Transcript: Victor Khosla, Strategic Value Partners

 

 

The transcript from this week’s, MiB: Victor Khosla, Strategic Value Partners, is below.

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00:00:09 (Speaker Changed) This is Masters in business with Barry Riol on Bloomberg Radio

00:00:15 (Speaker Changed) This week on the podcast. Yet another extra special guest, Victor sla, founder, CIO of the $19 billion Strategic Value Partners. Victor has had a fascinating career, stood up the distressed debt department at Citibank before doing the same thing at Merrill Lynch a few years later. He also spent time at Sebus and More Capital before launching his own firm in 2001. They do everything from hard assets like real estate, infrastructure, aircraft, power plants, to private debt, event driven opportunities. Europe accounts for anywhere between a third and a half of their investments. They have a number of businesses that they’ve taken over through the debt side of the equation. 15 businesses with over 90,000 employees. Really just a fascinating person who has seen the distressed debt business from day one. He was there at the creation and has taken it to all sorts of really interesting places. I found this conversation to be absolutely fascinating if you’re at all interested in things like hard debt and what distressed asset buying is like, and what it’s like to take over a company, not through its equity, but through its defaulted debt. I, I think you’ll find this to be an absolutely fascinating conversation. I know I did. With no further ado, my discussion with Strategic Value Partners, Victor Kla. Victor Kla, welcome to Bloomberg.

00:01:56 (Speaker Changed) Thank you. Thanks for having me, Bob.

00:01:57 (Speaker Changed) So, so I skimmed over a lot of your, your cv We’ll, we’ll get to some more details in a little while. Let’s just start with your educational background. Bachelor of Commerce with honors from Delhi University, a Master’s in Economic from Vanderbilt, and then an MBA from the University of Chicago. So, is it, is it safe to say finance was always in the career plans? Oh,

00:02:22 (Speaker Changed) Gosh, yes.

00:02:23 (Speaker Changed) From, from the beginning.

00:02:24 (Speaker Changed) Finance and business was always in the career plans. Running a $19 billion private equity, opportunistic credit firm was not. Right. It isn’t like that was the plan 40 years ago. You,

00:02:40 (Speaker Changed) You, you just tack into what was working and continue to build on it. Talk a little bit about your professional experience, ’cause I find it absolutely fascinating. You are relatively young in your career when you’re at Citibank, or was it Citigroup then? I, I keep track. And you essentially created their distressed debt department. Te tell us about that experience. What was that, 25, 30 years ago? Maybe more.

00:03:07 (Speaker Changed) It was more, it was 30 years

00:03:10 (Speaker Changed) Ago, 1980s, late

00:03:12 (Speaker Changed) Eighties, early nineties. Right. When, when it happened. Yes. I worked in all the places Barry, you described, right, right. The two places. I think what’s really interesting is I was there at the beginning at the creation of a loan trading business.

00:03:30 (Speaker Changed) Like it did not exist at Citi or most of Wall Street. It, it did before the early nineties.

00:03:35 (Speaker Changed) It did not exist. This is totally novel exist. Bloomingdale’s filed for bankruptcy, S-C-I-T-V filed for bankruptcy, and for the first time banks, which owned the debt, wanted to sell. So

00:03:50 (Speaker Changed) They’re sitting on, they’re sitting on a lot of bad paper. Yeah. And they don’t really know what it’s worth. They don’t know what to do with it. How do they come to you and Citi and say, Hey, we’re stuck with all this paper and you know, we’d like to at least have a partial recovery.

00:04:05 (Speaker Changed) That was what really got it going. There was no price. You had to kind of analyze it to come up with a price. And at the same time, there were very few buyers, more and more sellers. So the pricing was really good where you could buy these loans. Right.

00:04:24 (Speaker Changed) So, so was Citi acting as a middleman looking for buyers of distressed debt? Or did someone like yourself have the insight and say, Hey, you know, at a hundred cents on the dollar, this is junk. But at 15, 20 cents, there’s some upside.

00:04:39 (Speaker Changed) At Citi and at Merrill, I ran a proprietary trading business. And proprietary trading is using the firm capital to kind of buy it and also to distribute it, to syndicated it more broadly at the same time. But, but I think if I was to go back through my career, that moment in time, you know, when there is this big wave coming, because it was the start of the high yield market, the leverage loan market grew dramatically, you know, from 200 billion in the mid nineties to $5 trillion today, high yield and leverage loans. Right. And these deals, which never used to trade in the secondary market, they started to change hands. I was there right at the beginning of that big wave. And, and what has happened to me career wise is just riding that wave as it got bigger, as it got more complicated as it became us and Europe, not just us, as it went from buying and selling distressed debt to going out and taking control of businesses, operating them and improving them. It was all set at that moment of time in the early nineties.

00:06:01 (Speaker Changed) So, so let’s, let’s just stay in the early nineties at Citi for a few minutes. At the time, you’re early in your career, you have some experience, and an MBA when, when you first started hearing that from banks that, Hey, we got all this Bloomingdale debt. Tell us what went through your mind? Did you envision, oh, you know, there’s a market for here and there’s an opportunity. How, how did you look at this and then how did you stand up? That whole distressed debt department at city

00:06:31 (Speaker Changed) Banks are wanting to sell? I have worked at Booz Allen and Hamilton, I’m a strategic planning guy. I get hired by Citibank in planning. I work for a really senior guy in the investment bank. This business is just starting. I write a business plan for it.

00:06:52 (Speaker Changed) Like a legitimate, like it, like it’s a freestanding entity. Like,

00:06:56 (Speaker Changed) Like, you know, it’s a business. We should be like,

00:06:58 (Speaker Changed) It’s

00:06:58 (Speaker Changed) A startup. Yes. It’s a business we should be bigger in. We should grow in. And, and there were a couple of people inside Citibank who were pioneers in trying to buy and sell loans. Right? I get folded right into that group after writing the business plan. And boy, we are off to the races now. You know, when you look at something like a Bloomingdale’s, what you have to ask yourself is, Bloomingdale’s is restructuring. It’s going through a bankruptcy, right? It’s got the debt itself, which banks want to sell. You have to price it. And at this point in time, the bankruptcy processes, the restructuring processes weren’t that well developed, right? You had to really say, Hey, it’s a two year stint in bankruptcy, right? We are going to cut costs. We’ll make this business much more efficient right. As we do it. And then you say, what is the business worth? Right?

00:07:57 (Speaker Changed) And I, and at the time, they had a good name. Yeah. A good brand, fantastic real estate locations. So there was some assets that were salvageable. The question was, do we continue as a going concern or do we just liquidate? You guys just said, Hey, let’s, let’s reorganize this. ’cause there’s still value here. It’s not, we’re not just gonna sell it off for parts

00:08:20 (Speaker Changed) E Exactly. Right. And by the way, most of the businesses we invest in, there’s much more value, even like today, there’s much more value in fixing it, in transforming it than selling it for pots. But because these are really good businesses, which got levered, they got leveraged through these leverage buyouts. Right? But that valuation, to be able to come up with the valuation, to be then able to work in a restructuring process, bankruptcy process, and say, Hey, I think at the end of this, we are buying debt at 50 cents. It could be worth 80, 90 cents. It could take two to four years to kind of get there. That’s how this business started. Huh? It was just not well understood. Even the fact that there was a bankruptcy process, which could be two years long or three years long. Right. It was just not well understood in the early nineties.

00:09:23 (Speaker Changed) So I have so many questions for you about, ’cause this is such a, the nineties was such a fascinating era. So first, was this like a small side project at Citi? Or did the higher ups say, oh, Victor’s onto something, let’s put some capital into this and see where it goes. What were, what was the initial reaction within Citi?

00:09:44 (Speaker Changed) And by the way, don’t get me wrong, please. It wasn’t just Victor. I know it wasn’t just Victor. I

00:09:49 (Speaker Changed) Was a, it’s the, you know, anytime we talk about Merrill or City or UBS or Morgan, we’re always talking about big teams Yes. With a number of different people leading different departments. Yeah. All that said, you wrote the, the business plan. So, so how, how, how warmly was it embraced? Or was it, all right, give the kid a couple of bucks and let’s see how far this goes.

00:10:09 (Speaker Changed) It, it started out with give the kids a couple of bucks, right? And then what happened was, like, literally in the first few weeks,
00:10:19 (Speaker Changed) So not long at all, like immediate success,

00:10:22 (Speaker Changed) Boom, right there, we are starting to get in the middle of some of these secondary sales of debt. It’s almost like liftoff, right? Because the moment in time, you, you know, in those days, Barry, a lot of debt was owned by Japanese banks. And I recall European banks, right?

00:10:41 (Speaker Changed) Remember when everyone was terrified they were gonna buy Rockefeller Center and they’re gonna take over? Yeah. Everything around the late eighties, early nineties, that was peak Japan. Yeah. And they spent the next 30 years wandering in the desert.

00:10:53 (Speaker Changed) Well, they’ve had a tough few decades. Right?

00:10:56 (Speaker Changed) Right. Although they seem to be very much on the, on the comeback. But so immediately this looks successful.

00:11:01 (Speaker Changed) Typically 30% of the market was owned by Japanese banks. Really?

00:11:07 (Speaker Changed) That’s a giant number

00:11:08 (Speaker Changed) In the early nineties. Right? Wow. So now you have these restructurings, you have these bankruptcies, and the Japanese banks want to sell the debt. They drive it, then the European banks want to sell, because US bankruptcy in those days was not as well understood. Right. And then, boy, it, it was almost like bankruptcy filings boom, debt for sale, boom, boom. Wow. And it just took

00:11:35 (Speaker Changed) Off. And, and my recollection is that when foreign banks come into the US and buy up a bunch of assets or debt or whatever it is, and when they start to run into trouble back home, there’s usually a change of leadership. Hmm. And whoever the new owner of the foreign banks are, tend to say, Hey, I didn’t buy that junk. You guys just get rid of this. Whatever you can get for it, hit the bid. They’re very aggressive sellers. Or am I, am I misremembering this?

00:12:05 (Speaker Changed) They, they are, they are aggressive sellers and foreign banks, foreign institutions tend to be more aggressive. But there’s also a very, you know, there’s also a very economic reason for it, right? Because when you are in a restructuring, the debt you own has defaulted, right? And the central bank, which governs you, like the one in Japan, or like the one in the United States, right? They make you take reserves, mark it down, right?

00:12:34 (Speaker Changed) So you write it down to zero. So whatever you get for it is practically found money. You’ve already taken the hit.

00:12:40 (Speaker Changed) So there’s a very good economic reason why all you know, short, they’re far away, right? They don’t quite understand what’s going on.

00:12:49 (Speaker Changed) It’s a small part of their book. Right? Yeah.

00:12:51 (Speaker Changed) No. So the obvious reason, right? But then also the economic reason that, hey, I have it marked down. I have all these non-performing loans in my balance sheet. It’s creating a drag the way equity analysts look at my balance sheet. I should be selling, I should be getting out. Right? So, and by the way, it con continues to today, if you have a bankruptcy filing, you have a restructuring, right? They, they will sell the debt, they’ll sell it at a price, which is probably too low. But there’s a very sound economic reason for the banks or the CLOs to want to sell.

00:13:30 (Speaker Changed) They have a very different set of priorities than a pure distress debt buyer. Right?

00:13:35 (Speaker Changed) Exactly right. Huh. But Barry, can I tell you, but go back, go back to one thought though. I wanted to make sure it just came through. Early nineties was the start of the modern high yield leverage buyout business done at scale. It was the start of the high yield business exploding dramatically in size to where it is today. And still growing. Still growing dramatic still, right? Yeah. And it was the start of the secondary market to kind of buy and sell kind of pieces of debt. And what I was lucky enough to be in the early nineties was I was one of the first people in this business, right. Overseeing a trading desk like I did at Merrill Lynch.

00:14:25 (Speaker Changed) So that, that was wide open white space. It was virgin snow. It was very new. How, how long did you stay at Citi before you left for other places?

00:14:35 (Speaker Changed) I was working at Citibank for a couple of years, working on kind of the secondary prop investing trading side. And then I was hired by Merrill to start the business.

00:14:48 (Speaker Changed) Previously, we were talking about your experience at the very beginning of the distressed dead industry, building the desk at, at Citi. You, you join Merrill Lynch in 93 and start building their distressed prop trading businesses, which became wildly successful. And you’re there from 93 to 98, right. In the middle of the nineties. Tell us a little bit about that experience. What was it like at Merrill in the 1990s?

00:15:18 (Speaker Changed) Merrill never really had very much of a proprietary culture, right? As a firm. It’s just not in the nineties. It was very much a brokerage house with a growing, expanding investment bank. It wasn’t really a proprietary investing trading culture. Right. In those years.

00:15:38 (Speaker Changed) So what made them say, Hey, let’s go, you know, let’s go pull Victor outta city and set up a prop desk,

00:15:45 (Speaker Changed) Ma, the, the old fashioned rationale making money.

00:15:49 (Speaker Changed) Right. They saw so a little fomo they saw city. Yeah. Hey, since when a city so big in distress debt, they seem to be doing really well. We need to have a little bit of that for ourselves. Yeah. Was it that simple?

00:16:01 (Speaker Changed) It, it, it was early people could see the explosive growth taking place. And as somebody who was a well-known commodity, well-known player in that business already. Right. They, they hired me to go run it. So when I started at Merrill, it was one of me. And, and they said, okay, Victor, here’s a hundred million dollars. Right. It’s kind of where I started in 1993.

00:16:29 (Speaker Changed) Right. Was that a lot of money back then, or?

00:16:32 (Speaker Changed) It, it was, it was a lot of money back then. So in 19 funny

00:16:37 (Speaker Changed) Years, I know that sounds silly, because when you, it’s a little hard to put 34 years into context or 30 years into context. Yeah. But like a hundred million dollars today. Yeah. You know, that’s a small account at a lot of shops. Yeah. Back in the early nineties, a hundred million dollars was real cash.

00:16:55 (Speaker Changed) So, so what they, and what they did was they encouraged me. So I had a couple of very supportive people I worked with. You know, success begets more success. So we ended up getting the resources to hire a bigger and bigger team. Ended up setting up a business in London. We were, we were literally one of the first people into Europe buying and selling debt, investing in debt in Europe. And then in 97 set up a business in Japan to buy debt from Japanese banks in Japan. Right. So for me, at Merrill, from that a hundred million and 1993, by the time I left in early 98, we had about $2 billion of proprietary capital. And I had 40 people, four zero people working with me in New York, in London, in Tokyo.

00:17:52 (Speaker Changed) Merrill also had a office in Hong Kong as well. Were you, were you buying debt out of Hong Kong also? Oh,

00:17:58 (Speaker Changed) We, I was not, I was starting to dabble in it. This was before the Thai bot. Right? The Thai crisis. 98. Right. So it was before that I was starting Look at it. Yeah. Yeah. But it wasn’t kind of the focus, huh? It was really us, Europe, Japan.

00:18:14 (Speaker Changed) So, so a hundred million to 2 billion in five years. That’s a giant lift. That’s a big expansion. Your next couple of stops along the way, were at some pretty regarded firms. Se BIS capital, you ran a, a joint venture doing Japanese debt with more, tell us a little bit about your experiences away from the big brokerage firms and some of these more nimble independent shops.

00:18:43 (Speaker Changed) You know, the nimble independent shops had a lot more money than the $2 billion. Really?

00:18:49 (Speaker Changed) I never would’ve guessed that.

00:18:50 (Speaker Changed) Right. What, what I was overseeing at Merrill Lynch. Right. But, but you know what, what I found was, I think with sous, you had a very strong, very well-known brand at that time. More capital was much more institutional in how it worked. It had much more of a structure and process around it. And I, and I worked with Res, I worked with more capital between them for a total of about four years. It was my first foray from working in a proprietary trading business, which is what I did at Merrill, to working on the buy side. Just the learning what it takes to actually raise money, what it, what it, what it means to actually build a really strong infrastructure of finance, operations, legal team. Right. My first foray out of Merrill into the buy side and, and learning kind of all these different kind of skills. And, and those were four incredibly growth oriented as for me.

00:19:56 (Speaker Changed) I can, I can imagine, and for listeners who may not be familiar with the distinction between buy side and sell side, when you’re at Citi or you’re at Merrill, you’re trading on behalf of either the firm’s fund or on behalf of clients. And we call that the sell side. ’cause you have to sell that product to clients. The buy side is Sarah Bris or more have their own pile of assets from their limited partners. And you are investing in trading on behalf of the firm itself. And so it’s, it’s a little bit different in, you are not dealing with the client. That’s somebody else’s job. You are investing the money on behalf of, of the firm. Ultimately, that leads you to say, Hey, this buy side thing seems like a pretty good structure for making investments. What led you to say, I think I could launch my own shop and stand something up on behalf of myself instead of working for someone else.

00:20:56 (Speaker Changed) It takes a lot of confidence. Yeah. A little bit of chutzpah. Right, right. I was never lacking in that. Right. So,

00:21:05 (Speaker Changed) So, but but, but to be fair, yeah. You know, there’s Chut and there’s chutzpah. You, you built a great desk at City. You built a great desk at, at Merrill. You, you generated a lot of profits for Moura and Sebus. So it wasn’t a big leap of faith. It it’s not, Hey, can I do this? You obviously had a great track record. Yeah. So standing up your own firm was why not? Why not be in charge? Why not run my own ship?

00:21:31 (Speaker Changed) In those days, there were 10, 15 people who were probably well known in this business, and I was one of the 10, 15 people. Right, right. By the way, well, when I think about kind of more capital, what, what a great firm by the way. Right.

00:21:47 (Speaker Changed) Legendary founder, just great track record, the

00:21:51 (Speaker Changed) Whole thing, all, all that. But also just a great firm. Right. But when I think about kind of why start something, you know, when I really cut through it, I really wanted to work for myself.

00:22:02 (Speaker Changed) Understandable. Right.

00:22:03 (Speaker Changed) So when we started Strategic Value Partners, more capital gave us a hundred million dollars to

00:22:09 (Speaker Changed) Start. Oh, no kidding. So that’s quite a vote of confidence. You’re not, you know, if, if more is giving you that much the same amount that you started with at, at, at Merrill, at Merrill. So, so the firm is now $19 billion. Yeah. When you launched in 2001, what were you launching with More is a hundred plus. How much additional capital did you raise?

00:22:31 (Speaker Changed) 10 million.

00:22:32 (Speaker Changed) Really? So they were 90% of what you had, you, you know,

00:22:35 (Speaker Changed) We were, we were launching the firm and the markets crash

00:22:39 (Speaker Changed) In oh one. Sure. You were, you were early days of that. Yeah.

00:22:42 (Speaker Changed) Markets crash. And as a result of that crash in markets, we think we are going to launch with three, 400 million. Right. And we launch with 110 million

00:22:52 (Speaker Changed) At the same time. You launch into a, let’s call it a target rich, it was field. There had to be a lot of opportunities.

00:23:00 (Speaker Changed) Yeah. You know, the, the performance numbers, our returns were just kind of really great because it was a target rich world. And that kind of set us up when I think about those early years. Right. And I think about kind of the firm we have become today.

00:23:18 (Speaker Changed) So let’s start with what you began with. How many people did you launch with? How many, you had two clients, it sounds like. Yes. A hundred and a 10. Yes. How many, how big was the staff when you launched?

00:23:30 (Speaker Changed) It was eight people.

00:23:31 (Speaker Changed) Eight. And today you a little bigger than that.
00:23:35 (Speaker Changed) We’ve got over 200 people.

00:23:37 (Speaker Changed) I mean, that, that’s a substantial firm. Not only that, when you launched, it was primarily distressed debt. You’ve expanded into so many different areas. Tell us a little bit about that growth, especially the first few years, and what led you to opening another London office in, in 2004 when

00:23:57 (Speaker Changed) We started, we were focused on distressed debt and restructurings in 2001, 2002. That’s kind of that, that was the focus.

00:24:05 (Speaker Changed) What, what sort of companies was it? Was a lot of the dotcoms that had imploded? Or was it just generally across the economy?

00:24:12 (Speaker Changed) You, you were in, we were in the middle of a recession. WorldCom, if you remember, had kind of filed for bankruptcy, right? Yes. There were a couple of big energy companies in trouble. Enron. Enron. So, you know, we were never a.com kind of person. And even today, we are really not a tech or a software focused firm. Right. We are very much in the old economy businesses, service businesses, consumer brands. That’s very much our focus as a firm. So in 2002, when we start, it’s not the.com debris we are looking through. It’s the recession and all the problems it’s caused in all these old economy businesses.

00:24:54 (Speaker Changed) Huh. Really interesting. So you, you start with distressed debt. What’s the next division you, for lack of a better word. Yeah. Opportunistic credit, lending, money taking control. What were the next businesses you added?

00:25:10 (Speaker Changed) When we did distressed debt, we were focused on buying debt and restructuring it into equity, being on kind of boards of directors trying to work with the businesses. But we, we were mostly had minority equity positions because when you, when you, all you have is a hedge fund, Barry. Right. You need liquidity. Right. You can’t do private equity. Right. Long

00:25:36 (Speaker Changed) Term. You’re not locking stuff up for forever.

00:25:38 (Speaker Changed) No. Really. You can’t. Right. So the early years, were very much focused on this more liquid side of the world, the distressed debt side of the world. And by the way, we had success, that fund of, we started with the $110 million. By the time 2008 came around, we had about $5 billion.

00:25:59 (Speaker Changed) Really? That that’s a big, that’s a big number.

00:26:02 (Speaker Changed) We had, we had some really good success, huh? Right. In, in those years doing what we do. But, but you know, what we found was 2008 was a really good, you know, I talked to

00:26:14 (Speaker Changed) Target rich environment,

00:26:16 (Speaker Changed) It was in 1991, we were there, I was there on day one as the business of buying and selling secondary debt. Investing in secondary debt took off in 2008. There was another one of those really dramatic changes. So what we told ourselves was, Hey, this is a really great target rich environment. Sure. But the business has changed. Our view was, hey, the, this, these distressed debt cycles, they only happen every two years out of 10. It’s not like a business you can do every year. Right. It’s a very, it’s a super cyclical business. Right. So as a firm in 2008, we started to go down a different path. We said, okay, there are some really great businesses which have had a really rough time with bankruptcies. With restructurings. There’s a lot of low hanging operational fruit. Let’s go out and buy into these businesses and take control.

00:27:31 (Speaker Changed) And you’re talking about doing this through debt, not equity

00:27:35 (Speaker Changed) Exactly. But buying enough debt to own 51% or more of the company becoming a private equity investor, and then driving an operational transformation in the business.

00:27:48 (Speaker Changed) So, it’s so funny, you

00:27:49 (Speaker Changed) Completely different,

00:27:50 (Speaker Changed) It’s so funny you talk about this. I vividly remember having a conversation with a friend who was originally from Canada and relocated to the Grand Caymans. And the first time I learned, and this has gotta be 10, 15 years ago, of an investor taking control of an asset through the debt. Not the equity was, there’s a giant Ritz Carlton on the Grand Cayman Island. Oh yes. And the under the owner was constantly floating notes. Hmm. And during the financial crisis, he ran into trouble. And a lot of big banks owned that paper. And somebody very cleverly picked up a lot of that debt. Pennies on the dollar ended up taking over that whole thing. It was eyeopening like, oh, you can control a company, not just through equity, through debt,

00:28:40 (Speaker Changed) But, but, you know, but if you just take control, you could be the proverbial dog who chases that ice cream truck and find Right. What

00:28:48 (Speaker Changed) Do you do when you catch it?

00:28:50 (Speaker Changed) Yes. You know, you need these operating skills to go out and improve and transform these businesses. Right. So what we started to do in 2008 was not just to take control, but to take control in a very hands-on way. Right. We strengthen management, we build new business plans. We call them value creation plans in our world. And we try and drive fundamental change even sometimes in these businesses. So for us as a firm, we went from buying and investing in debt after 2008 to taking control of businesses. We, we went from a firm in 2004 even. We said, look, there’s this great growing opportunity in Europe. We set up a London office, and our London investment teams today are almost the same size as the US teams. And what we also did over those years was we said, Hey, look, there are all these real assets, airplanes, power plants, real estate, toll roads. Right. These are all going through these kind of restructurings, these kind of problems with their capital structure. So as a firm, starting in 2008, we went from our roots in value in distressed debt. Right. We went into control, we went into kind of real assets, and we started lending money to people. Not, not direct lending much more the higher risk, higher return lending. Right. But as a firm, we’ve gone through this journey from 2008, that transformation,

00:30:35 (Speaker Changed) Huh. Really quite fascinating. Let’s continue talking about some of these operating businesses, 90,000 employees, 15 different businesses. This is more than just buying the bad debt of a company that’s hit a hard time. You are pretty much fully taking over and running and operating substantial companies. Tell us how this came about and how did, how did SVP develop the expertise to effectively become operators and managers?

00:31:07 (Speaker Changed) When you have a company which kind of hits a really rough patch, you know, leverage buyouts, by definition. There’s leverage. They hit a rough patch, they have really big financial problems. And when that happens, even really good businesses, Barry Shake. Right. You know, some of the businesses we are invested in, we own a toll road in Texas today, a toll road between Austin and San Antonio. Gotcha. We, we just bought a hornblower, which is, we took op majority control of it, which is a ferry business. The New York City ferries, the, oh, that’s where

00:31:47 (Speaker Changed) I

00:31:48 (Speaker Changed) Recognize that the Statue of Liberty Ferry. Right. It is. But all these businesses, these are good

00:31:55 (Speaker Changed) Businesses, but they take on a lot of debt. There’s no room for error.

00:31:58 (Speaker Changed) And, and things sh and everything shakes. You know, often we find some of the really good management teams, they get frustrated. Some of them leave. Right. Because, because now you’ve got so much leverage. You’ve got a good business, but so much leverage and you can’t figure out how to, how you’re going to pop your head up above the surface. Right. So as a result of that, we find that when we are investing short, we have to recapitalize it. So the leverage numbers go down dramatically.

00:32:30 (Speaker Changed) Right. So, so let me ask you a question about what’s just been going on over the past couple of years. If you’re a leveraged company and that debt is, you know, what used to be L-I- B-O-R plus, so it’s no longer L-I-B-O-R, now it’s the new, new measure. Central banks raise interest 525 basis points. Yeah. Suddenly, what was a manageable amount of debt might become unmanageable. How has the past few years of rapidly rising rates affected these leveraged businesses?

00:33:02 (Speaker Changed) It has been really tough for them. Right. You, you know, you borrowed money when interest rates were zero and you were paying all in 5%. Right? Now you’re paying 10%, 12%.

00:33:17 (Speaker Changed) Right. Which is a lot of money. Right.

00:33:19 (Speaker Changed) And, and, and you are very levered. And by the way, these old economy businesses, they are not having that same growth like tech or

00:33:28 (Speaker Changed) Software. Right. They’re not ai, they’re very businesses in toll roads. Yeah. That’s steady income. But you’re not looking at double digit growth.

00:33:36 (Speaker Changed) So you can’t really grow into your capital structure. Right. So easily you marry the two things together. Growth, but slow growth, modest growth in cashflow or EBITDA with much higher interest rates. Like in terms of what you have to do. And by the way, remember some of these businesses went through Covid where they had to take on even more debt Sure. To kind of tide over covid.

00:34:02 (Speaker Changed) Right. That was a double whammy. Yeah. Covid. And then the rate increase.

00:34:06 (Speaker Changed) And now what is happening is there are maturities coming due. There’s a large maturity wall in 25, 26, 27. By the way, by our reckoning, there’s almost 2 trillion of that 5 trillion of high yield matures in the next three and a half years.

00:34:24 (Speaker Changed) Really? So, so I heard an expression, a debt trader used survive till 25. You’re suggesting, hey, 25 isn’t good enough, you’re gonna have to get through 26 and 27.

00:34:36 (Speaker Changed) Exactly. Huh. It’s creating issues by the way, this is not like, oh, it’s going to happen next year.

00:34:44 (Speaker Changed) It’s happening already. It’s

00:34:45 (Speaker Changed) Been happening for the last 18 months. Wow.

00:34:47 (Speaker Changed) Well, given the high rates that, that makes perfect sense. Our,

00:34:50 (Speaker Changed) Our pace of investing has picked up substantially. Our pipeline has almost quadrupled over the last 18 months. Wow. That’s giant. This is happening right now. Barry, don’t get the wrong idea. I’m not trying to tell you there’s some crash or something we don’t think there is. Right.

00:35:08 (Speaker Changed) You seem to be enthusiastic about the opportunities ahead of you. Yeah. Not that the world is coming to an end, but rather, hey, this is gonna be a great period of time if you’re an opportunistic, distressed debt investor,

00:35:20 (Speaker Changed) Or if you are in a, a special situations private equity

00:35:24 (Speaker Changed) Investor. So, so let’s talk about that. How do you define special situations?

00:35:28 (Speaker Changed) You know, we are in the business of trying to buy businesses at a good price. And then we are in the business of trying to improve them, sometimes even transform them operationally. Right. Because they have been undermanaged with everything I described to, to us. That’s, you know, that combination. You can’t really, if somebody’s having an auction of a company and they have hired Goldman Sachs on Merrill Lynch to sell it, it’s very hard to buy something at a really good price. Right? Right. You’ve got to be able to buy it. Either you buy it through the debt, right. Where you buy it through by buying debt at a discount or you buy it bilaterally in a process without a process. Right. The company has enough issues and there’s a way to just negotiate a price bilaterally. So, so I think for us, the opportunity set today is, is to kind of buy it. Well, but that is just step one. The step two is to, is to go strengthen the management team, build a new business plan often to inject more capital into the business,

00:36:45 (Speaker Changed) Restructure it so it’s not carrying all that debt.

00:36:48 (Speaker Changed) 14 of the 15 businesses we control have more employees today than when we took over. Wow.

00:36:54 (Speaker Changed) That’s pretty impressive. Yeah. But

00:36:56 (Speaker Changed) I, but I think it’s, so this is not about just cutting, it’s about kind of investing and looking to transform these businesses which have been undermanaged and those together is what in our world, in our mind, constitute a special situation. Private equity.

00:37:14 (Speaker Changed) Let’s talk a little bit about hard assets. You mentioned infrastructure, like ferry and toll roads. Let’s talk about real estate, airplanes and power plants. I would think power plants would be very tied to the cost of energy plus whatever their costs are for modernizing and reducing pollutants and, and their output. Tell us about what you look at when you look at a buying a power plant. Yeah.

00:37:46 (Speaker Changed) You know, for us, about 60% of what we do is corporate investing. So we invest these industrial businesses, service businesses. Right.

00:37:57 (Speaker Changed) Old economy. Yeah. Solid. Yeah. You know, ready, steady businesses that have run into a little trouble

00:38:04 (Speaker Changed) With generally very good market shares. Right. 40%, four 0% of what we do are real assets.

00:38:12 (Speaker Changed) Oh, really? That much. Yeah. That’s giant. Yeah. So, so give us some examples of, first of all, I’m fascinated by hard assets like airplanes. Yeah. How do people get into trouble owning a either a single plane or a fleet of

00:38:27 (Speaker Changed) Planes? Can, can I tell you? Sure. Can we even start with infrastructure? Sure. Right. Because Barry, the, the prevailing view would be infrastructure, toll roads, ferries, all these kind of businesses. They are really, you’ve got, you’ve got a monopoly or a duopoly. Right? They are, they, they should be really strong, they should be good growers and they should be steady. Eddie. And infrastructure today is bought by sovereign funds, big pension funds with a view that it is very steady. Seven, eight, 9% kind of returns. Right. That’s the prevailing view,

00:39:08 (Speaker Changed) Assuming you’re purchasing, purchasing it at the right price. Right

00:39:11 (Speaker Changed) Now, what has, what has happened in infrastructure is there were a couple of very aggressive people who bought infrastructure, told roads with 80, 90% debt. Right. Not, not 40%, 50%, 80, 90% debt.

00:39:28 (Speaker Changed) No room for error there. Yeah.

00:39:29 (Speaker Changed) And if you had, if you hit covid or if you, or if you hit a financial recession, it’s really hard to dig yourself out of 18 90% debt. Right? Yeah. So what we saw was a whole class of toll roads, which are supposed to be core infrastructure, safe, a whole class of toll roads, the ferry business I’m kind of talking about. Right. A a waste to energy business in London we invested in, called Cory. Right. All these businesses ended up kind of crashing. Now infra for us has never been distressed. Right there, there’s no broad infrastructure distress cycle. But for us, it started about 10 years ago. Right. We were one of the first ones who started to take apart infrastructure and say, Hey, it’s not like corporate. Right. It’s, it’s valued very differently than how you’d value a company. There’s a whole, the, the what it takes to operate it is really quite different. You need some really great government skills, by the way, to manage the agency, which regulates you

00:40:44 (Speaker Changed) A lot of, lot of complexity there. Not just, you’re not just selling widgets. Yeah.

00:40:48 (Speaker Changed) It’s different. Right. And you’ve got to understand it. And we were one of the first people in our business to really drive into it. And I think we’ve been the biggest investors in our, in our industry, in infra.

00:41:00 (Speaker Changed) So, so I gotta ask, who the hell is buying a toll road with 90% debt? I mean, it’s one thing if you’re buying your first house and you put 10% down and finance the other 90%. ’cause you’re gonna live there over the next 30 years and you gotta live somewhere. Yeah. But who would buy a, like, that just seems kind of reckless or am I

00:41:21 (Speaker Changed) You, you know, it was viewed in the old days, it was viewed 15 years ago. It was viewed as such a safe asset class. Not only could, not everybody did it. Okay. There were a few real outliers who did a lot of it. Right. Right. And they did it with 85% debt. Wow. 80% debt, 90% debt. But, and by the way, most of the industry does not do this. Right.

00:41:48 (Speaker Changed) You, you are very much confirming my long held belief that there’s no such thing as toxic assets, only toxic prices and toxic debt levels. Yeah. It sounds like that’s a key part of, of how you guys have grown.

00:42:04 (Speaker Changed) It is. It it has been. Right. But, but, but what’s kind of interesting also is like, you know, that waste to energy business in London, right. When we bought it, they had a really great, I I’ll, I’ll, I’ll, I’ll tell you this. Forgive me. I’ll just di digress

00:42:20 (Speaker Changed) Into it. No, go on. I want, I’m, I’m fascinated. Right.

00:42:22 (Speaker Changed) So there’s a, there’s a, this business, Cory, in, in London. So if you go, if you, on the river thas, you’ll see these barges taking garbage. They take garbage from some of the richest boroughs in London. They take it to a plant called Riverside where they burn it and they produce electricity for those same boroughs, huh? Right. This business, great business by the way. Right now, what they had done was they also had a landfill business. They also had a garbage collection business. And those businesses got them into real trouble. So the company itself got into a pickle too much debt. And with this one really great core business and two other really troubled and so-so businesses. Right. And what we ended up doing was when we kind of took control of the business, yes. We, we fixed and sold the two businesses, which weren’t so great. But at the same time, the core business, we invested in it, we hired a new chairman, we hired a new CEO and a management team. And by the way, the business itself had long-term, you know, what makes infrastructure is when you have long-term contracts, they had long-term contracts for about 55% of their output in Riverside. We increased that to 70%. We started to build a plan to expand the plant, to build a new data center next to the plant. Right. And

00:44:00 (Speaker Changed) Because they’re so energy intensive,

00:44:02 (Speaker Changed) It is because they, they, they produce electricity also, which, so you can create a data center kind of right next to it. So you can see the transformational work, which is going on. It wasn’t like, Hey, we just bought it. It’s great. Right. Right. And, and, and we subsequently ended up kind of selling it three, four years later after we’d finished doing all that. And it was a very successful investment. But you can buy infrastructure. But if we just bought it and just put it on auto control Right. Nothing would’ve happened.

00:44:35 (Speaker Changed) This isn’t a passive investment. This is market. This is active management. I, I’m fascinated by some of the other hard assets. Tell us about what you do with aircraft. Like who, how do people over leverage themselves with either a jet or a fleet of jets? Yeah. And have to have a distressed buyer come in and take it over.

00:44:55 (Speaker Changed) We find that investing in aircraft for us, two out of 10 years, we really lean in. It’s not a steady state. Hey, we are going to invest X million every year. It’s a very cyclical business. So like, so like take covid. Right. Covid happens flying shots down. Right.

00:45:19 (Speaker Changed) Done.

00:45:20 (Speaker Changed) Couple of couple of really large airlines. There’s one called latam in Latin America, there’s a Mexico. Sure. A couple of large airlines end up kind of filing for bankruptcy. Now they are in bankruptcy and PE and they have, like, latam in those days had a fleet of 300 plus airplanes. Oh,

00:45:40 (Speaker Changed) Really? That’s a big fleet. Yeah.

00:45:42 (Speaker Changed) So by the way, latam a really, it’s a big airline. Right, right.

00:45:46 (Speaker Changed) Mostly South America and Central America

00:45:49 (Speaker Changed) And, and flying to the United States. Right. They’re the market leader in, in south and in Latin America. Right. But now they, they are, the people have given them the planes on these leases. They have leases with all these kind of financial guys, which is how they bought a lot of their airplanes. They’re in bankruptcy. They want to redo the lease, recut the lease. And by the way, this is COVID, lease pricing has collapsed. Right? Right. So now all of a sudden the leases aren’t the, the person who’s lent them the money on the lease. It’s no longer worth that. Right. Because lease prices have collapsed and they are being reset right now because of the bankruptcy of la. So for us, you, you know, we ended up kind of buying, we ended up buying 23 of those airplanes Right. From some of the lease holders in latam, for

00:46:51 (Speaker Changed) Instance. Buying the planes outright.

00:46:53 (Speaker Changed) Buying the planes.

00:46:54 (Speaker Changed) And then what do you do with that aircraft? We

00:46:55 (Speaker Changed) Actually bought the debt, we foreclosed on the planes. So now we own the planes. Most of them we leased back to latam. Oh. Some of them, they were actually four very large a three fifties. Right. Right. Which is we, we, which is like a wide body. Right. Large, a three fifties. And we sold them to Luft Tanza. We had to fix them. We bought them in the desert, we fixed them, and we sold them

00:47:24 (Speaker Changed) To the right. They can’t sit for very long though. They have to be constantly be tended. Yeah. So if you’re going through a bankruptcy, they, you can’t have a plane on the tarmac for 18 months.

00:47:32 (Speaker Changed) And so, so what’s interesting to us about the airline business when it’s really active, like in those periods, right. Somebody like us, we’ll invest a, we invested a few billion dollars buying airplanes in those two, three years.

00:47:48 (Speaker Changed) Oh, really? That’s a lot. That’s a lot of aircraft.

00:47:50 (Speaker Changed) We, we bought the aircraft, by the way, at this point we’ve sold most of them. Right. But we also ended up with a claim, which became equity. So today we are actually a very significant holder of equity and latam and Aero Mexico. Huh.

00:48:07 (Speaker Changed) Right. Really, really

00:48:08 (Speaker Changed) Interesting. So, so, but, but this is, but I, but what we find is this business of investing in aircraft, it’s a, it’s a very cyclical business for us because we have a very high rate of return expectation. So it’s not an every year business. And, and what’s really helpful for us as we do this, Barry, we own a company called Dalian. Dalian has 65 employees and they manage the aircraft for us. Hmm. So when we take over the planes, if we have to park them in the desert, if we have to fix them, lease them, finance them, Dalion gives us the arms and legs to kind of do it. You don’t want to do this business just as a paper investor. Right. You need those operating skills. And by the way, Dalion today manages 125 airplanes for third parties even away from us. Right? Huh? So for us having dal, it’s a big piece of kind of what makes our airplane aircraft platform really work.

00:49:14 (Speaker Changed) Huh. Really interesting. Last hard asset, I have to ask you about real estate. Return to office has been, you know, only a part way success depending on the city. You look at at it’s 20, 30, 40%, 50% vacancy rates. And what I mean by that is 50% occupancy rates of already leased spaces to say nothing of the vacancy rates that come up as leases expire and, and some anchor tenants move out. How are you looking at the world of commercial real estate these days, given the stress we see in the office space?

00:49:53 (Speaker Changed) There is a tsunami working its way through parts of the commercial real estate sector.

00:50:02 (Speaker Changed) Slow motion tsunami, isn’t it? Yeah.

00:50:04 (Speaker Changed) And it’s, and it’s around maturities of the debt, right. Where people are foreclosing, title of the property is passing over to lenders. Right. That’s an so round numbers today, there’s $8 trillion of commercial mortgage debt in the US and Europe,

00:50:26 (Speaker Changed) 8 trillion US and Europe that you think is gonna eventually go, how much of that goes bad?

00:50:32 (Speaker Changed) 22% of it is office.

00:50:35 (Speaker Changed) Oh, really? Yeah. So that’s, let’s call that 2 trillion, almost 2 trillion. Yeah.

00:50:40 (Speaker Changed) And,

00:50:40 (Speaker Changed) And a trillion here and a trillion in Europe.

00:50:42 (Speaker Changed) Exactly. Right. Right. And and to our point of view, a third of it is going to kind of go broke in this particular cycle away from kind of office if there are other sectors. So if you look at multifamily, right? Right. Multifamily is generally a very stable asset class. But with these higher rates, people were buying multifamily at a 4% cap rate. Right. Today, public REITs, multifamily public REITs are 6% or so cap rates. That means that prices have fallen 50%. Wow. Right. If you just take the four, going to kind of six. Right.
00:51:26 (Speaker Changed) Right. If, if you have to sell it or if you have to service the debt. Yes. Why does it always come back to too much debt? Too much leverage invariably leads to a bad outcome. That’s, am I overstating that? It seems that every one of these stories begins with, and they bought this with way too much debt. And here’s what happened,

00:51:45 (Speaker Changed) Barry. I’ve made a career outta it.

00:51:48 (Speaker Changed) That, that, that’s amazing. So, so I know I only have you for a, a, a limited amount of time before we move on from residential, from commercial real estate, A trillion in the US a trillion in Europe, about a third is gonna go bad. And, and it’s a slow motion tsunami in a way that’s almost encouraging because, not to be glib, but $300 billion, it’s not the financial crisis, it’s not trillions and trillions and trillions of securitized debt blowing up. It almost sounds as if that’s manageable over time.

00:52:28 (Speaker Changed) It’s not systemic. Right. So whether it is the corporate world, you know, where I was describing all these maturities in a $5 trillion pool of high yield, or in the, this is not systemic. 2008, the banks were really levered. Right. It became systemic.

00:52:51 (Speaker Changed) Right.

00:52:51 (Speaker Changed) Right. So, so I think I look, I I I tend to, economic growth is okay. It’s, it’s not, it’s much, it’s much less than Okay. In the Europe, but in the US it’s kind of okay. Right. So, so I don’t think, I don’t think one needs to kind of say you, you know, that systemic stuff which causes shocks across the economy. Right. Don’t we? Look, we could be wrong, but we don’t think that’s in the cards. What’s in the cards is just this very gnarly, all these kind of credit issues, which will keep biting for the next three years. And we will just kinda work our way through

00:53:30 (Speaker Changed) Them. Right. If if you’re in the wrong sector, you’re gonna get hurt. And if you’ve avoided that, yeah. It, it shouldn’t, it shouldn’t have that spillover effect like we saw with securitized mortgage in oh 8, 0 9, if I’m hearing you correctly. So I also have to ask, I know you opened the London office in 2004. Did you ever expect that, that Europe would expand to just about half your assets? That that seems to be really substantial. Tell us a little bit about what’s going on in Europe, both their economy and the prospects for growth there and what you’re doing with your portfolio.

00:54:07 (Speaker Changed) Well, Europe is, if you just think about the broad market in high yield, 75% us 25% Europe. For somebody like us, Europe is always just a much bigger part, a third, maybe even a half of our

00:54:25 (Speaker Changed) Book. Right? Why is that?

00:54:28 (Speaker Changed) Europe has, Europe has more problems than the US

00:54:34 (Speaker Changed) Right. And a lot of old industries and old businesses that might run into trouble

00:54:41 (Speaker Changed) And you know, and every two years there’s a crisis there, right? Right. Like the US is Fortress America. But when you look at Europe, right, whether it is Brexit, whether it is other Italian guys,

00:54:54 (Speaker Changed) The Greece debt go on. It’s, it’s something every now that’s going on.

00:54:59 (Speaker Changed) So your frequent crises, you have economic growth, which is much slower than the United States. Right? And, and by the way, they’re suffering from some of the same high rates

00:55:11 (Speaker Changed) And their inflation seems to be stickier and more stubborn than inflation rates. Here

00:55:16 (Speaker Changed) It is. Right? So you take all that kind of together, you know, what we find is Europe, when I think about it in the context of 20 years, we find that Europe just gives us more frequent opportunity. Right. Just the way it’s set up. And the second thing which makes Europe really interesting for us, we are, we are really, I could be, I, I I, I, I, I, I, I’m not, I we are really one of the market leaders in Europe. In Europe, we are one of the acknowledged market leaders in Europe for what we do. And it’s a world where there are much fewer people with the skills we have in the us there are more people. So you look at a market which is big, which gives you constant opportunity. You look at the marketplace positioning we have, right? You take that together for us, Europe is much more interesting, which is why it always for us, is a bigger piece of our portfolio than, than the market.

00:56:24 (Speaker Changed) Huh. That, that, that’s really, really fascinating since we’re talking about inflation and rates. You said something about a year ago that I very much agreed with about a year ago. I was last summer, you said the Fed was behind the curve. Now it’s 12 months later. Tell us a little bit about your pers, especially from your vantage at looking at debt and what the distress that’s out there caused in part by 525 basis points of hikes in 18 months. Tell us a little bit about what you see from central banks here in the United States or elsewhere.

00:57:04 (Speaker Changed) Y you know, we are now on the other side of the, you know, we are now in the, we are, we are trying to figure out how quickly do rates come down, how much and how quickly. So we are not really, now we’re on the other side of the mountain. Right? Right. And I think, and you’ve already seen it with Europe. Europe has already reduced. Right. Right. So I I, I think our, our point of view would be these short term rates, the five and a quarter, five and a half percent Fed funds rate. Right. It is going to be kind of coming down and we can all debate, is it two cuts, three cuts, 50 basis points, 20. We can all debate that. But I think the path going forward is that what is different is just look at the tenure, not so much the short term fed fund rate. Right? Right. The 10 year rate is 3.85%. Right. It’s not the one point a half or 2%

00:58:03 (Speaker Changed) That that era seems to be over. Yeah.

00:58:05 (Speaker Changed) That era is over. So the fact that rates are going to be higher now over the course of the next three, five years, I, I, I think that’s the part we should all be just kind of focused on

00:58:18 (Speaker Changed) H higher than zero, but isn’t three, three and a half kind of normal or even reasonable. I mean, how do you contextualize the 10 year briefly kissed 5%? Yeah. And then is headed south since if we end up at credit rates being in the three, 3.5% range. Yeah. 75 to a hundred basis points below where they are now, what does that mean for distressed debt investing? What does that mean for the economy?

00:58:48 (Speaker Changed) It, it points to the fact that you, you know, I think you were saying Barry lived till 2025. Right?

00:58:56 (Speaker Changed) Right. Survive to 25, survive

00:58:58 (Speaker Changed) To 25, you get three point a half percent, 10 year rates. Right? Right. You add the usual four, 500 basis point high yield spread. Right. You are borrowing at eight and a half percent,

00:59:13 (Speaker Changed) Which which is not 12%. I mean, it’s 12, it’s not four, but

00:59:17 (Speaker Changed) It’s not, but it’s not four. Right. So I I, I think what all this kind of means is, look, things will improve slowly, right? As, as short term rates kind of come in. But the problems which we’ve set up, they’re here, you have, you have a slower old world economy, you have maturities kind of coming up. You have to kind of default or you have to do some pretty unusual things to extend your maturities. Those problems with eight and a half percent rates, not four or five all in cost for a lender, for a borrower. Those problems really, now stay with us for a

01:00:01 (Speaker Changed) While. So, so not just to talk your book, but an opportunistic, distressed debt investor. These look like pretty good times coming up over the next few years. I

01:00:11 (Speaker Changed) I, I, I do think they’re good times, but I, but I think, I don’t think, but there are times I, I’m talking my book now, they’re really good times for somebody like us who can operate businesses, improve

01:00:25 (Speaker Changed) Businesses. It’s not just paper transactions. Yeah. You, you are more hands on than that.

01:00:29 (Speaker Changed) You know, the, you know, most people in our industry, in my industry are really focused on buying debt at 50, 60, 70 cents trading it, having it kind of appreciate in price and then trading out of it.

01:00:46 (Speaker Changed) Right. That’s so 1991, you’ve done that already.

01:00:49 (Speaker Changed) Now, this cycle, the one we are in is not kind of that wholesale move down in prices. It’s much more buying into these businesses through debt, sometimes through equity, transforming the businesses, operating them. That’s the opportunity. It’s not a trading opportunity in debt, which is what we, we, we just don’t think it’s a trading opportunity now for the next three, four years.

01:01:18 (Speaker Changed) Huh. Really, really fascinating. I only have you for a few minutes more, so let me jump to some of my favorite questions that we ask for our guests. Starting with, tell us what’s keeping you entertained these days? What are you listening or, or watching podcasts? Netflix, what keeps you entertained?

01:01:38 (Speaker Changed) I like watching sports Barry, before we, I

01:01:41 (Speaker Changed) Know you’re a big tennis fan. Yeah.

01:01:43 (Speaker Changed) I like watching Break Point.

01:01:45 (Speaker Changed) Oh really? On Netflix. On Netflix

01:01:47 (Speaker Changed) Sort

01:01:47 (Speaker Changed) Of drive to drive to survive. But for tennis. Exactly.

01:01:51 (Speaker Changed) By

01:01:52 (Speaker Changed) The way, I have that in my queue and I haven’t started it yet. You, you

01:01:54 (Speaker Changed) Know, I’ve been playing tennis for 50 years. Really? I, I should be better. Right? You just

01:02:00 (Speaker Changed) Need a good coach. That’s all.

01:02:02 (Speaker Changed) But, but watching Break Point, at least for a while, transforms it for me.

01:02:06 (Speaker Changed) What, what’s the worst part of your game?

01:02:09 (Speaker Changed) Backhand. Really. And by the way, everybody who knows me, they are merciless. They hit at my backhand.

01:02:16 (Speaker Changed) Huh? I, I, I’m a lefty, but I’ve always played tennis. Righty. Yeah. So the backhand has never been Wow.

01:02:23 (Speaker Changed) How do you do that? Okay.

01:02:24 (Speaker Changed) I I, you know it as a kid, they stick a baseball bat in your right hand. Yeah. Yeah. So I write lefty, I do everything else lefty. So the serve is my weakest part, but I find the backhand is easy. ’cause it’s, it’s natural, right? It’s almost natural. It’s so crazy. Let’s talk about your mentors who helped shape your career.

01:02:47 (Speaker Changed) I, I had, I had a lot of, I had a lot of support from people I worked for or worked with Right.

01:02:55 (Speaker Changed) At Citi and at Merrill when you starting out at City and

01:02:58 (Speaker Changed) At Merrill. Right. And, and at more particularly, right. I, I had a lot of support like that you, you know, a mentored, the word mentor means, I think also somebody who helps you grow, who helps you develop, who talks to you every few weeks or a month officially unofficially. Right. You know, what I have found is the business I chose to be in was such a new emerging business where, you know, you know, I kind of, there

01:03:30 (Speaker Changed) Were no people with a decades experience in that sense. And

01:03:32 (Speaker Changed) There, it wasn’t like I had a quote, mentors in the business. Right. But what I found was, and by the way, every time you do something which is new and different, and you’re one of the first guys on the wave, right? It is, you learn as you go. Sure. But, but having that support right. From kind of all those different parts, I, I think that’s kind of what I would say. I think I learned

01:03:55 (Speaker Changed) That, that team approach of everybody kind of lifting everybody else. Let’s talk about books. What are some of your favorites and what are you reading right now?

01:04:05 (Speaker Changed) I like historical fiction. So there’s a, there’s a guy, there’s an English author, a guy called kgi, I don’t know. He’s written five, six books about the Roman Empire. The Caesars. Right. He’s written about Coupla Kahan and the K dynasty out of Mongolia. Right. Chenga. I, I love reading that sort of historical fiction. He just came out with a new book on Nero, the Roman Emperor, and it’s a new series. Right. Then I’m reading that.

01:04:39 (Speaker Changed) Huh. Sounds really interesting. Our final two questions. What sort of advice would you give to a recent college grad interested in a career in distressed debt or credit investing?

01:04:53 (Speaker Changed) Be ready to work really hard, right? Yeah, yeah. You know, the typical person we hire at SVP is we have two entry points, right? So, we’ll, we’ll hire 26, 27 year olds. So you should have gone to undergraduate school couple of years at an investment bank with the 8,000 hours a week. Right. Two, three years at a private equity firm. Right. And then you come work with us, and then the second entry point is you are that 27-year-old, you go to business school and then you come work with us. Right? So those are our two entry points. But when you look at kind of, you know, the people who are kind of coming in by the time you are that 26, 20 7-year-old, you know, if you were in that class at Dartmouth or Yale or wherever, you are probably already that one in a hundred, maybe one in 500 kind of person to have made it that far.

01:05:56 Right. This is a tough, incredibly demanding profession. Just be ready for that. It is extraordinarily rewarding. Right. And I, I, and I don’t mean financially, right? It’s fun, you know, the, the, the people you work with, the culture of what you have, it is fun. Yeah. It’s financially good too. But, but to be, but to position yourself to be in this world, right. Especially in a world like ours. Look, we are not looking for people who are just kind of, you know, paper investors. We want you to work with our portfolio companies, with our management teams. You’ve got to have the eq, you’ve got to have the presence and the communication skills too. Right. You look at kind of the training we need for somebody who can do that at age 30 or age 35. Right? It is, it’s very much that sort of a growth track you’ve got to follow.

01:06:56 (Speaker Changed) Huh. Really, really quite fascinating. And our final question, what do you know about the world of investing today that you wish you knew back in the 1990s when you were first getting started?

01:07:09 (Speaker Changed) Oh my gosh, Barry, I, I was, I was in, when, when, when we got started, right? As a firm in 2001, somebody asked me and said, Hey, Victor, what would you, what would you consider success in five years? And remember, this is when the world was young. Alts was really young, right? And I said, boy, if I could be running four or 500 million in five years, wouldn’t that be great? Right. We went through 500 million in a year and a half. Right. Wow. But I think I, I think what I, what I’ve learned about what I’ve learned about investing, because boy, when you do what, what I’ve done, you make mistakes. What I’ve learned about managing and growing people and developing people, right? The, the, it’s like I have been in this laboratory of learning. So when I think about the person I was 25, 30 years ago, right?

01:08:21 Running a proprietary desk at Merrill Lynch, right. To kind of the person I am today. Right. In so many different ways. I couldn’t, I couldn’t even have told you 25, 30 years ago. I couldn’t even have told you what it would take Right. To kind of be here. And I, and I think it’s like, I think you’ve just got to constantly be ready to learn, to evolve. You can’t get stuck. And if anything, if my journey says anything, it is, you know, I’ve seen the evolution in the firm. Sure. But I’ve seen the evolution in me. Right? And, and I think if you were, if I was to give advice to somebody who goes down this journey, it is to have a lot of people around you who can, not just in your firm, but outside your firm. Some people you can trust, you can talk to, who can coach you, who can make you think, because you are in an evolutionary journey to grow up, to be a leader in this business. Huh.

01:09:25 (Speaker Changed) Really quite fascinating. Thank you, Victor, for being so generous with your time. We have been speaking with Victor sla, founder and CIO of Strategic Value Partners. If you enjoy this conversation, well check out any of the 500 or so discussions we’ve had over the past 10 years. You can find those at iTunes, Spotify, YouTube, wherever you find your favorite podcast. Be sure and check out my new podcast at the Money Short conversations with experts about topics related to your money, earning it, spending it, and most importantly, investing it at the money wherever you find your favorite podcast or in the Masters in Business podcast feed. I would be remiss if I did not thank the crack staff that helps put these conversations together each week. Meredith Frank is my audio engineer. Ako Valon is my project manager. Sean Russo is my researcher. Anna Luke is my producer. Sage Bauman is the head of podcasts at Bloomberg. I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.

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