Latest / Masters in Business / David Snyderman on Specialty Finance and Data in Investing

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David Snyderman on Specialty Finance and Data in Investing · Masters in Business

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News. This is Master's in
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Speaker 1: Business with Barry rid Holds on Bloomberg Radio. This week
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Speaker 1: on the podcast, I have a fascinating and extra special guest.
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Speaker 1: David Sneinermann has put together an incredible career in fixed income,
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Speaker 1: alternative credit, and really just an amazing way of looking
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Speaker 1: at risk and trade structure and how to figure out
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Speaker 1: probabilistic potential outcomes rather than playing the usual forecasting and
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Speaker 1: macro tourist game. He is global head of all credit
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Speaker 1: and fixed income and managing partner at Magnetar. They have
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Speaker 1: an incredible track record. They've put together a string of
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Speaker 1: j huge returns. They are not like any other funds
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Speaker 1: that you'll hear me talk about. Their pre unique and
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Speaker 1: specific in the world. I found this conversation to be fascinating,
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Speaker 1: and even though we kind of wander off into the
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Speaker 1: weeds of private credit, it's so informative and so interesting.
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Speaker 1: I think you'll you'll really enjoy it. With no further
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Speaker 1: ado my discussion with Magnetars David Snyderman.
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Speaker 2: Thank you very much for having me, Barry. I really
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Speaker 2: appreciate it and I'm looking forward to our conversation.
1:24
Speaker 1: I am. Also, I'm very familiar with Magnetar and it's history.
1:28
Speaker 1: It's really a fascinating firm in so many ways. Let's start, though,
1:33
Speaker 1: talking a little bit about your background. You grow up
1:37
Speaker 1: in suburban New Jersey and then you head to Saint
1:41
Speaker 1: Louis for college. Tell us a little bit about where
1:43
Speaker 1: you went, what you studied.
1:45
Speaker 2: Sure, I grew up in Freehold, New Jersey, so most
1:47
Speaker 2: people a know home of Bruce Springsteen. You know, my
1:49
Speaker 2: focus coming out of high school was playing football. I
1:52
Speaker 2: want to play football at the highest level I could.
1:54
Speaker 1: You are not much bigger than me. What made you
1:57
Speaker 1: think you could play on the gridiron?
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Speaker 2: I don't know. I thought I could, but I definitely
2:01
Speaker 2: thought I could at the time, and so I wanted
2:04
Speaker 2: to play at the highest level possible. My parents were
2:06
Speaker 2: much more focused on academic institution and so wash you
2:10
Speaker 2: sort of met both criteria.
2:11
Speaker 1: Did you play born college?
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Speaker 2: I did all four years. It was a lot of fun.
2:14
Speaker 1: What position did you play?
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Speaker 2: I played strong safety, and yeah Division three is the
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Speaker 2: highest level I could play up, but I loved it.
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Speaker 1: Right, So safety you have to be pretty fast, and.
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Speaker 2: That was the issue.
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Speaker 1: So but for that you would have gone pro there
2:28
Speaker 1: you go. What did you study at Washoe.
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Speaker 2: Washoo back then? Was it was a great They had
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Speaker 2: a great medical school and they still do today. And
2:37
Speaker 2: in my family, being a doctor was the highest level
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Speaker 2: of achievement. So I had an older sister starting medical school,
2:43
Speaker 2: and I had a relative that is actually a dean
2:45
Speaker 2: of Duke Medical School. So I had this nice glide
2:48
Speaker 2: path to be a doctor.
2:50
Speaker 1: Right.
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Speaker 2: So I started off pre med, but I didn't end
2:52
Speaker 2: pre med. I found out quickly that's not what I
2:54
Speaker 2: wanted to do. The hardest part is telling my parents
2:57
Speaker 2: and especially my grandparents, you know, no more pre med.
3:00
Speaker 2: So I switched to be an economics major. I graduated
3:03
Speaker 2: economics with a lot of courseworking accounting and finance.
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Speaker 1: Huh. Interesting. So you come out of college, you go
3:09
Speaker 1: to Price Waterhouse Cooper and then Coke Industries, where you're
3:13
Speaker 1: focusing on convertible securities, merger arm and special situations. How
3:19
Speaker 1: do you get from medical school to that? What was
3:22
Speaker 1: the career plan?
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Speaker 2: Yeah? My path was certainly non traditional. I didn't go
3:26
Speaker 2: to one of the East Coast Ivy League schools, knowing
3:28
Speaker 2: I wanted to go to Wall Street. I didn't even
3:30
Speaker 2: know what Wall Street. Working on Wall Street meant at
3:32
Speaker 2: the time, So for me, it was much more around,
3:35
Speaker 2: you know, being around fantastic people and really taking advantage
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Speaker 2: of opportunities. It's like you said, I started a price
3:40
Speaker 2: waterhouse and I went through a one year rotation there.
3:43
Speaker 2: So it started with audit, so I saw many companies,
3:47
Speaker 2: then tax and financial services, so it's a great training
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Speaker 2: ground to understand how, you know, theoretics went into the
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Speaker 2: practical business. From there, I went to Coke Industries and
3:58
Speaker 2: I had a great experience of Coke. I was there
3:59
Speaker 2: five years. I worked in three different places for them.
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Speaker 2: So I started in Houston, Texas, and I worked on
4:05
Speaker 2: their natural gas business. Then this opportunity came up in Switzerland.
4:09
Speaker 2: So it's a thirteen thousand person company and there were
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Speaker 2: going to be five people in Switzerland to manage about
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Speaker 2: several hundred million dollars more in cash optimization. So I
4:19
Speaker 2: had the opportunity to be a junior person there. I'd
4:22
Speaker 2: never left the US before, so I was sat in
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Speaker 2: the middle of Switzerland and sat there for two years
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Speaker 2: and worked in that business, and then went to Wichita, Kansas,
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Speaker 2: which tak Kansas was the home office and there were
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Speaker 2: sort of a dozen of us, very simply situated, you know,
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Speaker 2: all young and hungry. But they had great management at Coke.
4:41
Speaker 2: They really encouraged us to start businesses. So I remember
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Speaker 2: writing the merger our business plan there and then implementing
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Speaker 2: the business. So a quick fun fact about Coke at
4:52
Speaker 2: Magnetar today we have three of my prior bosses that
4:56
Speaker 2: you know from Coke, so it's pretty neat. But to
4:59
Speaker 2: answer your question, like, I had a lot of broad
5:01
Speaker 2: experiences by the time I was in my mid twenties,
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Speaker 2: but no real direction on what my career was going
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Speaker 2: to be.
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Speaker 1: Where in Switzerland was a Geneva somewhere.
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Speaker 2: Else it was Frebourg, So a town twenty minutes from
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Speaker 2: Burnho was a tax free canton.
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Speaker 1: Uh huh.
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Speaker 2: So I was in a town that spoke, you know,
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Speaker 2: half French and half German and I spoke English.
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Speaker 1: So there you go. But no taxes, no income.
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Speaker 2: Taxes, no income taxes for the company.
5:23
Speaker 1: And then Coke Industries. I don't think a lot of
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Speaker 1: people realized one of the largest private companies in the
5:29
Speaker 1: United States and maybe even the largest. They're giant energy powerhouse.
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Speaker 1: What else does Coke do?
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Speaker 2: Yeah, so when I was there, that had thirteen thousand people,
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Speaker 2: and that was before they bought Georgia Pacific. I think
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Speaker 2: now it's probably thirty five thousand people. Immens It's immense,
5:44
Speaker 2: and so they have many, many different business lines there.
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Speaker 2: For me, I sat mostly in their internal really an
5:51
Speaker 2: internal hedge fund, so it was their excess cash. They
5:54
Speaker 2: borrowed money at live bid at the time, so they
5:56
Speaker 2: borrowed money very cheaply, and our job was to make
5:59
Speaker 2: money on that money.
6:01
Speaker 1: So you end up as head of global credit and
6:04
Speaker 1: senior managing director at Citadel Investment Group. Was that right
6:08
Speaker 1: from Coke Industries? That was seven years at Citadel. That's
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Speaker 1: supposed to be a tough shop.
6:13
Speaker 2: To work at.
6:13
Speaker 1: What was your experience like there?
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Speaker 2: It was a perfect job for me at the time,
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Speaker 2: So I always thought I worked at a high level
6:19
Speaker 2: of intensity right right. But when I got there, I
6:21
Speaker 2: realized I was one of many. But I had the
6:24
Speaker 2: opportunity to work for gentleman Dave Bunning. He was one
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Speaker 2: of the original few handful of people that started at Citadel.
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Speaker 2: And Dave was fantastic in so many different ways. A
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Speaker 2: great leader, a great investor, but really a great person
6:38
Speaker 2: and he took me under his wing there. It was
6:40
Speaker 2: a lot of work, but a lot of formidable lessons
6:43
Speaker 2: came out of my time there. Right. So the first
6:46
Speaker 2: one that I think about is the investing business itself
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Speaker 2: is an operating business. So we really have to understand
6:54
Speaker 2: what we're going to invest in. Value everything in the universe, rank,
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Speaker 2: order them, and then only can we put together portfolios.
7:01
Speaker 2: And the second, and this is very credit specific, was
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Speaker 2: when you own a credit portfolio, your short volatility. So
7:08
Speaker 2: what that simply means is if you have a dislocation,
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Speaker 2: you're gonna lose a lot of money, uh huh. And
7:12
Speaker 2: so to put together credit portfolios, we have to find
7:15
Speaker 2: hedges that offset that short volatility. So really learning the
7:19
Speaker 2: value of options right was probably the biggest lesson coming
7:23
Speaker 2: out of Citadel.
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Speaker 1: So I want to rephrase that for some of the
7:26
Speaker 1: less option involve savvy members of the audience. When we
7:31
Speaker 1: buy fixed income, we just wanted to be steady and
7:34
Speaker 1: pay a divinend and not swing up and down. And
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Speaker 1: if it does swing up and down, the odds are
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Speaker 1: it's not in your favor. That volatility you can look
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Speaker 1: at as an insurance product. If the volatility goes up, Hey,
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Speaker 1: we can make a bet that will offset the draw
7:50
Speaker 1: down in the bonds.
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Speaker 2: That's exactly right, all right.
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Speaker 1: And you you at Citadel, you were running a convertible
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Speaker 1: bond and credit trading desk. Is that what you eventually
8:01
Speaker 1: ended up as head of Global Credit?
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Speaker 2: That's correct. I started there on the convertible bond arbitrage desk,
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Speaker 2: and then we started capital structure arbitrage, which meant we were,
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Speaker 2: you know, buying or selling credit and against that buying
8:14
Speaker 2: and selling equities. And finally we consolidated that together and
8:18
Speaker 2: I ran that business for Ken and Citadel.
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Speaker 1: And some of the folks Ken being Ken Griffin. When
8:24
Speaker 1: people say Citadel is a lot of work, you don't
8:28
Speaker 1: realize there's a whole other gear you have to move
8:31
Speaker 1: into and its next level was that your experience.
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Speaker 2: It was and for me, I actually loved that part
8:38
Speaker 2: of Citadel. It was sixteen hour days and it was
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Speaker 2: six or seven days a week, but you really got
8:43
Speaker 2: to learn the financial markets there.
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Speaker 1: Huh. Interesting. So Magnetar launches in two thousand and five
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Speaker 1: with some capital and you joined. You you weren't one
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Speaker 1: of the original founders, but you joined not long afterwards.
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Speaker 2: That's correct. So Alec Litowitz and Ross Lazar founded the firm,
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Speaker 2: and you know I did join the day we launched
9:04
Speaker 2: our main fund. Now, for me, Alec was a known quantity.
9:07
Speaker 2: He ran equities at Citadel with Dave Bunning, my prior
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Speaker 2: boss there, and then when I moved up into Dave's spot,
9:16
Speaker 2: Alec moved out and they started and he spent I
9:19
Speaker 2: think two years in a noncompete and then started Magnetar.
9:23
Speaker 2: Him and Ross Lazar co founded the firm, and they
9:25
Speaker 2: had a vision to co found the firm, and I
9:28
Speaker 2: bought into the vision immediately, and Alec always did a
9:31
Speaker 2: great job of laying it out right. And first was
9:35
Speaker 2: we're going to have a culture of collaboration. So back then,
9:39
Speaker 2: you probably remember in two thousand and five, you know,
9:41
Speaker 2: there were a lot of what they call pod shops,
9:43
Speaker 2: so they give individual asset allocation to people and they'd
9:46
Speaker 2: go invest their money. This was going to be a
9:49
Speaker 2: multi strategy vehicle, so we'd have credit, we'd have equities,
9:52
Speaker 2: we'd have hedge fund strategies, but with no silos. So
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Speaker 2: we're going to work together and put best opportunities into
9:59
Speaker 2: the portfolio.
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Speaker 1: So you have people from Coke Industries with you. You
10:03
Speaker 1: have people from Citadel. Did those prior employees have a
10:07
Speaker 1: piece of you guys? Did they seed you, did they
10:09
Speaker 1: invest you? Or was it just a clean break and
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Speaker 1: we're off on our own.
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Speaker 2: It was a clean break. And Ross Lazar came from
10:16
Speaker 2: the fund of Funds World and he was the primary
10:19
Speaker 2: money raiser and business builder there and so he did
10:21
Speaker 2: a fantastic job. I think were the largest launch of
10:24
Speaker 2: two thousand and five with about two point three billion dollars.
10:27
Speaker 1: How long did it take you to get up and running?
10:29
Speaker 1: Were you felt, oh, this is really all the pieces
10:32
Speaker 1: are in place.
10:33
Speaker 2: Yeah, it's a good question and funny funny you asked
10:35
Speaker 2: that question because we talk about it often around Magnetar.
10:39
Speaker 2: You know, I started and I hired three or four
10:42
Speaker 2: people that I started with, and Ross Lazar, right, and
10:46
Speaker 2: again he's a he's my partner, my close friend, and
10:50
Speaker 2: a great business builder. Two weeks into it, he came
10:52
Speaker 2: to me and said, what's the first investment, Like, when
10:55
Speaker 2: are you going to start investing? And I said to Ross, look,
11:00
Speaker 2: we were gonna build the systems in infrastructure to prepare
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Speaker 2: to invest first, and.
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Speaker 1: I need a computer and an internet netline and maybe
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Speaker 1: a trader to help us out.
11:09
Speaker 2: That's exactly what what Ross was saying. And he very
11:12
Speaker 2: politely said to me, you know, you're here to invest,
11:16
Speaker 2: not to build software. And so he I think he
11:19
Speaker 2: stopped by my desk for the next nine months every
11:22
Speaker 2: single day and asked the same question. But it truly
11:25
Speaker 2: took us nine months to build the systems in infrastructure
11:28
Speaker 2: just to be investment ready.
11:30
Speaker 1: Wow, that's amazing nine months. And I have to ask
11:34
Speaker 1: why Evanston in Illinois? I mean, I like Lumel, Natty's
11:39
Speaker 1: and super Dog as much as the next guy, but
11:41
Speaker 1: why the middle of the Illinois suburbs the Chicago suburbs.
11:46
Speaker 2: Yeah, so it was just north of the city and
11:48
Speaker 2: it's across the street from Northwestern, so that would be
11:51
Speaker 2: the draw. You know, the train lines in there, so
11:53
Speaker 2: you can recruit people from the city. But it was
11:57
Speaker 2: probably a little more selfish, like we all lived on
12:00
Speaker 2: the north shore of Chicago and so it was an
12:02
Speaker 2: easy commute for us to work, and so that that's
12:05
Speaker 2: where we started the firm.
12:06
Speaker 1: And that is really a lovely part of the world
12:09
Speaker 1: on the lake. It's such a manageable, easy city to
12:14
Speaker 1: operate within. I mean, the winters are a little cold,
12:17
Speaker 1: but still it's a lovely place.
12:19
Speaker 2: It's a great quality of life in Chicago and outside
12:22
Speaker 2: of Chicago.
12:24
Speaker 1: So only a few years later, we're right in the
12:27
Speaker 1: teeth of the Great Financial Crisis. How did you guys
12:31
Speaker 1: navigate that?
12:32
Speaker 2: We were very fortunate and we performed quite well in
12:35
Speaker 2: our credit strategies, which which certainly we can talk about.
12:38
Speaker 2: We had both long and short credit products, and we
12:43
Speaker 2: had a long voltary position, meaning meaning we protected the
12:47
Speaker 2: balance sheet very well if there was a dislocation. And
12:50
Speaker 2: I think that went back to some of the prior
12:52
Speaker 2: lessons from prior firms, like we really need to have
12:55
Speaker 2: portfolios that we protect the balance sheet and make sure
12:58
Speaker 2: that we're able to stand up in difficult environments.
13:01
Speaker 1: I have noticed that a lot of firms that describe
13:04
Speaker 1: themselves as hedge funds really aren't very hedged. You guys
13:10
Speaker 1: operated pretty fully hedged it most of the time, right.
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Speaker 2: We really did. And the systems in infrastructure we built
13:18
Speaker 2: were not only to measure risk, but to manage that risk,
13:22
Speaker 2: and so we'd find good investments both on the long
13:25
Speaker 2: and short side.
13:27
Speaker 1: So even if you have a position that that's long
13:29
Speaker 1: you have an offsetting or matching position, or do you
13:33
Speaker 1: just hedge out that long position with a short bet.
13:37
Speaker 2: So there's a quality of earning's question embedded, and I
13:40
Speaker 2: think what you said, and that's we're trying not to
13:42
Speaker 2: take macro level bets. Those for us are low quality bets.
13:47
Speaker 2: And so what we're trying to take is idiosyncratic bets,
13:50
Speaker 2: meaning we're focused on one factor or're betting on that factor.
13:54
Speaker 2: Then we're going to hedge out all of the macro
13:56
Speaker 2: risks around the portfolio.
13:58
Speaker 1: Huh. Really interesting. So we were talking about you guys
14:02
Speaker 1: launched a few years right before the financial crisis. I
14:07
Speaker 1: wanted to talk about a couple of trades from that era,
14:10
Speaker 1: perhaps most famously, you guys put on a CDO bet,
14:15
Speaker 1: a collateralized debt obligation bet that was designed to do
14:19
Speaker 1: well if housing made some extreme moves and it was nondirectional.
14:24
Speaker 1: It was hedge. Tell us a little bit about the
14:26
Speaker 1: magnetar CDO bet from the financial crisis.
14:30
Speaker 2: I talked about setting up the infrastructure to prepare to invest,
14:33
Speaker 2: and we looked at every asset class. So we looked
14:36
Speaker 2: at corporates, we looked at mortgages, we looked at credit cards,
14:40
Speaker 2: and what we found in the mortgage market is something
14:43
Speaker 2: you don't read about in textbooks. We found that we
14:46
Speaker 2: could invest on the longside in what they called the
14:51
Speaker 2: equity piece or the most risky piece of a CDO,
14:55
Speaker 2: and we could short the next level up, so the
14:58
Speaker 2: mezzanine piece, and we could short two or three times
15:02
Speaker 2: the amount. But what was super interesting was we were
15:05
Speaker 2: getting paid to hold an option that never happened.
15:08
Speaker 1: Right, Options cost you money, and that's the old joke.
15:11
Speaker 1: Option traders never die, they just expire worthless.
15:13
Speaker 2: That's exactly right. In this case, we were going to
15:16
Speaker 2: hold an option that we were going to get paid
15:19
Speaker 2: fifteen to twenty percent a year.
15:20
Speaker 1: Though, oh really, that's real money.
15:22
Speaker 2: So you never see that and you never read about that.
15:25
Speaker 2: But that's the way the markets set up. It was
15:27
Speaker 2: just too fragmented. You had people that were willing to
15:30
Speaker 2: buy pieces of these structured products because of the ratings,
15:35
Speaker 2: and on things that weren't rated, no one was willing
15:37
Speaker 2: to buy. So we took the other side of that trade.
15:40
Speaker 1: So you bought the unrated portions and you shorted the
15:44
Speaker 1: rated portions. That's correct, that's very contrary that's very interesting.
15:48
Speaker 1: How did you identify that opportunity? That's such a talk
15:51
Speaker 1: about idiosyncretic niche trades? How did you figure that out?
15:57
Speaker 2: The firm was built on finding white spaces, and so
16:00
Speaker 2: I remember back back in two thousand and five when
16:02
Speaker 2: we first started, you know, we'd think about the banks.
16:05
Speaker 2: The banks would have an equity trading desk and they'd
16:08
Speaker 2: have a debt desk, and they'd both value the same companies,
16:11
Speaker 2: and both sides of the firm with vlume completely differently.
16:14
Speaker 2: And so for us, those are exactly the opportunities we
16:17
Speaker 2: were looking for. But we didn't find it in the
16:19
Speaker 2: corporate markets. We found it in the mortgage market. It
16:22
Speaker 2: was so fragmented that the machine that sold rated products
16:27
Speaker 2: hit all the right buyers, but no one could sell
16:29
Speaker 2: the unrated piece. The unrated piece yielded twenty twenty five percent,
16:33
Speaker 2: where the rated piece would yield three to five percent,
16:36
Speaker 2: And so that difference was the arbitrage that we saw.
16:40
Speaker 1: So heading into five six, we saw real estate peek
16:44
Speaker 1: in I want to say, in volume in five and
16:47
Speaker 1: price and six. So if you're getting paid fifteen twenty
16:51
Speaker 1: percent to hold the unrated piece, isn't there a lot
16:54
Speaker 1: of downside risk that hey, if some of these mortgages
16:57
Speaker 1: go south, you could see, you know, you get cut
17:00
Speaker 1: in half or worse.
17:02
Speaker 2: That's exactly right, and so our what the modeling actually said, though,
17:05
Speaker 2: is if nothing happens in the world, we make this
17:08
Speaker 2: twenty percent return. But if anything happened, not only would
17:13
Speaker 2: our equity piece suffer, but the short side or our
17:16
Speaker 2: mezzanine pieces would make the money back. And that's the raceo,
17:20
Speaker 2: that's the ratio we had to be on. So what
17:22
Speaker 2: they call that is delta neutral in the options world.
17:25
Speaker 2: So we had a we were hedging an option, and
17:29
Speaker 2: that hedge made us a lot of money in downside scenarios,
17:33
Speaker 2: but that was never the focus. We didn't know the
17:36
Speaker 2: housing market would crash. We had no idea. What we
17:38
Speaker 2: had was a trade or an investment that we'd make
17:41
Speaker 2: twenty percent a year on and if anything happened in
17:44
Speaker 2: the world, we've really protected the balance sheet. It just
17:46
Speaker 2: happened quite quickly.
17:48
Speaker 1: So let's talk a little bit about what's going on today,
17:51
Speaker 1: especially in some of the private alternative spaces you've talked about.
17:58
Speaker 1: Pensions are now facing ill equids. The issues because private
18:02
Speaker 1: equity and venture capital have gates up a lot of
18:05
Speaker 1: long term tie ups. How has this affected your business?
18:10
Speaker 2: That's been the most challenging part of the business. Really,
18:13
Speaker 2: it really hasn't. And pension funds they're on hold today,
18:16
Speaker 2: they're not investing, and it's been not just a headwind
18:20
Speaker 2: for us, but for the entire industry. So I'll step
18:22
Speaker 2: back and I'll give you my view on it. So
18:26
Speaker 2: pensions have this mandate, they have a diversified portfolio they
18:30
Speaker 2: invest in, they receive cash flow from the portfolio, and
18:33
Speaker 2: that supports their retiree benefits. So they're always making this
18:36
Speaker 2: judgment while I produce enough cash to manage those liabilities.
18:41
Speaker 2: What happened over the last year and a half or
18:43
Speaker 2: so is rates went up and valuations went down. Now,
18:47
Speaker 2: the handshake agreement with the venture firms and the private
18:51
Speaker 2: equity firms was give them a dollar today and in
18:54
Speaker 2: five years they'll give you back two or three dollars, right,
18:56
Speaker 2: depending on how the fund did. They've stopped giving back
18:59
Speaker 2: that capital today. Oh really, And so the pension funds
19:03
Speaker 2: are faced with this illiquidity problem, and so they're borrowing
19:06
Speaker 2: money against their portfolios. They're selling positions in their portfolios.
19:10
Speaker 2: But what they're not doing is taking on new investments. Now,
19:13
Speaker 2: there's a flip side to this. Whenever we have trouble
19:16
Speaker 2: raising capital, the investment opportunities are usually very good. So
19:20
Speaker 2: our pipeline is extremely robust today.
19:22
Speaker 1: Huh, that's really intriguing. Do you see this across the
19:26
Speaker 1: board or is it really just more generalized that when
19:30
Speaker 1: you have the dislocation of five hundred plus basis points
19:34
Speaker 1: in eighteen months, what does that do to the landscape.
19:38
Speaker 2: It always changes the landscape, and so no one's ever
19:40
Speaker 2: prepared for moves of that size, even though everyone says
19:44
Speaker 2: they are. And so it's opportunities that have come out
19:48
Speaker 2: of this mainly are around the banks today, right, and
19:51
Speaker 2: so we can talk a little bit more about that.
19:53
Speaker 1: Well, let's talk a bit about Magnetar has more of
19:56
Speaker 1: a specialty finance focus than other credit managers. Tell us
20:01
Speaker 1: about that and how has the shift and rates impacted
20:05
Speaker 1: specialty financed.
20:07
Speaker 2: Yeah, so after the GFC, these private credit markets really
20:11
Speaker 2: developed and they went in two different directions. They went
20:13
Speaker 2: in direct lending, right, and so ninety percent of the
20:16
Speaker 2: market went direct lending. So that's going to middle market
20:19
Speaker 2: companies and disintermating the banks and lending directly to them.
20:23
Speaker 2: For us, we went in a different direction. We went
20:25
Speaker 2: in specialty finance and especially finances is a bit smaller,
20:29
Speaker 2: but it's been around for ages and it touches our
20:32
Speaker 2: lives every day.
20:33
Speaker 1: Define it if you would, Yeah, so's it's.
20:35
Speaker 2: The cars we drive, so auto loans, it's the houses
20:38
Speaker 2: we buyer ranso, it's mortgages. It's the podcasts that we stream, right,
20:43
Speaker 2: so it's all the music royalties and streaming royalties. So
20:47
Speaker 2: it's it's assets like that. And the interesting part about
20:50
Speaker 2: these assets is there's a very strong investment thesis around
20:55
Speaker 2: them because they have three attributes when combined together, that
20:58
Speaker 2: most other asset classes don't have, and certainly I don't
21:01
Speaker 2: think direct lending has. So the first is you can
21:04
Speaker 2: find very stable payoff profiles. Second, you can find assets
21:10
Speaker 2: or these payoff profiles that don't correlate to the overall market,
21:14
Speaker 2: so you're not worried about them moving with the SMP
21:17
Speaker 2: or the highyield index. And third, and most importantly, they
21:20
Speaker 2: don't correlate to one another. And so I'll give you
21:23
Speaker 2: an example of a three asset portfolio. So In our
21:26
Speaker 2: music royalty portfolio, returns could be driven by an artist's
21:30
Speaker 2: song downloads like Taylor Swift downloads. And in our solar
21:34
Speaker 2: finance portfolio, it's by how much sunlight there is in
21:37
Speaker 2: a particular region. Or lately we've been lending a lot
21:40
Speaker 2: against in video GPUs for cloud usage and that's driven
21:44
Speaker 2: by aim machine learning growth. If I think about just
21:48
Speaker 2: those three assets, they shouldn't correlate to the SMP, but
21:52
Speaker 2: they certainly shouldn't correlate to one another. That's how we
21:55
Speaker 2: can really produce a high quality of earnings for our investors.
21:58
Speaker 1: Really interesting you mentioned in banks earlier. I know that
22:02
Speaker 1: Magnetar has had opportunities to partner with banks via what
22:07
Speaker 1: some people call rig cap transactions. Tell us a little
22:10
Speaker 1: bit about those.
22:11
Speaker 2: So rag cap or some people call them significant risk
22:14
Speaker 2: transfer transactions. That is a massive opportunity for credit funds today.
22:19
Speaker 2: And so a lot of people would think that the
22:21
Speaker 2: banks are selling assets, right, but in our experience, we're
22:25
Speaker 2: seeing them efficiently transfer the credit risk of assets but
22:29
Speaker 2: keeping the customer relationship. It's a very important distinction.
22:33
Speaker 1: How do you do that either you have the asset
22:35
Speaker 1: and the credit risk. I would imagine or if you don't,
22:37
Speaker 1: if it's a mortgage, you sell the mortgage and you're out,
22:40
Speaker 1: how do you have How are you a little bit pregnant?
22:43
Speaker 2: Exactly? So the solution to that are these reglatory capital solutions.
22:48
Speaker 2: And so you're taking a portfolio of credit risk and
22:52
Speaker 2: you're transferring that credit risk to a private credit fund
22:55
Speaker 2: like us, but maintaining the customer relationship. And what banks
22:59
Speaker 2: I think eminently realizes the customer relationship is how they
23:04
Speaker 2: drive revenues. So traditional banking FX advisory services, you know,
23:09
Speaker 2: high net worth and so without that they start to
23:12
Speaker 2: lose their franchise. This is the product that allows them
23:16
Speaker 2: to transfer credit risk. And for private credit firms, we
23:20
Speaker 2: all of a sudden have access to some of their
23:22
Speaker 2: highest quality lending. Right It's it's been the fastest growing
23:26
Speaker 2: part of our portfolio.
23:27
Speaker 1: So I'm trying to figure out if they're transferring the
23:30
Speaker 1: credit risk to you, I'm assuming you're taking some sort
23:35
Speaker 1: of contract with the bank that you're going to assume
23:39
Speaker 1: the liability if X happens, and then you, with your expertise,
23:43
Speaker 1: are hedging out that risk through your options or credit desk.
23:49
Speaker 2: Yeah, and that's exactly right. But importantly, the first thing
23:52
Speaker 2: we're doing is we're using data to really understand what
23:55
Speaker 2: the credit risk is. And with that data, then we
23:58
Speaker 2: can start thinking about what what the likely hedges are
24:01
Speaker 2: for the macro risk of the portfolio.
24:03
Speaker 1: So let's talk about that. What is your approach to data,
24:06
Speaker 1: How do you institutionalize data management and how do you
24:11
Speaker 1: leverage the idea of hey, we know a lot about this,
24:15
Speaker 1: here's how we monetize it.
24:16
Speaker 2: People talk a lot about the importance of data, but
24:19
Speaker 2: it's usually in a different context. It's usually for these
24:21
Speaker 2: quantitative strategies or quantitative hedge funds. For US, data is
24:25
Speaker 2: the lifeblood of specialty finance. So for US, we use
24:30
Speaker 2: data to solidify our assumptions. What we do with the
24:33
Speaker 2: data is we forecast a performance of assets by matching
24:38
Speaker 2: statistically significant characteristics. So back to the redcap examples, we've
24:44
Speaker 2: looked at hundreds and hundreds of these types of investments
24:48
Speaker 2: and we've taken all the data from those transactions. Now
24:52
Speaker 2: we look at a new transaction. A bank comes to us
24:54
Speaker 2: and says, I need to produce more regulatory capital on
24:58
Speaker 2: this one hundred to ten thousand loans. We can take
25:02
Speaker 2: the character risks of their polio today and out of
25:05
Speaker 2: sample price them through history. That helps us price the
25:08
Speaker 2: credit right and understand what risk we're taking on.
25:11
Speaker 1: So this is really fairly sophisticated financial engineering. That is,
25:17
Speaker 1: it sounds like it's a way for the banks to
25:20
Speaker 1: meet the SEC requirements, the increased post financial crisis financial
25:25
Speaker 1: reserves that they're required to have, but not have to
25:29
Speaker 1: sell off big parts of the business and not have
25:31
Speaker 1: to sell off the relationships you described.
25:34
Speaker 2: I think that's exactly right. And even when you get
25:36
Speaker 2: to what happened earlier in twenty twenty three with Credit Swiss,
25:40
Speaker 2: that again put pressure on the banks to really think
25:43
Speaker 2: about how they're going to hedge their credit risk. This
25:46
Speaker 2: is their hedge to credit risk.
25:48
Speaker 1: And then related to the way you guys work with
25:51
Speaker 1: data management, tell us a little bit about Magnetar Labs.
25:54
Speaker 2: Yeah, Magnetar Labs has been a great initiative for us.
25:57
Speaker 2: It's really the institutionalization of our data. So we're trying
26:01
Speaker 2: to produce infrastructure where we can ingest large data sets
26:05
Speaker 2: very quickly and not only use them in specific business lines,
26:09
Speaker 2: but use it across business lines. So I'll give you
26:13
Speaker 2: a few examples In our merger arbitrage business, we've tracked
26:17
Speaker 2: every detail and every characteristic of every merger and acquisition
26:22
Speaker 2: for the last twenty plus years, and even our recent
26:25
Speaker 2: restaurant finance business, we have itemized bills of every customer.
26:30
Speaker 2: This is really useful data. So here's an example from
26:33
Speaker 2: just a couple of months ago. We were looking at
26:35
Speaker 2: an auto loan transaction and the servicer tried to overload information,
26:40
Speaker 2: so they gave us eighty million line items of information
26:43
Speaker 2: on purpose or I don't know if it's on purpose
26:46
Speaker 2: or not, but eighty million line items, one hundred different files,
26:50
Speaker 2: forty gigabytes of memory. So that's far too much for
26:55
Speaker 2: Excel to handle or any local Python right or overload
26:58
Speaker 2: to any one machine. But our Magtar Labs team was
27:02
Speaker 2: able to take that in in just minutes. Right now,
27:05
Speaker 2: we can analyze the data and then look at look
27:07
Speaker 2: at the attributes to that investment and see if it
27:10
Speaker 2: fits in our portfolio. We actually made the made the investment.
27:14
Speaker 1: So so what sort of hardware using is this? Old?
27:16
Speaker 1: Cloud based? Is this I think of like, oh, sounds
27:19
Speaker 1: like a mainframe. I don't even know if mainframes still
27:22
Speaker 1: exist anymore.
27:22
Speaker 2: Everything's gone to the cloud now, right, it is pretty amazing.
27:26
Speaker 1: And that sort of distributed computer has no ceiling, essentially
27:30
Speaker 1: no capacity correct, infinite capacity correct. Really really interesting. So
27:36
Speaker 1: let's talk a little bit about the status quo. I
27:39
Speaker 1: read something where you said it was important to not
27:43
Speaker 1: maintain the status quo. Explain what that means.
27:46
Speaker 2: We're not efficient market theorists, but we certainly believe that
27:50
Speaker 2: in the medium for long term the markets are efficient.
27:53
Speaker 1: Kind of mostly eventually.
27:55
Speaker 2: Efficient, eventually efficient. Right, So we know that what works
27:59
Speaker 2: today at work several years forward, right, And so I'll
28:03
Speaker 2: give you the converts example. Like you mentioned, I've been
28:06
Speaker 2: in the convert market for thirty years now, and sometimes
28:10
Speaker 2: converts are very cheap, you know, commal bonn arbitrage, and
28:13
Speaker 2: when they are, we have a lot of our portfolio
28:15
Speaker 2: in it. But today we have less than one percent
28:17
Speaker 2: of our portfolio in the asset class. And it's just
28:21
Speaker 2: because it's not cheap or not cheap enough versus what
28:24
Speaker 2: we can invest in.
28:25
Speaker 1: And is the expectation is that whatever inefficiencies were there,
28:29
Speaker 1: markets figured it out. It's arbitraged way, and the odds
28:33
Speaker 1: are against that ever becoming really cheap or might it
28:37
Speaker 1: you know, become a trade again.
28:38
Speaker 2: Yeah, some of it's supplied demand, right, and you're driven.
28:42
Speaker 2: But I think the most important part is we're not
28:45
Speaker 2: hiring desks of people to stay in an asset class.
28:48
Speaker 2: That's the status quo. That's not what we're looking for.
28:51
Speaker 2: We're looking to aggressively rotate our capital to get to
28:55
Speaker 2: the optimal portfolio, to get to the best risk adjusted return.
28:58
Speaker 1: So does this mean you're exploring new business areas and
29:01
Speaker 1: strategies or is it just that you're rolling through the
29:05
Speaker 1: various other opportunities that you've fished in before.
29:09
Speaker 2: Yeah, it's a good question. We maintain our diligence on
29:12
Speaker 2: other strategies, but we always have a strong research and
29:15
Speaker 2: development pipeline. Huh.
29:17
Speaker 1: Really interesting. So let's talk about some of the things
29:20
Speaker 1: that are going on today. Artificial intelligence AI dominated the
29:26
Speaker 1: twenty twenty three narrative. You made investments in core Weave,
29:30
Speaker 1: a specialized cloud provider. Tell us a little bit about
29:34
Speaker 1: what you're doing in that space. Is that related it
29:37
Speaker 1: all to what we talked about earlier with Magnetar Labs.
29:40
Speaker 2: Yeah. Core Weave is such an exciting story for Magnetar.
29:44
Speaker 2: I can't say enough good things about it. Sometimes the
29:47
Speaker 2: stars just align. You have the right time, the right product,
29:50
Speaker 2: the right team. And for the listeners that don't know
29:54
Speaker 2: who core Weave is, corev is the largest owner of
29:57
Speaker 2: GPUs outside of the hyperscalers, Google or Amazon Web services.
30:02
Speaker 2: They sell is high performance compute, which is sort of
30:05
Speaker 2: the picks and shovels to enable AI. So if you
30:09
Speaker 2: are a new AI lab, you need somebody like core
30:13
Speaker 2: Weave to host that specialized cloud for you. Now, we
30:17
Speaker 2: were the first institutional investor, so all the way back
30:20
Speaker 2: in twenty twenty and at that point, core We've had
30:23
Speaker 2: just twenty six million dollars of top line revenue, and
30:26
Speaker 2: I think we're the first firm to really get comfortable
30:29
Speaker 2: lending against that asset called high performance compute. Right, So
30:34
Speaker 2: they've had explosive growth, But what we haven't been is
30:37
Speaker 2: just a capital provider. We've really been a partner to
30:40
Speaker 2: them within the business. Are you guys also a customer
30:43
Speaker 2: of their We're a customer there is in Magnetar Labs,
30:45
Speaker 2: just like you intimated before, and so we use them
30:49
Speaker 2: for Magnetar Labs. But we have Ernie Rodgers, our COO,
30:53
Speaker 2: sits on their board. We have daily interaction between our
30:57
Speaker 2: management teams. This company is growing so quickly they need
31:01
Speaker 2: all the help they can get around them, and what
31:03
Speaker 2: we try to help with is mostly balance sheet management.
31:06
Speaker 1: So for a firm that specializes in credit, this almost
31:11
Speaker 1: sounds like a venture investment.
31:12
Speaker 2: There are parts of this that are venture ish, but
31:15
Speaker 2: what's interesting is the underlying asset, this high performance compute
31:19
Speaker 2: is something that we can really scale with and so
31:22
Speaker 2: I think that's been the innovation in the marketplace. So
31:26
Speaker 2: you mentioned in twenty twenty three on the venture side,
31:29
Speaker 2: we actually let around for them a four hundred million
31:31
Speaker 2: dollars Series B round, but we also let a two
31:34
Speaker 2: point three billion dollar financing on their high performance compute assets.
31:38
Speaker 1: So it's capital and credit, it's equity and credit.
31:41
Speaker 2: It's equity and credit, and it's a true partnership between
31:45
Speaker 2: the firms. Towards the end of last year, in December,
31:49
Speaker 2: the firm got valued at seven billion dollars. And to me,
31:52
Speaker 2: it's just a start. This company just the you're just
31:56
Speaker 2: going to see it continue to grow over time.
31:58
Speaker 1: Well, let me know about the C round when that comes.
32:01
Speaker 1: What do you guys, in all seriousness, what are you
32:04
Speaker 1: guys looking for? What sort of characteristics are you looking
32:08
Speaker 1: for when a company like this comes along. You mentioned
32:11
Speaker 1: idiosyncratic types of investment. This sounds very specific and not
32:16
Speaker 1: all that usual.
32:17
Speaker 2: It is. It's very specific, but we always start with
32:19
Speaker 2: the assets. So it's assets, it's data, and its structure. Right,
32:23
Speaker 2: So first on the assets, we're usually focused on specialty
32:27
Speaker 2: finance because the assets drive the performance of the company. Right.
32:31
Speaker 2: The next thing we need is data. We can't predict
32:33
Speaker 2: the future, so we're trying to do is use historical
32:37
Speaker 2: data to predict how an asset reacts in different states
32:40
Speaker 2: of the economy, and finally we use structure around that
32:44
Speaker 2: to protect the downside of the investment itself.
32:47
Speaker 1: Huh. Sounds really intriguing. So as long as we're talking
32:51
Speaker 1: about twenty twenty three, we saw a lot of bank
32:53
Speaker 1: failures last year, we saw the response to a rapid
32:58
Speaker 1: increase in rates. You had a front row seat to
33:01
Speaker 1: what transpired. Share what that was like, and what did
33:05
Speaker 1: you guys see in the space. Tell us about the
33:08
Speaker 1: opportunities that came up from those events.
33:10
Speaker 2: Those were stressful events for the entire community, you know,
33:14
Speaker 2: for Silicon Valley Bank in particular. I remember it was
33:17
Speaker 2: Friday night, and the question of moral hazard appeared immediately.
33:22
Speaker 2: So it's California based, right. It was a lot of
33:25
Speaker 2: venture funds that had accounts there, and the questions started
33:29
Speaker 2: coming out, is their cash safe, will they be able
33:32
Speaker 2: to access it? If so, when will they be able
33:34
Speaker 2: to make payroll? A lot of these smaller companies were
33:37
Speaker 2: very worried about payroll, and in California specifically will the
33:41
Speaker 2: border directors be liable if they couldn't make payroll? And
33:44
Speaker 2: then they started rolling it out to what about all
33:46
Speaker 2: the similar situated banks. So we all know that by
33:49
Speaker 2: Monday morning, the contagion risk was too high and the
33:52
Speaker 2: government did step in. But the opportunities really arose from that.
33:56
Speaker 2: And so the first opportunity, which is very similar to
33:59
Speaker 2: doing regulatory capital investments with large banks, is being a
34:04
Speaker 2: risk capital provider to the small and regional banks. And
34:07
Speaker 2: I think we're going to see more and more of
34:09
Speaker 2: this overtime. It's credit firms partnering with banks where we
34:13
Speaker 2: have access to all the diligence around their customers and
34:17
Speaker 2: together we can jointly underwrite and make loans.
34:20
Speaker 1: You mentioned moral hazard. Where was the moral hazard with
34:24
Speaker 1: Silicon Valley Bank? Was it the equity investors in the
34:27
Speaker 1: bank or was it the customers with way over the
34:32
Speaker 1: FDIC limits? And if there isn't a quarter million or
34:36
Speaker 1: half a million dollar ceiling, did the Federal Reserve essentially say, okay,
34:41
Speaker 1: FDIC insurance is now unlimited? Is that the moral hazard?
34:45
Speaker 2: We found that to be the moral hazard. Who's the
34:47
Speaker 2: governor of how much risk a bank can take? So
34:49
Speaker 2: the federal government came out and they said, you have
34:52
Speaker 2: a two hundred and fifty thousand dollars limit, but people
34:54
Speaker 2: were putting in one hundred million dollars into the account
34:57
Speaker 2: because they got twenty five basis points more of interest, right,
35:00
Speaker 2: So how do you actually control that? That's the moral
35:03
Speaker 2: hazard we saw now. I think at the end of
35:05
Speaker 2: the day, it was just too big of a risk
35:07
Speaker 2: to the economy.
35:08
Speaker 1: The contagion risk was Hey, there's a moral hazard question
35:12
Speaker 1: to the depositors. But rather than stand on ceremony, let's
35:16
Speaker 1: stop this before it spreads.
35:18
Speaker 2: That's exactly right.
35:20
Speaker 1: Huh, that's really that's really kind of intriguing. What else
35:23
Speaker 1: has been the result of this rapid spike in interest rates?
35:26
Speaker 1: What do you see in the private credit world that hey,
35:30
Speaker 1: blame the fed. But here's what's gone off the rails.
35:34
Speaker 2: For credit investors. Everyone thinks about fixed rate risk, right,
35:38
Speaker 2: but that's easily hedgable, and that's a choice that that
35:41
Speaker 2: credit investors make. So for people like magnets, are we
35:45
Speaker 2: swap everything back to floating rate, we don't have any
35:47
Speaker 2: edge on a macro risk like that. But the second
35:50
Speaker 2: order effect is much much more difficult, and that's the
35:53
Speaker 2: business impact of rates changing. So when we think about businesses,
35:58
Speaker 2: we think about that margins change as rates go up
36:02
Speaker 2: or down, to originations change, What about the refinancing of
36:06
Speaker 2: their debt? I think those are the things that are
36:08
Speaker 2: going to keep lawyers and restructuring advisors very busy for
36:12
Speaker 2: the foreseeable future.
36:13
Speaker 1: So given this current environment where first rates went up
36:17
Speaker 1: further and faster than it seemed like, the consensus amongst
36:22
Speaker 1: analysts was they stayed higher longer than people expected. There's
36:28
Speaker 1: no recession. People have been talking about that for two years,
36:31
Speaker 1: and the expected rate cuts I guess tied to that
36:35
Speaker 1: recession haven't showed up yet. We were talking about March,
36:38
Speaker 1: now we're talking about May, even June of twenty twenty four.
36:43
Speaker 1: How does this affect how you think about putting portfolios together,
36:47
Speaker 1: constructing portfolios. And I am very aware that you guys
36:50
Speaker 1: aren't macro tourists. You don't play that game. But given
36:54
Speaker 1: the volatility and the various probabilistic outcomes, how does that
36:58
Speaker 1: impact your thinking.
37:00
Speaker 2: It's a very good question, and for us, we think
37:02
Speaker 2: a lot about the affordability factor. So I'll give you
37:06
Speaker 2: two examples at both extremes. So we have a partial
37:10
Speaker 2: ownership in an auto loan business in Ireland, and so
37:13
Speaker 2: when rates are at zero, we're loaning to consumers. It's
37:16
Speaker 2: somewhere between five and a half and six percent, and
37:19
Speaker 2: we're gaining market share rapidly. All of a sudden, risk
37:22
Speaker 2: free rate goes to five percent, that equivalent loan we're
37:25
Speaker 2: gonna have to charge consumers eleven percent. It's just it's
37:28
Speaker 2: simply unaffordable.
37:29
Speaker 1: Right, different calculus, different.
37:31
Speaker 2: Calculus, And so we have a decision to make. We
37:34
Speaker 2: can stay at eleven percent, keep the same margin but
37:37
Speaker 2: reduce origination, or we can take our margin down and
37:41
Speaker 2: try to keep market share. Either way, the business is
37:44
Speaker 2: worth a lot less. That has a lot of affordability
37:47
Speaker 2: factor effect to it. On the other end of the
37:50
Speaker 2: stream is our music royalties business. So in music royalties,
37:54
Speaker 2: you know, the simplification is you get some small part
37:57
Speaker 2: of worldwide streaming revenue. So it takes Spotify. Spotify raise
38:02
Speaker 2: rates recently and they had no customer churn, so some
38:06
Speaker 2: percentage of that rate went directly to the royalty holder.
38:09
Speaker 2: There was very little affordability factor. So we're veering away
38:13
Speaker 2: from things that the business impact on affordability is high,
38:18
Speaker 2: and we're investing in things where it's lower.
38:20
Speaker 1: Private credit seems to be getting a lot of attention
38:22
Speaker 1: these days. Why is that.
38:24
Speaker 2: If you would have asked me going into the global
38:26
Speaker 2: financial crisis, I know we keep going back fifteen years now,
38:29
Speaker 2: I would have said the banks had it all right.
38:31
Speaker 2: They controlled origination of all of the different asset classes,
38:34
Speaker 2: especially finance and lending, so whether its credit cards or
38:38
Speaker 2: mortgages or loans to their customers. But after as the
38:43
Speaker 2: financial crisis happened, there was a spotlight flashed on their
38:46
Speaker 2: balance sheet. They just had too much risk and so
38:49
Speaker 2: the regulators came in to reduce that risk. So the
38:52
Speaker 2: simple question is that private credit came in and stepped
38:56
Speaker 2: in the shoes of banks and really took markets. But
39:01
Speaker 2: this scale was much larger than anyone could have anticipated.
39:04
Speaker 2: But for me, what I think about a lot is
39:07
Speaker 2: the more profound effect is the talent transfer. The talent
39:12
Speaker 2: transfer from the banks that went to the credit providers,
39:15
Speaker 2: the private credit providers that set the stage for this
39:18
Speaker 2: mass growth in private credit.
39:21
Speaker 1: So let's talk about talent a little bit. One of
39:24
Speaker 1: the things I know your firm is proud of is
39:28
Speaker 1: more than half of your workforce has been with the
39:30
Speaker 1: firm for five years or longer. So first, I'm assuming
39:34
Speaker 1: that's not typical in your space, and second I have
39:37
Speaker 1: to ask what contributed to that sort of retention.
39:42
Speaker 2: I'm very proud. I think we're very proud of that fact,
39:44
Speaker 2: and I think it is very atypical. But the credit
39:47
Speaker 2: really goes to so many people at Magnetar. You know,
39:51
Speaker 2: we're a global firm, but I think with a Midwestern ethos,
39:56
Speaker 2: so it's work hard, stay humble, be a good teammate,
40:00
Speaker 2: good person, And I think if we can consistently demonstrate
40:04
Speaker 2: those qualities will attract people who value them. And it's
40:08
Speaker 2: a virtuous circle. And what's incredible about the firm is
40:11
Speaker 2: when we get when we're focused, how much we can
40:13
Speaker 2: get done. So I'll give you a simple example. We
40:15
Speaker 2: started a summer internship program several years ago, and we
40:20
Speaker 2: started with two interns and we built the program around them,
40:23
Speaker 2: and this last summer we had sixty interns for a
40:26
Speaker 2: two hundred person organization. You know, it's pretty humbling when
40:30
Speaker 2: you think about all the exceptional people around Magnetar and
40:33
Speaker 2: how much we can get done.
40:34
Speaker 1: So one of the things we've been hearing a lot
40:37
Speaker 1: about as big companies try and get their staff back
40:41
Speaker 1: in the office five days a week is corporate culture.
40:46
Speaker 1: Tell us a little bit about what is differentiating Magnetar
40:51
Speaker 1: from a cultural perspective. You know, starting with Evanston, Illinois,
40:57
Speaker 1: not a lot of private credit shops in the neighborho
41:01
Speaker 1: that's true.
41:01
Speaker 2: You know, first principles, it's always about integrity. But I
41:04
Speaker 2: think for most tenured firms integrity is high. But for us,
41:09
Speaker 2: the north star is always creating the best portfolios to
41:13
Speaker 2: deliver to our clients. And we really have two foundational
41:17
Speaker 2: points there. One is we run a very flat organization
41:21
Speaker 2: and secondly, we've thought a lot about alignment. So on
41:23
Speaker 2: the flat organization, it doesn't matter who has the right answer.
41:27
Speaker 2: We know we're trying to reach the right answer. So
41:30
Speaker 2: I'll take our investment committees as an example. We have
41:33
Speaker 2: bi weekly investment committees. And it's not the top two
41:37
Speaker 2: or three people that sit on the investment committee. We
41:39
Speaker 2: have one hundred and twenty people in that meeting, you know,
41:43
Speaker 2: every two weeks. Wow, And we really want people to
41:45
Speaker 2: voice opinions, right, and that's how we're going to get
41:48
Speaker 2: to the best answer. You know, we talk about it
41:50
Speaker 2: internally a lot. We're trying to manage investments by consensus,
41:54
Speaker 2: and so especially in private credit, if someone doesn't like something,
41:58
Speaker 2: we can change it. We can change you know, what
42:00
Speaker 2: a structure looks like. And so we'll get to something
42:03
Speaker 2: where we actually get consensus, you know. On the alignment point.
42:08
Speaker 2: It really goes back to not giving individual capital allocations,
42:12
Speaker 2: but incentivizing people to create the best portfolio. So you
42:16
Speaker 2: asked about pretention before. I think the reason why people
42:19
Speaker 2: stay at Magnetar long term is because they believe in
42:22
Speaker 2: these philosophies and they believe if we get to the
42:25
Speaker 2: right portfolio that everyone wins in the long term.
42:28
Speaker 1: Huh. Really very interesting, So we only have you for
42:31
Speaker 1: a limited amount of time. Let me jump to my
42:33
Speaker 1: favorite questions that I ask all of my guests starting
42:37
Speaker 1: with tell us what you've been streaming these days? What's
42:40
Speaker 1: been keeping you entertained? Either video or audio, Netflix or podcast?
42:45
Speaker 1: What's keeping you entertained?
42:47
Speaker 2: Yeah, I think this will be different than most of
42:49
Speaker 2: the people have stated on this show. But for me,
42:51
Speaker 2: it's been.
42:51
Speaker 1: Flow sports, flow sports.
42:54
Speaker 2: Flow sports. So I have my older son is in
42:57
Speaker 2: between high school and college right now, and he's playing
43:00
Speaker 2: hockey and juniors for a year, and so all of
43:03
Speaker 2: his games are on flow Sports. So Christy and my
43:07
Speaker 2: son Jake and I sit around and watch every game together.
43:10
Speaker 1: What does he what positions does he play?
43:12
Speaker 2: He plays defense. It's been a lot of fun flow sports.
43:15
Speaker 1: Is that like a YouTube channel on internet channel? How
43:18
Speaker 1: do you find that?
43:19
Speaker 2: We pull it up on Apple TV or on our phone,
43:22
Speaker 2: and yeah, it's been great for a lot of youth sports.
43:26
Speaker 1: Huh. Interesting.
43:26
Speaker 2: And then on the podcast side, this podcast aside on.
43:29
Speaker 1: Here you never have to bring this podcast up.
43:31
Speaker 2: Of course. So I listened to one by Larry Burnsteed
43:35
Speaker 2: what Happens Next, and he's been doing it since COVID,
43:39
Speaker 2: and it's sort of six minutes of really relevant topics
43:43
Speaker 2: that come out every weekend.
43:45
Speaker 1: What happens next. I'm going to check that out. I
43:47
Speaker 1: love the idea of these having done long form for
43:50
Speaker 1: a decade, I love the idea of five, ten, twelve
43:54
Speaker 1: minutes and you're done, And there's something very appealing about that.
43:58
Speaker 1: Let's talk about your mentors who helped to shape your career.
44:02
Speaker 2: You know, it always starts with their parents, and then
44:04
Speaker 2: you know football coaches like like Larry Kimbaum. But I
44:08
Speaker 2: mentioned Dave Bunning before. I think most people would say,
44:10
Speaker 2: you know, I'm a product of his teachings over time.
44:13
Speaker 1: Huh. Interesting. How about books? What are some of your favorites?
44:16
Speaker 1: What are you reading right now?
44:18
Speaker 2: You know I always like Michael Lewis books. We had
44:20
Speaker 2: him at one of our off sites a few years ago.
44:24
Speaker 2: You ever remember this book is one of my favorites.
44:26
Speaker 2: You know, Memos from the Chairman by Alan Greenberg. Sure,
44:29
Speaker 2: that was a.
44:29
Speaker 1: Great bay Greenberg Greenberg correct.
44:32
Speaker 2: And what was so interesting about his book is, you
44:34
Speaker 2: know he's running the firm, but he's really in the
44:37
Speaker 2: nuche of every detail.
44:39
Speaker 1: It was very interesting, including the paper clips recycling.
44:43
Speaker 2: Between every expense.
44:45
Speaker 1: So let me interrupt you one second. Say I was
44:48
Speaker 1: at a lunch just with you know, three people at
44:51
Speaker 1: a table and he came in and sat like a
44:54
Speaker 1: table or two over and the whole meal, I mean
44:58
Speaker 1: this was later in his life. The whole meal was
45:00
Speaker 1: a parade of people coming in to genuflect in front
45:04
Speaker 1: of him and just pay their respects. It was like
45:08
Speaker 1: the Pope was having lunch. I don't know how well
45:12
Speaker 1: you know of him, and the book certainly is kind
45:15
Speaker 1: of you know, you don't get a sense of how
45:18
Speaker 1: other people perceived him, but fascinating guy.
45:21
Speaker 2: I met him when he was at bear Stearns and
45:23
Speaker 2: I felt the same way. He was a special person.
45:27
Speaker 1: What other books are you reading? Anything else you want
45:29
Speaker 1: to mention?
45:30
Speaker 2: So my colleague and the head of our London ops,
45:32
Speaker 2: Alan Schafferan, recommended the book The Missing Billionaires and the
45:36
Speaker 2: reason that I just started. But the reason it's interesting
45:39
Speaker 2: is it's very focused on asset allocation and mistakes and
45:44
Speaker 2: asset allocation and how much that can cost a portfolio
45:47
Speaker 2: over time. So it has a lot of parallels to
45:50
Speaker 2: the way we think about asset allocation and magnets are.
45:52
Speaker 1: Huh really interesting. Our final two questions, what sort of
45:56
Speaker 1: advice would you give a recent college grad interest in
45:59
Speaker 1: the career in either private creditor alts, fixed income, any
46:04
Speaker 1: of the areas you specialized in.
46:06
Speaker 2: It's what we think about for the firm. I know
46:08
Speaker 2: what I tell my kids would be, it's people on platform.
46:13
Speaker 2: You need to be around good integrist people that are
46:16
Speaker 2: great mentors, and the platform needs to be growing over time,
46:21
Speaker 2: so each seat should be more more than the person
46:23
Speaker 2: in it.
46:23
Speaker 1: Huh. Interesting. And our final question, what do you know
46:26
Speaker 1: about the world of investing, of credit of risk management
46:31
Speaker 1: today that you wish you knew when you were first
46:33
Speaker 1: getting started thirty years or so ago.
46:35
Speaker 2: Yeah, this may be an atypical answer, but I think
46:38
Speaker 2: about luck versus skill a lot more than I ever
46:40
Speaker 2: did before. If you make a decision today and don't
46:43
Speaker 2: have an outcome for ten years, you don't really know
46:46
Speaker 2: if you were good at it or not right, whether
46:48
Speaker 2: you won or lost. If you're able to have a
46:50
Speaker 2: much faster feedback loop now, you can really hone your
46:54
Speaker 2: skills and understand whether you're making good decisions or bad decisions.
47:00
Speaker 2: And so I think for me, and as we look
47:02
Speaker 2: at people's track records, we really try to think about
47:05
Speaker 2: how often do they get to make the same decision
47:09
Speaker 2: and what's the process around that decision and how different
47:12
Speaker 2: is it over time?
47:13
Speaker 1: Very interesting. I have a book for you, but I'm
47:16
Speaker 1: gonna bet you've already read it, Michael Mobison's book I
47:19
Speaker 1: have not Please, Separating skill from luck in investing, business
47:24
Speaker 1: and sports like that is right up your al that
47:27
Speaker 1: is thank you, and he's a fascinating author and really
47:31
Speaker 1: a fascinating book. I would bet you you would appreciate it.
47:34
Speaker 2: Excellent.
47:34
Speaker 1: Thank you David for being so generous with your time.
47:37
Speaker 1: We have been speaking with David Snyderman. He is the
47:41
Speaker 1: global head of Alternative credit and fixed income and managing
47:44
Speaker 1: partner at Magnetar, a fifteen billion dollar multi strategy, multi
47:49
Speaker 1: product alternative investment management firm. If you enjoy this conversation,
47:54
Speaker 1: well check out any of the previous five hundred or
47:56
Speaker 1: so we've had. You can find those ato Spotify, YouTube, Bloomberg,
48:02
Speaker 1: wherever you find your favorite podcast. Be sure and check
48:06
Speaker 1: out my new podcast at the Money, ten minutes each
48:10
Speaker 1: week with an expert discussing a topic that's relevant to
48:14
Speaker 1: you and your money. I would be remiss if I
48:17
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