a smaller part of how things work over there. And so while I'm not sure i'd want to be a tech investor in Europe, I'm super happy to be an opportunistic credit or an advent driven investor there because these are really very deep value markets in terms of where you're investing, in terms of the specific impacts of bregsit. I mean, so, first of all, it's not been great for the UK

in terms of where things are. I keep thinking they're going to turn it around at some point, but it's been a tough seven or eight years there in terms of the economy and the need really for the human capital that they've lost and maybe have a harder time attracting as a result of where bregsit is in the continental market. It's really a country by country scenario, and so I look at markets like Greece or Portugal or Italy, and they've actually proven to be really strong markets for US.

And those are markets that folks, particularly a pond away, often shy away from because it's complex to be there. They don't know how business is done. They have certain assumptions about the markets that maybe aren't always true, and then people have assumptions about the northern European markets that also aren't trilling. Germany's in a very hard spot right now,

there's no getting around that. Again. I've got confidence it will turn around over time, but I do expect there'll be a lot of opportunities there between now and now and then. And there's definitely a big macro lens over Europe as well in terms of what can happen in Europe over the next five years, which is not just related to Brexit, but maybe related to some of the geopolitical forces that are in play in two thousand and

twenty five as well. We like complexity, like we seek out complexity, like when there's very few buyers of assets or people willing to lend, because you know, you have to sort through a lot of stuff, like even just the complexity of understanding how different restructuring law as are in Spain versus Portugal, right, Like, that's super helpful for US in our strategies. The fewer people who can be

involved in assets, the better it is for US. And Europe creates those opportunities, and so it continues to be a fruitfall area for US. But if folks in the United States don't want to look at it, that's okay.

see on the private side? Do you run into similar valuation issues or the math is the math, and when the opportunities arise, it doesn't matter.

out tech, if there's really such a valuation gap. I mean, it's something like half the market cap in the US and tech at this point when you look at the S and P. That's not to say I'm in Europe right, there's very little tech industry. So I do think the tech separation is a big part of the US versus European separation. For better or for worse, you don't do a lot of technology related investing in opportunities to credit, you get some chances. Sometimes tech companies are not often

great for opetusity to credit. Perhaps software will be different. If there's often if there's ultimately a crack in the software world, excuse me, but I would say that, you know, in the sectors that we invest in, which is basically everything else, you know, we are getting paid a premium to invest in Europe for the reasons that we that we said.

very different from each other. And then I was the deputy managing partner for several years before becoming the cohed with Tom for two years. You know, Tom was very focused on succession and leaving the place in better shape than he got there with, so to speak, and that's super helpful. I got a lot of calls because we're now third generation and running the business about how you

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

how do you broadcast your message out? How do you make sure that the things that are happening in the portfolio are happening in a way that you want them to happen. How do you empower people when everyone's sitting in their home or whatever. So we rode through the pandemic and we learned a lot. But I did have, you know, twenty plus years of training to do this.

And because I've only been at one firm in my entire career, like, i didn't have the benefit of being CEO somewhere else, but I'd the benefit of really knowing David's and Kepner cold and that probably proved to be the biggest advantage.

at some point, right. We you know, have brought in different things over the years to speak to what our workforce is today, not what our workforce was ten or twenty years ago. So the example I give is when I got to Davidson Kapner in the nineteen nineties, I feel like our workforce mostly cared that we had clients, right, and by two thousand and eight, two thousand and nine, they didn't want too many of the clients to be fund of funds just because fund of funds weren't doing

very well at that period of time. That was a transition where more and more investors in apps return strategies were investing direct and obviously there are still a few allocators that are out there of scale in that world.

And then by the mid twenty tens, people wanted to know not only that we had clients, but what public good are we doing right, So we instituted a program called DK pledge Right, and it was a way that people could learn a little bit about what our clients did, you know, so whether returns went to you know, a lot of our clients are endawments or foundations or pension funds or people who are doing real good and even our high networth clients, many of them have big philanthropic

arms that are doing very good things with the returns that we generate for them as well. But it was also a chance for our employees to give back to charities, bring charities into the organization. So we've given away like six million dollars and I think had a thousand different organizations. We've impacted twenty five hundred hours of volunteer time. That's all stuff that came from like thinking about where our

workforce was today. It's not to say that our workforce wasn't very philanthropic in the nineteen nineties and two thousands. That actually was. It's just people did that more outside the office. And by the mid twenty tens are people wanted more of an integrated experience where they could do things that were philanthropic while doing their day jobs. Right, And so you have to just kind of keep a pulse to where people are today, and I've tried to

really do that in terms of my role. You know, again, the place is going to be exactly the same in terms of how do you keep people in seven offices like singing from the same page. There actually were really good learning lessons from that in the pandemic, and by the way, I did my best to get people back in the office as soon as humanly possible. We returned to the office, I think well before many of our peers did. That was important to me in terms of

continuity of the teams and keeping the culture. But I started doing a bi weekly email to the entire firm during the pandemic, and I did that because that was the best way to communicate with people. We did some videos and things like that too, but I wanted something in writing, and it was a combination of PEP talk, firm news, sometimes some market insights and not sure I've got amazing market insights every two weeks. But over time I certainly do right, and when I really had something

to say, I would say it. And we've kept doing those even through today. It's become like a hallmark of our firm. We get very good internal feedback on that because it was important to me. That's the way everyone knows they're going to hear from me every couple weeks, no matter what. Huh.

like you know, possibly could I could have stayed. But if there wasn't going to be a growth in the industry, I wanted there at least to be growth for me, right. I just wanted to be doing different things at a more senior level twenty seven years in than I where I started that. But fortunately all three of those things

did align. Look, there's real human capital you get by being at a place for a long time, right, I mean, you know't you don't want to be somewhere for a long time just because of that, But the reality is there are switching costs that you have when you leave our roles. And so I was very fortunate that I was able to grow with the organization, and I'm very fortunate that I enjoy what I do.

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

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

and why people are attracted to it. So, number one, the outright rates of return that you can earn on strategies like that, I think are compelling compared to many things in the market over time. But they also are very good diversifiers in portfolios, And so like, why are

these strategies attractive to allocators? They're attractive to allocators because you can achieve your overall objectives just being in the strategy most people or not obviously, but you can also do it in a way to diversify your overall portfolio. And not only does it diversify your overall portfolio in terms of when your earn rates of return, ie, the strategies tend to do better when other strategies aren't doing well.

It's sometimes when capitals return to you too. So you know, we did some work a couple of years ago We actually published a white paper on this in twenty twenty three. What there's actually an inverse correlation between when opportunistsic credit funds return capital to their LPs versus when growth equity and venture capital funds return capital to their LPs. And that kind of makes sense intellectually. So if you're you know, an allocator, you probably don't want to only have growth

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

there's sort of force selling because of that. But I'd say more, you know, credits are credits, right, There's only so much that any one person can borrow, anyone entity can borrow, and so you know, there have been reasons you've had to restructure. Greece has been an incredibly successful restructuring. The Greek economy's booming right now, right, So that would be an example of one. And they don't come very often.

It's not a very big part of our business, but they're out there in terms of things that people have invested in it.

of equity. My theory is, if it doesn't work, you've just spent some of your coupon on sort of equity optionality. If it does work, you can really juice your return. So again, not something we do in every time, in all the situations, many of the companies we invest in public credit actually are private companies, so there's no opportunity to do that in those obviously, But every once in a while, a credit opportunity will lead us to an equity opportunity.

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

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

you fast forward to twenty twenty five. It's not totally clear what the new anti trust regime is going to be, but all signs are it's going to be much more accommodating to mergers. Maybe not in every industry. I'm not sure this is true in big tech, but in many other industries as well. And so you've got a number of management teams and boards that we think have been

sitting on the sideline. And then you know, people need to find growth, right and M and A is sometimes an easy way for people to find growth in their businesses. There are a lot of businesses that deserve to be consolidated or should be consolidated, and you know, the fancy markets I think are very amenable to it, right. A lot of pent up demand, a lot of pent up demand, a lot of demand for new debt to finance acquisitions for sure, because there's you know, a huge amount of

demand for performing debt in general right now. So you know, in my mind, this is probably a US centric story first and foremost. You may see some in Europe, but I think you're going to see a lot more in the US. I don't know if it's two months into the administration or ten months into the administration, but I think it's coming.

And these things tend to have positive effects, Like the more M and A you get, the more M and A you'll have because all of a sudden, if you're in an industry and two of your competitors have done a deal and you haven't, you're behind and it can actually endanger your franchise. And so you know, it tends to be there's a reason why the M and A comes in buckets in terms of like specific industries. Sure, and so once that like flywheel effect happens, I think

you'll see a lot more of it. So that that's my viewpoint on where m ANDA is heading in twenty twenty five.

real estate investors don't invest that way. Many real state investors specialize in a country, or they specialize in a sector. I think that's hard. I mean, if you look at the last fifteen years, right, and you were to go back, you know, I don't know twenty ten, right, So I think retail assets and office assets would have been perceived much better in twenty ten. I think that data center assets and industrial assets would have been perceived much worse

in twenty ten. Right. So just like there's I don't have a mathematical answer for this, but just like there's substantial dispersion and performance and equity and credit markets, I think there's actually substantial dispersion in performance in real estate

markets as well. And geography too. By the way, there's geographies that have been big winners and geographies that have been big losers, And so you could have been the best office fund manager for the last fifteen years, and it's been a really hard place to make money, right, And so we try to take that out by investing

across these areas. So the benefit of doing opportunistic real estate investing, and I don't just mean across geography or product type within real estate, but I mean buying into assets that other people don't want to own, is real estate markets have gotten hit much harder by the rise of interest rates, even that corporate markets have, you know, corporates at least there's been some growth, right, So real estate much less growth in terms of rents in most

of these areas. Data centers and industrial would be an exception to that. And the covenants in real estate debt are much less for giving than they are in corporate debt, and the term of the debt is much shorter in real estate debt than it is in corporate debt. And so the crisis in real estate is like here and coming very quickly compared to maybe corporates, where companies in some cases have a little bit more duration, a little

bit more time to try to solve their problems. And so you know, for us, real estate's a very interesting asset class. It's an asset class many people avoided in the twenty tens with rates where they were. I think there's a lot more alligat or interest in it than there was previously. There's different approaches, there's different ways to win in it, but we think it's very worthy of our attention.

just a boom in converting office space to residential. Seems like you kill two birds with one stone if we do that in Manhattan and elsewhere, is that a viable opportunistic space in real estate or is it just building by building case by case.

window in all the square floor plan rooms, right. You want up with a huge amount of a square footage in the middle of the building that potentially becomes unusable, right, And then it's a huge cost to retrofit.

there aren't conversions that that makes sense. There definitely are some of those, but I don't think it's the majority of situations, And so you know, you do, and it really is the sixties and seventies buildings that are the ones that are in trouble. Because you know, I think about like Midtown East where we are right now, it actually isn't so easy to get space in mid ten East right now because guess what the Plaza district, which is what it's widely called, it is like a super

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

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

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

debt that might rank ahead of you in the capital structure. Right, So if you own a bunch of unsecured debt and they come to you and they say, well, you're owed a one hundred cents, but we're going to offer you seventy five cents of you know, debt that's got a higher coupon and it's higher in the capital structure than where you were, and so you almost are co opted into having to take that agreement because if everyone else takes it and you don't take it, all of a sudden,

you've been primed by everyone else in your capital structure, even if it's only seventy five percent of the amount. And so that's a very active exercise that's going on in public markets right now. Some of the companies have to do this because they don't have any other chance to right size their capital structures. Other companies are trying to do an opportunistically. They say, Hey, if we can get something from the creditors for nothing, why don't we do that.

the capital structure that's not along with us. They're gonna get less, and then we're gonna look even better than they look because we've gotten a better return on the same that's creditor creditor. It's just a perfect violence there. Well, you all may have invented it. I didn't invent I No, I've.

usually try to work together on things. Although I think even the fabric of that is starting to fray a bit, and they may say, okay, company, you can't pay your debt, we're gonna stay marked at park. So we're gonna keep the debt at par, but we're not going to make you pay interest for the next year or two while you right size your business, and we're going to tack that onto the principle. So if it's ten percent coupon

a year, you're not going to it's one hundred. You know, it's one hundred and twenty of principle, and during that coupon holiday, you're going to fix your business. So the business is magically worth one hundred and twenty at ten uh huh.

private markets. What is happening in public markets with liability management exercises, but it's been being done in a way where there's no mark to market. That only works if the loan is worth par at the end at the new amount. Right, So if the loan is worth one hundred and twenty cents at the end of this, that's when that works. If the company isn't worth more, and often the companies might be worth less to the end of this process, you wind up with a loan that's

got less value. If the company was worth ninety cents to begin with, instead of being ninety out of one hundred, you're ninety out of one hundred and twenty. So all of a sudden, what's left is worth seventy five cents. And so it's a way to postpone problems for a few years. It doesn't always solve problems. Liability management exercises are a way to postpone problems for a few years. They also often don't solve problems.

in individual strategies. I mean, some of it's obvious, right If you have the same q SIPs or positions in a public markets fund that happened to be in different areas, that's an obvious area that you're going to find risk. You know, industry concentration will be the second most obvious area that you're going to find risk. You know, things like how are each of our books going to perform

during a COVID type crisis or a GFC crisis. You stress test, but ultimately you don't know, right because you know there are different markets that do better than you think in different markets and worse than you think in different markets, And so you know, it goes down to my basics. You know, the thing we have a risk arbitrage business is it allows you to think about risk reasonably simply. You know, the risk arbitise mantras. What can you make if if your deal closes, and that's a

pretty defined amount of money. What do you lose if your deal doesn't close? And we're pretty good at calculating that, what's the probability of success? And then what's the probability that the market is implying with its price to success? And if you can get those four things right, it's basically like poker, you can underwrite everything right. And ultimately, if you know your odds every time, you can win consistently over time. You know, you try to take that

mantra and you apply it everywhere else. Unfortunately, most other parts of our portfolio, there's several different scenarios things can go down, So I go back and credit in particular. You know, one of the questions we like to ask is what are all the bad things that can happen to us where we still get our money back? Right? And that's sort of how I sort of this trading risk.

And there's ultimate downside risk and I like investments where you could really really stress it and you're still going to get most of all your money.

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

a way that they find helpful. They've allly asked me to serve on their investment committees, which is why I've done so. New York Presbyterian is newer. I got involved in that in twenty twenty one, and that was a situation where I felt like the city needed me in the healthcare organization in the city needed me. I had a very close relationship with that institution, so it wasn't random, but it was one where kind of came to it later on. And in terms of the endowments, they're all

very different. I mean, New York Presbyterian is in the low double digit billions, New York Public Library is between one and a half and two billion, and Princeton is in the thirties. In terms of what they are, they require different things. In terms of being a trustee. You know, at a smaller institution, you typically have a board driven model,

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

than anything else. Each of those committee is kind of as a different approach and how they want to run their portfolios and manage their portfolios. And you know, I like to think I contribute to the meetings. I also learn a lot while while I'm there. Right, I'm certainly a subject matter expert in each of the areas that we invest in. I think I'm reasonably knowledgeable about all the areas that all the endowments invest in, but I'm not a subject matter expert in venture capital or things

along those lines. And so it's been a fantastic experience and a good way to give back. But you know, when you're at a smaller endowment, and I don't view too belion is small in the real world. But like when you're at a smaller endowment, you have to think about things differently. You're gonna have less staffing, you can cover less number of managers. Your institution's needs with respect to your cash flow might be different. At a larger institution.

You have to put each of them in framework in terms of what you're trying to achieve, and you have to make sure this's buy into that model up and down the organization. So the investment commit needs to buy into what the staff is doing, which needs to buy in. There needs to be buy in from what the management of the organization is doing. There needs to be buying from the full board. When you get all four of those things right, you can do really powerful things.

a decade plus. And then obviously the Yale model under David Swinson was unique, and once Swinson began thinking about retiring that no longer was putting up the sort of numbers they had in prior decades. What is Princeton doing other than just keeping their head down and quietly doing what they're doing.

It worked him for a few years earlier in his career, had a spectacular almost thirty year run running Princo, and he's been replaced by a brand new CIO, Vince Tuwey, who came from MIT and had a very long career there. Mit has been among the best performing endowments as well, and the head of its endowment, Seth Alexander, is also

a disciple of David Swinson. The second thing, which was came out in our recent President's Letter, which he publishes annually, is that you do have to look that endowment returns have come down over long periods of time, and that's something to do with Princeton or Yale or any of

these August institutions. It has to do with you know what I mentioned earlier, capital chases returns and market's become efficient over time, and things that David or Andy were doing that were completely visionary in nineteen eighties nineteen nineties today are commonplace.

we all used deerically today. I can't substantiate it, but I take Tom's word for it in terms of being a thing. And so you look at what these institutions created and now the incredible industry that's come from it, it's pretty staggering.

going to come out this fall. Gilded Age, so Gilded Age is an HBO show, and it's basically about life in the eighteen eighties or eighteen nineties, so hence the Gilded Age of the United States. And there are characters that are based on Cornelius Vanderbilt or Jay Gould or some of the leading lights of the era. It's always an era. I found it very historically fascinating, and I think they've done a great job with the show. It's

a great period piece. I mean, if you look around, there's more buildings left here or Newport or Albany from that era than you would think, so that the don a very good job of integrating a cgi with some of the older historic buildings. You know.

my grandfather and my father ultimately ran. It was book publishing, and like I mentioned before, I come from a family of book publishers and academics, and so it was good to sort of learn over the dinner table when I was a kid what was working and what wasn't working. My mother was very volunteer work when I was younger, and when I was thirteen, she said, you don't need me anymore, I'm gonna go back to work and had a twenty five year career as a senior administrator at

our local community college. So that was very influential on me as well. Growing up. You know, I ran track both in high school and in college. I ran like half mile and cross country.

styles and how they did things. But I also found people out there who's investing style I admired. I would try to figure out what they were doing and reverse engineer it, and so that's super helpful. I mean, some of that you can do just by reading. But there's other portions of it, like when you see the trades and you see the investments and like you're involved in them, and you see how someone did it better, and then you can figure out after the fact, like what you

could do next time better. Like I just found that like super helpful. I'm a little bit further removed from that today. This is probably a little bit harder for me to do that, but that's some of the ways I really taught myself to invest over time.

businesses and how you deal with that. I'm also part of the way through a book called Gambling, ma'am, which is about Masayoshi sun And by Lionel Barber, and that's a book where he's a fascinating character. I think a lot of people know about, you know, the last ten or fifteen years of Massa's career. I don't think that many people know about how he got there, all the times he had near misses with the whole thing could have blown up, or things along those lines. So that's

very interesting to me. You know, early in my investing career, there are a number of books that are classics that I read. It's actually not The Intelligent Investor by Ben Graham.

It's obviously a great book, but it's books like Extraordinary Popular Delusions in the Madness of Crowds by Charles McKay, or Reminiscence of a Stock Market Operator by Edlin Lefevre, which was a pseudonym for Jesse Livermore, who was a famous trader in the nineteen twenties and nineteen thirties, or Where Are the Customer Yachts by Fred Sweed, you know, very early in my career, Like, that's how I learned, even before I started a decay. That's how I learned

was reading these books. And so even though other books maybe I haven't read in a little while, like they're all classics, I stole readily recommend.

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

as soon as you want to. If you know what you want to do, you should go do it right. And so that's piece of advice number one. Piece of advice number two I got from my post college roommate's mother, and my post college roomate ultimately followed the same advice, but it took them fifteen years. And the advice I got was, and I'm going to use the Goldman Sachs for this because what she said at the time, but you could apply a number of other firms to it.

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

but it's also just being a Davidson keptner. Is that you know, investing is a very broad universe. Things are interlinked. So for example, if you don't know what's going on with technology investing, you may not understand what's going on with oppetistic credit. Even though there are different things and you know you need different expertise to do well in each of them. And so it was something I didn't

really think about early in my career. I started broad and then I got really narrow, and I've probably gotten broader as both I've gotten more senior and I've gotten more different types of experience in the investing world in general. But to some degree, you should always stay broad even if you're going narrow. So you know you're gonna have to go narrow to be successful in your career. There's very a few people who can do everything as an

investor and be successful. But as you go narrow, like, don't lose sight of other asset classes and what's going on in the world, because you can get blinded to bigger trends if you did that.

favorite podcasts. And be sure and check out my new book coming March eighteenth, How Not to Invest the bad ideas, numbers, and behaviors that destroy wealth. I would be remiss if I did not thank the Cracked team that helps put these conversations together each week. John Wasserman is my audio engineer. Anna Luke is my producer. Sean Russo is my researcher. Sage Bauman is the head of podcasts at Bloomberg. I'm Barry Retolts. You've been listening to Master's in Business on Bloomberg Radio.