This is Master's in Business with very rid Holds on Bloomberg Radio.
This week on the podcast, I have an extra special guest, Tom Wagner, co founder and portfolio manager at Nighthead Capital. They run about ten billion dollars across all sorts of really fascinating investing lines. Not only do they do distressed investing and deep value investing, but they have an insurance business, they have a sports practice. They really look anywhere and everywhere. Talk about an unconstrained fund that can just find opportunities
in all sorts of ways. Not only do they buy sports teams and have been really pushing the envelope in things like buying soccer clubs in the UK, investing in pickle bowl in the United States, investing in endurance racing around the world, but they also run a long short fund and find opportunities and things like HERTZ, which was a deep value bankruptcy investment or PG and E in California post campfire, where there was all sorts of regulatory
and litigation risk. Just a fascinating approach to understanding value investing, understanding how to allocate capital and take risks. I thought this was a fascinating conversation, and I think you will also with no further ado, my discussion with Nighthead Capitals. Tom Wagner. Tom Wagner, Welcome to Bloomberg.
Thank you, Berry. I appreciate being her.
I'm glad to have you. Your background is quite fascinating, and I'm just going to do this chronologically, otherwise I'll reveal all of my personal biases. You start out spending five years that Ernst and Young doing hedge fund accounting, like I didn't even know that is a thing ATY. And why tell us a little bit about how you got started.
Yeah, I started as a as a certified public accountant, and one of the early engagements that I was tasked with was in the space of asset management. And I recall doing the audit on Jeffrey Vinnick's very first year as a hedge fund man.
Post Fidelity posts Magellan.
Funds exactly, and he had a sizeable amount of money under management, and you know, hard closed his vehicle and in his first fourteen months, if I remember correctly, his gross return was one hundred and twenty percent, not too shabby, not too bad.
And that's two and twenty right, So there's some upside there.
It was indeed, and I said, what is this business that this gentleman is in, and how do I get involved?
I am wasting my life as an accountant. I gotta I gotta see a different Working for the man is no good, No.
It's it's And you know, it was a great you know, doing accounting and being a CPA had its benefits. You learn the language of business, and you learn how to operate in a business environment. There are a lot of great takeaways from that experience. But I you know, at that point in time, I think I recognized something else was drawing me.
I got to think, eleven thousand hedge funds out there, not a lot are run by somebody who spent a big chunk of time really seeing the ins and outs of hedge fund accounting. I mean, you're a pretty rare bird.
I think that's probably right. Most guys and gals who get into the business of working at a hedge fund, never mind you know, founding and running one. Yeah. I think there's a pretty typical track where they're finance majors at top schools. They they work at an investment bank or an advisory bank, sometimes at a law firm, and then they make their way into the investing realm. Mine. You know, I started in a much more boring and you know that I ended up in public accounting for
a variety of reasons. You know, I started my college career as an engineering major.
Right as did I.
That's really interesting and I and I got into my junior year and I just really didn't like it. And we had a career day and everybody who came in was miserable in their jobs. And I was like, what am I torturing myself for? My friends are having a
blast in college. I'm studying all the time. And I had a bit of an epiphany that that perhaps, you know, if I didn't love it, there was a better path, And so I switched to accounting because the most successful person I knew directly was my uncle, who was a partner in a public accounting firm. And I, you know, I looked at him and said, there's a there's a guy that did well with this. You know, I'll give it a shot.
You mentioned business schools. You end up going to Columbia B School, and I know these are two year programs, but explain to me how during your second year Columbia you were also working full time at Credits with first boss, and how can you jo both of those?
Well, you know, I think a lot of times in life you're faced with a situation where if you're trying to achieve your objective, that you have to find a path irrespective of what sacrifices you have to make to allow you to attain that objective. And you know, when I was in business school from ninety seven to ninety nine, we had kind of a hiccup in the markets in the fall of ninety eight.
That Long Term Capital Management and the Roughs Act default.
And it was really you know, when I was an intern at Credit SUITEE, it was a highly volatile environment. We were expecting offers in the fall, and none were really forthcoming in the areas where I wanted to work, which was in the high yield department in the sales and trading desk. And so I had a mentor on the desk who was a few years ahead of me, and said, why don't you start coming in and doing research for me on the side. You know, we'll pay
you some nominal sum. I mean, I don't know. It wasn't minimum wage, but it wasn't a lot more than that, and once I was in the door, I was there every moment I wasn't in class, and so I was doing thirty forty hours a week on the desk doing research. One, I needed the money because I was, you know, not in a position where I could rely on outside sources for income. And two, you know, it was direct experience
and I was a career changer. I went back to business school to prosecute my path of moving from public accounting into the capital markets. So I needed the degree. I needed the transition period, and you know that that allowed me the ability to gain a lot of experience directly that I felt I needed to have a leg up and ultimately get a job, which which fortunately I did.
Was that at Credits was first Boston And how long did you stay there?
Yeah, so I was at Credit, Sueese, I guess, you know, you could say I started just after my internship finished, and I was there until the fall of two thousand when I received a call from somebody at Goldman Sachs on their desk that I had met and cajoled me into coming into interview for a spot on the distressed debt trading desk.
And you had not done distress debt prior.
You know, I was, I was a regular way high yield trader and I was happy at Credit Sweez. I thought, I you know, I had my own trading book. I was thrilled. I love the team that I worked with there. I mean really, to this day, I remained very friendly with a lot of those folks. I felt very fortunate to be on that team. But two things happened. One, Credit Sweee bought DLJ and I had to interview to
keep my job, which thankfully I did. And two, you know, I had an opportunity to meet with the folks at Goldman and the distressed debt trading desk at Goldman had a particularly colorful lineage. You know, there was you know, there was a group of people that had had that job and went on to some spectacular success. I mean, you know, the likes of David Tepper and John Colatch and John Savatz, who was there the person that hired me.
And it was so it was a really impressive group of people that had run that desk prior to my arrival, and I was it was very alluring to think about trading in companies that were facing their worst moment.
So I always think of high yield as sort of the precursor to distress that I don't know if that's sort of oversimplifying it, but it seems like a lot of what we call high yield and used to call junk, and some of it ends up in a decent amount of it ends up in the junk drawer. Tell us a little bit about how you see that transition there.
Yeah, most companies that end up in distressed are very levered at the outset, so they have a sub investment grade or junk or high yield rating, depending on what terminology you want to use. And you know, those are the companies that are most likely to face severe financial stress because they have the biggest stock of debt, they have the least financial flexibility. But there are companies, and this was particularly true in the early days of my career,
that go from investment grade right into distress. And there are a variety of reasons why that occurred in nearly two thousands, but that for me was an area where I gained exposure to really marquee companies that were priced as if they were going out of business or would liquidate. And as we all know, you know, most companies that
go into bankruptcy don't liquidate, they don't go away. They just restructure their balance sheet, and if they're smart, they restructure their operations as well to fix the issues that ultimately led them getting into bankruptcy.
So you mentioned the era was the early two thousands. What was the fallout from the dot com enplosion. Did this create a target rich environment or did it just make things more challenging.
Well, you know, here's the reality of distressed investing. Whenever there's a period of time in the markets where there's upheaval, it creates opportunity. And for me, you know, I was not somebody that grew up in a financially comfortable environment, and so I think I was drawn to being involved in companies that were experiencing difficulty. There's also the reality of being in that seat on the cell side working
for a bank. Is when the markets are really disrupted, is when banks usually lay people off, but not their distress team.
That's your glory days, right, the worst the economy, and no.
One gets laid off when everything's going well. So I had a lot of job security. So for my early days, it was a risk averse way of being in the capital markets.
That's very amusing. How long were you on the desk at Gulman.
For just under eight years? So I left in early two thousand and eight. And my experience there, you know, similar to my experience at Credit Suee, was really fantastic and it was driven by the people around me. When we go back and look at the team that we had assembled in the early two thousands in the Goldman Sachs distressed trading desk, an extraordinary number of those folks went on to become partners and founders of very successful
multi billion dollar asset management firms. It's a pretty unparalleled track record for a group of professionals that were together at one time, and for me, that was incredibly valuable. I was surrounded by people that were more experienced than I, that were in my mind, smarter than I, and were you know, every bit is motivated, and that's a great
environment to become an expert in a particular industry. I very very fortunate to have been able to work in that environment with those people, you know, really enormously talented individuals.
So you're there for eight years. What stands out as some really interesting trade, some distressed opportunities? What were some of the memorable moments on the Goldman Sachs distressed debt trading desk.
Well, I'll start with sort of my first impression. I get, you know, Credit Sueee. There was a hard working but also a you know, a kind of a collegial, fun loving group of people. And I get to Goldman and I was at that time, you know, I was a subscriber to the When you're the junior person on the
desk or the institution, you at first went in. So I'd be at my desk at six forty five in the morning typically, And I remember the first day I'm there and it's it's dark outside because it's you know, it's late, it's mid fall, and I'm like, wow, it's really noisy in here. And I look around and ninety percent of the people are still at their desk at six thirty at night. And I thought to myself, oh boy,
I'm in a different environment. And people, you know, they worked hard, and they worked late and in positions where you didn't often see that, meaning a lot of folks on a trading desk get up and walk out, you know, thirties minutes sixty minutes after the market's closed. This was a group of people that were sticking around and continuing to work, and that really resonated with me, and I was like, oh my gosh, this is going to be a whole different experience, and I'm in for a ride.
And sure enough it was. You know, we had a lot of a lot of late nights. Equally, I was also trying to become acquainted with the people that were my customers, who are the asset managers, both on mutual funds, insurance companies, hedge funds, private equity firms that were our counterparties, and so I spent a lot of time going out.
There was a gentleman who ran sales that literally introduced me to everybody in the industry, and four nights a week we were out to dinner, you know, entertaining customers, getting to know them, talking about the markets. And that
was credible education for me. So, in addition to being surrounded by great people at work all day, I'm now out with folks that would become the titans of the credit markets that were in the early days or midway through the founding of their businesses and talking about the markets. It was a really valuable set of experiences. For me,
So those things definitely stand out. But I think when I think about the markets at that point in time, there are certainly a couple of things that stand out enormously, the biggest obviously being nine to eleven, and you know, we were on the trading floor and I distinctly recall seeing piece of paper floating by our window at eighty five Broad Street and then turning to my colleagues and saying, some of those pages are singed, and then we all
know what transpired thereafter. We had, you know, sadly a front row seat to everything that occurred after the first plane went in, and then the markets afterwards were obviously
heavily disrupted. The our country was heavily disrupted. But I remember getting on the phone the first day the market's reopened with the first phone calls from Fidelity and they said, you know, buyers only today, really, yeah, and it was it was sort of a theme across the market that really stands out to me even today, where you know, for the first day, nobody was really unless they had to,
no one was selling. And that really really stands out for me because you know, we all lost, you know, a lot of friends that day and so that that was an incredibly memorable moment. I'd say. The other one that really stands out as well was the day that that WorldCom fell as a result of a report that was put out on a competing network, and you know, I had I had been at work early that morning.
We traded until you know, normal time, and the news hit just after the close, and I ended up trading until midnight, went home, slept for a couple of hours. I was back at my seat at like three thirty or four o'clock in the morning, and I traded that following night until eight thirty in the evening.
Wow.
And it was the most profitable day of trading I'd ever had, no kid, and it was it was the busiest day I'd ever had. It was literally, you know, a trading floor with I don't know how many hundreds of people, and because of what had happened, the person trading that name became the center of attention. So everyone was looking at, you know, whether the price of those world combounds going up or down, or who was buying,
who was selling, what kind of size was trading. It was an incredibly intense period, but it was probably the most enjoyable. You know, thirty six hours of my professional career, because you know, it was just so exciting.
You're in fighter pilot mode. Does you're not even thinking, You're just responding to three sixty input.
Yeah, constant, and my second command, if you will to trade on the trading day ask you know it is now a very successful manager of a hedge bond and he and I joke about it to this day and how crazy that day was, and so you know, I, you know, that stands out just because of the enormity of the surprise in the market for a single name, and you know, the bonds in that company fell fifty sixty seventy points depending on which bond flavor it was,
meaning which duration bond instantaneously, and you know, you're talking about wiping out billions and billions of dollars of capital, and it was just a huge shock to the market. So you know, those are those are two of many days that really stand out in my mind.
And world come perhaps different than on N Run or something like that. Clearly valuable assets just I think that was an accounting from Bernie Ebers and Jack Solomon and all that crazy stuff that took place. So you end up Jack Grugman, who is at Solomon right, I think was the acts on that stock. So you're looking at this saying, hey, you know, at one hundred cents on the dollar, these are disasters, but at thirty cents on the dollar.
Ten cents on the dollar are very valuable. The MCI bonds were very valuable, if I remember, they got as low as the twenties or low thirties, and the recoveries were quite high. You know, people say that it was an accounting fraud. It was in the sense that they were misrepresenting the facts. But the information was there, as is the case in many of these situations, if you dug deep enough, you could figure out relatively quickly what
was going on. And you know, but there were a lot of companies that were over levered and perhaps over promoted, but where there was real underlying value. You know, Enron as another great example, another you know, huge opportunity at that point in time. Less so with some of the telecom names and so really well, you know, you had a lot of businesses. You know one that you know that stands out. Oh, I'm going to blank on the name.
It just gets worse.
Get it is. Now there's so many hundreds of names banging around in the small brain of mind.
Once that hard drive fills up.
Something else has to give way. But what you know, with a lot of the companies in that time, they were building capacity that was unneeded. Technology was advancing to the point where we didn't need as much fiber laid.
So you remember metro Media Fiber and Global Crossing, and they were like thousands of dollars per mile laid and sold.
For pennies pennies, And you know Metromedia, great example. You know, they had the valuable assets in the cities, but they weren't as valuable as the cost of installation. And it's one of the reasons why I think in distressed investing, one of the worst mistakes you can make is how much money was spent on the assets that you may be acquiring and distressed it's irrelevant. It doesn't matter what is it really worth in the market. Only that matters.
How much cash floking gen in the future. That's it. Any investment, that's all that matters. And we can you know, we've I'm sure we'll get into some of the other things we're doing, but at the end of the day, you want to think about what is the inherent value of this business, meaning how much cash flow can this business generate. There are, you know, different ways to value
different businesses. You know, luxury assets, as an example, are valued very differently than infrastructure assets or boring, you know, assets in mining, let's say, where the risks are very different, but at the end of the day, there's some basis on you know, how much cash they generate.
Dan Gross wrote a book a couple of years ago called Pop Why Bubbles Are Great for the Economy, and his thesis is, yea, let the VC spend all the money laying this fiber when that blows up, and we buy if depending is on the dollar. In the out decades, you get things like YouTube or Facebook or whatever that requires all that bandwidth that no one would want to pay the original money for, but at a thousandth of the price, hey we'll take some bad. Yeah.
There's a lot of examples like that over time. And you know, I think there's one thing as it relates to distressed investing, which is a smaller component of what we do now than it was in the early days, but this has always resonated with me. Credit Suite had an index for hiyield data, an index for investment grade loans, and one of the industries they had that no one
ever really talked about was the distressed debt index. The distressed debt index has a negative long run return, interesting and.
It meaning that the ones that go out of business lose more capital than the ones that recover.
Yeah, or or put slightly differently, when a company becomes distressed, let's say that that's the line of demarcation is say seventy cents in the dollar around the debt from that date forward, on average, the ultimate value of that security is lower. That makes sense, and what it tells you is that when companies start to run in problems, that isn't necessarily the low. And there's two types of businesses
that run into distress. There are businesses that are that are over levered or mismanaged at a point in time, and then there are companies that have a flawed business model or are somehow on the wrong side of secular change. Those last two categories are really dangerous, really dangerous.
Not the first time that someone who's been on a trading desk has told me that, you know, patience is a key attribute to making these investments. If you jump into a First Republic bank a little early, Yeah, well you're early is the same as.
Wrong, yes, one hundred percent, and you know it's it's you know your your total return is what matters, and ultimately, you know, buying right is half of the game. That the half that no one ever talks about is selling right right, Which is why I always tell people. People come to me and say, which, you know what, that's your great idea right now? I'm like, I don't give out ideas, and they think that I'm withholding something, not withholding anything. But I got to remember to call you
back when it's time to sell. And that's a hard thing. So whenever you're taking a tip from somebody, it's not just a tip to buy. You need a tip on when to sell, and particularly if it's not your idea. And so I think that's one of the things that is often lost on the non professional investing public is
buying is half of it. And you can buy right, but I've seen lots and lots and lots of examples of buying right where it looks good for a period of time and ultimately fails because you didn't sell right.
I could not agree more it's so true. It's the cocktail party chatter. Yes, is just a lose lose.
Yeah, there are a few assets that persistently appreciate for a long period of time. You know, the very very best companies, if you buy them, you know consistently. You know this whole idea of of you know, your retirement account right where you're buying every month. That's great, that that will work for you. You'll learn a very solid return because you're not selling until you're presumably much older. But for an idea raid a moment in time, you got to know when to sell.
So here you are on the Goldman Distress Asset desk, working with these future legends, getting a first class education, really baptism of fire, and then some what led to the thought to hey, maybe it's time to graduate from Goldman and launch my own fund. How did you get to that point?
You know, there are a number of things that occurred. I would say I had another unique advantage, which is that my wife was in the business as well and had an incredibly successful career, and so I always joked that I had a really valuable backstop at home, meaning that I had the ability to take some risk where personal bankruptcy was maybe less likely, and so that's a
huge advantage and not to be understated. And having somebody in your corner that's very supportive, whether it's a spouse or a significant other or friend, parent, that's an important element of achieving success in any new venture. But I think, you know, a couple of things really stand out to me. One I was managing or co managing. I had a co head of my last business that I ran at Goldman,
a team of twenty one people. We had about four billion in capital across everything that was non investment grade rated, so all junk rated instruments other than bank loans, so every bond, CDs, contract, convertible, bond, preferred equity, kind of the whole gamut was positioned on our one desk. We crossed over between equity and fixed income, which meant I reported to people in both divisions, which was challenging to
say the least. But I sat back one day and recognized, well, if I were doing this on my own and I had this many people and I had this much capital, my paceco would be very different. And so that's a pretty significant motivator. And you know, I felt that that that I would be capable of doing that, So that was one, you know, that was one of the big reasons. Secondly, I think I always wanted to be an entrepreneur. I've always been a little bit taken with entrepreneurs. I'm fascinated
by them. There's a lot of great entrepreneurs in the world today that are doing amazing things, and I'm always fascinated by how they've achieved success, particularly those that I think are really changing the world. So I think, you know, those are the things that pushed me there. A conversation I had with my dad really stands out in my mind.
You know.
I was like talking through with him how the fund economics worked and what the upside was. And I'm like, you know, if we raise X dollars a capital and we put up a y returned, the pay is Z and here's all things that can go right. And he said, well, what if it doesn't go that way? And I said, well, you know, I get kind of ped off. I'm like, what do you mean, Like, you know this is what's
going to happen, so well what if it does? And I said, well, then everything will fail and I'll lose some money and I'll have to go out and find a job, and you know, but that's like, that's okay. I'm like, you know, geez, Dad, like, don't you think like I can do this? And he said to me, he goes, I'm not asking you because I don't think you can do it. I'm asking you to make sure
you'll be okay if it doesn't. And you know, striking moment where I was like, Wow, how lucky am I to have a father who didn't grow up in this industry and certainly wasn't an expert in it in any way, but was definitely an expert in the things you have to consider. You know. At that time was I was married, I had two kids, and you know, I was taking a substantial risk, and he just wanted to be sure that if it didn't go well, that I'd be all right.
And if the worst case scenario is, hey I got to go get another gig at some other firm, that's not such a terrible dance.
That's what I thought. The worst case scenario was. Then we get to mid October two thousand and eight, and oh, you launched right into launched right into the disaster I June second eight, So we just passed our fifteen year anniversary. So we launch and you know, the world comes to an end virtually. You know, a few months later.
If only you were investing in distress ask eight.
If I had a little luck. It was great in that regard, but that there was one very scary day, which is the day that Goldman stock So it's kind of all time post IPO low and we you know, we're a new fund. We weren't that large. We had I think we launched with four hundred and thirteen million a capital, so it was a fine launch. We had a billion and change in commitments a few months earlier
before the Bear Stearns unwind. It changed the world. We launched with far less than what we thought we'd launched with. And as a result of being new, you know, you don't you don't have multiple prime brokers, you don't have multiple relationships. So our only prime was Goldman. I still had Goldman stock. My wife was a Goldman mdch at Goldman stock. We both had our cash at Goldman Funds.
Cash was at Goldman. And it hit me that if Goldman went the way of Leman, that I would probably you know, be wiped out.
So I have to focus on this for a second. Please, I'm ready to move into the next conversation. But it's hard to imagine for the people who were listening, who weren't of age, actively trading working during eight or nine. It sounds ridiculous today that Goldman would go the way Lehman brothers, But in the fall of eight that really wasn't unthinkable.
No, it was. It wasn't because there was something wrong with Goldman or any other bank. It was just that if confidence failed, there would have been it would have been very, very difficult for Goldman or almost any other bank to survive. And you know, we've put in place measures now to help protect against that, but ultimately no bank is really protected against a fallen confidence. We just built barriers around them to to ensure that the confidence remains high.
And ultimately that's what our fractional banking system and ultimately capitalism is based on. And I'm a big believer in it. But for the people out you know they're listening and thinking about this. If you think that going out and starting a hedge fund is a zero risk proposition, you're just wrong. It's not. And if you want to achieve great success, whether it's in the investing world, or the
hedge fund world, or in any venture. Ultimately, it's rare to achieve great success without putting it all on the line. And I didn't really think I'd put it all on the line, but ultimately I did. And you know, I'll tell you it's really motivating. We did really well on a relative basis in two thousand and eight, and exceptionally well in two thousand and nine, and so, you know, I think it was incumbent on us to recognize the moment in time we were facing and be willing to
take that much risk. You know, It's sort of like if you you know people people today get frustrated when we see great wealth, okay, but you have to stop and think about the risks that we're taken to attain that. Perhaps the best example today is Elon Musk, who achieved multi generational wealth in the sale of his first his first big win PayPal and PayPal, and then risked every single penny to build Ultimate three three different companies. And whether you give him all the credit or some of
the credit is irrelevant. He took the most risks.
He rolled the dice, and at one point in time, if Tesla hadn't worked out, he would have been completely bustled out. Shocking to think about someone having such a massive success yeah, and then saying no, no, let's put it all on red and spin the wheel and see what happened.
An enormous conviction. And I have to say that, having you know, done business directly with Elon by way of our investment in hurts, you know, I have an incredible amount of respect for his conviction as a business person, and I think that's probably informed some of his views generally, and ultimately, I just believe that that kind of disposition is important in society, and it's important, and particularly in a capitalistic society to have risk takers and have people
that are willing to really stick their necks out, because if you don't take risk, you're not going to achieve reward. It just there's no two ways around it. And you need the incentive structure to be set up such that people are willing to take those risks. And interestingly, you know, you have a guy in Elon that doesn't really own anything other than his companies. He is not an acquirer of things. He's a builder of businesses, and that's all his focus is. And that for the markets in general.
Folks like that are good. They deploy capital, they grow businesses, they create jobs. Ultimately, if you take a step back and think about what he's doing with his three major companies, it's pretty astounding. You know. In in Tesla, it's leading the revolution evs, and and we believe enormously in the value of evs, not simply because they're good environmentally, which which they are, although I think there there's a there's a good solid debate around just how beneficial they are environment.
Well, the whole minerals, rare are things in the astraction and if those are problematic.
That's right. And what you do with the batteries at the end of life and making sure you recycle them, those things are all incredibly important. And how we generate the electricity, the charges of vehicles, all of those things need to be considered. But ultimately, the cost of running an EV over a long period of time is demonstrably lower than an ice car. Meaning an internal about it.
And as a car guy, I am would be lying if I didn't say it's a superior propulsion system. When you step on the gas on a high step on the gas. Look at how I stuck in when you mashed down the accelerator in an ev ice, engines just can't match that comp And it's a fraction of the cost. What used to cost a million dollars for a thousand horse power you could pick up for twenty percent of that,
and it's a shocking change. I give a lot of credit, not just to Elon, but I'm pretty convinced that Jeff Bezos deserves some credit because after Amazon demolished so much of retail and yeah, America was over retailed. In this whole other conversation there, I got the sense that the entire legacy automaker world looked at Elon and said, Hey, we can't let this guy do to us what Bezos did to retail. We got to step it up absolutely.
And I think that, look, you've got some other great executives. You know what Mary Barr is doing at GM and some of the products they have coming out. Yes, they're behind Tesla. I don't think that I'm saying anything that's controversial. They're they're spectacular products. Yeah, I think that Ford is the world's largest commercial vehicle manufacturer. We'll find its footing and evs and come up with some pretty spectacular.
They've been crushing it. When you look at not just the Mustang Mocky, but the one Lightning. Have you driven that pick up?
It's amazing.
No vehicle that large has any business being that fast. It's shocking.
It is shocking. And and you know, I'm Farley's a big motorsport guy, and so I'm I've got a you know, uh soft spot for that. And obviously Mary's you know, move into endurance racing with Cadillac is pretty interesting. So there's a lot of exciting things going on. But I think when you when you look at what you know Elon did and kind of kicking off that revolution, it's it's a good thing, uh, for the Market's a good
thing for society. Ultimately, we've got we've got some things we need to get right as it relates to power generation, but that's good SpaceX and what that will do for the cost of lift is with this new the largest rocket, I'm blanding on the name, but you know that's going to be an unbelievable reduction and lift costs. I think it's ninety percent cheaper than the Apollo program, which is astounding. And then finally with with the satellite business, and you
know what we can do for telecommunications. You know how it's difficult to assess without getting into a kind of a deep rabbit hole, how valuable it is to have thousands of satellites that are really hardened against strategic attacks and can serve the entire planet and provide fast communication and data. Is an unbelievable resource for humanity.
Especially for the non industrialized countries that skipped over landlines and stringing copper, attached the dead trees and went right to mobile. This is data, voice communications, no matter what you want on the globe.
It's amazing and those things, those you know, those are going to have an extraordinary impact on humanity. I'm a big believer in the power of humanity. When we, you know, provide people with opportunity, I think, all things being equal, they tend to respond really well.
And we're recording this at the end of June, and the news broke very recently that Tesla cut a deal with GM and Ford to make their massive network of chargers available to GM and fod evs. That's potentially a game changer, and it's potentially a revenue source for Tesla that looks out years and years and years.
Absolutely, and what it does is it begins to reduce the range anxiety that people ultimately feel. Look, you know, one of the things that we looked at It Hurts, and I have to credit Steven Share, our CEO, for being really unbelievable in his pursuit of the objective of electrifying more of the fleet. But one of the things that his team looked at was the percentage of trips that are greater than two hundred miles and ninety single
It's a very low percentage. Most rental days are less than two hundred miles, Most total rental experiences over a multi day period lesson two hundred miles. So this idea of range anxiety accounts for very small percentage of trips that people ultimately take. And as we have access to more charging, and particularly charging in places where cars reside at rest so restaurants, hotels, office buildings, homes, that's critically important.
And I think one of the big initiatives that I love that Steven's pursuing It Hurts is to bring charging infrastructure into underserved communities and that's something that he's working on with British Petroleum and Uber and state and city municipalities and kind of bringing that opportunity to areas where it's a little tougher, you know, to have charging infrastructure
in the home. So that's all of this is spurned by, you know, the initial foray of of Tesla and Evs, and then ultimately these other great companies following.
Huh really quite quite fascinating. Let's talk a little bit about investing in sports. Tom Brady, Tom Brady, how does this happen?
Well, Tom, Tom and I have known each other for a long time, and we met through some mutual friends and our boys. Actually, his eldest son and my son were classmates for a number of years together at the school here in New York City, and so we get to know each other and then became friendly, and then opportunities arose where we saw some pretty interesting things to
do in sport. And you know, if you're going to invest in sport, you know, why not do it with somebody who has had unparalleled success in sport, not simply in so far as winning or winning percentages or statistics, but in the persistent performance at the highest level over an incredibly long period of time in a sport that is absolutely not known for longevity.
Yeah, to say, to say, what's the average NFL three of three years, although very quarterbacks are do a little better than that. But he played at New England for decades.
Yeah, in twenty three year career and you know, set just about every record that could possibly be set, and I think did it in a way that you know, left his legacy unlikely to be paralleled. And what I mean by that is, you know, he brought others up. If you look at the performance of his teammates when they were with him vis a vis their performance elsewhere, or the teams when he was with them versus when he wasn't, it's pretty clear that, you know, he is
a key component of success. So you know, we wanted to understand that and tap into it. And I think a lot of it has to do with nutrition and recovery and that's a big area of Tom's focus. And so you know, we've looked at investments where we can partner together and bring some of that to bear. Also where we can use you know, his his fame as a as a springboard to bring attention to a sport or an opportunity. So we've we've done a handful of things together, and I think there'll be more to come.
I love the concept of those rare players who make everyone around them better, whether it's Tom Brady or Michael Jordan, or Derek Jeter or go down the list. There's something really interesting about it. I also love this headline, this Bloomberg headline, why a hedge fund manager is betting on pickleball with Tom Brady and former number one ranked world
tennis player Kim Kleisters tell us about pickleball. I'm a tennis player, and I'm terrified of pickleball because I don't want to affect my swing.
Well, I don't think that pickleball would have would would damage in any way your swing, I think. But we found interesting about pickleball is the enormous explosion of popularity in the.
US fastest growing sports growing sport.
We liked the idea of a league with teams that are based in or connected to cities, so you bring in a tribalism element to it, which has proven very successful in sport over the years. We liked, you know, the idea that this would be something that would continue to grow. It's a it's an early early stage investment. It was it was not a particularly large investment, but it was something that we were excited about. And you know, Tom and I have played pickleball and enjoy playing pickleball.
And is he any good? He's very good. You know, people forget by the way, you know his athleticism. Is a guy that was drafted in two different sports, right, and so he and he's a super competitive human.
That's the thing I was thinking of. It's like Michael Jordan and golf. It doesn't matter what his skill level is, he is not going to back down.
No, No, I think there's a level of you know, when you run into anybody who was incredibly success us will in a given profession. They tend to be hyper competitive. And so you know, I think we we saw the demographics and were attracted to it and and are quite excited about that opportunity. I think there's a long way to go to to get the league to the point where it's where it's you know, really connecting on a commercial level. But I you know, we we think that there's a great tale in there.
Let's discuss another sports investment. We're recording this at the end of June. By the time as broadcast, you will have closed the deal to purchase Birmingham City FC in the English Football League. Why a soccer club, What what motivates this and why the UK that that seems to be a little off the beaten path.
Well, we were really really excited about the prospect of investing in Birmingham. There were a few things that drew us to that particular opportunity that were unique to Birmingham.
So first, it's it's England's second city. It's we understand it to be the youngest city in Europe, it's one of the fastest growing cities in Europe, youngest professional population in Europe, very very diverse population, and a city that is going through what I would characterize as sort of urban renewal, where a lot of investment is coming in alongside, you know, and not a lot of a lot of
new folks that are moving into the city. And so all of those demographics were really really interesting to us. Then you have the named team in the city that had been under invested in and had gotten a lot of things wrong in our opinion, in the preceding years, the fan experience was really subpar and candidly not fair relative to the incredibly passionate fan base that Birmingham City has. We just you go there and you spend time with these folks and you talk to them. They are just
amazing people. And you know, we felt that one there was an opportunity where we could turn the team around. Can talk a little bit about that, and two where we could connect with the folks that are so passionate about this and effectively partner with them to make this a much better experience and hopefully a much more successful team.
So let's talk a little bit about that. What are you guys doing to turn around the team and also to kind of bring the stadium up to speed. It seemed to be a little neglected prior to your investment.
Yeah, you know, for a recent past, almost a third of the seats in the stadium were not fit for use because of some structural issues in the stadium that's being remediated. The pitch was in disrepair, the concessions, the quality of the seats, the overall look of the stadium, the electronics, Wi Fi, everything was was either not there, not working, or you know, in a state of disrepair. And so I think improving all of those things and
more will really improve the fan experience. And that's important, right, It's not simply what's going on in the pitch. It's the overall experience, particularly if you're if you're going with friends or family or what have you. You know, we need to make that experience commensurate with the legacy of the team. The second thing is obviously the competitiveness on the field. That is something that is constrained by the English Football League rules which require that you not spend
more than the revenue that you make. So you can't just go out and say I'm going to spend an ungodly sum of money.
Waite, So let me let me get up dispute on this because I don't know those rules. This isn't like a salary cap like Major League Baseball has with a penalty if you go over. It's hey, whatever you generate is how much you can spend. You would think people would do whatever they could to get more butts in the seats to generate more revenue.
Yeah, you have to have and that's why I say it has to be a partnership with the with the fans. You have to create an experience where people want to support the team, and then ultimately you have to be prudent in allocating those pounds to the players that will perform in the field, and that's obviously incumbent on our team to get that right. But it's not one thing, Barry, it's everything. We have to work on every element of
this and turn around every element to the team. It's different sponsors, it's different partners, it's different oversight, it's different management,
it's different talent acquisition. All of it has to be changed, and certainly we won't be able to do that overnight, but we're going to start the process immediately and get to a place where our hope is to field an immediately competitive team and then ultimately, you know, do all of the things that we need to do to make it permanently competitive.
So is this a fun investment or is this Hey, we're looking for this sort of ROI and this sort of return over time. How do you? Because I think of Steve Cohen's acquisition in New York Mets, which, by the way, you go to City fel Field, the whole experiences next level compared to what it was like in the I grew up with Say Stadium and was a little bit of a sad compared to Yankee Stadium. Now I don't know if this is blasphemy. City Field is
nicer than the New Yankee Stadium. It's amazing. So so tell us a little bit about the thought thought process on Well.
I think you've touched on something, right. I grew up outside of Boston and I was a Red Sox supporter and I go to Fenway and that experience in the seventies is very different than when you have today. You know, it's much better, same stadium, but a much better, much different experience, more engaging for the fans, particularly on the weekends when you have a lot of family activities. And so I think the whole fan engagement needs to change.
And you know, some of what we're doing in Birmingham is bringing in different sponsors that bring an element of cool for lack of a better word, to the team. Right, this is a team that should be viewed differently than it has been, and we're trying to demonstrate by way of drawing sponsors in that have never been associated with being attached to a particular sports franchise into the realm
to raise the profile. All of those things matter in the context of helping to improve the overall performance of the team because it helps to improve your overall revenue. So those are all things that we're working on. But when you ask the question about perspective returns, look, sports franchises have proven to be pretty consistently appreciating assets over time, and there's a variety of reasons for that. We don't think that that changes in the near or intermediate term.
So from that perspective, we believe there's a tailwind there. However, what we see in Birmingham is a unique opportunity to fix some things that have been done correctly, to invest appropriately in the infrastructure, and to position the team to achieve the level of success was that it had had looking back a couple of decades ago. If we get all those things right, obviously we've created a lot of value for our investors. And I think we have the right team of people to help us do that, both
internally and externally. So I think our focus in Birmingham is let's not worry about how much money we make. Let's worry about getting it right, making the right decisions. The success will follow. And I think that's the case in any turnaround investment. Don't say I need to do X so I can make why. In return, focus on making the changes you need to make to allow the business to be more successful that the returns will follow.
I'm fascinated by the idea of the revenue cap. Does that apply to the team or the stadium? Like if Taylor Swift comes in and does a show and you capture some revenue for hosting that, can you apply that to the team or is that the stadium a separate revenue its venue.
It's all part of the calculation. So we if the two are owned in the same enity, which ours will be the team in our stake and the team and our ownership of the stadium will all be in the same entity. So we're focused on doing all kinds of things that that will lead to additional revenue generation. But taking a step back from that for a moment, it's about creating a culture of success around that organization, and
that goes beyond the bottom line, if you will. It's it's about creating the right types of events that draw the community in. So this becomes a focal point for the community, cultural center, and if you think about English football, it is in many respects for a substantial part of the population, the cultural hub of the community. A lot and if you can make that a better experience, not just on match day but beyond that and bring the
community into the organization. Now you've really charted started to achieve success. And one of the things that we love about Birmingham is it sits in the middle of the country. It'll be a hub of the new high speed rail system in the sense that eighty percent of the English population will be within a one hour train ride of Birmingham. Really, when HS two or high speed Rail two is completed, you know, looking out eight ten years from now, that's
an extraordinary thing. You know, Birmingham could end up being a location that folks visit for football matches, concerts, other sporting events, you know, whether it's whether it's football or rugby or what have you, motorsport. There could be a whole series of things that could occur in Birmingham. And quite frankly, if not Birmingham, then why anywhere else. It's it will be so accessible to so many people, such a huge percentage of the population that why not make it a center for sport.
How many seats does the stadium hold and how far can that be expanded?
It's about twenty nine thousands, so.
That's a real that's a substanti good.
Statu it's good size. I think, you know, we've got to look at the infrastructure there and decide what's best for the long term needs of the team and the community. And so, you know, we're early days and so all those things will be looked at. I think for us, the immediate focus is let's make this more fun for the fans.
You mentioned motorsports again relatively new breaking news. Ryan Reynolds and Rob mcclhaney just bought twenty five stake in the Alpine F one team. Tell us about motorsports any aspirations in that area.
Well, we have an investment in motorsport. We own a World Endurance Championship racing team. So endurance racing is think twenty four hours of Lama, twenty four hours of Daytona. We have the only private team in the the WEC or World Endurance Championship race this season. That that is a series that has run one race in the US and a series throughout Europe, Middle East, in Asia, and we're quite excited about it. You know, we'd endurance racing
used to be more popular than F one. If you go back into the sixties and seventies and has has re emerged with a new class of hyper cars that were introduced, and you've got all these luxury brands getting into it. So Porsche, which manufactures the car that we're racing, and we're thrilled to the car. It's actually a nine to sixty three, so it's a purpose built car for
endurance racing. It looks like an F one car with an enclosure over the driver because they're in some cases driving the team of drivers is driving for twenty four hours in any weather condition. And so Porsches involved. We've got Ferrari, Lamborghini's entering next year. BMW is entering next year, Alpines coming in Cadillac, you know, has a very competitive team Poujo. So there's if you look at all these great manufacturers are getting back into endurance racing. It's really exciting.
We are tickled to be involved with it, and so we've brought in some of our partners. Brand not surprisingly is involved with the team. A couple of other companies that were invested in, one being Singer Vehicle Design was responsible for putting together the livery or the paint scheme on the car. As a sponsor as well, so we're
really excited about that. We're looking at other opportunities in motorsport or expanding our existing investment and trying to think about how it fits within the ecosystem of investments we have in the portfolio. Anything that we do in sport, we try to think about how does it fit within other investments in our longer term thesis around a given industry or sector.
It's interesting you mentioned the older days of endurance racing. It really was launched as a way for companies to show, look, how solidly built and reliable our vehicles are, we can run them flat out. I was just watching something on the Millimiglia in Italy and I think it was it Sterling. I'm trying to remember who set the record over one thousand miles averaged one hundred miles per hour, which is insane because you're just going through towns and that record
has has never been beat. But when you do that, and I think that was in a Mercedes back in the fifties or sixties, When you do that, hey, the brand's reputation for liability hard to top. I know Porsche put out this was it as a car racer, which is based on their actual racing vehicle, and then Lamborghini just took I think it's a hurricane that they turned into an off road vehicle, which looks looks ridiculous, And
of course everything Singer touches is just gorgeous. So having them do the do the the paint and the interior is I'm sure that is going to be spectacular.
No, it's it's it's an area where there's a distinct business case for the manufacturers to be involved in endurance racing. It does showcase exactly the things that you're that you're speaking to. You know, each of these manufacturers is going to develop a motor and a drive train. They're all hybrid cars, which which we love. But if you look at the Endurance Series, you know you've always had GT
cars in there. Although I think for next year, because of the number of hypercars that will be in the class, race is like like LAMA won't have a GT race. At the same time, I think could just be too many of these supercars you know, in track to do that. But nonetheless, the expansion to include other luxury brands is really interesting and I have to say, having attended LAMA this year, it is an unbelievable event to have twenty four hour long race. You know, there's all kinds of
things that happened. You know, you've you're always going to experience problems. It's a fascinating thing to watch.
Really quite quite fascinating. So let's talk a little bit about distressed investing. Your firm runs private credit, commercial real estate, long short real estate, and ensure currants, as well as an asset management shop and some of the sports investing we've talked about previously. How to all these separate businesses and approaches. Do they work together or are they all separately siloed? What's the to use a dirty word, synergy between all these different divisions.
I think at our core we're value investors, So we're looking for situations where we believe in virtually any scenario we have no or a very very low risk of impairment, meaning we won't lose money. That's the goal. And whether it's a turnaround situation or a private loan, or even a private equity situation or growth capital for a smaller company. In each of those situations, we're trying to structure the investment where we believe that if our thesis is wrong
that we won't lose money. And the way that these all fit together is that the duration of capital that
we make it is quite long. So the most of our capital is either permanent capital, meaning we are the manager of it forever, or it's very long dated in the case of a closed end fund, where we have five, seven or ten years to invest the capital, and that affords us an advantage versus a number of other firms, and that we can take a long term view, or we can make a commitment that requires a long term time horizon, and there's a lot of extra return to be had if you're willing to take a longer view.
There's still a huge premium on liquidity in the market today, there has been since the Global financial crisis. I think the premium for ill liquidity today is as high as I've ever seen in my career. So I think in those investments the common thread is value. In our real estate lending business, that's a function of what we do on behalf of the insurance company that we manage assets for, which is a related entity. In real estate lending, that's
all about avoiding loss. It's just super conservative.
Let's talk about taking a long term view. In the middle of twenty twenty one, we're right in the middle of the pandemic COVID lockdown, travel and tourism just collapse. You guys say, hey, I know we should do. Let's launch a billion and a half dollar fund, distressed travel and tourism fund with with people at Sataris Management. Tell us a little bit about the c K Opportunities Fund.
You know, the thought process there on that fund, which is you know closed now, was to raise money to pursue opportunities in travel, leisure, and hospitality.
All of which, by the way, have come back gangbusters.
Most yes, most of it has a business travel still lagging pretty significantly, but certainly personal travel is up dramatically, you know, even Visa v twenty nineteen. And the thesis was, you know, this isn't a permanent thing that we were experiencing in twenty twenty would be temporary. The challenge was going out and raising capital with two asset managers that hadn't worked together before, and doing that capital raise entirely
over Zoom. That was new, but we did. I don't think we had more than one or two in person meetings for that capital raise. So it was a very interesting time.
Did people say, Tom, what the hell are you doing? You're nuts these businesses are or did people get it right.
Away now they said, you know, how do you know it won't get worse? And if it does get worse, you know, we lose money. I think everyone sort of acknowledged that if travel was dead forever, we had much bigger problems.
Yeah.
Right, And so the general view was, if I'm going to take a risk, I may as well take it in an area that is more likely than not to rebound. And so what was in common on us is finding the opportunities where we could say with a straight face, we don't think we can lose money. We think we have a lot of upside, and so that's what we endeavored to pursue.
So it's all only been two years. Is this a seven year fund or a five year fund?
Well, the goal is to is to have you know, begin returning capital in kind of use years two and three, and ultimately have the average duration of that fund between three and five years. So some of us, some investments will ultimately go a bit longer, some will hopefully pay out more quickly, but with the average sort of in that you know, mid single digit zip code or less.
So two years post launch, how's it going.
It's it's it's gone very well. Our returns have been well above what we had you know, what we had targeted when we when we spoke with r LPs about it, and so we're excited. We love the portfolio, We love the forward on the portfolio, very very constructive on each of the names and in the portfolio. I don't really regret, you know, any of the investments. I think we'll have some that are better than others. But you know, we're we're quite excited about it.
Let's talk about another sort of contrarian distressed investing play. Had this horrific and infamous California fire called the Campfire. Soon after PG and E, the giant power provider there, ends up filing for bankruptcy. They were blamed as one of the possible causes of the wildfire. Who looks at that and says, hey, this is an amazing opportunity. The biggest, one of the biggest power producers in the country has gone belly up. How do I get me some of that?
And did you look at that from the bonds pre bankruptcy or equity post bankruptcy.
We looked at it as at the equity little bit pre bankruptcy, and then grew our position following the bankruptcy. And the thesis was that there would be a way to ensure that the victims received fair compensation but still allowed for the equity to have some upside. And you know, the thesis was, let's let's strike deal with the victims attorneys, and let's strike deals with the regulators and the government, and strike deals with the bondholders and move the company
through bankruptcy. So very very contentious negotiation, I can imagine, and particularly given that it moved into the spring of twenty twenty, so we were, you know, we were trying to get that restructuring done in the depths of COVID. It ultimately worked, It was a it was a good investment for us where you know, we monetized that and redeployed the capital elsewhere. You know, our goal was in that case to sort of fix what we could fix
and then and then move on. And so I think, you know, we're quite proud of of the work that went into that and ultimately think that you know, each of the stakeholder groups came away satisfied, or at least that's what they represented to us.
Let's talk about another investment that you referenced earlier. Hurts, a former Fortune five hundred company files for bankruptcy pretty early in the pandemic May twenty twenty. Subsequently, they sell off their fleet to cars because we're just not getting new cars. What made you think, oh, this dumpster fire is a great opportunity.
Yeah, that one was really predicated on three key tenants. One was that there was an opportunity to electrify a big chunk of the fleet, which required us, you know, cutting deals with major OEMs to get access to that supply. The second was in pursuing a new, if you will, line of business for the company in providing cars to ride hail drivers. And then the third would be a more effective way of disposing of the vehicles when you come to the end of their life, and that required
cutting a deal with Carvana. All of those initiatives are well underway. We're really happy with all of them. Our partners, you know, in Carvana and Uber, Tesla, GM, Pollstar are all going really really well, and we have a great leadership team that's Steven Share is running. That's doing an exceptional job and in prosecuting that business plan, and so you know that was really predicated on those three core tenants.
Now what happened was a bit of luck, and the luck was that we had a massive chip shortage and so the price the new cars became unavailable, use cars rocketed up in values, so we over earned for a period of a couple of years, really were able to de risk the investment. So the you know, our this is all public. Our our ownership of the company immediately
following the ip I was about thirty seven percent. We we announced a large buyback and and you know today our ownership stands in the in the high fifties percent if I remember correctly. So you know, that's that's a you know, an ability where we didn't you know, we didn't have to put new dollars to work. We were simply reinvesting the cash flow of the company, and all all shareholders that held you know, have benefited by owning a larger percentage the company without having to put any
more capital to work. So you know, I think, you know, we're really pleased about the forward on that one. We're excited about the prospects of the business to continue growing and these new lines of business and ultimately I think it will pay enormous dividends.
Let me talk about a space that is a little off the beaten path for you guys, long short, evergreen fund that just seems so separate and different from what you guys have done with distressed assets.
Yeah, you know, our legacy hedge fund is a long short vehicle. It's hedged. The rationale there is that not every investor wants a long only set of assets that has more volatility and down markets. So the hedge fund has less volatility, but obviously you have a cost of hedging associated with it, and there are certain investors for
whom that is exactly the right product. And so it's a part of the business that we will always pursue because we can still do some of the some of the same things on the event and alongside that we do in our and our closed end funds and our permanent capitol vehicles, but on a more hedge basis.
Huh really quite quite fascinating. So first, you know, we talked a little bit about you being a CPA at Ernst and Young in Massachusetts, but I also noticed you were a CPA at one of my favorite places in the world, the Cayman Islands. Was that just to service offshore hedge funds? Or how did that come about?
It's a it's a kind of a funny story. I was. I was based out of the Boston office working for Instant Young and I came to New York. I shouldn't say it can New York. I was. I was asked quote unquote meaning I was told to come to New York, go to New York work on a project there. And that project was at an investment bank and taking a look at their internal controls around derivative products. And what you was this around was this would have been ninety four, ninety five, and that's.
It, So derivative products there still were exits it back.
In the exactly early days. And I had had some experience in valuing derivative contracts on an earlier project I worked on. So I was sort of a unique individual in the sense that I was a CPA who had some of that experience back then. And so I came to New York and it was my first exposure to investment banks and trading floor. And I walked on to the trading floor and I was like, I don't even know what's going on either, but I have to do this.
And I remember walking back down to the room where all the consultants and accounts were and I said, what exactly doing up there? And guy explained, you know, sales trading, and I said, I need to be a trader, That's what I got to do. And the guy literally burst out laughing. Right, He's like, you're never going to be a trader on he said, your background's all wrong. You're a CPA. You know, you didn't go to the right Ivy League school. You didn't go to an Ivy League school.
And so I met up with a friend and said, how do I become a trader? And this person was doing recruiting at one of the big banks, and she's like, well, you need some interesting experience. You got to get into a top business school and then you got to do an internship and then you can be a trader. And so I'm like, oh my gosh, that's gonna take like five years. Okay, I'm going to do that. So I endeavored to, you know, find the right opportunity. So I'm
looking around. I can't really find anything, but I meet a guy in this project who is from our Cayman Island's office. So I go back, you know, to Boston. I'm working in the office and I'll never forget this. I'm I'm at my parents' house with their closest friends on a Sunday afternoon, and I'm kind of bummed out and my dad's best friend looks at me and he goes, what's problem And I said, well, I'm unhappy with everything in my life right now, like everything sucks. And he's like, well,
what do you want? And I'm like, ah, I can't happen. He's like, no, you have to be able to say it. What do you want? I said, Okay, want to know what I want. I want to make this much money X dollars, I want to live on the beach. I want to own a boat, and I want to be able to drive a jeep to work every day. That's
what I want, okay. And I was like, you know, being the smartass and young man, and I thought, like, you know, there, I kind of told him, and so he just looked at me and didn't say anything, and he goes, well, he goes, that door will be it will be open or presented to you because the question is do you have the guts to open it?
Wow?
And so I was like, what is he talking about? Right? And so six months later, the opportunity arose to go to work in the Cayman Islands. And this is pre internet days, so I had to go down to the local travel agent and pick up brochures that came in out it just so I have some idea of where it was, what it looked like sight unseen. I grabbed my bags and I literally moved there. And within a month of getting there, I had bought a jeep to
drive to work. I bought a little boat to me no no top ye except in the summer it rained all the time. You know, I lived on the beach and I and I had a job that was paying me. You know, what I felt was my you know that my target pay back when I was a kid, and and had I not done that, it wouldn't have led to me getting the unique experience that ultimately allowed me to get into Columbia Business School. And so it was
a life changing moment. But you know, my my dad's friend was was exactly right, like that was not an easy door to open because I had to take a leap of faith that was pretty extraordinary back in that time. Yet I didn't. I literally had no idea. There was no ability to go on and look at trip Advisor and see, you know where the restaurants were. I had
to go down their site on scene. I had a couple of phone calls with folks that work down there, and so it was a life changing set of experiences for many reasons.
I got so many questions for you. So first, if you didn't have that conversation with your dad's friends when the opportunity came along, might it have passed you by? Or did his words resonate over your head and you just jumped at it because of that they resonated.
I mean, you know, I think in life, you know, when I when I look at those key experiences, like you know, we spoke earlier about my dad and the question he asked me when I started my hedge fund, or my dad's friend when he when he challenged me to take the opportunity when it presented himself and he had no idea what would be presented to me, nor did I at that time, or or looking at my
uncle and his success in accounting. You know, those are all small but incredibly important things in the sense that they position you for success. Now, the question every young person or person starting out has to ask is are you willing to do what it takes? Then when you're when you're you know, you set the path in motion
that the easy part is taken the first step. The hard part is taking the steps in the middle of the night, when you're up late working you haven't you know, you haven't slept in two days and you're working on a big project because you're trying to make a name for yourself. Or the things that no one likes to talk about, the miss golf trips with friends, the forgiven vacations, the canceled trips you know, the missed birthday party for a kid. You know, those are all the little, uh
sacrifices we make to achieve some level of success. I think the goal is to minimize those things, or or to focus your sacrifices in areas that aren't really that important.
So let me push back a little bit on your characterization of your father's friend as a small thing that was a giant attitude shift, that was a philosophical Well, hey, there are opportunities in life that come along and you have to grab the ring when it presents itself and not sort of sit back and say, well, I'll wait for the next train to come home along. That's a huge philosophical change.
It was a small moment in time and a huge shift in the course of my life. And you know, I think I was always very motivated to work. I was not always very motivated to study or do homework, but I really like to work. And I worked a lot in high school. I worked a lot in college. I worked a lot after college and business school. I liked, you know, working. I liked making money because it afforded
me freedoms that I didn't otherwise have. And so what that question did was caused me to think to myself about what risks I would have to take to get to where I wanted to be. And it was a very important lesson that ultimately resonated when it was time for me to think about starting my own business.
So you were in the cane means in the mid nineties for for how long.
Will you there? Two years? And I would say that it sounds better and more exciting and in practice, you know, in in theory than it is in practice.
Come on, is it is there a better burger in the world than the Sunshine Grill.
No, there are some pretty spectacular places to go in there, and it was it was enormous fun. You know, you have to kind of settle into whatever routine is best for you. I was, you know that, I you know, you can only kind of go out every night in the week for for so long. And you know, some people, I guess can do that forever. I was not wanted.
Nobody can do it, but eventually, eventually, right.
Yeah, but I I got really into scuba diving, I got I got really into martial arts, and those were things that helped me, you know, create some balance in my life at that time. I haven't. You know, those are things that I that I don't still participate in today for a variety of reasons. You know, showing up
to work with cracked ribs is not super comfortable. But you know, I think the you know, the the ability to to branch out and experience and try new things in any doesn't matter where you live, those are great things to do. And living in a place that is very culturally different than what you experienced and I was definitively a minority in every way. There were very few Americans there.
A lot of Canadians, tons.
Of Canadians, lots of lots of you know Brits, right, so you know meaning.
I mean it's a British territory. I think it's independent, but there are photos of the Queen.
Governor. You know they're disappointed by now the king and you know it's it's a it's a very interesting, very close ties to the UK. And so you know, it was it was a really fascinating place not only to work and to recreate, but also to be part of society. I learned a lot some incredible lessons taken from my time there. So it was a great two years and and I you know, truly life changing period.
I have a bunch of friends who were in finance and banking from Canada and they go down there for a spell and they never leave. So not only is the Grand Cayman's the first place I've ever had poutine, but hold that aside. Over the past twenty years, the island has just completely transformed. You have the Dart family that it flip over a styrofoam cup, it says dark. It's that that family that have just invested literally billions and billions of dollars. The island is practically South Florida.
I mean it's very modern, very contemporary and beautiful, and every time I think about buying something down there, it's an island is the only problem. So getting anything there do they still have like a fifty or tax on bringing even like an old clunker jeep, you're gonna pay double the price.
Big big tax on vehicles. There no income tax though, so for for US citizens you have a limit. But in most other countries they're not taxing their worldwide income. So if your UK s is in or Australian, or South African or Canadian which constituted a lot of the employees there, you know you're running tax free income forever. Now you pay effectively your taxes through consumption.
Taxes plus the stamp tax to purchase property is another thing. Turks and Caicos has a very similar sort of financial setup. By the way, two of the most beautiful areas when you look at whether it's sailing or snorkeling or scuba diving, second to none, and maybe the Great Barrier Reef is the closest thing.
Camman's amazing in that regard. Now, what they've also done is they've they've worked really hard to build a real financial services sector there. So our insurance company is actually based there, our employees are there. We have a prime you know, a primate. It's not a reinsurance subsidiary. It's a real primary insurer that's located and came out and and we, you know, ultimately became comfortable with that jurisdiction because I had contacts there and we're able to you know,
people I maintained contact with from my time there. That gave us great comfort in what they were doing and building out the insurance industry. And it's been a fantastic jurisdiction.
And I always say when people ask you your insurance company is based on the Cayman Islands, I said, listen, if I put a blindfold on you and I take you there, and I removed the blindfold outside our office, you will swear you're in coconut growth, right like you won't for a second think that you're not in South Florida. And it's become very much a first world financial hub. And you know, I would not be surprised to see its growth continue unabated for the next couple decades.
First World healthcare, first world Internet, first world financials network hard to be. Since you mentioned the insurance company, I got to ask, you're running a hedge fund. Why an insurance business. Is it the float to play with the way Buffett does with Geico, or how does this interlate with the rest of the business.
So it's an annuity business, so unlike property and casualty were the key is, you know, making money by underwriting your risk very very efficiently and earning a profit. You're underwriting in an annuity business. It's a it's a spread business. So we're taking capital in, we're investing it. We owe our annuity holders a fixed return, so we have to manage to make a higher return on our diversefied pool of assets than what we are required to pay out
to the annuity holder. That's the whole game, and that that comports very well with our strategy of deep value investing and looking for opportunities where we can preserve capital not lose money. You know, again comes back to that
same that same core thesis. So the draw initially was the duration of the capital you start an insurance company, so long as you you know, maintain control of the assets, you know they're effectively permanent assets, right, and and again going back to that point about the excess return that you can earn by having long data capital, it's really an extraordinary pickup in total yield. And so we you know, this is the most exciting thing we do, but we're thrilled about it.
I would never have guessed that. I have to ask the obvious question, since we've seen a five hundred basis point bump in rates, what do higher rates do for running an insurance book.
Yeah, for the annuity business, it's the spread between the assets that we're buying and the annuity rates. So while the annuity rates have gone up by quite a bit, the yield and the assets we're buying has gone up by slightly more. So our total return to the equity has increased. So I would say that this environment is just about perfect for the insurance business.
Huh. All right, So let's talk about a different business line that I'm kind of fascinated by. Ever since the pandemic ends, it looks like commercial real estate has been poised on the brink of disaster, especially offices. How do you look at CRE and what sort of opportunities are are there in the world of real estate.
Yeah, you know, we will definitely be heavily involved there if the sector or if individual opportunities become distracts. I think we're taking a wait and see and very patient approach right now. We're trying to sort out what work from home means for a demand for office space. It's just challenging, right It's not as if people working three days a week, you still need the same amount office if they're all there at the same time. So, you know,
what it means is utilization has shifted. We may need to change the way that we use offices. We're spending a lot of time thinking about that. We need to change the places where we have offices. So we have more people working outside of New York now than ever before, and we're perfectly comfortable with that. We provide greater flexibility
and where people work from. But I think as it relates to CIRE, you know, the two big components are answering that first question around aggregate demand, and then the second is answering questions around you know, are some cities and jurisdictions poised for more success than others, will some be more permanently challenged? Those are the big unknown You know, we need some real restructuring in some of our major cities to make them attractive for business again.
Yah San Francisco and Saint Louis stand out is two real basket cases. New York seems to be coming back. Raises the question of those that if you're there three days a week, can you do the sort of hot desk that allows you to use half the space? Hey, your Monday, Wednesday, Friday. This person is Tuesday Thursday and everybody is in pick a day Wednesday. Do you really need, you know, a thousand desks for a thousand employees or can you get away with six hundred desks?
If you have everybody in that one day a week, you need the thousand desks. The question is do you need as many offices? Do you need as many conference rooms? That's an unknown and I think we're all every business. It's not just the commercial real estate companies that are thinking about it. We're all thinking about it because either you're a provider of that capacity or a user of that capacity, and both sides of the equation have to make a determination as to what the appropriate level of
space is. And we're in that boat with everybody else. So I think for us in commercial real estate, we haven't seen any opportunities that have really caught our eye yet, but it's definitely an area to watch.
No doubt about it. I'm kind of fascinated that return to office at least in the metropolitan areas are fifty five to sixty percent in the US, but Europe is running ninety ninety five percent. Whether that's better mass transit, shorter commutes, or smaller houses where you can't just set up a home office as easily as we do here.
Well, it's a good point. I think it's I think it's probably a combination of those factors. Also some societal differences as it relates to what's accepted. I mean, if you if you go to London, there are a few things that really stand out. One that this casual address is not something that's been as fully adopted. Oh really, no, it's it's.
I mean, just for the record, you and I are both in white shirts, yeah, darker blue blazers. I'm wearing jeans, you're wearing khakis. But would do either us really ever wear a tie unless we're presenting at some event where it says suit and tie.
Yeah? No, And if you go to London and you're in you know, in the center of in this London city, you'll see a lot of people in suits, more than you see in New York and so there's a level of formality perhaps that exists there. It's also an incredibly vibrant place to city centers in the UK are you know,
fully back relative to to pre pandemic. So you know, we've got to think about whether or not we're doing our broader community a favor or a disservice by not being in our city centers as much as we were a pre pandemic. And that goes beyond simply what's best for work and can you get the work done? No, it's can you develop the young talent? Right? Are you supporting your metropolitan area? Meaning all of those businesses that
rely on the people coming in and out. All of these things are really important and it can't just flip a light switch and make it all change instantaneously. If you're going to shift the way those things happen, you have to plan for it. You have to think about how you're going to train your young people. You have to think about how businesses can move from city centers out to the local communities where people will spend an
increasing period of time. So I believe that we will see some level of deurbanization over time, deurbanization, and I think it's there's a variety of reasons for it. A lot of it's based on our views on mobility. I think that you know, as we see greater levels of automation, as we see greater levels of electrification, which are tied hand in hand, it'll become easier to travel, it's not as much of a burden. People will be able to live and commute more, particularly if they're not commuting five
days a week. So there's a lot of big changes that I think will occur over the next ten or fifteen years. The worst thing we can do is try to force those changes in twelve or twenty four months too fast.
Professor Scott Galloway it and while you Stern talks about the disservice we do to the youngest employees who need to come in, learn the ropes, be mentored, actually have some FaceTime. You know, if you're old folks like us and you've been doing this for a number of decades, you don't have to be in the office five days a week, two or three days as plenty. But if you're early in your career and you talked about what it was like at Credit Swiss and at Goldman, that's
a loss. For people who are not there every day.
It's a massive loss. If you're learning from your more experienced co workers and you're only there three days a week, there's some forty percent of your time is without the direct contact, and so there's going to be some diminution in your ability to ramp up. I don't know whether it's a forty percent or whether it's a fraction of forty percent not zero.
It's a real chunce, all right. So before we get to our favorite questions, I got to throw you one curveball. You sit on a number of different boards, including the board of trustees at Villanova, but you're also a board member of the Navy Seal Foundation. How does this come about? Tell us a little bit about that experience.
Yeah, the last person that I hired at Goldman was a seven year veteran of the Seal teams and was one of the early board members at the Seal Foundation and introduced me to the organization. And so for the last ten twelve years I've been involved as a as a supporter and host of their New York City gala, and then earlier this year I was asked to join
the board, which is an unbelievable honor for me. It's a way to support folks that I have a great deal of respect for for a whole variety of reasons, but you know, it was at its core a way for me to get involved with a community that took action following nine to eleven, which had, you know, as we mentioned early, a profound impact on me and and folks that frankly, as I got to know, I came to really like they're not what I think the average
person views them to be. These these are very much the the you know, the guy next door, You know that that young person that you knew growing up that was kind of always doing the right thing and was very steadfast in their views and and and unwavering in their commitment. That that seems to be a common thread that I found with some of those, these these men and the teams professionals.
Yes, so when I was on the trading desk, the head trader was a former Marine jungle combat instructor. The guy I left was a seal, The guy next to him was a ranger.
Yep.
So the four of we would go out for drinks afterwards, and I could be a wise ass at aar because no people would look at us, and they'd look at me like that guy's a wisess. I should slap him, and then they look at you the saw of me. Maybe best to not get involved in them. Yeah, yeah, I got away with a lot of But the word that always stood out is these were just consummate professionals. They had a task to do, they knew how to
go about doing it. And there are some fascinating parallels between those services and traded about going and prepared thinking about plan b's, being able to make decisions under pressure. It's really quite fascinating, though it is. That must be an amazing experience working with them.
It is, and you know, it's it just that's the community that I became connected to. There are lots of service members across our different branches that are equally worthy of our respect, And you know, I think it was my way, as I said, of doing something to serve people who so selflessly serve all of us.
Huh, really really great stuff. So I know I only have you for a finite amount of time. Let's jump to our favorite questions that we ask all of our guests, starting with tell us what you've been watching or listening to lately? What kept you entertain since the pandemic on either Netflix or Amazon or whatever the fam is enjoying?
Yeah, you know, it's funny, of course, you know a lot of the very popular shows we've we've watched and you know, I think, you know, shows like ted Lasso or Funny, you know some good lessons in there that that one's been very enjoyable. The ones that I've watched more recently that I think are great, or the prequels to Yellowstone, I really.
Sixty three, eighteen eighty three and Early is the same as wrong.
Yes, nineteen twenty three, I think is the other one, And you know they I'm a big fan of the American West, a Mountain West. I spent a lot of time in Montana, and so those really resonated with me. And what I liked about the prequels is, you know, while you know, a story told in a Hollywood sense, they give some insight into just how difficult and different time was then, particularly in that part of our country, how hard it was and I just think the stories
are fascinating. So that's you know, I've really enjoyed those those programs and and look forward to the next installments coming out.
Sounds like one we should put on our list. Let's talk about your early mentors who helped shape your career.
Yeah, you know, I never really had official mentors. It wasn't really the way the businesses that I operated in worked, but I but there were people that I was able to observe that had, you know, just had achieved such incredible success and we're so good. And one that really stands out, I think is David Tepper, who you know, of all the individuals with whom I interacted over the years, is absolutely the best investor of the bunch. And David's
two things stand out. One is incredible conviction and two his ability to take a very complicated situation and to still it down to very simple terms, which is a mark of true genius. And I think his prosecution of his commitment and his strategy, you know, starting in distress corporate and then you know a lot of macro type investing in addition to what he does at his core
is incredibly impressive. And so you know, I think looking at the way that he approached, you know, being committed to a position and unwavering in many cases despite others maybe having a different view is something that I've always really respected.
Tepa's fund is appalousa capital.
That's right.
Yes, he He's put up pretty pretty amazing them.
It's unbelievable vable.
So let's talk about everybody's favorite question books. What are some of your favorites? What are you reading right now?
So I don't know how I get into this, but right now I'm reading this book called One's Second After, which is about life in the United States, you know, immediately following an emp or electromagic pulse attack. Is is a rather disturbing book, but it's really pretty fascinating. It goes to, you know, some of the risks that we face as a modern society and how quickly things can change if the right set of kind of really negative
and horrible circumstances arise. And I've always been sort of fascinated by the risks that we as a modern society face that aren't often thought about, and the ways that we can protect against them. That's a big one that in our electrical grid, I think you know, particularly in our urban areas, we are uniquely exposed to a loss of power. And so, you know, I think the Copple book Lights Out that was written a while ago as another sort of must read. It's something that we really
should be paying much more attention to. You know, there's a lot of great initiatives that as a country were pursuing for noble reasons, but my personal view is that the making our electric grid more robust should really be at the top of our list.
There's some funds in the Infrastructure Bill that go to hardening the electric grid. I don't know what your experience was during Sandy in the New York area, we had no electricity for thirteen days, and when we subsequently moved to a new house that was this close to getting that gas as soon as it became available, the first thing I did was putting in a giant generator and say,
I don't care what happens. I am never going through that nonsense, right, And it's really quite astonishing how frequently modern society, like the US, there's some website that shows you all of the outages for the electrical grid. It's kind of creaking and outdated and very vulnerable, not just the hacking, but silly things like trees falling. Yeah, takes out a whole neighborhood for a week. It's kind of a it's kind of shocking.
Yeah, it's there's no question that we need to be modernizing our you know, our electric distribution system. And it's not just at the industrial scale level but also right down to the home, so you know, greater levels of battery backup and solar power, but things that are protected against you know, small scale emp A results which wol like a lightning strike, and large scale if we ever were attacked, you know, it's it's a real risk to society.
So I think, you know, those are those are things that I've always been fascinated about, the big giant problems. That's exactly the kind of thing you want to be reading before bed at night, you know. But how do we how do we think about those and how should that be worked into our national priorities.
My sister lived in a town that was one of the few rare towns that have underground electrical well originally started as how do we avoid the visual blight of copper wire strung between dead trees, and instead they put it all on the ground and Sandy I have a vivid recollection of her saying it was really inconvenient. The cable went out for a couple of hours and that was.
Her entire experience.
Yeah, could be the greatest shower I ever took in my life. Was the fifth day of Gee this, we're not getting electricity back anytime soon. Yeah. So, and to move everything on the ground with costs billions, but at the very least to make things a little more resilient and a little more hardened, Yeah, got to be a top priority.
Yeah. Or micro generation, that's that's you know, smaller scale you could work as well.
So if you have solar or winds and the ability to store it for a couple of days, you're okay, even better lose.
Ah, that's right. Yeah, yea. It depends on your location. So but you know, it's a big giant investment that we should really take seriously across our country, you know, hardening the grid and distributing the power generator, you know, more solar, more renewable, all of it.
To circle back to the Caymans or the way I love the way the locals pronounce it k man Man is they had this setup where between the local power company, the local government and the UK government you could get pretty much one hundred percent funding for solar. Or they were really big on geothermal that you would drop sink a geothermal line and you have heat and air conditioning year round at essentially no cost.
That's right. I mean GEO is like, you know, I've always done geo. Well, you know, solar is tough in certain jurisdictions, but I think the combination, if you can do combo of solar and geo, you're really in a you know, you've got a lot of energy independence and much cleaner. It's well worth the investment in most places. And and you know, particularly in an island where you can put GEO in, you know, you're really just getting
down below the coral. It's an incredibly efficient way of managing your electric costs.
Yeah, drops everything in half. And because it's so expensive to import.
Everything, oh massively.
But they seem to have plenty of sunshine now they do think that's the big one. So let's jump to our last two questions that we ask all of our guests, Starting with what sort of advice would you give to a recent college grad interested in a career in either investing or distressed assets.
I think it's I think irrespective of what you're looking to do, the advice is the same, which is that make sure you find something that you love. And it sounds so trite you hear it from everyone, but it really is a critical piece of advice. Investing in distress is not for everyone. You know, it's not an easy way to make money. You know, they're definitely better ways
of doing it. I think, you know, if I could tell my kids to go into a type of investing, I'd probably tell them to do VC or something else. But I do think that you have to ensure that the career you're pursuing is something that you can be committed to for a long time, so that you're in it long enough to become an expert. I think that's perhaps the crucial element if you want to achieve great success. Make sure you stay committed to something long enough that you can become an expert.
At really interesting and our final question, what do you know about the world of investing today? You wish you knew back in the early nineties when you were first getting started everything.
I mean, I wish I knew you know gosh, I wish I knew everything. I guess the one if I could say, one big giant lesson that I've learned over the years is, you know, watch out for secular change. It's the killer. You can't be on the wrong side of secular change. So, you know, being on the wrong side of secular change the killer. You know, one example
would be the long term decline of commodity prices. Right over a long period of time to generally speaking, commodity prices are trending down, particularly after adjusting for inflation, and so you know, it's one of many, you know, the wrong set of technological change or adoption of new technologies. You've got to be really careful about that, and you have to have a thesis that looks out if you're
making a long term investment. So, you know, I think that that that's probably the most important lesson that I learned in my last you know, thirty years or so. That wasn't entirely self evident when I started.
Huh, really, really very fascinating stuff. Tom, Thank you for being so generous with your time. We have been speaking with Tom Wagner, co portfolio manager and co founder of Nighthead Capital If you enjoy this conversation, well, check out any of the previous five hundred or so we've held over the past eight years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcasts. Sign up for my
daily reading list at ridults dot com. Follow me on Twitter at ritults, follow all of the fine family of Bloomberg podcasts at podcast I would be remiss if I did not thank the crack team that helps put these conversations together each week. Sarah Livesey is my audio engineer. Attika Vaalbrun is my project manager. Jorn Russo is my researcher. Pariswald is my producer. I'm Barry Rudolts. You've been listening to Masters in Business on Bloomberg Radio.