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King Street's Brian Higgins On Navigating Distressed Markets · Masters in Business

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
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Speaker 2: This is Master's in Business with Barry red Holds on
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Speaker 2: Bloomberg Radio.
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Speaker 1: I'm Barry Ridults. You're listening to Masters in Business on
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Speaker 1: Bloomberg Radio. This week on the podcast What Can I Say?
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Speaker 1: Brian Higgins has put together an amazing track record handling
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Speaker 1: distressed and stressed debts as well as other forms of credit,
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Speaker 1: real estate, collateralized obligations. King Street is a fascinating firm.
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Speaker 1: It was formed in nineteen ninety five. Over the course
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Speaker 1: of the past I don't know, twenty five years, they've
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Speaker 1: put together really an impressive track record. They have already
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Speaker 1: returned about eighty percent of the net gains they've had
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Speaker 1: to their limited partners. Really, there are a few people
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Speaker 1: in the world who have a better sense of distress, asset, credit,
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Speaker 1: real estate, and how to not only do the fundamental research,
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Speaker 1: but tactically trade around the positions. As an example, institutional
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Speaker 1: investors mentioned King Street in twenty twenty two, perhaps the
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Speaker 1: worst year for hedge funds since eight o nine. They
1:23
Speaker 1: were down three point eight percent. Their benchmarks were down,
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Speaker 1: you know, fixed income was fifteen percent, equities was twenty
1:29
Speaker 1: something percent. To be low single digits is really just
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Speaker 1: a testament to their performance. U there are a few
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Speaker 1: people who are more knowledgeable about fixed income, credit, real
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Speaker 1: estate and distressed investing than Brian Higgins. I found this
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Speaker 1: conversation to be fascinating, and I think you will also,
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Speaker 1: with no further ado, King Streets Brian Higgins.
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Speaker 2: Well, thank you very much, Barry me.
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Speaker 1: I appreciate you being here. I've been looking forward to
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Speaker 1: this conversation for a while. Let's jump right into it.
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Speaker 1: You get a bachelor's in business administration from Villanova University.
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Speaker 1: What was investing always the career plan?
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Speaker 2: Well, actually I started out electrical engineering.
2:16
Speaker 1: Me too. That's funny you say that first first.
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Speaker 2: Two years electrial engeering. You graduate from high school. I'm
2:21
Speaker 2: good at math and science, and you know, I always
2:24
Speaker 2: had an idea with go into business, but I felt
2:26
Speaker 2: that electrical engeering would be a good foundation, and that's
2:30
Speaker 2: what I started at. But after two years it was
2:33
Speaker 2: sort of not very interesting, and I was intrigued by
2:37
Speaker 2: the markets at the time. In the mid eighties, you
2:39
Speaker 2: had a lot of stuff going on in terms of
2:40
Speaker 2: the merger boom, and Wall Street was rocking, and I said, hey,
2:45
Speaker 2: this is sort of interesting. I was probably the only
2:48
Speaker 2: electrical engeering major that had a subscription to the Wall
2:51
Speaker 2: Street Journal. So my roommate, who was a mechanical engineer,
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Speaker 2: said to me, what are you doing. Why don't you
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Speaker 2: just switch over to finance, which I said.
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Speaker 1: Sure, makes makes a lot of sense. So you come
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Speaker 1: out of Villanova, you end up at First Boston in
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Speaker 1: nineteen eighty seven in the special Situations fund and distressed
3:10
Speaker 1: securities group.
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Speaker 2: Yeah, we started out. I started out banking the two
3:13
Speaker 2: year banking program, which merchant banking was the group I
3:16
Speaker 2: was in. My co founder was an analyst. He came
3:20
Speaker 2: out of Yale. He was in the Bankruptcy Advisory group.
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Speaker 2: So we're in the analyst program together, sixty five of us.
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Speaker 2: And after two years I went down to trade distress Proprietarily,
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Speaker 2: I got promoted to associate without going to business school.
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Speaker 2: I had done an undergraduate business and felt that, you know, hey,
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Speaker 2: I can do this, but I want to get some
3:39
Speaker 2: different just rather being the analyst that never left. I
3:42
Speaker 2: want to get some markets experience, but you know, stay
3:44
Speaker 2: in the proprietary side. So there was a proprietary trading
3:49
Speaker 2: group that was forming and I was joined that, and
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Speaker 2: it was an interesting time in high yield as you know,
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Speaker 2: shortly thereafter Drexel, which goes from one day issuing commercial
4:01
Speaker 2: paper and the next day they go bankrupt.
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Speaker 1: So what was it like trading distress securities in the
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Speaker 1: late eighties that had to be you know, a pretty
4:11
Speaker 1: let's call it target rich environment.
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Speaker 2: Well, I would say it was interesting because the Marcus
4:18
Speaker 2: sophistication that we have today in terms of really the
4:22
Speaker 2: fluidity of capital, structures, of trading desks, et cetera, seamlessness
4:26
Speaker 2: which you had, you had. It was interesting. You'd see
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Speaker 2: things go from say the investment grade market to the
4:31
Speaker 2: high yield market. There was a big disconnect as they
4:35
Speaker 2: move positions that started to trade wider. The buyers didn't
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Speaker 2: have the ability to go cross assets and a cross
4:43
Speaker 2: let's say ratings as they are today. You know, mutual
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Speaker 2: funds were very siloed and now they're a bit wider mandates.
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Speaker 2: So it was yes, you had you know, ni CE
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Speaker 2: ratings changed for insurance companies post Drexel, and so there
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Speaker 2: was a number of less liquid markets that made for
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Speaker 2: quite wide spreads. You had a default cycle, so you
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Speaker 2: had trading with the crude and trading flat, and so
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Speaker 2: there was certainly a number of different movements, but there
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Speaker 2: was certainly downside of these things. So one had to
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Speaker 2: be very rigorous in your investing, in your analysis to
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Speaker 2: do the investing.
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Speaker 1: So you're at a big bank in eighty seven, you know,
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Speaker 1: obviously there were a lot of market dislocations later that year.
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Speaker 1: What was that experience like for you? It was.
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Speaker 2: Interesting. I mean, it certainly was indoctrination into the world
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Speaker 2: of finance. You go from you know, these big parties
5:43
Speaker 2: during the summer as you welcome to the new analysts,
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Speaker 2: to the market crash obviously in October of eighty seven.
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Speaker 2: I think the volatility that ensued and then you know
5:53
Speaker 2: the world's going to end, and then you know it
5:56
Speaker 2: comes back. I think that just spoke to the resiliency markets,
6:00
Speaker 2: but also the certainly the volatili and fragility of certain
6:04
Speaker 2: sectors that one has to be mindful of. And you know,
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Speaker 2: I think ultimately there was a number of opportunities that
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Speaker 2: came out. I had no money back in eighty seven,
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Speaker 2: but certainly, you know, some of the maging directors and
6:15
Speaker 2: other people that had some money, they made quite a
6:19
Speaker 2: quite a bit of profits on some of the left
6:23
Speaker 2: for dead Microsoft and others that were just you know,
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Speaker 2: sold to very low levels.
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Speaker 1: So that sort of this location sounds like it was
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Speaker 1: a formative experience.
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Speaker 2: Sure, and you know, many of these things I look at,
6:36
Speaker 2: you know growing up, you know, gas lines in the
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Speaker 2: seventies and you know, we had real recessions back of
6:42
Speaker 2: the seventies and eighties. These days, you know, it sounded
6:45
Speaker 2: like an old, cranky, old guy. But when you you know,
6:48
Speaker 2: that's the challenge of prosperity that it doesn't really prepare
6:54
Speaker 2: oneself investors too, right, you know, if you always have
6:57
Speaker 2: the FED put, if you always have you know just
7:00
Speaker 2: QI forever, that that does have a lot of complacency.
7:04
Speaker 2: And you see it as you've gone from active to
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Speaker 2: passive investing, people are like, well, why do I pay
7:09
Speaker 2: you know for active investing? I could just you know,
7:11
Speaker 2: it's easy. And now is dispersion has increased in fixed income.
7:15
Speaker 2: I think it's brings back, you know, the active investing.
7:18
Speaker 2: But you know, structurally there's there's a lot of money
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Speaker 2: that's gone into to pass investing, which we believe will
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Speaker 2: sew the seeds for the opportunity set for some time
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Speaker 2: going forward.
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Speaker 1: And arguably, passive doesn't work nearly as well on the
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Speaker 1: fixed income side as it does on equities.
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Speaker 2: Well, I mean again passive. You know it's nowadays if
7:40
Speaker 2: you look at the big banks, they're doing portfolio trading
7:44
Speaker 2: with large swaths of their institutional clients. And so someone
7:48
Speaker 2: will say I want give me a triple B single
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Speaker 2: A exposure and these industries, and they go out and
7:54
Speaker 2: dial it up or down in terms of exposure.
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Speaker 1: Uh.
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Speaker 2: That creates opportunities within the trading market. So uh for
8:02
Speaker 2: our long short credit hedge fund, you know there's there's
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Speaker 2: this locations and opportunities to trade, uh, to make money
8:08
Speaker 2: in those situations. But I mean, you know it's in
8:14
Speaker 2: these these markets as we as we pivot going forward. Again,
8:19
Speaker 2: if if you're saying I'm gonna earn five and change percent,
8:23
Speaker 2: you know my cash and you know, fixed income no
8:26
Speaker 2: problem to Fault rates are near zero. Now, fault rates
8:30
Speaker 2: are kind of skewed a bit because you do have
8:32
Speaker 2: perhaps in high yield. If you look at you know,
8:34
Speaker 2: these liability management exercises and other restructurings out of court,
8:39
Speaker 2: it doesn't default, but then there's a lesser consideration you
8:42
Speaker 2: get for your your claim. Uh, so it does factor enter.
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Speaker 2: But you know, you've had a very benign default environment
8:49
Speaker 2: as we've had a lot of money printed for quite
8:51
Speaker 2: some time. If you look at the Fed's balance sheet,
8:53
Speaker 2: the M two that has been printed, you know there's
8:57
Speaker 2: there's been a great tailwind. Huh.
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Speaker 1: Really interesting. So let's fast forward to nineteen ninety five.
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Speaker 1: What led you guys to depart and co found King Street.
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Speaker 2: So going from you know, First Boston banking, trading, distress proprietarily,
9:14
Speaker 2: then we started internal hedge fund at First Boston and
9:18
Speaker 2: that was from ninety one to ninety four, so I
9:20
Speaker 2: think about I already had started, in effect helped form
9:23
Speaker 2: to these businesses. And so at the end of ninety four,
9:27
Speaker 2: again many issues with First Boston, which became Credit Swiss,
9:31
Speaker 2: became ubs. They've I think I had five CEOs I
9:35
Speaker 2: worked under for the seven eight years I was there,
9:38
Speaker 2: and so we said we could do this, and my
9:41
Speaker 2: co founder and myself we left around a few months
9:45
Speaker 2: apart in ninety four form King Street started trading in
9:48
Speaker 2: ninety five. We never thought we'd start with the princely
9:52
Speaker 2: sum of four million dollars, which is what we started with.
9:55
Speaker 2: We thought, oh, we're gonna start with fifty. All these
9:57
Speaker 2: people are like, yeah, I'll give you five, I'll get
9:59
Speaker 2: you ten. You know, no problem in encouraging us to leave,
10:02
Speaker 2: So be it. We started with fort One of the
10:05
Speaker 2: first million dollars came from Jimmy Kine, who was chairman, yeah, chairman,
10:09
Speaker 2: CEO of Bear Stearns. I had met him through another
10:11
Speaker 2: friend of mine, Vince TC, and know him through golf
10:15
Speaker 2: and got to be friendly with him, and he heard
10:18
Speaker 2: what I was doing and he said, you know, I'm
10:20
Speaker 2: happy to give you a million dollars of my money
10:23
Speaker 2: to manage, and you can use my name in marketing,
10:27
Speaker 2: and so you know, it was it was quite comical
10:30
Speaker 2: because I have back then a list of references. Right.
10:33
Speaker 2: It felt like I was going for a job interview
10:36
Speaker 2: asking for money back then. And we were two guys
10:38
Speaker 2: twenty nine years old, as you know. My brother called
10:41
Speaker 2: us two guys capital and we would you go around
10:44
Speaker 2: all the usual suspects, begging for something, and we ended up,
10:48
Speaker 2: as I said, with four million. But you know, Jimmy
10:50
Speaker 2: took a personal pride and he took and people say,
10:54
Speaker 2: you mean I can call this guy he's CEO Bear
10:56
Speaker 2: Stearns said, I said, yeah, yeah, call him up. So
10:58
Speaker 2: he call him up and then immediately he'd called me opposite.
11:00
Speaker 2: You know, how did I do you get the money yet?
11:02
Speaker 2: So you know, it was it was, it was very humbling.
11:04
Speaker 2: It was a very sweet, you know mentor of mine
11:08
Speaker 2: as an Irish Catholic kid. You know, it's nice to
11:10
Speaker 2: have a rabbi such as such as Jimmy and Vince
11:14
Speaker 2: you know, introduced us. And also Vince was incredibly helpful
11:18
Speaker 2: so having to you know, fathers of King Street, if
11:22
Speaker 2: you will, And they asked for nothing in return except
11:25
Speaker 2: the satisfaction that they received by seeing us grow and prosper,
11:28
Speaker 2: which was again very very fortunate and blessed to have
11:33
Speaker 2: that those two people in my life.
11:35
Speaker 1: So from four million dollars you eventually grow assets over
11:38
Speaker 1: time to twenty six twenty seven billion dollars. That's an
11:42
Speaker 1: incredible track record over twenty five years. And I also
11:48
Speaker 1: can't help but notice it's been reported by places like
11:52
Speaker 1: Institutional Investor that you guys have distributed about eighty percent
11:57
Speaker 1: of those gains, which is really impressive. It tells me
12:02
Speaker 1: that you're concerned about scaling up too large. Tell us
12:07
Speaker 1: a little bit about why you kept the firm at
12:09
Speaker 1: a fairly modest size in terms of capital that you're trading.
12:15
Speaker 2: Well, I think there's opportunities that EBB and flow, and
12:18
Speaker 2: I think it's important to have the right structure, and
12:21
Speaker 2: so we have a number of business lines. We have
12:24
Speaker 2: our Cloudwise loan obligation business COLO business that is super
12:29
Speaker 2: interesting business. It does help feed into our long short
12:33
Speaker 2: credit business, which is our long standing business that we
12:36
Speaker 2: started in nineteen ninety five. We also have a number
12:39
Speaker 2: of drawdown businesses, drawdown meeting, drawdown credit, distress businesses, and
12:44
Speaker 2: those have longer duration attached to them, which is commensurate
12:49
Speaker 2: with the opportunities we're investing in. We also have a
12:52
Speaker 2: real estate business that we so used to be. The
12:55
Speaker 2: credit headphone business had what's called side pockets. A couple
12:59
Speaker 2: of years ago. We remove them and it's just the
13:01
Speaker 2: liquid long short credit business. And the side pockets come
13:04
Speaker 2: in the form of these draw down fund structures. That
13:06
Speaker 2: is something the industry has gravitated towards the last say
13:10
Speaker 2: ten years, and.
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Speaker 1: Meaning as each of those things mature, they get paid
13:14
Speaker 1: out to the correct right LPs.
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Speaker 2: Right, so you got three or three or one year
13:18
Speaker 2: extension perhaps which three are investing through harvesting and then
13:22
Speaker 2: payout traditional but they can vary, and so that's really
13:27
Speaker 2: having different buckets and one has to you know, it
13:31
Speaker 2: gets complicated because you have different investors in different buckets,
13:33
Speaker 2: and then there are different vintages and then they say, okay,
13:36
Speaker 2: I need distributions and you know which ventures you do,
13:39
Speaker 2: and the timing they can be, oh, I don't have
13:41
Speaker 2: money this year for next year. So there's there's a
13:44
Speaker 2: whole planning that goes on in terms of when you
13:46
Speaker 2: launch different funds. But it for for us in the
13:50
Speaker 2: long shore credit business, there's lots of lots of opportunities
13:53
Speaker 2: as a number of the people that we used to
13:56
Speaker 2: see all the time in the markets are no longer
13:58
Speaker 2: around and so that we believe has shrunk the competition,
14:04
Speaker 2: if you will, in the long shore credit trading business
14:07
Speaker 2: for stress to stress, and I think also it's it's
14:10
Speaker 2: where are we in the cycle? Do we ever do
14:12
Speaker 2: we believe that there will ever be a credit cycle?
14:15
Speaker 2: Do we think we'll ever have defaults again? Or you know,
14:19
Speaker 2: will we continue to grow? Depending on your math, we're
14:21
Speaker 2: I have two trillion of deficits and you know, then
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Speaker 2: all these other amounts of debt around the world in
14:28
Speaker 2: the government side that is being printed to uh support
14:31
Speaker 2: global economies. I think at a certain point we see
14:35
Speaker 2: this competition for capital, if you will, between you know
14:38
Speaker 2: what the public sector, uh, the government sector, in the
14:41
Speaker 2: in the private sector is trying to you know. So
14:44
Speaker 2: I think it's gonna be hard for rates to go
14:45
Speaker 2: low because there's still you know, a lot of depths
14:49
Speaker 2: that's spending out there. I mean, think about the deaths
14:50
Speaker 2: thats we have when it's pretty much full employment, economy
14:54
Speaker 2: is still pretty strong.
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Speaker 1: What are we one point eight trillion a year?
14:58
Speaker 2: I mean to some say two. You know, it always
15:01
Speaker 2: I see different numbers all the time. So it's always
15:04
Speaker 2: kind of like who's math, if you.
15:05
Speaker 1: Will, huh really interesting. And it seems like everybody and
15:10
Speaker 1: their brother managed to refinance both household and corporations in
15:14
Speaker 1: the twenty tens when rates were low, except Uncle Sam
15:18
Speaker 1: couldn't couldn't get around to it.
15:20
Speaker 2: Yeah, and you know you say that the I joke,
15:24
Speaker 2: the greatest asset and many people's portfolio is their thirty
15:29
Speaker 2: year two three percent mortgage, right, And so affordability has
15:34
Speaker 2: been problematic because of the supply, you know, we're short
15:39
Speaker 2: whatever five million homes, but the you know, the affordability
15:43
Speaker 2: is still because of that and other factors, has been difficult.
15:48
Speaker 2: So I mean, I think they're they're you know, it's
15:51
Speaker 2: a very it's a complicated landscape on the consumer.
15:54
Speaker 1: Side, to say the least. I mentioned earlier the Institutional
15:58
Speaker 1: Investor Lifetime Achievement Award you and your co founding partner received.
16:04
Speaker 1: Tell us what that meant to you. That is not
16:07
Speaker 1: something that many people get tagged with. I think there
16:12
Speaker 1: have been forty recipients of that from Institutional Investor. Tell
16:16
Speaker 1: us what that meant?
16:17
Speaker 2: That sort of recognition, It's an incredible honor and an
16:23
Speaker 2: honor shared by all the current and past, you know,
16:28
Speaker 2: people that worked at King Street and so we are
16:32
Speaker 2: some of the effort that has put forth over the
16:37
Speaker 2: thirty years, not just the partners, but and also the
16:40
Speaker 2: investors that believed in us and continue to believe in us,
16:44
Speaker 2: and counterparties, et cetera. And it sounds tripe, but it
16:48
Speaker 2: is very appropriate and true that, you know, we're just
16:52
Speaker 2: beneficiaries of, you know, some amazing people that we lucky
16:57
Speaker 2: to deem us worthy over the years. It's very humbling,
17:02
Speaker 2: it's very exciting, and it also you know, it's interesting
17:05
Speaker 2: because you know there's there's always well why now, why
17:08
Speaker 2: are you doing these podcasts? Or why would you do that?
17:11
Speaker 2: And I guess it's it's really we have a story
17:15
Speaker 2: to tell and I'm very proud of King Street and
17:18
Speaker 2: the people, and I think it's a great opportunity. And
17:23
Speaker 2: it also is a sign of the times where we are.
17:25
Speaker 2: And I think evolution personally and professionally as a firm
17:29
Speaker 2: as an institution is so critical and I think that's
17:33
Speaker 2: part of our staying power, is our desire to continuous improvement.
17:38
Speaker 2: And you know, you look back and people might say, well,
17:42
Speaker 2: why do you focus on the past? Well, you know,
17:44
Speaker 2: focus on the past so that there is a future.
17:47
Speaker 2: I think the Lifetime Achievement Award is it is kind
17:50
Speaker 2: of I thought they give it to dead guys whatever,
17:52
Speaker 2: But you know, we're not dead yet and don't plan
17:55
Speaker 2: it ever being so we're we're excited about the going forward.
17:59
Speaker 1: Like that concept you don't know where you're going unless
18:02
Speaker 1: you understand where you've already been. It makes a lot
18:04
Speaker 1: of sense. Let's talk a little bit about what you
18:08
Speaker 1: guys do you mentioned earlier stressed and distressed. I know
18:14
Speaker 1: that they're two very different things, but there's some nuance
18:17
Speaker 1: there help us understand the distinction between stressed assets and
18:21
Speaker 1: distressed assets.
18:23
Speaker 2: Yeah, I think it is kind of nuance in a way.
18:26
Speaker 2: I think, you know, distressed assets, you know, you're you're
18:31
Speaker 2: on your way to default most times or restructuring. Stressed assets,
18:37
Speaker 2: you know, can be out of favor assets. I think
18:40
Speaker 2: you're splitting hairs. You know. Some would say, oh, triple
18:42
Speaker 2: C bucket, that's all distressed, and if you look in
18:46
Speaker 2: single B, double B, oh, that's stressed. You know. I
18:49
Speaker 2: think it also depends on where we are on the
18:51
Speaker 2: cycle what can be stressed distressed. And also if you
18:56
Speaker 2: look at a stressed infrastructure situation, that might not be
19:01
Speaker 2: that wide in terms of total spread. So let's say
19:05
Speaker 2: you have you know, a thousand basis points over the
19:09
Speaker 2: treasury is a say, a distress situation. And then if
19:13
Speaker 2: you look at something that normally trades say one hundred over,
19:16
Speaker 2: but it's trading at two hundred over and that could
19:20
Speaker 2: be stressed. Now you would say, well, that's in high yield.
19:24
Speaker 2: That's nothing we can see a you know, twenty fifty
19:27
Speaker 2: hundred and two hundred spread widening or tightening, you know
19:29
Speaker 2: in high yield. Now that is I'm giving a historical perspective.
19:34
Speaker 2: It seems like the last couple of years, this is
19:37
Speaker 2: not your father's high yield market when they you know,
19:40
Speaker 2: high yield meant junk bonds, and these days high yield
19:43
Speaker 2: is trying to be an investment grade market given the
19:46
Speaker 2: security five ye these days you had the FED come
19:51
Speaker 2: in and push a lot of the banks and say, hey,
19:53
Speaker 2: you can't have a ton of leverage on the high
19:55
Speaker 2: yield issuance, and so they kind of help create the
19:59
Speaker 2: private credit market, if you will, or it went into
20:02
Speaker 2: loans and so and lack of covenant protection. But the
20:08
Speaker 2: the quality of the higher market is dramatically different than
20:12
Speaker 2: you know, once I came up.
20:14
Speaker 1: So it sounds like it's not so much that there's
20:18
Speaker 1: any real distinction other than a spectrum of risk of
20:22
Speaker 1: your debt is going to have a higher yield but
20:25
Speaker 1: greater risk that comes along with it, and stressed distressed
20:29
Speaker 1: are just different points along that spectrum.
20:31
Speaker 2: Is that fair? H? I think that's fair. I mean again,
20:33
Speaker 2: I'm sure some would have their own classification system as
20:37
Speaker 2: it were I would, I would just liken it and
20:40
Speaker 2: too you know, distressed as you know, real operational issues
20:45
Speaker 2: or financial issues that as I say, inevitably preponderance of
20:50
Speaker 2: outcomes is to a restructuring or a bankruptcy out of
20:54
Speaker 2: quart or others, and so versus the stress which is
20:57
Speaker 2: not always heading that way.
20:59
Speaker 1: So let's delve into not your father's high yield market.
21:04
Speaker 1: How does the high yield market differ today than when
21:07
Speaker 1: you begin in the nineties, and how much credit or
21:11
Speaker 1: blame lay at the feet of the Federal Reserve.
21:14
Speaker 2: Well, I wouldn't say it's the Fed. I think the
21:17
Speaker 2: markets have evolved dramatically. And if you look at markets
21:22
Speaker 2: around the world, you know, the US capital markets or
21:25
Speaker 2: the envy of the world, because the banks have had
21:28
Speaker 2: less and less responsibility, if you will, meaning they're twenty
21:31
Speaker 2: five percent banking a traditional banks and seventy five percent
21:35
Speaker 2: capital markets, which would be you know, all sorts of bonds,
21:38
Speaker 2: private and public. You go to Europe, it's seventy five
21:41
Speaker 2: percent banks. You go to developing markets, it's ninety five
21:44
Speaker 2: hundred percent banks. And so they're more susceptible boom and
21:47
Speaker 2: buck bus because there's that lack of you know, cushion
21:51
Speaker 2: and you know, and the more systemic in terms of
21:54
Speaker 2: their issues when when the economy turns. But if you
21:58
Speaker 2: go back to the question on you know, a high
22:00
Speaker 2: yield and how it's differentiated, there was just a lot
22:03
Speaker 2: more leverage back then. I remember doing the Allied Federated deal. Now,
22:08
Speaker 2: granted the ristory rate was higher, but you had you know,
22:12
Speaker 2: sixteen percent loans, seventy percent loans, You had you know,
22:17
Speaker 2: eight times ten times leverage, right, So so you have
22:21
Speaker 2: less leverage, you know, lower spread going in as they said,
22:25
Speaker 2: higher quality and then and the greater leverage is being
22:29
Speaker 2: found at times in some of the private credit or
22:33
Speaker 2: or other loans. But I think this extreme leverage is
22:39
Speaker 2: not as prevalent as it once was, and so I
22:41
Speaker 2: would I would argue that, you know, the markets have
22:44
Speaker 2: been more rational in terms of their approach to leverage
22:47
Speaker 2: than ever before, at least you know, my almost forty
22:51
Speaker 2: years doing this.
22:52
Speaker 1: So you also talked about the US markets versus you know,
22:56
Speaker 1: Europe and emerging markets. How much credit it goes to
23:02
Speaker 1: places like the FDIC or the SEC or is it
23:06
Speaker 1: just the full faith and credit of the US government
23:10
Speaker 1: standing on top of a very healthy macro economy.
23:14
Speaker 2: In terms of the market construct comparing us versus the
23:19
Speaker 2: rest of the world. I think, you know, there's a
23:22
Speaker 2: lot of credit due to the innovation, open regulation, but
23:26
Speaker 2: also involving regulation, and also it helps having these large banks.
23:31
Speaker 2: If you look at there hasn't been the big bang
23:35
Speaker 2: in Europe as they said it was going to be. Right,
23:37
Speaker 2: you look at the wrestling going on between you to
23:40
Speaker 2: credit and commerce bank, and you look at the German
23:44
Speaker 2: banks and some of the issues the stagnant aspect of
23:47
Speaker 2: that economy. If you look at savings products over there,
23:50
Speaker 2: there's not the full depth and breadth of products that
23:54
Speaker 2: we have.
23:55
Speaker 1: Even money market you don't have money market funds to
23:58
Speaker 1: the same degree you have in here.
23:59
Speaker 2: Correct. Lot of times they do it with you know, okay,
24:02
Speaker 2: like you have japan Post, you have Italian Post, you
24:05
Speaker 2: have Deutsche Post, you have you know, the regulatory environment
24:10
Speaker 2: for asset management in Europe is quite onerous and is
24:14
Speaker 2: difficult to passport. I mean, they have that these days,
24:17
Speaker 2: but there's still the reality is there's still a lot
24:20
Speaker 2: of inflexibility within the regulatory framework that and look, I
24:25
Speaker 2: you know, I've spent a fair amount of time with
24:27
Speaker 2: regulators and central bankers and participated in a number of
24:30
Speaker 2: forums and meetings on the topic. It does get complicated
24:36
Speaker 2: because Europe is Europe, but it's still a number of
24:39
Speaker 2: different countries within that. The US having this large, deep
24:43
Speaker 2: market does help. And look, I think we do have
24:46
Speaker 2: the innovation, sophistication, and I think the beneficiarrea is the
24:52
Speaker 2: world being able to buy sophisticated products that really are
24:56
Speaker 2: solution providers in all way shapes of form.
25:00
Speaker 1: I want to delve a little deeper into what makes
25:03
Speaker 1: King Street so unique, not just its performance, but the
25:08
Speaker 1: way you guys approach the world. You combine a fundamental
25:13
Speaker 1: approach with very disciplined and opportunistic trading approach, which is
25:19
Speaker 1: you know, usually those are two totally different animals. It's
25:21
Speaker 1: interesting to see, especially in credit and stressed and distressed
25:26
Speaker 1: see those two married. Tell us a little bit about
25:30
Speaker 1: how that set of strategies evolved and what sort of
25:35
Speaker 1: opportunities it's created for you.
25:37
Speaker 2: I think going back to history, which is nineteen eighty nine, Well,
25:42
Speaker 2: so you can go back to A seven with the crash,
25:44
Speaker 2: seeing the importance of tactical trading, go back to A nine,
25:48
Speaker 2: the formation of the distress the prop group, the distressed
25:50
Speaker 2: securities group on the trading desk, but being part of
25:56
Speaker 2: that when you had very wide bits spreads and you
25:59
Speaker 2: could see that execution and entering an exit position, there
26:04
Speaker 2: was a massive amount of differentiation and performance that could
26:08
Speaker 2: be created if one were to be able to trade
26:11
Speaker 2: it tactically. So for example, if things go quite wide
26:16
Speaker 2: and spreads where they can trade ten bond points wide,
26:19
Speaker 2: being able to buy on the bid side versus the
26:21
Speaker 2: as side. If it's fifty sixty market, for example, that's
26:26
Speaker 2: twenty percent differential. So just your entry point is massive.
26:30
Speaker 2: And also we call ourselves short long investors.
26:33
Speaker 1: And people say as opposed to long short.
26:35
Speaker 2: Correct because many of our biggest longs start out as shorts.
26:41
Speaker 2: And why that's important is.
26:43
Speaker 1: Meaning you cover the short and then go long correct
26:45
Speaker 1: at the end of the At the end of the
26:47
Speaker 1: short trade, it's like, oh, if it's good enough to cover,
26:50
Speaker 1: maybe we want to completely reverse our original views.
26:54
Speaker 2: Right, And so initially there's always the and we could
26:58
Speaker 2: sit there a bit of time and it could expensive
27:00
Speaker 2: carrying shorts, so you have to be mindful of that.
27:03
Speaker 2: It can take some time. However, it does enable us
27:07
Speaker 2: to have done a fair amount of work in advance,
27:09
Speaker 2: and so let's say something breaks, hopefully we've been short
27:13
Speaker 2: it and we have a fair amount of institutional knowledge
27:15
Speaker 2: about that situation, and then we can cover it or wait,
27:20
Speaker 2: it's going to get worse, because you know, oftentimes management
27:24
Speaker 2: comes out and they say, okay, they find some guy,
27:27
Speaker 2: they shoot him and say that was the bad guy,
27:28
Speaker 2: and now we're back and you're like, wait a minute,
27:30
Speaker 2: that guy, you know was the janitor. What do you
27:33
Speaker 2: mean or are we going to execute on this or that?
27:36
Speaker 2: And you say they've tried to execute you know, for
27:38
Speaker 2: the last three years, I have able to do it,
27:40
Speaker 2: so it really having a bit of perspective is important,
27:45
Speaker 2: and then you can then time it appropriately. Now we're
27:48
Speaker 2: not market timers, but it does give us, I think,
27:51
Speaker 2: a relative value perspective. So coupling the trading and understanding, okay,
27:57
Speaker 2: a lot of sellers are coming out, there's more coming out.
28:01
Speaker 2: Having that supply demand question answered is important as well.
28:06
Speaker 1: So I want to put some flesh on the bones
28:09
Speaker 1: of what it looks like combining the tactical with the fundamental.
28:12
Speaker 1: And I'm going to quote numbers from institutional investor because
28:16
Speaker 1: I know as a regulated entity, I know what I
28:19
Speaker 1: cannot say. I know you can't give specific numbers, but
28:22
Speaker 1: I could cite what institutional investor had observed. Twenty twenty
28:27
Speaker 1: two was the worst year for hedge funds since two
28:29
Speaker 1: thousand and nine. The S and P five hundred and
28:31
Speaker 1: down twenty percent, bonds down fourteen percent. King Street, according
28:37
Speaker 1: to II, was down only three point eight percent, a
28:41
Speaker 1: massive outperformance to either the SMP or the Bloomberg AG.
28:47
Speaker 1: Tell us what it was like trading in twenty twenty two,
28:50
Speaker 1: first time in forty years stocks and bonds were down
28:53
Speaker 1: double digits together.
28:55
Speaker 2: I would say it's set the table going back to
28:57
Speaker 2: say twenty twenty if you look in the pandemic when
29:00
Speaker 2: you know world's going to end, and then you know,
29:02
Speaker 2: a lot of equity injected, and then then we had
29:05
Speaker 2: the vaccine news came out, everything rallied, but there was
29:09
Speaker 2: so much stimulus being put and I think, you know,
29:13
Speaker 2: just let's say, I don't like losing money ever, and
29:17
Speaker 2: is my co founders say, you know, relative performance, but
29:21
Speaker 2: you can't eat your relatives. So it's just important to
29:25
Speaker 2: from our perspective, contextualize that. And so we are very disciplined.
29:30
Speaker 2: I think one of the things that we looked to
29:32
Speaker 2: was like, hey, let's go up in quality, up in liquidity,
29:35
Speaker 2: and that was a concern. I think one of the
29:38
Speaker 2: things took us by surprise was okay, you know how
29:42
Speaker 2: much inflation really rooted and how quickly and how high
29:45
Speaker 2: it went. So I'd say, you know, that was something
29:47
Speaker 2: we missed. Again, we always try to focus on what
29:50
Speaker 2: we did wrong and we correct those. Hopefully then the
29:54
Speaker 2: going gets better going forward trading in twenty two, as
29:57
Speaker 2: I said, I wouldn't say it's too differentiated, but again,
30:01
Speaker 2: you know, an absence of a true distress cycle, I
30:03
Speaker 2: think that it loses the sort of meaning. But if
30:06
Speaker 2: you look at you know, in twenty twenty there was
30:08
Speaker 2: a number of things that is really for me at
30:11
Speaker 2: more signature important time.
30:14
Speaker 1: So I want to talk about a few specific investment
30:17
Speaker 1: strategies that King Street does. In twenty seventeen, you launched
30:22
Speaker 1: a collateralized loan obligation business. Tell us a little bit
30:25
Speaker 1: about that strategy.
30:27
Speaker 2: So we've been investing in clos, mezzanine and opportunistically for
30:31
Speaker 2: a number of years, equity and et cetera. We've always
30:35
Speaker 2: had this credit expertise, and we felt that as a
30:39
Speaker 2: compliment for our investors and to benefit our launch short
30:44
Speaker 2: credit business. To have the CLO strategy was we think
30:48
Speaker 2: a distinctive manage and so we've had a terrific growth
30:53
Speaker 2: and successful business launch and continue to grow from strength
30:56
Speaker 2: to strength there in both the US and Europe issues
31:00
Speaker 2: during twenty twenty, there was a number of opportunities that
31:04
Speaker 2: came out to rescue finance a number of the companies
31:07
Speaker 2: we had relationships with, and so it has proven very
31:11
Speaker 2: complementary to our business. We describe our business in terms
31:16
Speaker 2: of overlapping circles, and that is that we will have
31:20
Speaker 2: different fund strategies and there might be a bond or
31:24
Speaker 2: a loan situation that we might see in different funds
31:27
Speaker 2: if they meet the investment criteria liquidity duration that we
31:32
Speaker 2: are looking for in that particular strategy, and so there
31:34
Speaker 2: is real synergistic effects and ability to analyze these situations
31:42
Speaker 2: quite rigorously.
31:43
Speaker 1: Let's talk about another overlapping business line, real estate. What
31:47
Speaker 1: do you guys do in the real estate.
31:49
Speaker 2: So we've been doing real estate, as we mentioned, first
31:52
Speaker 2: real estate finance and then real estate buying the equity
31:55
Speaker 2: or buying actual properties for quite some time a number
31:59
Speaker 2: of years ago. Go again, as I mentioned earlier, the
32:02
Speaker 2: demise if you will, the stop doing side pockets and
32:06
Speaker 2: you set up separate real estate funds. And so we've
32:09
Speaker 2: set up a number of funds. We've also invested in
32:12
Speaker 2: some specialties such as student housing in Europe. We've done
32:18
Speaker 2: last mile logistics, We've done movie studios. We've also done
32:22
Speaker 2: a number of financings as the banks have pulled back,
32:25
Speaker 2: has created great opportunities in that. And then more recently,
32:30
Speaker 2: we bought a data center business that specializes in AI
32:35
Speaker 2: and high performance compute, which is quite an exciting business.
32:38
Speaker 1: That's cul of war. I was reading about that and saying, wow,
32:42
Speaker 1: this seems to be a little off of what I
32:46
Speaker 1: was expecting. Liquid cooled, AI, data center, liquid cooled, what's
32:52
Speaker 1: that about?
32:53
Speaker 2: So to give you the history, So years ago we
32:57
Speaker 2: started focusing on growth lending, growth financing. You know, it's
33:01
Speaker 2: funny VC distress. There's a lot of similarities between the two.
33:05
Speaker 2: You know, you don't know what's going to happen with
33:08
Speaker 2: the company, is it going to make it not make it?
33:10
Speaker 2: So for example, Airbnb in door dash and twenty twenty
33:14
Speaker 2: we lent them money prior to their IPOs. Now, the
33:18
Speaker 2: v on the LTV loan to value the value oftentimes
33:23
Speaker 2: the disparity because when you ask a tech person what's
33:26
Speaker 2: this company worth, generally it's it's very very high numbers,
33:30
Speaker 2: which we don't always support from our valuation. But if
33:34
Speaker 2: the loan percentage is quite small five ten percent, then
33:39
Speaker 2: there's a margin of safety, and we have a lot
33:41
Speaker 2: of covenants to protect ourselves. And you say, we did
33:44
Speaker 2: some of that. We looked at GPU financing, which GPU
33:48
Speaker 2: is the Navidia chip, that's what they produce, and so
33:53
Speaker 2: we looked at some financings there. Couldn't get quite comfortable
33:56
Speaker 2: the depreciation curve because you know, Navidia comes out of every
34:00
Speaker 2: the other day with a new chip, and so we said,
34:03
Speaker 2: why lend your money if every two years you're going
34:05
Speaker 2: to have a new chip, and so worry about the
34:07
Speaker 2: value eroding on that chip. And so even though we
34:11
Speaker 2: over earning in terms of financing, now there'll be situations
34:13
Speaker 2: and opportunities that will make sense to lend in that sector.
34:17
Speaker 2: However that's we then you know, said, wow, this data
34:20
Speaker 2: center business is going to have legs for quite some time.
34:22
Speaker 2: We looked at the hyperscale business insanely competitive and said, okay,
34:28
Speaker 2: can't make a mark or find an edge there. And
34:31
Speaker 2: that's when we came up with colo Oar, which was
34:34
Speaker 2: selling itself. They had been doing liquid cooling for thirteen years.
34:38
Speaker 2: They started company thirteen years the company ten years ago,
34:41
Speaker 2: operational in a co location business in Santa Clara, California,
34:45
Speaker 2: in the heart of all these tech bohemoths, and they've
34:49
Speaker 2: been DGX certified by Navidia for over five years. Liquid cooling,
34:54
Speaker 2: the way we do it is it's full true liquid cooling.
34:57
Speaker 1: Meaning it's more efficient, more productive.
35:00
Speaker 2: Yeah, so just think about just the construct right, So
35:02
Speaker 2: you have the whole data center, you have three foot
35:04
Speaker 2: raise floors, you have an intake outtake of water that's
35:09
Speaker 2: ambient water temperature, goes, flows around and goes to the rack.
35:14
Speaker 2: Many will do liquid cooling to the rack, but separately,
35:17
Speaker 2: and that's very expensive because in effect you're retrofitting. Ninety
35:20
Speaker 2: five plus percent of the data centers are air cooled.
35:24
Speaker 2: As we know, air water is three thousand times more
35:27
Speaker 2: effective cooling than air. And so the PUE, which is
35:32
Speaker 2: the efficiency rating that they utilize, we're like one point
35:35
Speaker 2: three and many are one point five six, et cetera.
35:39
Speaker 2: So it's very efficient. You can have a denser facility
35:43
Speaker 2: and it can handle the AI chips. The other metrics
35:45
Speaker 2: that people use is the killowatz per cabinet, and so
35:49
Speaker 2: we can host up to two hundred and fifty kilowats
35:52
Speaker 2: per cabinet, where you know five ten twenty is these
35:55
Speaker 2: traditional data centers air cooled and so as Winning Gretzky
36:00
Speaker 2: used to say, I skate where the puck is going
36:02
Speaker 2: to be and the chips are all about, we need
36:06
Speaker 2: liquid cooling. Also, as we look to satisfy the future
36:10
Speaker 2: which will be inferenced versus the l M, the big
36:13
Speaker 2: training models, there will be a need for the data center.
36:17
Speaker 2: So we're having a number of conversations and across many
36:20
Speaker 2: different verticals. Our real estate group is executing, plus the team.
36:25
Speaker 2: It's super exciting and and it's again it's it's something
36:29
Speaker 2: that evolved out of our overlapping circles with the financing.
36:33
Speaker 2: You know, we we don't. There's always a method to
36:36
Speaker 2: it that we evolve into.
36:39
Speaker 1: Huh, really fascinating. So let's let's start out talking about
36:44
Speaker 1: why we're even talking. For for most of King Street's history.
36:50
Speaker 1: You've been a quiet firm. You You quoted one of
36:54
Speaker 1: your colleagues as saying, Hey, it's the spouting well that
36:57
Speaker 1: gets harpoons. Tell us why we're even having this conversation now.
37:03
Speaker 2: Evolution is so important, self improvement, evolution. I think markets change,
37:08
Speaker 2: and I think it's important to adapt to survive. As
37:11
Speaker 2: the trite saying, we might say, we look at the
37:16
Speaker 2: opportunities that we're facing, the business that we're building and
37:21
Speaker 2: have built, and they're quite excited about it. And I
37:23
Speaker 2: think it's important to communicate for our investors, for perspective,
37:29
Speaker 2: partners and people that to attract the best and make
37:33
Speaker 2: sure we have the best partners, to make sure our
37:36
Speaker 2: story's out there. It's gotten incredibly noisy, if you will,
37:39
Speaker 2: when everyone's out there. So to do nothing, I think
37:44
Speaker 2: would be a disservice to the people in the business
37:48
Speaker 2: and our and our partners. Really, as you know, the
37:52
Speaker 2: opportunities you know come to you know, as they say,
37:56
Speaker 2: squeaky will gets the grease and so one has to.
38:00
Speaker 2: You know, relationships are great. However, at times people you
38:04
Speaker 2: know would say, oh, King Street, they still in business,
38:06
Speaker 2: you know, because if if you're you're not out there
38:09
Speaker 2: with your LinkedIn presence or or I think it's just
38:12
Speaker 2: a sign. Look we're not on Instagram, so uh, no
38:15
Speaker 2: tiktoks from no no TikTok videos.
38:18
Speaker 1: You know, really really interesting. You know, there's some quotes
38:24
Speaker 1: of yours that I really like. One of the things
38:26
Speaker 1: you had said recently was what kills you in investing
38:30
Speaker 1: is a full sense of bravado, I have all the answers,
38:34
Speaker 1: I could beat this market, or that sort of approach.
38:38
Speaker 1: We say, the work is never done and knowledge reduces risk.
38:43
Speaker 2: Explain, well, it's it's from our perspective fairly simple. As
38:52
Speaker 2: investors that focus on out of favor, distress, bankruptcy, we
38:57
Speaker 2: see failure every day, and we would be incredibly delusional
39:04
Speaker 2: to think that without and and sometimes it's no fault
39:09
Speaker 2: of the companies, right, it's it's some unforeseen act. It's
39:13
Speaker 2: you know, some fraud was perpetrated on it, you know.
39:18
Speaker 2: But it's incumbent upon us to be tireless in our effort,
39:23
Speaker 2: as there's multitude of competitors out there globally that we
39:30
Speaker 2: go up against every day, and if we're not grinding
39:33
Speaker 2: it out, then you know there's there's going to be
39:38
Speaker 2: a shortfall, and we we don't plan on having that.
39:41
Speaker 1: Early in your career, someone would ask you what drives you,
39:44
Speaker 1: and your response would be paranoia and insecurity along the
39:49
Speaker 1: same lines.
39:50
Speaker 2: Yeah, you know, look paranoid insecurity it's it's it's I
39:54
Speaker 2: try to be humorous and colorful because investors come in
39:58
Speaker 2: and to own on you know that it doesn't always
40:03
Speaker 2: keep their attention. I think it's important to look at
40:08
Speaker 2: you know, we also talk about probability and you know proportionality,
40:13
Speaker 2: and so if you take those four things right, So
40:16
Speaker 2: the paranoid insecurity is like, Okay, did I do enough work?
40:20
Speaker 2: Does someone else know what can happen that I'm not seeing?
40:24
Speaker 2: It keeps that drive to continue to ask those questions.
40:27
Speaker 2: As we said, knowledge produces risk because you know, these
40:30
Speaker 2: is a moving picture. This is not a still life photograph.
40:35
Speaker 2: And so there's many different variables that happen through a business,
40:41
Speaker 2: through a cycle, through you lifetime owning, investment, and markets
40:45
Speaker 2: to change. So if you think about the number of variables,
40:48
Speaker 2: one would be kidding oneself to think that they can
40:50
Speaker 2: rest in their laurels. If you will, the work just
40:54
Speaker 2: begins when that investment is made and so in the
40:59
Speaker 2: paranoid it's ccurity. The only paranoid survivors, they say. And
41:02
Speaker 2: so we have to say, did I do enough work?
41:05
Speaker 2: Was there something I missed? Keeping one up at night
41:08
Speaker 2: that constantly looking at it? I think if you look
41:12
Speaker 2: at any piece of work, you know, an artist or
41:15
Speaker 2: whomever it is, they put some work, they do some work,
41:18
Speaker 2: they put it down, they come back, they look at
41:19
Speaker 2: it from another light and oh I missed that. Let me,
41:22
Speaker 2: let me continue to refine it. And so investments, in
41:25
Speaker 2: our mind are are bodies of work that need to
41:28
Speaker 2: be continually refined because the elements, if you will, continue
41:34
Speaker 2: to challenge it. And then you look at probability and proportionality.
41:38
Speaker 2: One has to be careful on that right because if
41:40
Speaker 2: you say, well, you know this hurricane is going to happen,
41:46
Speaker 2: you know the tragic hurricanes that we've had currently and
41:50
Speaker 2: just recently. Okay, if you had said never going to happen,
41:54
Speaker 2: we haven't had for a while, and if it happens,
41:56
Speaker 2: it's it doesn't create much damage. Well, what's the probability
42:00
Speaker 2: that that could could outcome? Now, if you look at
42:03
Speaker 2: geological faults and you're buying a piece of property, and
42:06
Speaker 2: you're building a data center, for example, and you say, well,
42:08
Speaker 2: one in one point six million or billion years that
42:12
Speaker 2: you know, I feel good about that, right. But if
42:15
Speaker 2: you're down in Florida and you're saying I'm not going
42:18
Speaker 2: to buy flood insurance now, question can you get it
42:20
Speaker 2: these days for it? Right? But like, think about the
42:24
Speaker 2: people the tragedy happened in North Carolina up and then
42:27
Speaker 2: you know, they didn't think they'd need flood insurance.
42:28
Speaker 1: They were deep inland and at a fairly high elevation,
42:32
Speaker 1: and yet they still got flooded out.
42:33
Speaker 2: Right. So these are things in terms of proportionality and probability,
42:38
Speaker 2: and proportionality is okay. You can create a scenario with
42:41
Speaker 2: any investment where you'd never make the investment. You could say, well,
42:45
Speaker 2: that could happen, and then you could say to certain,
42:47
Speaker 2: well it's one in a million years and it's two
42:49
Speaker 2: percent of the business. Is that really going to cause
42:52
Speaker 2: you to pass on that investment? So that's the constant
42:55
Speaker 2: interplay that we feel is critical to arrive. You know,
43:00
Speaker 2: the best decision you can make, and again the best
43:01
Speaker 2: things you make today tomorrow look at it again and say,
43:05
Speaker 2: oh I screwed up.
43:07
Speaker 1: You mentioned earlier you wanted to be a little public
43:10
Speaker 1: because you want to attract and retain the best employees.
43:14
Speaker 1: King Street has about two hundred and fifty people working
43:17
Speaker 1: for them, seventy of whom have been with the firm
43:21
Speaker 1: for ten or more years. That's pretty unusual in the
43:24
Speaker 1: hedge fund world. Tell us a little bit about the
43:26
Speaker 1: ten year club you guys created.
43:29
Speaker 2: Well, it really again, as I said at the outset,
43:33
Speaker 2: it's celebrating the people that comprise King Street, as I
43:39
Speaker 2: thought from the beginning, and talk to other people in leadership.
43:44
Speaker 2: Remember that your greatest asset goes down the elevator every
43:48
Speaker 2: day and you hope they come back up the next day,
43:50
Speaker 2: and so one has to again celebrate the teamwork. And
43:57
Speaker 2: that's the approach that we have a King Street talked
44:00
Speaker 2: about the overlapping circles and the ability to work on
44:05
Speaker 2: different aspects of the business. But it's very much a
44:08
Speaker 2: team and we look at the what what the operation team,
44:12
Speaker 2: the investment team, and the training team. There's a lot
44:15
Speaker 2: of collaboration that is constantly occurring, and people get paid
44:20
Speaker 2: on the well being of the overall firm, and so
44:23
Speaker 2: it forces that teamwork and collaboration, and I think it's
44:28
Speaker 2: important to celebrate events. You know, we we have outings,
44:34
Speaker 2: we have different groups celebating our women, our diversity, our
44:39
Speaker 2: charitable pursuits, or holiday party. We still have the old
44:42
Speaker 2: school holiday party that we do every year. I think
44:46
Speaker 2: the summer outings, et cetera. These are all we believe
44:51
Speaker 2: part of the building culture. You know, everyone the month end,
44:54
Speaker 2: everyone's birthday gets celebrated with you know, we had them
44:59
Speaker 2: happen to every day. So we say, wait, we'll just
45:01
Speaker 2: to once a month all the February birthdays you know which,
45:04
Speaker 2: and then you get to vote on it. So the
45:06
Speaker 2: little things that I think create the family, and you
45:10
Speaker 2: spend a lot of time with people, and if there's
45:13
Speaker 2: not that recognition of individuality and the effort put forth,
45:21
Speaker 2: then it's a miss. We believe it's again to celebrate together.
45:27
Speaker 2: What we've achieved is critical.
45:30
Speaker 1: I've heard a number of executives complain or at least
45:34
Speaker 1: raise the issue. It was very difficult to either create
45:38
Speaker 1: or maintain a corporate culture during the pandemic work from
45:42
Speaker 1: home remote. How have you guys navigated that and how
45:46
Speaker 1: important is corporate culture to a fund like yours?
45:51
Speaker 2: Well, culture is becomes what it becomes. It's you just
45:58
Speaker 2: everyone hopes that they're culture is sustainable and constructive and
46:03
Speaker 2: not toxic, and so we strive to make sure there's
46:10
Speaker 2: that communication openness. We do a lot of surveys. We've
46:15
Speaker 2: always trying to better our scores. It's self improvement we
46:17
Speaker 2: focus on. If you go back to a pandemic, it
46:20
Speaker 2: was hard, right because you're on zoom and so you
46:22
Speaker 2: know holiday party on zoom or you know scavenger hunts
46:27
Speaker 2: on zoom. It was how do we create these ties
46:31
Speaker 2: that bind us over what It was incredibly challenging personally
46:36
Speaker 2: and professionally for a lot of people. And frankly, the markets,
46:41
Speaker 2: as we all know back in the twenty twenty as
46:43
Speaker 2: our reference earlier, were brutal and working incredible amount of hours.
46:48
Speaker 2: The family challenges that people had with their kids at
46:51
Speaker 2: home were trapped in different places and so and the
46:53
Speaker 2: sicknesses and loss of life. So those are obviously in
47:00
Speaker 2: any regular time important, but we believe, you know, corporate
47:03
Speaker 2: culture has to play its role, uh and not to replace,
47:08
Speaker 2: but to be a part of it, to be supportive
47:12
Speaker 2: of of people. But it's it's and also think about
47:15
Speaker 2: like there's there's We have offices, as you've indicated in
47:19
Speaker 2: the US and Europe and Asia Middle East. How do
47:24
Speaker 2: we create that consistency, How do we create that that
47:29
Speaker 2: fabric that runs throughout And it's a lot of times
47:33
Speaker 2: we'll do our similar uh, you know, furniture and the like,
47:37
Speaker 2: so they feel like, oh, this feels like a King
47:39
Speaker 2: Street office. Things of that nature. Similar events and uh
47:42
Speaker 2: and the swag, if you will, that binds people.
47:46
Speaker 1: So your your co founder and partner of Francis BEYONDI
47:50
Speaker 1: retired a couple of years ago. Two questions about Francis
47:56
Speaker 1: First is he is he still sitting on the Yelle
47:58
Speaker 1: investment committee or has he fully retired from asset management?
48:03
Speaker 1: And then second, you know, what was that transition? Like,
48:06
Speaker 1: suddenly your co founder is no longer there every day?
48:10
Speaker 1: How did you adjust to that?
48:12
Speaker 2: Well, I believe the website's correct. He's still at Yale.
48:16
Speaker 2: I know I've spoken to him recently, but I know
48:20
Speaker 2: he's got a lot of pursuits and quite busy and
48:24
Speaker 2: with his family, and I think he's enjoying a well
48:27
Speaker 2: deserved time. He and I had an incredible twenty five
48:32
Speaker 2: years together. We call ourselves you know old married couple
48:35
Speaker 2: or you know brothers of King Street whatever they call
48:38
Speaker 2: us and two Guys Capital, two guys Capitol, right, so,
48:41
Speaker 2: which is funnily enough, my brother named that. We grew
48:44
Speaker 2: up in New Jersey and in East Brunswick and there
48:46
Speaker 2: was a two guys which.
48:49
Speaker 1: Is giant Alexander Kolder on the outside of that building.
48:54
Speaker 1: Am I remembering that correctly? In Hackensack?
48:56
Speaker 2: Well, well, I was from I grew up in East Buswick,
48:59
Speaker 2: so I don't know about the Hackensack one, but in
49:01
Speaker 2: the one it was a discount store and went bankrupt
49:05
Speaker 2: in the eighties, which Fernado was part of the Portfolo
49:09
Speaker 2: became then the so if it's funny history. But my
49:14
Speaker 2: brother recently gave me a shirt you know, two Guys Capital,
49:17
Speaker 2: and we've got on a website somewhere. But anyway, so
49:21
Speaker 2: I had a saving events there, but no so, as
49:24
Speaker 2: I said earlier, having this team and this partners with
49:28
Speaker 2: us over thirteen years on average and having mds thirty
49:33
Speaker 2: eight plus mds with us over ten years on average,
49:36
Speaker 2: we've had a very deep, deep bench and fortunate to
49:41
Speaker 2: have incredible depth and breadth to the organization where we
49:44
Speaker 2: didn't miss a beat, and you know that's that's something
49:48
Speaker 2: I think testament to the culture that fran and I
49:52
Speaker 2: built the first twenty five years, which we hopeful we'll
49:56
Speaker 2: continue for many, many years to come.
49:59
Speaker 1: Let's jump to our favorite questions that we ask all
50:02
Speaker 1: of our guests, starting with what have you been watching
50:06
Speaker 1: these days? What's been keeping you entertained?
50:09
Speaker 2: Well, I've been watching the Mets a bit lately. I
50:12
Speaker 2: went to my first Mets game and.
50:14
Speaker 1: In October, which I can't remember the last time you
50:16
Speaker 1: could watch the Mets in October having grown up online.
50:19
Speaker 2: Yeah, well, yeah, I mean I grew up in New
50:22
Speaker 2: Jersey and my first Met game was nineteen sixty nine,
50:25
Speaker 2: which when they went in the World Series. Yeah, from
50:28
Speaker 2: a despicable like worst team ever. I think Chicago White
50:32
Speaker 2: Sox had taken that over. But anyway, so we went,
50:36
Speaker 2: you know there, watch some of that. Also, I'm a
50:39
Speaker 2: Knicks fan. Is went to Villanova and they call him
50:41
Speaker 2: the Nova Knicks. Funny story. Years ago, I was fortunate
50:46
Speaker 2: enough Jay Wright, who was the coach of Villanova, invited
50:49
Speaker 2: me to speak to the team before the start of
50:53
Speaker 2: the season. They were in New York, and you know,
50:57
Speaker 2: talking to the team, and I, you know, I said
51:00
Speaker 2: to him, guys, I'm really really nervous here. You know,
51:03
Speaker 2: twenty eighteen, they were reigning national champions and if you
51:07
Speaker 2: guys don't win the championship like they're, don't look at
51:10
Speaker 2: me and blame me. And they were kind of looking
51:12
Speaker 2: at me quizzically. And I picked one of the young players,
51:18
Speaker 2: young freshmen, and I sat down right across from right
51:22
Speaker 2: up in his face, and I said, you know, look,
51:23
Speaker 2: I'm really nervous. I got this big meeting and you
51:27
Speaker 2: got to help me, you know, can you what do
51:31
Speaker 2: you say to me? You know? And he had like
51:34
Speaker 2: deer in the headlights. Look, he was eighteen year old kid.
51:36
Speaker 2: He was sort of like this, you know, old guy
51:39
Speaker 2: with supposedly you know, successful guy coming in begging me
51:43
Speaker 2: for advice, you know. And he said like quizzically, like
51:49
Speaker 2: you can do it. And I said yeah. And it
51:53
Speaker 2: was funny watching the faces of all the older upper
51:55
Speaker 2: class and they were laughing because they knew I was
51:57
Speaker 2: just trying to see and I said, and I said,
52:01
Speaker 2: it was interesting because Jay Wright had called me like
52:03
Speaker 2: four times in advance because it was so but you
52:07
Speaker 2: go back to leadership and culture. It was so important
52:10
Speaker 2: with you want to make sure I was what message
52:12
Speaker 2: I was going to give, And I said to the team,
52:15
Speaker 2: I said, see, you all can be leaders. You all
52:17
Speaker 2: can inspire. And when you're on the court and Jay
52:20
Speaker 2: is you know fifty hundred feet away, who's going to
52:23
Speaker 2: inspire and lead each other? And you can't just rely
52:26
Speaker 2: on the coach. You got to look to each other
52:28
Speaker 2: for leadership and to sponsor. And that's what when I
52:32
Speaker 2: talked to my team and how do we have the culture?
52:34
Speaker 2: How do we continually have that leadership If the partner
52:37
Speaker 2: is not in the room, who's going to take that
52:39
Speaker 2: mantle and who's going to push forward? And so on
52:43
Speaker 2: the things that I ingest. I got to have a
52:46
Speaker 2: lot of intake to have outtake, right because I got
52:48
Speaker 2: to do a lot of meetings. So I got to
52:50
Speaker 2: find that time to refill the tank with information. And
52:54
Speaker 2: so you know, on stuff I'll watch, whether it's if
52:58
Speaker 2: it's not sports, it will be some you know, mindless
53:02
Speaker 2: spies things I like sort of because it's I like
53:04
Speaker 2: to travel and see things around the world and different
53:06
Speaker 2: cultures and understand that and history, and so that usually
53:10
Speaker 2: wraps up and say a spy things.
53:13
Speaker 1: I'm gonna give you a recommendation only because I watched
53:16
Speaker 1: this on the flight back from Europe and it's dead
53:19
Speaker 1: center of what you're talking about. The Ministry of Ungentlemanly
53:23
Speaker 1: Warfare is essentially Churchill's Special Teams creation as a way
53:31
Speaker 1: of fighting Nazi submarines during World War Two. If you
53:36
Speaker 1: like global spy stuff and history, this is right in
53:40
Speaker 1: your sweet timet.
53:41
Speaker 2: I wrote it down and we'll put it on the
53:44
Speaker 2: list for sure.
53:45
Speaker 1: Absolutely, and again we're recording this in October. I can't
53:50
Speaker 1: remember the last time I was this excited about a
53:52
Speaker 1: next season, Like, even injured, really distinguished themselves last year's playoffs.
53:59
Speaker 1: You know you could see, hey, if they were full strength,
54:02
Speaker 1: they could have gone pretty deep into uh to the finals.
54:07
Speaker 2: Yeah, I'm super excited for this season and and sort
54:11
Speaker 2: of seeing what they could do as well.
54:14
Speaker 1: So you mentioned some of your mentors. Tell us about
54:17
Speaker 1: the people who helped shape your career.
54:21
Speaker 2: Well, you know, I mentioned Jimmy Kine and Vince.
54:24
Speaker 1: Tc They were the Vince Tincy was where.
54:27
Speaker 2: Vincent tc uh is on the number of boards to
54:31
Speaker 2: this days. He was Banking Commissioner State of New York.
54:36
Speaker 2: He was Urban Development chair. He had been a tax lawyer,
54:40
Speaker 2: he was the commodities trader. So he had this incredible
54:43
Speaker 2: varied career and life and quite successful entrepreneur, and so
54:48
Speaker 2: he's always a wealth information contacts and always great great
54:51
Speaker 2: advice and perspective. And Jimmy of course ran Barons Stearns
54:55
Speaker 2: obviously unfortunate ending to a storied career, but he was
55:02
Speaker 2: very helpful in giving great advice.
55:04
Speaker 1: Right legendary CEO of Bear Stearns. Let's talk about some books.
55:09
Speaker 1: What are your favorites? What are you reading currently?
55:12
Speaker 2: I would say book wise, just let's say a genre
55:15
Speaker 2: books because I listened to them. I'm not a big
55:19
Speaker 2: reader because I read so much in terms of research
55:22
Speaker 2: and consultants and sell side and our own internal research,
55:26
Speaker 2: plus the papers, et cetera. And I try to ingest
55:30
Speaker 2: a lot there and then content deeper content on the
55:34
Speaker 2: weekends and then you know, just number of emails et
55:37
Speaker 2: cetera you go through. So I'll listen to different whether
55:43
Speaker 2: it's leadership or let's self help type things, but it's
55:48
Speaker 2: more about I think, the self improvement and so how
55:51
Speaker 2: do you get the most out of life if you will?
55:54
Speaker 2: There's I love hacks if you will, in terms of
55:58
Speaker 2: health hacks or you know, efficiency hacks. I think that's
56:02
Speaker 2: qurrically important technology to utilize to its followers. So that
56:06
Speaker 2: that's sort of the focal point. Let's talk and bye
56:11
Speaker 2: on that. Just sorry is I found that blinkst is
56:14
Speaker 2: a great thing to utilize because the website, well, blinkest
56:18
Speaker 2: is sort of the reader's digest version of books, because
56:23
Speaker 2: most books they have a concept, interesting concept, and they
56:26
Speaker 2: spend two three hundred pages saying same thing seven different ways,
56:30
Speaker 2: you know, you know, trying to convince you that that
56:33
Speaker 2: versus blink is like, all right, here's the concept. You're like, okay,
56:35
Speaker 2: it makes sense. Interesting.
56:37
Speaker 1: And next, one of my partners likes to say most
56:41
Speaker 1: books should be magazine articles, most magazine articles should be tweets,
56:45
Speaker 1: and most tweets should be deleted. And that's his same
56:48
Speaker 1: same sort of concepts as blinkst. So now we're down
56:52
Speaker 1: to our final two questions. What sort of advice would
56:56
Speaker 1: you give to a recent college grad interested in a
57:00
Speaker 1: career and either stressed or distressed investing.
57:04
Speaker 2: Well, there's the critical importance of analytical rigor, and so
57:12
Speaker 2: if you're recent college gradu you can't necessarily go back
57:15
Speaker 2: and take the courses that would be helpful. And so
57:18
Speaker 2: it's if you see some of the Ivy League kids,
57:22
Speaker 2: they don't have the accounting background. For example. I think
57:27
Speaker 2: critical thinking is important. I think having some understanding of
57:32
Speaker 2: the legal framework as that's become has always become such
57:36
Speaker 2: a big deal to get into let's say stress distress
57:41
Speaker 2: out of favor. Look, there hasn't been as much interest,
57:46
Speaker 2: frankly because the tech world has been such a you know,
57:50
Speaker 2: robust world, and so it's important again, as I said,
57:55
Speaker 2: to work in the in the credit business to understand
57:59
Speaker 2: the those covenants, understand those companies, to get a generalist
58:03
Speaker 2: type experience, because one never knows is it the utility sector,
58:07
Speaker 2: is that the energy sector, Is it the TMT sector
58:12
Speaker 2: that will have issues or asbestos or you know, different issues,
58:16
Speaker 2: and then you're like, oh, I'm an expert in this.
58:18
Speaker 2: But at the end of the day, if you understand
58:19
Speaker 2: casual generation, you understand balance sheets, you understand legal framework accounting,
58:25
Speaker 2: then you can kind of learn most valuations frameworks.
58:30
Speaker 1: Really interesting and our final question, what do you know
58:33
Speaker 1: about the world of distressed credit today you wish you
58:37
Speaker 1: knew back in nineteen eighty seven when you were first
58:40
Speaker 1: getting started.
58:43
Speaker 2: Well, I guess having the hindsight is twenty twenty perspective
58:46
Speaker 2: on markets in general. I think it's important, you know,
58:51
Speaker 2: pivoting globally. Also, the let's say, the broad product suite
58:57
Speaker 2: that we now have, I think are are are super interesting, informative.
59:04
Speaker 2: I I I never would have thought that we would
59:08
Speaker 2: rebound so easily and quickly in so many different difficult times.
59:13
Speaker 2: And that that kind of me speaks to the resiliency,
59:17
Speaker 2: you know, of of markets and and the resilt you know,
59:21
Speaker 2: the commitment that the governments et cetera had to uh,
59:25
Speaker 2: you know, bail us out time and time again. And
59:28
Speaker 2: so now thirty five plus trillion debt we got, you know,
59:32
Speaker 2: massive amount of debt and to show for it since
59:35
Speaker 2: eight Uh you know, we'll see how it all works out.
59:39
Speaker 2: But I think it's it's really the the sophistication UH
59:45
Speaker 2: and innovative nature of let's say, security design UH has
59:52
Speaker 2: been enabled to have the flexibility of capital that has
59:56
Speaker 2: been transformative certainly for the US count markets and then
1:00:00
Speaker 2: then finds its way into other markets. But it enables
1:00:03
Speaker 2: you know, people say traffickers and tragedy. You know, it's
1:00:08
Speaker 2: it's interesting. We had, you know, one of one of
1:00:10
Speaker 2: the investors going to allocate ESG and he said, well,
1:00:14
Speaker 2: you know, distress, it's not ESG friendly. I said, well,
1:00:17
Speaker 2: we're one hundred percent of ESG. We're trying to have
1:00:21
Speaker 2: companies help companies survive and you know they have Batty
1:00:24
Speaker 2: is Chusco. We're trying to transform them into into productive
1:00:28
Speaker 2: companies that are you know, doing better think about environment.
1:00:32
Speaker 2: They might have had some spill that they had a
1:00:34
Speaker 2: big liability from, or the governance was bad. That's why
1:00:37
Speaker 2: they were, you know, in distress because it's some guy
1:00:39
Speaker 2: who's stealing money or what have you. So you know,
1:00:42
Speaker 2: there's a number of things that we've been able to
1:00:44
Speaker 2: prove bon bringing new management or cleaning up environmental issues
1:00:48
Speaker 2: that then the company valuation reabount it.
1:00:50
Speaker 1: Thank you, Brian for being so generous with your time.
1:00:53
Speaker 1: We have been speaking with Brian Higgins. He is co
1:00:57
Speaker 1: founder and managing partner at King Street. If you enjoy
1:01:01
Speaker 1: this conversation, check out any of the past five hundred
1:01:05
Speaker 1: or so discussions we've had over the past ten years.
1:01:09
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1:01:14
Speaker 1: you find your favorite podcast, and be sure and check
1:01:17
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1:01:21
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1:01:31
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1:01:35
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1:01:38
Speaker 1: not thank the crack team that helps put these conversations
1:01:41
Speaker 1: together each week. John Wasserman is my audio engineer. Anna
1:01:45
Speaker 1: Lucas my producer. Sean Russo is my head of research.
1:01:48
Speaker 1: Sage Bauman is the head of Bloomberg Podcasts. I'm Barry Retults.
1:01:53
Speaker 1: You've been listening to Masters in Business on Bloomberg Radio.
1:02:00
Speaker 2: What Baths