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Building a Global Private Credit Firm and 'Trading' Planes with Victor Khosla · Masters in Business

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Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
0:09
Speaker 2: This is Master's in Business with Barry Ridholds on Bloomberg Radio.
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Speaker 1: This week on the podcast, yet another extra special guest,
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Speaker 1: Victor Kosla, founder CIO of the nineteen billion dollar Strategic
0:25
Speaker 1: Value Partners. Victor has had a fascinating career stood up
0:30
Speaker 1: the distressed debt department at Citibank before doing the same
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Speaker 1: thing at Merrill Lynch a few years later. He also
0:38
Speaker 1: spent time at Cerebus and More Capital before launching his
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Speaker 1: own firm in two thousand and one. They do everything
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Speaker 1: from hard assets like real estate, infrastructure, aircraft, power plants,
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Speaker 1: to private debt event driven opportunities. Europe accounts for anyway
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Speaker 1: between a third and a half of their investments. They
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Speaker 1: have a number of businesses that they've taken over through
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Speaker 1: the debt side of the equation fifteen businesses with over
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Speaker 1: ninety thousand employees. Really just a fascinating person who has
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Speaker 1: seen the distressed debt business from day one. He was
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Speaker 1: there at the creation and has taken it to all
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Speaker 1: sorts of really interesting places. I found this conversation to
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Speaker 1: be absolutely fascinating if you're at all interested in things
1:30
Speaker 1: like hard debt and what distressed asset buying is like,
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Speaker 1: and what it's like to take over a company not
1:37
Speaker 1: through its equity but through its default to debt. I
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Speaker 1: think you'll find this to be an absolutely fascinating conversation.
1:45
Speaker 1: I know I did with no further ado my discussion
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Speaker 1: with Strategic Value Partners Victor Cosla. Victor Cosla, welcome to Bloomberg.
1:56
Speaker 2: Thank you, thanks for having me back.
1:57
Speaker 1: So I skipped over a lot of your CV. We'll
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Speaker 1: get to some more details in a little while. Let's
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Speaker 1: just start with your educational background. Bachelor of Commerce with
2:09
Speaker 1: honors from Delhi University, a master's in Economic from Vanderbilt,
2:15
Speaker 1: and then an MBA from the University of Chicago. So
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Speaker 1: is it safe to say finance was always in the
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Speaker 1: career plans?
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Speaker 2: Oh gosh, yes, from the beginning, finance and business was
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Speaker 2: always in the career plans. Running a nineteen billion dollar
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Speaker 2: private equity opportunistic credit firm was not right. It doesn't
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Speaker 2: like that was the plan forty years.
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Speaker 1: You just tack into what was working and continue to
2:44
Speaker 1: build on it. Talk a little bit about your professional experience,
2:47
Speaker 1: because I find it absolutely fascinating. You're relatively young in
2:52
Speaker 1: your career when you're at City Bank or was it
2:55
Speaker 1: City Group. Then I keep track and you essentially created
2:59
Speaker 1: their stress debt department. Tell us about that experience. Was
3:04
Speaker 1: that twenty five thirty years ago? Maybe more?
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Speaker 2: It was more it was thirty years ago.
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Speaker 1: Nineteen eighties, early.
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Speaker 2: Nineties, right when it happened. Yes, I worked in all
3:17
Speaker 2: the places Barry you described, right, the two places. I
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Speaker 2: think what's really interesting is I was there at the beginning,
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Speaker 2: at the creation of a loan trading business.
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Speaker 1: Like it did not exist at City or most of
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Speaker 1: Wall Street. It did before the early nineties. It did
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Speaker 1: not great novel.
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Speaker 2: Bloomingdale's filed for bankruptcy, SCITV filed for bankruptcy, and for
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Speaker 2: the first time, banks which owned the debt wanted to sell.
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Speaker 1: So they're sitting they're sitting on a lot of bed paper. Yeah,
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Speaker 1: and they don't really know what it's worth. They don't
3:56
Speaker 1: know what to do with it. How do they come
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Speaker 1: to you and City and say, hey, we're stuck with
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Speaker 1: all this paper, and you know, we like to at
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Speaker 1: least have a partial recovery.
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Speaker 2: That was what really got it going. There was no price.
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Speaker 2: You had to kind of analyze it to come up
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Speaker 2: with a price, and at the same time there were
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Speaker 2: very few buyers more and more sellers, so the pricing
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Speaker 2: was really good where you could buy these loans.
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Speaker 1: So was City acting as a middleman looking for buyers
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Speaker 1: of distress dead or did someone like yourself have the
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Speaker 1: insight and say, hey, you know, at one hundred cents
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Speaker 1: on the dollar, this is junk, but at fifteen twenty cents,
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Speaker 1: there's some upside.
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Speaker 2: At City and at Merrill, I ran a proprietary trading business,
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Speaker 2: and proprietary trading is using the firm capital to kind
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Speaker 2: of buy it and also to distribute it to syndicated
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Speaker 2: more broadly at the same time. But I think if
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Speaker 2: I was to go back through my career, that moment
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Speaker 2: in time, you know when there is this big wave coming,
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Speaker 2: because it was the start of the high yield market.
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Speaker 2: The leverage loan market grew dramatically, you know, from two
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Speaker 2: hundred billion in the mid nineties to five trillion dollars today.
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Speaker 2: High yield and leverage loans right, and these deals which
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Speaker 2: never used to trade in the secondary market, they started
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Speaker 2: to change hands. I was there right at the beginning
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Speaker 2: of that big wave, and what has happened to me
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Speaker 2: career wise, is just riding that wave as it got bigger,
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Speaker 2: as it got more complicated, as it became US and Europe,
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Speaker 2: not just US. As it went from buying and selling
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Speaker 2: distress debt to going out and taking control of businesses,
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Speaker 2: operating them, and improving them. It was all set at
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Speaker 2: that moment of time in the early nineties.
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Speaker 1: So let's just stay in the early nineties at City
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Speaker 1: for a few minutes. At the time, you're early in
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Speaker 1: your career, you have some experience in an MBA when
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Speaker 1: you first started hearing that from banks, that hey, we
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Speaker 1: got all this Bloomingdale debt. Tell us what went through
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Speaker 1: your mind? Did you envision, Oh, you know there's a
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Speaker 1: market for here and there's an opportunity. How did you
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Speaker 1: look at this? And then how did you stand up
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Speaker 1: that whole distress debt department at.
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Speaker 2: City banks are wanting to sell. I have worked at biz,
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Speaker 2: Allen and Hamilton. I'm a strategic planning guy. I get
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Speaker 2: hired by City Bank in planning. I worked for a
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Speaker 2: really senior guy in the investment bank. This business is
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Speaker 2: just starting. I write a business plan for it.
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Speaker 1: Like a legitimate like it like it's a freestanding entity.
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Speaker 2: Like, you know, it's a business, we should get a startup. Yes,
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Speaker 2: it's a business. We should be bigger in, we should
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Speaker 2: grow in. And there were a couple of people inside
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Speaker 2: City Bank who were pioneers in trying to buy and
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Speaker 2: sell loans. Right, I get folded right into that group
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Speaker 2: after writing the business plan, and boy, we are off
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Speaker 2: to the races. Now. You know, when you look at
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Speaker 2: something like a Bloomingdale's, what you have to ask yourself
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Speaker 2: is Bloomingdale's is restructuring. It's going through a bankruptcy. It's
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Speaker 2: got the debt itself which banks want to sell. You
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Speaker 2: have to price it. And at this point in time,
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Speaker 2: the bankruptcy processes, the restructuring processes weren't that well developed. Right.
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Speaker 2: You had to really say, hey, it's a two year
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Speaker 2: stint in bankruptcy. We're going to cut costs. We'll make
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Speaker 2: this business much more efficient right as we do it.
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Speaker 2: And then you say what is the business worth?
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Speaker 1: And at the time they had a good good brands,
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Speaker 1: fantastic real estate locations, so there was some assets that
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Speaker 1: were salvageable. The question was do we continue as a
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Speaker 1: going concern or do we just liquid eate. You guys
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Speaker 1: have said, hey, let's reorganize this because there's still value here.
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Speaker 1: It's not We're not just going to sell it off for.
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Speaker 2: Parts exactly right. And by the way, most of the
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Speaker 2: businesses we invest in, there's much more value even like today,
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Speaker 2: there's much more value in fixing it and transforming it
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Speaker 2: and selling it for parts. But because these are really
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Speaker 2: good businesses which got levered, they got leveraged through these
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Speaker 2: leverage buyouts, right, But that valuation to be able to
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Speaker 2: come up with the valuation to be then able to
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Speaker 2: work in a restructuring process, bankruptcy process and say, hey,
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Speaker 2: I think at the end of this we are buying
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Speaker 2: debt at fifty cents, it could be worth eighteen ninety cents.
9:02
Speaker 2: It could take two to four years to kind of
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Speaker 2: get there. That's how this business started. It was just
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Speaker 2: not well understood, even the fact that there was a
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Speaker 2: bankruptcy process which could be two years long or three
9:18
Speaker 2: years long. Right, It was just not well understood in
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Speaker 2: the early nineties.
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Speaker 1: So I have so many questions for you about because
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Speaker 1: this is such a The nineties was such a fascinating era.
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Speaker 1: So first, was this like a small side project at city,
9:34
Speaker 1: or did the higher up say, oh, Victor's onto something.
9:38
Speaker 1: Let's put some capital into this and see where it goes.
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Speaker 1: Were what was the initial reaction within city.
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Speaker 2: And by the way, don't get me wrong place. It
9:46
Speaker 2: wasn't just it it was It wasn't.
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Speaker 1: Just it's the You know, anytime we talk about Merrill
9:51
Speaker 1: or City Ubs or Morgan, we're always talking about big teams. Yes,
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Speaker 1: a number of different people leading different departments. All that said,
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Speaker 1: you wrote the business plan, So how warmly was it
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Speaker 1: embraced or was it all right? Give the kid a
10:07
Speaker 1: couple of bucks and let's see how far this goes.
10:10
Speaker 2: It started out with give the kids a couple of bucks.
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Speaker 1: Uh huh.
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Speaker 2: And then what happened was like literally in the first
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Speaker 2: few weeks.
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Speaker 1: So not long at all, like immediate success.
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Speaker 2: Right, we are starting to get in the middle of
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Speaker 2: some of these secondary sales of debt. It's almost like liftoff,
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Speaker 2: right because the moment of time. You know, in those days, Barry,
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Speaker 2: a lot of debt was owned by Japanese banks.
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Speaker 1: I recall on banks, right, remember when everyone was terrified
10:42
Speaker 1: they were going to buy Rockefeller Center and then take
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Speaker 1: over everything. Around the late eighties, early nineties. That was
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Speaker 1: peak Japan and they spent the next thirty years wandering
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Speaker 1: in the desert.
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Speaker 2: Well, they've had a tough few decades.
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Speaker 1: Right, although they seemed to be very much on the
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Speaker 1: on the comeback. But so immediately this looks successful.
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Speaker 2: Typically thirty percent of the market was owned by Japanese banks.
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Speaker 1: Really, that's a giant number.
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Speaker 2: In the early nineties right now. So now you have
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Speaker 2: these restructurings, you have these bankruptcies, and the Japanese banks
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Speaker 2: want to sell the debt huh, they drive it. Then
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Speaker 2: the European banks want to sell because US bankruptcy in
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Speaker 2: those days was not as well understood, right, And then boy,
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Speaker 2: it was almost like bankruptcy filings boom, debt for sale boom, boom,
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Speaker 2: and it just took off.
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Speaker 1: And my recollection is that when foreign banks come into
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Speaker 1: the US and buy up a bunch of assets or
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Speaker 1: debt or whatever it is, and when they start to
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Speaker 1: run into trouble back home, there's usually a change of leadership,
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Speaker 1: and whoever the new owner of the foreign banks are,
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Speaker 1: I tend to say, Hey, I didn't buy that junk.
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Speaker 1: You guys just get rid of this whatever you can
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Speaker 1: get for it. Hits a bid. They're very aggressive sellers
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Speaker 1: or am am I misremembering.
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Speaker 2: They are aggressive sellers, and foreign banks, foreign institutions tend
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Speaker 2: to be more aggressive. But there's also a very you know,
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Speaker 2: there's also very economic reason for it, right, because when
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Speaker 2: you're in a restructuring the debt you own has defaulted,
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Speaker 2: and the central bank which governs you, like the one
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Speaker 2: in Japan or like the one in the United States,
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Speaker 2: they make you take reserves mark it down.
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Speaker 1: Right, so you write it down to zero, So whatever
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Speaker 1: you get for it is practically found money. You've already
12:40
Speaker 1: taken it.
12:40
Speaker 2: So there's a very good economic reason why, you know, short,
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Speaker 2: they're far away, they don't quite understand what's going on.
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Speaker 1: It's a small part of their book right now.
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Speaker 2: So obvious reason, right, But then also the economic reason that, hey,
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Speaker 2: I have it marked down, I have all these nonfer
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Speaker 2: forming loans in my balance sheet. It's creating a drag
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Speaker 2: the way equity analysts look at my balance sheet, I
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Speaker 2: should be selling, I should be getting out right. So,
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Speaker 2: and by the way, it continues to today. If you have
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Speaker 2: a bankruptcy filing, you have a restructuring right, they will
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Speaker 2: sell the debt they'll sell it at a price which
13:22
Speaker 2: is probably too low. But there's a very sound economic
13:27
Speaker 2: reason for the banks or the clos to want to sell.
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Speaker 1: They have a very different set of priorities than a
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Speaker 1: pure invested buyer.
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Speaker 2: Exactly right. But so Barry, can I tell you, but
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Speaker 2: go back, go back to one thought, though, I wanted
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Speaker 2: to make sure it just came through. Early nineties was
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Speaker 2: the start of the modern high yield leverage buyout business
13:52
Speaker 2: done at scale. It was the start of the high
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Speaker 2: yield business exploding dramatically in size to where it is
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Speaker 2: today and still growing, right. And it was the start
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Speaker 2: of the secondary market to kind of buy and sell
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Speaker 2: kind of pieces of debt. And what I was lucky
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Speaker 2: enough to be in the early nineties was I was
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Speaker 2: one of the first people in this business, right overseeing
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Speaker 2: a trading desk like I did at Merrill Lynch.
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Speaker 1: So that was wide open white space. It was virgin snow.
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Speaker 1: It was very new. How long did you stay at
14:33
Speaker 1: City before you left for other places?
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Speaker 2: I was working at City Bank for a couple of years,
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Speaker 2: working on kind of the secondary prop investing trading site,
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Speaker 2: and then I was hired by Merrill to start the.
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Speaker 1: Business Previously we were talking about your experience at the
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Speaker 1: very beginning of the distressed debt industry building the desk
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Speaker 1: at city. You join Merrill Lynch in ninety three and
15:02
Speaker 1: start building their distressed prop trading businesses, which became wildly successful,
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Speaker 1: and you're there from ninety three to ninety eight, right
15:11
Speaker 1: in the middle of the nineties. Tell us a little
15:13
Speaker 1: bit about that experience. What was it like at Merrill
15:17
Speaker 1: in the nineteen nineties.
15:19
Speaker 2: Merril never really had very much of a proprietary culture
15:23
Speaker 2: right as a firm, It's just not. In the nineties
15:26
Speaker 2: it was very much a brokerage house with a growing
15:30
Speaker 2: expanding investment bank. It wasn't really a proprietary investing trading
15:36
Speaker 2: culture right in those Yes.
15:38
Speaker 1: So what made them say, hey, let's go, you know,
15:41
Speaker 1: let's go pull Victor out of city and set up
15:43
Speaker 1: a prop desk.
15:46
Speaker 2: The old fashioned rationale making money?
15:50
Speaker 1: They so little fomo they saw city. Hey, since when
15:54
Speaker 1: a city so big in distress debt they seem to
15:57
Speaker 1: be doing really well. We need to have a little
15:58
Speaker 1: bit of that for ourselves. So is it that simple?
16:01
Speaker 2: It was early people could see the explosive growth taking place,
16:09
Speaker 2: and as somebody who was a well known commodity, well
16:14
Speaker 2: known player in that business already, right, they hired me
16:17
Speaker 2: to go run it. So when I started at Meryl,
16:20
Speaker 2: it was one of me and they said, okay, Victor,
16:24
Speaker 2: here's one hundred million dollars. Right, it's kind of where
16:27
Speaker 2: I started in nineteen ninety three.
16:30
Speaker 1: Right. Was that a lot of money back then?
16:31
Speaker 2: Or it was it was a lot of money back then,
16:35
Speaker 2: so in ninety Funny, I.
16:37
Speaker 1: Know that sounds silly because it's a little hard to
16:41
Speaker 1: put thirty four years into context, for thirty years into context,
16:45
Speaker 1: But like one hundred million dollars today, you know that's
16:49
Speaker 1: a small account at a lot of shops. Back in
16:52
Speaker 1: the early nineties, one hundred million dollars.
16:54
Speaker 2: Was real cash. So what they and what they did
16:58
Speaker 2: was they encouraged me. So I had a couple of
17:01
Speaker 2: very supportive people I worked with. You know, success begets
17:06
Speaker 2: more success. So we ended up getting the resources to
17:10
Speaker 2: hire a bigger and bigger team, ended up setting up
17:14
Speaker 2: a business in London. We were literally one of the
17:18
Speaker 2: first people into Europe buying and selling debt, investing in
17:23
Speaker 2: debt in Europe, and then in ninety seven set up
17:27
Speaker 2: a business in Japan to buy debt from Japanese banks
17:32
Speaker 2: in Japan. Right, So for me at Merrill, from that
17:35
Speaker 2: one hundred million and nineteen ninety three, by the time
17:39
Speaker 2: I left in early ninety eight, we had about two
17:43
Speaker 2: billion dollars of proprietary capital and I had forty people
17:48
Speaker 2: four zero people working with me in New York, in London,
17:52
Speaker 2: in Tokyo.
17:52
Speaker 1: Merrill also had an office in Hong Kong as well.
17:56
Speaker 1: Were you buying debt out of Hong Kong also?
17:59
Speaker 2: I was, now I was starting to dabble in it.
18:02
Speaker 2: This was before the Thai bot the Thigh crisis eight, right,
18:07
Speaker 2: So it was before that I was starting to look
18:09
Speaker 2: at it. Yeah, but it wasn't kind of the focus.
18:13
Speaker 2: It was really US era up Japan.
18:15
Speaker 1: So one hundred million to two billion in five years,
18:18
Speaker 1: that's a giant lift. That's a big expansion. Your next
18:23
Speaker 1: couple of stops along the way were at some pretty
18:25
Speaker 1: well regarded firms. Sarah Is Capital, you ran a joint
18:30
Speaker 1: venture doing Japanese debt with more. Tell us a little
18:34
Speaker 1: bit about your experiences away from the big brokerage firms
18:38
Speaker 1: and some of these more nimble independent shops.
18:43
Speaker 2: You know, the nimble independent shops had a lot more
18:47
Speaker 2: money than the two billion dollars.
18:49
Speaker 1: Really, I never would have guessed that what I.
18:52
Speaker 2: Was overseeing at Merrill length right, But you know what
18:56
Speaker 2: I found was, I think it's sobers you had a
18:59
Speaker 2: very strong, very well known brand at that time. More
19:03
Speaker 2: Capital was much more institutional in how it worked. It
19:08
Speaker 2: had much more of a structure and process around it.
19:11
Speaker 2: And I and I worked with Cypress, I worked with
19:14
Speaker 2: more Capital between them for a total of about four years.
19:18
Speaker 2: It was my first foray from working in a proprietary
19:24
Speaker 2: trading business, which is what I did at Merrill, to
19:27
Speaker 2: working on the buy side. Just the learning what it
19:31
Speaker 2: takes to actually raise money, what it what it means
19:37
Speaker 2: to actually build a really strong infrastructure, a finance, operations,
19:42
Speaker 2: legal team. Right, my first foray out of merrile into
19:47
Speaker 2: the buy side and learning kind of all these different
19:50
Speaker 2: kind of skills, and those were four incredibly growth orientedy
19:55
Speaker 2: as for me.
19:56
Speaker 1: I could I can imagine it and for listeners who
19:58
Speaker 1: may not be familiar with the distinction between buyside and
20:02
Speaker 1: sell side. When you're at City or you're at Merrill,
20:05
Speaker 1: you're trading on behalf of either the firms fund or
20:10
Speaker 1: on behalf of clients. And we call that the sell
20:13
Speaker 1: side because you have to sell that product to clients.
20:16
Speaker 1: The buy side is Cerebrus or more have their own
20:20
Speaker 1: pile of assets from their limited partners, and you are
20:24
Speaker 1: investing in trading on behalf of the firm itself, And
20:28
Speaker 1: so it's a little bit different in you're not dealing
20:31
Speaker 1: with the clients at somebody else's job. You're investing the
20:34
Speaker 1: money on behalf of of the firm. Ultimately, that leads
20:39
Speaker 1: you to say, hey, this buyside thing seems like a
20:43
Speaker 1: pretty good structure for making investments. What led you to say,
20:48
Speaker 1: I think I could launch my own shop and stand
20:53
Speaker 1: something up on behalf of myself instead of working for
20:55
Speaker 1: someone else.
20:57
Speaker 2: It takes a lot of confidence, a little bit woodspot right.
21:02
Speaker 2: I was never lacking in that right.
21:05
Speaker 1: So, but to be fair, you know, there's Kutsman, there's kutzpah.
21:11
Speaker 1: You built a great desk at City, you built a
21:13
Speaker 1: great desk at Merrill, you generate a lot of profits
21:17
Speaker 1: for more and Serabis, So it wasn't a big leap
21:20
Speaker 1: of faith. Hey can I do this? You obviously had
21:23
Speaker 1: a great track record, so standing up your own firm
21:28
Speaker 1: was why not why not be in charge? Why not
21:31
Speaker 1: run my own ship?
21:31
Speaker 2: In those days, there were ten fifteen people who were
21:35
Speaker 2: probably well known in this business, and I was one
21:39
Speaker 2: of the ten fifteen people. Right by the way, Well,
21:42
Speaker 2: when I think about kind of more Capital, huh, what
21:45
Speaker 2: a great firm, by the way.
21:47
Speaker 1: Right, legendary founder, but just great track record.
21:52
Speaker 2: All that, but also just a great firm. Right. But
21:55
Speaker 2: when I think about kind of why start something, you know,
21:58
Speaker 2: when I really cut through it, I really wanted to
22:01
Speaker 2: work for myself. Understandable, right, So when we started Strategic
22:05
Speaker 2: Value Partners, More Capital gave us one hundred million dollars system.
22:10
Speaker 1: No, no kidding. So that's quite a vote of confidence.
22:12
Speaker 1: You're not, you know, if Moore is giving you that much,
22:15
Speaker 1: the same amount that you started with it at Merrill.
22:20
Speaker 1: So so the firm is now nineteen billion dollars. When
22:24
Speaker 1: you launched in two thousand and one, what were you
22:26
Speaker 1: launching with Moore's one hundred plus? How much additional capital
22:30
Speaker 1: did you raise?
22:31
Speaker 2: Ten million?
22:32
Speaker 1: Really, so they were ninety percent of what you had.
22:35
Speaker 2: You know, we were launching the firm and the markets
22:38
Speaker 2: crash in one Sure you were early days of that
22:43
Speaker 2: markets crash and as a result of that crash and
22:46
Speaker 2: markets we think we are going to launch with three
22:48
Speaker 2: four hundred million, and we launched with one hundred and
22:51
Speaker 2: ten million.
22:52
Speaker 1: At the same time, you launch into a let's call
22:56
Speaker 1: it a target rich field, there had to be a
22:59
Speaker 1: lot of opportunity.
23:00
Speaker 2: You know. The performance numbers out returns were just kind
23:05
Speaker 2: of really great because it was a target rich world,
23:09
Speaker 2: and that kind of set us up when I think
23:12
Speaker 2: about those early years, right and I think about kind
23:15
Speaker 2: of the firm we have become today.
23:18
Speaker 1: So let's start with what you began with. How many
23:21
Speaker 1: people did you launch with? How many you had two clients?
23:24
Speaker 1: It sounds like, yes, one hundred and ten. How many
23:28
Speaker 1: How big was the staff on you on it was
23:30
Speaker 1: eight people, eight and today you're a little bigger than that.
23:35
Speaker 2: We've got over two hundred people.
23:37
Speaker 1: I mean, that's a substantial firm. Not only that, when
23:41
Speaker 1: you launched it was primarily distressed debt. You've expanded into
23:46
Speaker 1: so many different areas. Tell us a little bit about
23:50
Speaker 1: that growth, especially the first few years, and what led
23:53
Speaker 1: you to opening another London office in two thousand and four.
23:57
Speaker 2: When we started, we've focused on distressed debt and restructurings
24:01
Speaker 2: in two thousand and one, two thousand and two, that's
24:04
Speaker 2: kind of that was the focus.
24:06
Speaker 1: Well, what sort of companies was it was a lot
24:08
Speaker 1: of the dot coms that had imploded, or was it
24:10
Speaker 1: just generally across the economy.
24:12
Speaker 2: You were in. We were in the middle of a recession.
24:15
Speaker 2: M hm. WorldCom, if you remember, had had a file
24:18
Speaker 2: for bankruptcy as there were a couple of big energy
24:22
Speaker 2: companies in trouble.
24:23
Speaker 1: And Ron and Ron.
24:24
Speaker 2: So you know, we were never a dot com kind
24:28
Speaker 2: of person. And even today we're really not a tech
24:30
Speaker 2: or a software focused firm, right. We are very much
24:34
Speaker 2: in old economy businesses, service businesses, consumer brands. That's very
24:39
Speaker 2: much our focus as a firm. So in two thousand
24:43
Speaker 2: and two, when we start, it's not the dot com
24:47
Speaker 2: debrivia looking through, it's the recession and all the problems
24:51
Speaker 2: it's caused in all these old economy businesses.
24:54
Speaker 1: Huh. Really interesting. So you start with distressed debt, what's
24:59
Speaker 1: the next division you, for lack of a better word,
25:04
Speaker 1: opportunistic credit lending, money taking control. What were the next
25:09
Speaker 1: businesses you added?
25:10
Speaker 2: When we did distress that we were focused on buying
25:14
Speaker 2: debt and restructuring it into equity, being on kind of
25:19
Speaker 2: boards of directors, trying to work with the businesses. But
25:23
Speaker 2: we were mostly had minority equity positions because you when
25:28
Speaker 2: you all you have is a hedge fund parry, right,
25:31
Speaker 2: you need liquidity, right, you can't do private equity.
25:36
Speaker 1: You're not locking stuff up for forever.
25:38
Speaker 2: No, really, you can't write. So the early years were
25:42
Speaker 2: very much focused on this more liquid side of the world,
25:45
Speaker 2: the distressed debt side of the world. And by the way,
25:49
Speaker 2: we had success that fund of We started with one
25:53
Speaker 2: hundred and ten million dollars. By the time two thousand
25:57
Speaker 2: and eight came around, we had about five billion dollars.
26:00
Speaker 1: Really, that's a big that's a big number.
26:02
Speaker 2: We had some really good success right in those years
26:06
Speaker 2: doing what we do. But you know, what we found
26:09
Speaker 2: was two thousand and eight was a really good.
26:14
Speaker 1: You know I talked target rich environment.
26:16
Speaker 2: It was in nineteen ninety one, we were there. I
26:21
Speaker 2: was there on day one as the business of buying
26:25
Speaker 2: and selling secondary debt, investing in secondary debt took off.
26:31
Speaker 2: In two thousand and eight, there was another one of
26:35
Speaker 2: those really dramatic changes. So what we told ourselves was Hey,
26:41
Speaker 2: this is a really great target rich environment. Sure, but
26:45
Speaker 2: the business has changed. Our view was, Hey, these distress
26:52
Speaker 2: debt cycles, they only happen every two years out of ten.
26:57
Speaker 2: It's not like a business you can do every right.
27:01
Speaker 2: It's a super cyclical business. So as a firm in
27:06
Speaker 2: two thousand and eight, we started to go down a
27:09
Speaker 2: different path. We said, Okay, there are some really great
27:14
Speaker 2: businesses which have had a really rough time with bankruptcies,
27:20
Speaker 2: with restructurings. There's a lot of low hanging operational fruit.
27:26
Speaker 2: Let's go out and buy into these businesses and take control.
27:31
Speaker 1: Now you're talking about doing this through debt, not.
27:34
Speaker 2: Equity exactly, but buying enough debt to own fifty one
27:39
Speaker 2: percent or more of the company, becoming a private equity investor,
27:44
Speaker 2: and then driving an operational transformation in the business.
27:49
Speaker 1: So it's so funny different, it's so funny you talk
27:52
Speaker 1: about this. I vividly remember having a conversation with a
27:56
Speaker 1: friend who was originally from Canada relocated to the Grand Caymans,
28:02
Speaker 1: and the first time I learned that it's got to
28:05
Speaker 1: be ten fifteen years ago of an investor taking control
28:10
Speaker 1: of an asset through the debt, not the equity was
28:13
Speaker 1: there's a giant Ritz Carlton on the Grand Cayman. Oh yes,
28:17
Speaker 1: and the under the owner was constantly floating notes and
28:21
Speaker 1: during the financial crisis he ran into trouble and a
28:25
Speaker 1: lot of big banks own that paper and somebody very
28:28
Speaker 1: cleverly picked up a lot of that debt pennies on
28:32
Speaker 1: the dollar ended up taking over that whole thing. It
28:35
Speaker 1: was eye opening, like, oh, you can control a company,
28:38
Speaker 1: not just through equity, through debt.
28:40
Speaker 2: But you know, but if you just take control, you
28:44
Speaker 2: could be the proverbial dog who chases that ice cream truck.
28:48
Speaker 1: What do you do when you catch it?
28:50
Speaker 2: Yes, you know, you need these operating skills to go
28:54
Speaker 2: out and improve and transform these businesses. Right, So what
28:59
Speaker 2: we start to do in two thousand and eight was
29:02
Speaker 2: not just to take control, but to take control in
29:05
Speaker 2: our very hands on way. Right. We strengthen management, we
29:10
Speaker 2: build new business plans, we call them value creation plans
29:15
Speaker 2: in our world, and we try and drive fundamental change
29:19
Speaker 2: even sometimes in these businesses. So for us as a firm,
29:23
Speaker 2: we went from buying and investing in debt after two
29:28
Speaker 2: thousand and eight to taking control of businesses. We went
29:33
Speaker 2: from a firm in two thousand and four even we said,
29:36
Speaker 2: look there's this great growing opportunity in Europe. We set
29:41
Speaker 2: up a London office and our London investment teams today
29:45
Speaker 2: are almost the same size as the US teams. And
29:49
Speaker 2: what we also did over those years was we said, hey,
29:53
Speaker 2: look there are all these real assets airplanes, power plants,
29:57
Speaker 2: real estate, toll roads. Right, these are all going through
30:02
Speaker 2: these kind of restructurings, these kind of problems with their
30:06
Speaker 2: capital structure. So as a firm, starting in two thousand
30:10
Speaker 2: and eight, we went from our roots in value in
30:15
Speaker 2: distress debt, right, we went into control, We went into
30:20
Speaker 2: kind of real assets, and we started lending money to people,
30:24
Speaker 2: not direct lending, much more the higher risk, higher return lending. Right.
30:30
Speaker 2: But as a firm, we've gone through this journey from
30:33
Speaker 2: two thousand and eight, that transformation.
30:35
Speaker 1: Huh, really quite fascinating. Let's continue talking about some of
30:39
Speaker 1: these operating businesses. Ninety thousand employees, fifteen different businesses. This
30:46
Speaker 1: is more than just buying the bare debt of a
30:49
Speaker 1: company that's hit a hard time. You are pretty much
30:53
Speaker 1: fully taking over and running and operating substantial companies. Tell
30:59
Speaker 1: us how came about and how did SVP develop the
31:03
Speaker 1: expertise to effectively become operators and managers.
31:07
Speaker 2: When you have a company which kind of hits a
31:10
Speaker 2: really rough patch, you know, leverage buyouts. By definition, there's leverage.
31:17
Speaker 2: They hit a rough patch, they have really big financial problems.
31:21
Speaker 2: And when that happens, even really good businesses Barry Shick, right,
31:28
Speaker 2: you know, some of the businesses we are invested in.
31:31
Speaker 2: We own a toll road in Texas today, a toll
31:34
Speaker 2: road between Austin and San Antonio. We just bought Hornblower,
31:41
Speaker 2: which is we took operate majority control of it, which
31:44
Speaker 2: is a ferry business, the New York City Ferries, the
31:48
Speaker 2: Statue of Liberty ferry, right, it is. But all these businesses,
31:54
Speaker 2: these are good businesses.
31:55
Speaker 1: But they take on a lot of debt. There's no
31:57
Speaker 1: room for.
31:58
Speaker 2: Error, and things and everything shakes. You know. Often we
32:02
Speaker 2: find some of the really good management teams they get frustrated.
32:07
Speaker 2: Some of them leave, right because now you've got so
32:11
Speaker 2: much leverage. You've got a good business, but so much leverage,
32:14
Speaker 2: and you can't figure out how to how you're going
32:17
Speaker 2: to pop your head up about the surface. Right. So
32:20
Speaker 2: as a result of that, we find that when we
32:23
Speaker 2: are investing short, we have to recapitalize it, so the
32:27
Speaker 2: leverage numbers go down dramatically.
32:30
Speaker 1: So let me ask you a question about what's just
32:33
Speaker 1: been going on over the past couple of years. If
32:36
Speaker 1: you're a leverage company and that debt is you know,
32:40
Speaker 1: what used to be libor plus, it's no longer libor
32:43
Speaker 1: now it's the new measure. Central banks raise interest five
32:48
Speaker 1: hundred and twenty five basis points. Suddenly what was a
32:51
Speaker 1: manageable amount of debt might become unmanageable. How has the
32:56
Speaker 1: past few years of rapidly rising rates acted these leverage businesses.
33:02
Speaker 2: It has been really tough for them, right. You know,
33:07
Speaker 2: you borrowed money when interest rates were zero and you
33:11
Speaker 2: were paying all in five percent. Right now you're paying
33:15
Speaker 2: ten percent twelve percent, which is a lot of money, right,
33:19
Speaker 2: and you are very levered. And by the way, these
33:22
Speaker 2: old economy businesses they are not having that same growth
33:27
Speaker 2: like tech or software.
33:29
Speaker 1: They're not AI. They're at fery businesses and toll roads.
33:33
Speaker 1: That's steady income, but you're not looking at double digit growth.
33:37
Speaker 2: So you can't really grow into your capital structure. Right,
33:40
Speaker 2: So easily you married the two things together. Growth, but
33:45
Speaker 2: slow growth, modest growth in cash flow or EPA with
33:50
Speaker 2: much higher interest rates, like in terms of what you
33:53
Speaker 2: have to do. And by the way, remember some of
33:56
Speaker 2: these businesses went through COVID where they had to take
33:59
Speaker 2: on even more debt to kind of tide over COVID.
34:02
Speaker 1: Right, that was a double WHAMMI COVID and then the
34:05
Speaker 1: rate increase.
34:06
Speaker 2: And now what is happening is there are maturities coming due.
34:11
Speaker 2: There's a large maturity wall in twenty five, twenty six,
34:15
Speaker 2: twenty seven. By the way, by our reckoning, there's almost
34:18
Speaker 2: two trillion of that five trillion of high yield matures
34:23
Speaker 2: in the next three and a half years.
34:25
Speaker 1: Really, so I heard an expression a debt trader used,
34:29
Speaker 1: survive till twenty five. You're suggesting, hey, twenty five isn't
34:34
Speaker 1: good enough. You're gonna have to get through twenty six
34:36
Speaker 1: and twenty seven exactly. Huh.
34:38
Speaker 2: It's creating issues. By the way, this is not like, oh,
34:41
Speaker 2: it's going to happen next year.
34:44
Speaker 1: It's happening already.
34:45
Speaker 2: It's been happening for the last eighteen months.
34:47
Speaker 1: Well. Well, given the high rates, that makes perfect sense.
34:50
Speaker 2: Our pace of investing has picked up substantially. Our pipeline
34:56
Speaker 2: has almost quadrupled over the last eighteen months. This is
35:00
Speaker 2: happening right now, Barry. Don't get the wrong idea. I'm
35:04
Speaker 2: not trying to tell you there's some crash or something.
35:06
Speaker 2: We don't think there is.
35:07
Speaker 1: You seem to be enthusiastic about the opportunities ahead of you,
35:12
Speaker 1: not that the world is coming to an end, but rather, Hey,
35:15
Speaker 1: this is going to be a great period of time
35:17
Speaker 1: if you're an opportunistic distress debt investor.
35:21
Speaker 2: Or if you are in a special situation's private equity.
35:24
Speaker 1: So let's talk about that. How do you define special situations?
35:28
Speaker 2: You know, we are in the business of trying to
35:32
Speaker 2: buy businesses at a good price, and then we're in
35:36
Speaker 2: the business of trying to improve them, sometimes even transform
35:41
Speaker 2: them operationally, right because they have been undermanaged with everything
35:45
Speaker 2: I'd described to us, that's you know, that combination. You
35:51
Speaker 2: can't really if somebody is having an auction of a
35:55
Speaker 2: company and they have hired Goldman Sachs on the re
35:58
Speaker 2: lane to sell it, it's very hard to buy something
36:02
Speaker 2: at a really good price. Right, You've got to be
36:05
Speaker 2: able to buy it either you buy it through the
36:08
Speaker 2: debt right where you buy it through by buying debt
36:12
Speaker 2: at a discount, or you buy it bi laterally in
36:16
Speaker 2: a process without a process, right, the company has enough
36:21
Speaker 2: issues and there's a way to just negotiate a price bilaterally.
36:25
Speaker 2: So I think for us, the opportunity set today is
36:31
Speaker 2: to kind of buy it well, but that is just
36:34
Speaker 2: step one. The step two is to go strengthen the
36:39
Speaker 2: management team, build a new business plan, often to inject
36:44
Speaker 2: more capital into.
36:45
Speaker 1: The restructure so it's not carrying all that debt.
36:48
Speaker 2: Fourteen of the fifteen businesses we control have more employees
36:52
Speaker 2: today than when we took over.
36:54
Speaker 1: Wow, that pretty impressive.
36:56
Speaker 2: But I think it's so this is not about just
36:58
Speaker 2: cutting about kind of investing and looking to transform these
37:03
Speaker 2: businesses which have been undermanaged, and those together is what
37:09
Speaker 2: in our world, in our mind, constitute special situation private equity.
37:14
Speaker 1: Let's talk a little bit about hard assets. You mentioned
37:18
Speaker 1: infrastructure like ferrying, toll roads. Let's talk about real estate, airplanes,
37:25
Speaker 1: and power plants. I would think power plants would be
37:29
Speaker 1: very tied to the cost of energy plus whatever their
37:33
Speaker 1: costs are for modernizing and reducing pollutants and their output.
37:41
Speaker 1: Tell us about what you look at when you look
37:44
Speaker 1: at a buying a power plant.
37:46
Speaker 2: Yeah, you know, for us, about sixty percent of what
37:49
Speaker 2: we do is corporate investing. So these industrial businesses, service businesses.
37:57
Speaker 1: Right fold, economy, stolid, yeah, you know, ready steady businesses
38:02
Speaker 1: that have run into a little trouble.
38:04
Speaker 2: With generally very good market shares. Right. Four zero percent
38:09
Speaker 2: of what we do are real assets.
38:12
Speaker 1: Oh really that much? That's giant. So give us some
38:15
Speaker 1: examples of First of all, I'm fascinated by hard assets
38:21
Speaker 1: like airplanes. How do people get into trouble owning either
38:26
Speaker 1: a single plane or a fleet of plane?
38:28
Speaker 2: Can I tell you? Can we even start with infrastructure, right,
38:31
Speaker 2: because barrye the prevailing view would be infrastructure, toll roads, ferries,
38:38
Speaker 2: all these kind of businesses. They are really you've got
38:42
Speaker 2: a monopoly or adopoly, right, they are. They they should
38:47
Speaker 2: be really strong, they should be good growers, and they
38:51
Speaker 2: should be steady. Eddy, And infrastructure today is bought by
38:57
Speaker 2: sovereign funds, big pension funds with a view that it
39:01
Speaker 2: is very steady seven eight nine percent kind of returns. Right,
39:07
Speaker 2: that's the prevailing.
39:08
Speaker 1: View, assuming you're purching purchasing it at the right price.
39:11
Speaker 2: Right. Now, what has happened in infrastructure is there were
39:15
Speaker 2: a couple of very aggressive people who bought infrastructure toll
39:20
Speaker 2: roads with eighty ninety percent debt, right, not forty percent,
39:25
Speaker 2: fifty percent, eighty ninety percent debt.
39:28
Speaker 1: No room for error there.
39:30
Speaker 2: And if you had if you hit COVID, you or
39:34
Speaker 2: if you hit a financial recession, it's really hard to
39:39
Speaker 2: dig yourself out of eighteen ninety percent debt. Right. So
39:42
Speaker 2: what we saw was a whole class of toll roads,
39:46
Speaker 2: which are supposed to be core infrastructure safe, A whole
39:51
Speaker 2: class of toll roads, the ferry business I'm kind of
39:55
Speaker 2: talking about, right, a waste of energy business in London
39:59
Speaker 2: we in in called Cory Right. All these businesses ended
40:04
Speaker 2: up kind of crashing. Now, for US has never been distressed, right,
40:12
Speaker 2: there's no broad infrastructure distress cycle. But for us it
40:17
Speaker 2: started about ten years ago. Right. We were one of
40:21
Speaker 2: the first ones who started to take a part infrastructure
40:25
Speaker 2: and say, hey, it's not like corporate Right, It's valued
40:30
Speaker 2: very differently than how you'd value a company. There's a
40:34
Speaker 2: whole what it takes to operate it is really quite different.
40:38
Speaker 2: You need some really great government skills, by the way,
40:41
Speaker 2: to manage the agency which regulates you.
40:44
Speaker 1: A lot of complexity there, not just you're not just
40:47
Speaker 1: selling widgets.
40:48
Speaker 2: It's different, right, and you've got to understand it. And
40:51
Speaker 2: we were one of the first people in our business
40:54
Speaker 2: to really drive into it, and I think we've been
40:56
Speaker 2: the biggest investors in our industry in infra.
41:00
Speaker 1: So I got to ask, who the hell is buying
41:03
Speaker 1: a toll road with ninety percent debt. I mean, it's
41:06
Speaker 1: one thing if you're buying your first house and you
41:09
Speaker 1: put ten percent down in finance, then the other ninety
41:12
Speaker 1: percent because you're gonna live there over the next thirty
41:14
Speaker 1: years and you got to live somewhere. But who would
41:17
Speaker 1: buy like that? Just seems kind of reckless or am I.
41:22
Speaker 2: You know, it was viewed in the old days. It
41:25
Speaker 2: was viewed fifteen years ago. It was viewed as such
41:29
Speaker 2: a safe asset class. Not only could not everybody did it? Okay,
41:35
Speaker 2: they have a few real outliers who did a lot
41:38
Speaker 2: of it right, and they did it with eighty five
41:41
Speaker 2: percent debt. Eighty percent debt, ninety percent debt. And by
41:45
Speaker 2: the way, most of the industry does not do this right.
41:49
Speaker 1: You are very much confirming my long held belief that
41:53
Speaker 1: there's no such thing as toxic assets, only toxic prices
41:58
Speaker 1: and toxic debt level. Yeah, it sounds like that's a
42:01
Speaker 1: key part of how you guys have grown.
42:04
Speaker 2: It is it has been, right. But what's kind of
42:07
Speaker 2: interesting also is like you know that waste to energy
42:11
Speaker 2: business in London, right when we bought it, they had
42:15
Speaker 2: a really great I'll tell you this, forgive me, I'll
42:19
Speaker 2: just die digress.
42:21
Speaker 1: I'm fascinated.
42:22
Speaker 2: Right, So there's a there's a this business corry in London.
42:27
Speaker 2: So if you go, if you're on the River Thames,
42:30
Speaker 2: you'll see these barges taking garbage. They take garbage from
42:35
Speaker 2: some of the richest burrows in London. They take it
42:39
Speaker 2: to a plant called Riverside where they burn it and
42:42
Speaker 2: they produce electricity for those same burrows. Right, this business
42:48
Speaker 2: great business, by the way, Right now, what they had
42:51
Speaker 2: done was they also had a landfill business. They also
42:55
Speaker 2: had a garbage collection business, and those businesses got them
43:00
Speaker 2: into real trouble. So the company itself got into a
43:05
Speaker 2: pickle too much debt and with this one really great
43:09
Speaker 2: core business and two other really troubled and so soo businesses. Right,
43:15
Speaker 2: And what we ended up doing was when we kind
43:17
Speaker 2: of took control of the business. Yes, we fixed and
43:22
Speaker 2: sold the two businesses which weren't so great, but at
43:26
Speaker 2: the same time, the core business we invested in it.
43:30
Speaker 2: We hired a new chairman, we hired a new CEO
43:33
Speaker 2: and a management team. And by the way, the business
43:37
Speaker 2: itself had long term You know what makes infrastructure is
43:40
Speaker 2: when you have long term contracts. They had long term
43:44
Speaker 2: contracts for about fifty five percent of their output in Riverside.
43:50
Speaker 2: We increased that to seventy percent. We started to build
43:54
Speaker 2: a plan to expand the plant, to build a new
43:58
Speaker 2: data center next to the plant.
44:00
Speaker 1: Right, And they're so energy intensive.
44:02
Speaker 2: It is because they produce electricity also, which so you
44:07
Speaker 2: can create a data center kind of right next to it,
44:10
Speaker 2: so you can see the transformational work which is going on.
44:14
Speaker 2: It wasn't like, hey, we just bought it. It's great, right, right,
44:17
Speaker 2: And we subsequently ended up kind of selling it three
44:21
Speaker 2: four years later after we'd finished doing all that, and
44:24
Speaker 2: it was a very successful investment. But you can buy infrastructure.
44:30
Speaker 2: But if we just bought it and just put it
44:32
Speaker 2: on auto control, nothing would have happened.
44:35
Speaker 1: This isn't a passive investment. This is active management. I'm
44:39
Speaker 1: fascinated by some of the other hard assets. Tell us
44:42
Speaker 1: about what you do with aircraft, Like how do people
44:47
Speaker 1: over leverage themselves with either a jet or a fleet
44:50
Speaker 1: of jets and have to have a distressed buyer come
44:53
Speaker 1: in and take it over.
44:55
Speaker 2: We find that investing in aircraft for us two out
45:01
Speaker 2: of ten years we really lean in. It's not a
45:05
Speaker 2: steady state. Hey, we're going to invest ex melion every year.
45:09
Speaker 2: It's a very cyclical business. So like so like take COVID, right,
45:15
Speaker 2: COVID happens, flying shuts down. Right. A couple of couple
45:21
Speaker 2: of really large airlines. There's one called LATINAM in Latin America,
45:26
Speaker 2: there's Aero Mexico. A couple of large airlines end up
45:29
Speaker 2: kind of filing for bankruptcy. Now they are in bankruptcy
45:34
Speaker 2: and people and they have like LATINAM in those days
45:37
Speaker 2: had a fleet of three hundred plus airplanes.
45:40
Speaker 1: Oh really, that's a big fleet.
45:42
Speaker 2: Yeah. So by the way, Latham's really it's a big airline, right.
45:46
Speaker 1: One of mostly South American and Central America.
45:49
Speaker 2: And flying to the United States. Right, they're the market
45:53
Speaker 2: leader in South in Latin America. Right, But now they
45:59
Speaker 2: are the people have given them the planes on these leases.
46:05
Speaker 2: They have leases with all these kind of financial guys,
46:08
Speaker 2: which is how they bought a lot of their airplanes.
46:11
Speaker 2: They're in bankruptcy. They want to redo the lease, recut
46:16
Speaker 2: the lease. And by the way, this is COVID. Lease
46:20
Speaker 2: pricing has collapsed right right, So now all of a sudden,
46:25
Speaker 2: the leases aren't the person who's lent them the money
46:29
Speaker 2: on the lease. It's no longer worth that because lease
46:32
Speaker 2: prices have collapsed and they are being reset right now
46:38
Speaker 2: because of the bankruptcy of Latin. So for us, you know,
46:43
Speaker 2: we ended up kind of buying. We ended up buying
46:46
Speaker 2: twenty three of those airplanes right from some of the
46:50
Speaker 2: leaseholders in Latin.
46:51
Speaker 1: For buying the planes outright buying the planes and then
46:54
Speaker 1: what do you do with that aircraft?
46:55
Speaker 2: We actually bought the debt. We've foreclosed on the planes,
47:00
Speaker 2: so now we own the planes. Most of them we
47:04
Speaker 2: leased back to Latin. Some of them. There were actually
47:08
Speaker 2: four very large eight three fifties right, which is which
47:14
Speaker 2: is like a wide body large a three fifties, and
47:18
Speaker 2: we sold them to Luftanza. We had to fix them.
47:21
Speaker 2: We bought them in the desert we fixed them and
47:23
Speaker 2: we sold them.
47:24
Speaker 1: They can't sit for very long though, they have to
47:26
Speaker 1: constantly be tended. So if you're going through a bankruptcy,
47:30
Speaker 1: you can't have a plane on the tarmac for eighteen months.
47:32
Speaker 2: And so what's interesting to us about the airline business
47:37
Speaker 2: when it's really active, like in those periods, right, somebody
47:41
Speaker 2: like us, we'll invest. We invested a few billion dollars
47:46
Speaker 2: buying airplanes in those two three years.
47:48
Speaker 1: Oh really, that's a lot. That's a lot of aircraft.
47:50
Speaker 2: We bought the aircraft, by the way, at this point
47:53
Speaker 2: we've sold most of them, right, But we also ended
47:57
Speaker 2: up with a claim which became equity. So today we
48:02
Speaker 2: are actually a very significant holder of equity in Latin
48:06
Speaker 2: and Aero Mexico. Right. So, but this is what we
48:11
Speaker 2: find is this business of investing in aircraft. It's a
48:16
Speaker 2: it's a very cyclical business for us because we have
48:19
Speaker 2: a very high rate of return expectation, so it's not
48:22
Speaker 2: in every year business. And what's really helpful for us
48:27
Speaker 2: as we do this, Barry, we own a company called Ukalion.
48:31
Speaker 2: Deucalion has sixty five employees and they manage the aircraft
48:36
Speaker 2: for us. So when we take over the planes, if
48:40
Speaker 2: we have to park them in the desert, if we
48:43
Speaker 2: have to fix them, lease them, finance them. Deucalion gives
48:47
Speaker 2: us the arms and legs to kind of do it.
48:50
Speaker 2: You don't want to do this business just as a
48:53
Speaker 2: paper investor. You need those operating skills. And by the way,
48:58
Speaker 2: Deucalion today manages one hundred and twenty five airplanes for
49:03
Speaker 2: third parties even away from us. Right, So for us
49:07
Speaker 2: having Deucalion, it's a big piece of kind of what
49:10
Speaker 2: makes our airplane aircraft platform.
49:13
Speaker 1: Really really interesting. Last heart asset, I have to ask
49:17
Speaker 1: you about real estate. Return to office has been, you know,
49:23
Speaker 1: only a part way success, depending on the city you
49:26
Speaker 1: look at. It's twenty thirty forty fifty percent vacancy rates,
49:32
Speaker 1: and what I mean by that is fifty percent occupancy
49:35
Speaker 1: rates of already lease spaces, to say nothing of the
49:40
Speaker 1: vacancy rates that come up as leases expire and some
49:44
Speaker 1: anchor tenants move out. How are you looking at the
49:47
Speaker 1: world of commercial real estate these days? Given the stress
49:51
Speaker 1: we see in the office space.
49:54
Speaker 2: There is a tsunami working its way through parts of
50:00
Speaker 2: the commercial real estate sector.
50:02
Speaker 1: Slow motion tsunami, isn't.
50:03
Speaker 2: It, And it's around maturities of the debt. Right, where
50:09
Speaker 2: people are foreclosing, title of the property is passing over
50:15
Speaker 2: to lenders. Right, that's so round numbers. Today there's eight
50:20
Speaker 2: trillion dollars of commercial mortgage debt in the US and Europe.
50:26
Speaker 1: Eight trillion US in Europe that you think is going
50:29
Speaker 1: to eventually go How much of that goes bad?
50:32
Speaker 2: Twenty two percent of its office?
50:35
Speaker 1: Oh really? Yeah, so that's let's call that two trillion
50:38
Speaker 1: almost two trillion, yeah, and a trillion here and a
50:41
Speaker 1: trillion in.
50:42
Speaker 2: Europe exactly right, right, And to our point of view,
50:46
Speaker 2: a third of it is going to kind of go
50:51
Speaker 2: broke in this particular cycle away from kind of office
50:56
Speaker 2: if there are other sectors. So, if you look at multifamily, right,
51:01
Speaker 2: multifamily is generally a very stable asset class. But with
51:05
Speaker 2: these higher rates, people were buying multifamily at a four
51:10
Speaker 2: percent cap rate. Today public rates multifamily public rates are
51:17
Speaker 2: six percent or so cap rates. That means that prices
51:21
Speaker 2: have fallen fifty percent. Right if you just take the
51:24
Speaker 2: four going to kind of six.
51:26
Speaker 1: If you have to sell it or if you have
51:28
Speaker 1: to service the debt. Yes, why does it always come
51:31
Speaker 1: back to too much debt, too much leverage invariably leads
51:36
Speaker 1: to a bad outcome. Am I overstating that? It seems
51:39
Speaker 1: that every one of these stories begins with and they
51:43
Speaker 1: bought this with way too much debt. And here's what happened.
51:46
Speaker 2: A barrier made a career art.
51:48
Speaker 1: That's amazing. So I know, I only have you for
51:52
Speaker 1: a limited amount of time before we move on from
51:56
Speaker 1: residential from commercial real estate. A truly in the US,
52:00
Speaker 1: a trillion in Europe about a third is going to
52:03
Speaker 1: go bad. And it's a slow motion tsunami. In a
52:09
Speaker 1: way that's almost encouraging because, not to be glib, but
52:14
Speaker 1: three hundred billion dollars it's not the financial crisis. Not
52:19
Speaker 1: trillions and trillions and trillions of securitized debt blowing up.
52:24
Speaker 1: It almost sounds as if that's manageable over time.
52:28
Speaker 2: It's not systemic, right, So, whether it is the corporate world,
52:34
Speaker 2: you know, when I was describing all these maturities in
52:37
Speaker 2: a five trillion dollar pool of high yield or in
52:42
Speaker 2: the this is not systemic. Two thousand and eight, the
52:46
Speaker 2: banks were really levered, right, it became systemic, right, right?
52:52
Speaker 2: So I think, look, I tend to economic growth is Okay,
52:58
Speaker 2: it's it's not it's much. It's much less than okay
53:01
Speaker 2: in the era, but in the US it's kind of okay. Right,
53:05
Speaker 2: So I don't think I don't think one needs to
53:07
Speaker 2: kind of say, you know, that systemic stuff which causes
53:11
Speaker 2: shocks across the economy. Right, Look, we could be wrong,
53:16
Speaker 2: but we don't think that's in the cards. What's in
53:18
Speaker 2: the cards is just this very gnarly all these kind
53:23
Speaker 2: of credit issues which will keep biting for the next
53:27
Speaker 2: three years, and we'll just kind of work our way
53:30
Speaker 2: through them.
53:30
Speaker 1: Right, if you're in the wrong sector, you're going to
53:33
Speaker 1: get hurt. And if you've avoided that, it shouldn't it
53:37
Speaker 1: shouldn't have that spillover effect like we saw with securitized
53:40
Speaker 1: mortgage in eight oh nine, if I'm hearing you correctly.
53:44
Speaker 1: So I also have to ask, I know you open
53:47
Speaker 1: the London office in two thousand and four. Did you
53:50
Speaker 1: ever expect that Europe would expand to just about half
53:54
Speaker 1: your assets? That that seems to be really substantial. Tell
53:58
Speaker 1: us a little bit about what's going going on in Europe,
54:02
Speaker 1: both their economy and the prospects for growth there, and
54:05
Speaker 1: what you're doing with your portfolio.
54:07
Speaker 2: Well, Europe is if you just think about the broad
54:11
Speaker 2: market in high yield, seventy five percent US twenty five
54:16
Speaker 2: percent of Europe for somebody like US, Europe is always
54:21
Speaker 2: just a much bigger part, a third, maybe even a
54:25
Speaker 2: half of our book.
54:26
Speaker 1: Why is that.
54:28
Speaker 2: Europe has Europe has more problems than the.
54:34
Speaker 1: US, right, and a lot of old industries and old
54:39
Speaker 1: businesses that might run into trouble.
54:41
Speaker 2: And you know, and every two years there's a crisis
54:44
Speaker 2: there right, right, Like the US is Fortress America. But
54:48
Speaker 2: when you look at Europe, right, whether it is Brexit,
54:52
Speaker 2: whether it is other Italian advisories.
54:55
Speaker 1: That go on, it's something every now everywhere else that's
54:59
Speaker 1: going on.
55:00
Speaker 2: You have frequent crises, you have economic growth which is
55:04
Speaker 2: much slower than the United States. Right. And by the way,
55:08
Speaker 2: they're suffering from some of the same high rates.
55:11
Speaker 1: And their inflation seems to be stickier and more stubborn
55:14
Speaker 1: than inflation rates here.
55:16
Speaker 2: It is, right, So you take all that kind of together,
55:20
Speaker 2: you know what we find is Europe when I think
55:23
Speaker 2: about it in the context of twenty years, we find
55:27
Speaker 2: that Europe just gives us more frequent opportunity, right, just
55:32
Speaker 2: the way it's set up. And the second thing which
55:35
Speaker 2: makes Europe really interesting for us, we are we are
55:40
Speaker 2: really I could be we are really one of the
55:48
Speaker 2: market leaders in Europe. We are one of the acknowledged
55:53
Speaker 2: market leaders in Europe for what we do. And it's
55:57
Speaker 2: a world where there are much fewer people with the
56:00
Speaker 2: skills we have. In the US, there are more people.
56:03
Speaker 2: So you look at a market which is big, which
56:06
Speaker 2: gives you constant opportunity. You look at the marketplace positioning
56:11
Speaker 2: we have. You take that together for us, Europe is
56:16
Speaker 2: much more interesting, which is why it always for us
56:20
Speaker 2: is a bigger piece of our portfolio than the market.
56:24
Speaker 1: Huh. That's really really fascinating since we're talking about inflation
56:30
Speaker 1: and rates. You said something about a year ago that
56:35
Speaker 1: I very much agreed with. About a year ago, it
56:38
Speaker 1: was last summer you said the FED was behind the curve.
56:42
Speaker 1: Now it's twelve months later. Tell us a little bit
56:45
Speaker 1: about your especially from your vantage at looking at debt
56:49
Speaker 1: and what the distress that's out there caused in part
56:54
Speaker 1: by five hundred and twenty five basis points of hikes
56:57
Speaker 1: in eighteen months. Tell us a little bit about what
57:00
Speaker 1: you see from central banks here in the United States
57:03
Speaker 1: or elsewhere.
57:04
Speaker 2: You know, we are now on the other side of
57:07
Speaker 2: the you know, we're now in the we're trying to
57:11
Speaker 2: figure out how quickly do rates come down, how much
57:15
Speaker 2: and how quickly, So we're not really now we're on
57:19
Speaker 2: the other side of the mountain, right right. And I think,
57:22
Speaker 2: and you've already seen it with Europe. Europe has already reduced.
57:26
Speaker 2: So I think our point of view would be these
57:30
Speaker 2: short term rates, the five and a quarter five and
57:33
Speaker 2: a half percent fed funds rate, it is going to
57:36
Speaker 2: be kind of coming down. And we can all debate
57:40
Speaker 2: is it two cuts, three cuts, fifty basis points twenty?
57:44
Speaker 2: We can all debate that. But I think the path
57:47
Speaker 2: going forward is that what is different is just look
57:52
Speaker 2: at the tenure, not so much the short term fed
57:55
Speaker 2: fund rate. Right the tenier rate is three point eight
57:59
Speaker 2: five percent, it's not the one and a half or
58:02
Speaker 2: two percent.
58:03
Speaker 1: That era seems to be over.
58:05
Speaker 2: Yeah, that era is over. So the fact that rates
58:09
Speaker 2: are going to be higher now over the course of
58:12
Speaker 2: the next three five years, I think that's the part
58:16
Speaker 2: we should all be just kind of focused.
58:17
Speaker 1: On higher than zero. But isn't three money and a
58:22
Speaker 1: half kind of normal or even reasonable. I mean, how
58:26
Speaker 1: do you contextualize the ten year briefly kissed five percent?
58:31
Speaker 1: And then it's headed south since if we end up
58:34
Speaker 1: at credit rates being in the three three and a
58:37
Speaker 1: half percent range, seventy five two hundred bases points below
58:41
Speaker 1: where they are, now, what does that mean for distressed
58:45
Speaker 1: dead investing? What does that mean for the economy?
58:49
Speaker 2: It points to the fact that you know, I think
58:51
Speaker 2: you were saying Barry lived till twenty twenty.
58:55
Speaker 1: Five, survived to twenty five.
58:58
Speaker 2: Survived to twenty five. You get three and a half
59:01
Speaker 2: percent tenure rates, right, you add the usual four five
59:06
Speaker 2: hundred basis point high yield spread. You're borrowing at eight
59:11
Speaker 2: and a half percent.
59:13
Speaker 1: Which which is not twelve percent, which is not twelve
59:16
Speaker 1: it's not.
59:17
Speaker 2: Four, but but it's not for So I think what
59:20
Speaker 2: all this kind of means is, look, things will improve
59:25
Speaker 2: slowly right as short term rates kind of come in.
59:31
Speaker 2: But the problems which we've set up, they're here. You
59:35
Speaker 2: have a slower old world economy, You have maturities kind
59:43
Speaker 2: of coming up. You have to kind of default or
59:46
Speaker 2: you have to do some pretty unusual things to extend
59:49
Speaker 2: your maturities. Those problems with eight and a half percent rates,
59:54
Speaker 2: not four or five all in cost for a lender,
59:58
Speaker 2: for a borrower, those problems really now stay with us
1:00:01
Speaker 2: for a us.
1:00:02
Speaker 1: So not just to talk your book, but an opportunistic
1:00:06
Speaker 1: distress then investor, These look like pretty good times coming
1:00:10
Speaker 1: up over the next.
1:00:11
Speaker 2: Fel I do think they're good times, but I think
1:00:14
Speaker 2: I don't think, but they're time. I'm talking my book now.
1:00:19
Speaker 2: They're really good times for somebody like us who can
1:00:23
Speaker 2: operate businesses, improve businesses.
1:00:26
Speaker 1: It's not just paper transactions. You are more hands on than.
1:00:29
Speaker 2: You know the You know, most people in our industry,
1:00:33
Speaker 2: in my industry, are really focused on buying debt at
1:00:37
Speaker 2: fifty sixty seventy cents, trading it, having it kind of
1:00:43
Speaker 2: appreciate and price, and then trading out of it.
1:00:46
Speaker 1: Right, that's so nineteen ninety one. You've done that already.
1:00:49
Speaker 2: Now, this cycle, the one we are in, is not
1:00:53
Speaker 2: kind of that wholesale move down in prices. It's much
1:00:58
Speaker 2: more buying into these businesses through debt, sometimes through equity,
1:01:04
Speaker 2: transforming the businesses operating them. That's the opportunity, it's not
1:01:09
Speaker 2: a trading opportunity in distress debt which is what we
1:01:14
Speaker 2: we just don't think it's a trading opportunity now for
1:01:17
Speaker 2: the next three four years.
1:01:19
Speaker 1: Huh really really fascinating. I only have you for a
1:01:22
Speaker 1: few minutes. More So, let me jump to some of
1:01:25
Speaker 1: my favorite questions that we asked well our guests, starting
1:01:29
Speaker 1: with tell us, what's keeping you entertained these days? What
1:01:31
Speaker 1: are you listening or watching podcasts? Netflix? What keeps you entertained?
1:01:38
Speaker 2: I like watching sports before I.
1:01:41
Speaker 1: Know you're a big tennis fan.
1:01:43
Speaker 2: Yeah, I like watching Breakpoint.
1:01:45
Speaker 1: Oh really on Netflix? On Netflix sort of to drive
1:01:49
Speaker 1: to survive, but for tennis exactly, By the way, I
1:01:52
Speaker 1: have that in my cue, and I haven't started yet.
1:01:54
Speaker 2: You know, I've been playing tennis for fifty years. Nicely,
1:01:57
Speaker 2: I should be better, right.
1:02:00
Speaker 1: You just need a good coach, that's all.
1:02:02
Speaker 2: But but watching Breakpoint, at least for a while, transforms
1:02:05
Speaker 2: it for me.
1:02:06
Speaker 1: What's the worst part of your game?
1:02:09
Speaker 2: Backhand?
1:02:10
Speaker 1: Really?
1:02:10
Speaker 2: By the way, everybody who knows me, they are merciless.
1:02:14
Speaker 2: They hit at my backhand.
1:02:16
Speaker 1: Huh. I I'm a lefty, but I've always played tennis righty,
1:02:22
Speaker 1: so the backhand is never done. I you know, it's
1:02:26
Speaker 1: as a kid. They stick a baseball bat in your
1:02:28
Speaker 1: right hand, so I right lefty, do everything else lefty.
1:02:32
Speaker 1: So the serve is my weakest part. But I find
1:02:35
Speaker 1: the backhand is easy because it's it's natural, right, It's
1:02:39
Speaker 1: almost natural. It's so crazy. Let's talk about your mentors
1:02:43
Speaker 1: who helped shape your career.
1:02:46
Speaker 2: I had. I had a lot of I had a
1:02:51
Speaker 2: lot of support from people I worked for or worked
1:02:54
Speaker 2: it right.
1:02:55
Speaker 1: At City and at Meryll City, starting out.
1:02:58
Speaker 2: At Meryl right and it more particularly right, I had
1:03:02
Speaker 2: a lot of support like that. You know, a mentor.
1:03:06
Speaker 2: The word mentor means I think also somebody who helps
1:03:11
Speaker 2: you grow, who helps you develop, who talks to you
1:03:14
Speaker 2: every few weeks or a month officially unofficially, right, Hu.
1:03:18
Speaker 2: You know, what I've found is the business I chose
1:03:22
Speaker 2: to be in was such a new, emerging business where
1:03:28
Speaker 2: you know, I can't.
1:03:29
Speaker 1: There were no people with decades's experience, And.
1:03:32
Speaker 2: It wasn't like I had a quote mentors in the business, right,
1:03:36
Speaker 2: But what I found was and by the way, every
1:03:39
Speaker 2: time you do something which is new and different and
1:03:42
Speaker 2: you're one of the first guys on the wave, right,
1:03:45
Speaker 2: it is you learn as you go. Sure, but having
1:03:48
Speaker 2: that support, right, from kind of all those different parts.
1:03:53
Speaker 2: I think that's kind of what I would say, become.
1:03:55
Speaker 1: An approach of everybody, kind of lifting everybody else. Let's
1:03:59
Speaker 1: talk about books. What are some of your favorites and
1:04:01
Speaker 1: what are you reading right now?
1:04:05
Speaker 2: I like historical fiction. So there's a there's a guy.
1:04:11
Speaker 2: There's an English author, a guy called con Igillen. I
1:04:14
Speaker 2: don't know. He's written five six books about the Roman Empire,
1:04:20
Speaker 2: the Caesars, right, He's written about Koklai Khan and the
1:04:25
Speaker 2: Khan dynasty out of Mongolia, right, Chengiz. I love reading
1:04:31
Speaker 2: that sort of historical fiction. He just came out with
1:04:33
Speaker 2: a new book on Nero, the Roman Emperor, and it's
1:04:36
Speaker 2: a new series. Right then, I'm reading that.
1:04:39
Speaker 1: Huh, sounds really interesting. Our final two questions, what sort
1:04:43
Speaker 1: of advice would you give to a recent college grad
1:04:46
Speaker 1: interested in a career in distress debt or credit investing?
1:04:53
Speaker 2: Be ready to work really hard, right? Yeah? Yeah. You know.
1:04:58
Speaker 2: The typical person we hire at SVP is we have
1:05:03
Speaker 2: two entry points, right, so we'll hire twenty six twenty
1:05:07
Speaker 2: seven year olds. So you should have gone to undergraduate school,
1:05:13
Speaker 2: couple of years at an investment bank with the eighty
1:05:16
Speaker 2: hundred dollars a week two three years at a private
1:05:20
Speaker 2: equity firm, right, and then you come work with us.
1:05:24
Speaker 2: And then the second entry point is you're that twenty
1:05:27
Speaker 2: seven year old you go to business school and then
1:05:30
Speaker 2: you come work with us. Right. So those are our
1:05:32
Speaker 2: two entry points. But when you look at kind of
1:05:35
Speaker 2: you know, the people who are kind of coming in
1:05:38
Speaker 2: by the time you are that twenty six twenty seven
1:05:41
Speaker 2: year old, you know, if you were in that class
1:05:44
Speaker 2: at Dartmouth or Yale or whatever, you're probably already that
1:05:49
Speaker 2: one in one hundred, maybe one in five hundred kind
1:05:54
Speaker 2: of person to have made it that far. Right, This
1:05:58
Speaker 2: is a tough, incredibly demanding profession. Just be ready for that.
1:06:05
Speaker 2: It is extraordinarily rewarding, right, and I don't mean financially right.
1:06:11
Speaker 2: It's fun, you know, the people you work with, the
1:06:15
Speaker 2: culture of what you have it is fun. Yeah, it's
1:06:18
Speaker 2: financially good too. But to be but to position yourself
1:06:22
Speaker 2: to be in this world, right, especially in a world
1:06:27
Speaker 2: like ours. Look, we're not looking for people who are
1:06:30
Speaker 2: just kind of you know, paper investors. We want you
1:06:33
Speaker 2: to work with our portfolio companies, with our management teams.
1:06:37
Speaker 2: You've got to have the EQ You've got to have
1:06:40
Speaker 2: the presence and the communication skills too. Right. You look
1:06:44
Speaker 2: at kind of the training we need for somebody who
1:06:48
Speaker 2: can do that at age thirty or age thirty five. Right,
1:06:51
Speaker 2: it is it's very much that sort of a growth
1:06:55
Speaker 2: track you've got to follow.
1:06:56
Speaker 1: Huh. Really really quite fascinating. And our final question, what
1:07:01
Speaker 1: do you know about the world of investing today that
1:07:04
Speaker 1: you wish you knew in the nineteen nineties when you
1:07:07
Speaker 1: were first getting started?
1:07:09
Speaker 2: Oh my gosh, Barry, I was. I was in when
1:07:20
Speaker 2: we got started right as a firm. In two thousand
1:07:23
Speaker 2: and one. Somebody asked me and said, hey, Victor, what
1:07:29
Speaker 2: would you what would you consider success in five years?
1:07:34
Speaker 2: And remember this is when the world was young, alts
1:07:38
Speaker 2: was really young, right, And I said, boy, if I
1:07:41
Speaker 2: could be running for five hundred million in five years,
1:07:44
Speaker 2: wouldn't that be great? Right? We went through five hundred
1:07:48
Speaker 2: million in a year and a half. Right, But I
1:07:51
Speaker 2: think I think what I what I've learned about, what
1:07:56
Speaker 2: I've learned about investing, because boy, when you do what
1:08:01
Speaker 2: I've done, you make mistakes. What I've learned about managing
1:08:05
Speaker 2: and growing people and developing people, right, it's like I
1:08:11
Speaker 2: have been in this laboratory of learning. So when I
1:08:16
Speaker 2: think about the person I was twenty five thirty years ago,
1:08:21
Speaker 2: right running a proprietary desk at Merrill Lynch, right to
1:08:26
Speaker 2: kind of the person I am today, right in so
1:08:30
Speaker 2: many different ways, I couldn't I couldn't even have told
1:08:36
Speaker 2: you twenty five thirty years ago. I couldn't even have
1:08:39
Speaker 2: told you what it would take right to kind of
1:08:42
Speaker 2: be here. And I think it's like, I think, you've
1:08:45
Speaker 2: just got to constantly be ready to learn, to evolve.
1:08:51
Speaker 2: You can't get stuck. And if anything, if my journey
1:08:55
Speaker 2: says anything, it is you know, I've seen the evolution
1:08:58
Speaker 2: in the firm, shure, I've seen the evolution in me right.
1:09:02
Speaker 2: And I think if you were, if I was to
1:09:05
Speaker 2: give advice to somebody who goes down this journey, it
1:09:08
Speaker 2: is to have a lot of people around you who
1:09:11
Speaker 2: can not just in your firm, but outside your firm,
1:09:14
Speaker 2: some people you can trust, you can talk to, who
1:09:17
Speaker 2: can court you, who can make you think because you
1:09:21
Speaker 2: are in an evolutionary journey to grow up to be
1:09:24
Speaker 2: a leader in this business.
1:09:25
Speaker 1: Huh really quite fascinating. Thank you, Victor for being so
1:09:29
Speaker 1: generous with your time. We have been speaking with Victor Kosla,
1:09:34
Speaker 1: founder and CIO of Strategic Value Partners. If you enjoy
1:09:38
Speaker 1: this conversation, well check out any of the five hundred
1:09:42
Speaker 1: or so discussions we've had over the past ten years.
1:09:46
Speaker 1: You can find those at iTunes, Spotify, YouTube, wherever you
1:09:50
Speaker 1: find your favorite podcast. Be sure and check out my
1:09:54
Speaker 1: new podcast At the Money, short conversations with experts about
1:09:59
Speaker 1: top related to your money, earning it, spending it, and
1:10:04
Speaker 1: most importantly investing it At the Money wherever you find
1:10:09
Speaker 1: your favorite podcast, or in the Masters in Business podcast feed.
1:10:14
Speaker 1: I would be remiss if I do not thank the
1:10:16
Speaker 1: crack staff that helps put these conversations together each week.
1:10:19
Speaker 1: Meredith Frank is my audio engineer. Attika Valbron is my
1:10:23
Speaker 1: project manager. Sean Russo is my researcher. Anna Luke is
1:10:29
Speaker 1: my producer. Sage Bauman is the head of Podcasts at Bloomberg.
1:10:34
Speaker 1: I'm Barry Retolts. You've been listening to Masters in Business
1:10:39
Speaker 1: on Bloomberg Radio.