[REPLAY] Chris Heller - Weird Alternatives at Cordillera Investment Partners (Manager Meetings, EP.28)

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2:32I'm Ted Seides, and this is Manager Meetings. This show is an exploration of investment opportunities. Through conversations with money managers, conducted by one of the manager's institutional clients, we'll share the stories and strategies that attracted their attention and capital. You can learn more and join our mailing list at capitalallocators.com. All opinions expressed by TED, guest hosts, and podcast guests are solely their own opinions and do not reflect the opinion of capital allocators or their respective firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

3:12Clients of capital allocators, the firms of guest hosts, or podcast guests may maintain positions in securities or managers discussed on this podcast. On today's manager meeting, Greg Dowling interviews Chris Heller. Greg is the co-CIO and head of research for Fund Evaluation Group, an institutional OCIO and investment consultant with$83 billion in assets under advisement. Chris is co-founder and co-managing partner at Cordillera Investment Partners, a$1.2 billion alternative investment fund that invests in niche, non-correlated assets, or what Chris calls weird stuff, like whiskey aging, boat marinas, Spectrum, and water rights.

3:53Their conversation covers Chris's background and the founding of Cordillera, the evolution of alternative assets and alternative alternatives, sourcing new opportunities, conducting due diligence, measuring risk, portfolio construction, and exit strategy. Please enjoy this manager meeting with Chris Heller from Cordillera Investment Partners. Chris, would you briefly introduce yourself and Cordillera? I will. Thanks, Greg, and thanks for having me. I'm excited to be here. I founded the firm with two other co-founders, my partner Gus Uriah and Ashley Marks. We founded it in 2014 to focus exclusively on the topic du jour, which is a niche non-correlated off-the-beaten-path assets or alternative alternatives or, for lack of a better word, just weird stuff.

4:44My background, so I graduated from Vanderbilt University, went to work in investment banking for a number of years, both in New York and Menlo Park. Had a brief stint on Capitol Hill in DC. Then went to the Stanford University Endowment, spent a number of years there. My co-founder, Ashley Marks, also worked at the Stanford University Endowment with me. And interestingly enough, she and I grew up together in Denver and have known each other since middle school. So a long history with my partner, Ashley. My other co-partner and co-founder, Gus Uriah was down the street from us at the Hewlett Foundation on Sand Hill Road.

5:24And then all three of us were a part of a firm that itself was a spin out of the Stanford University Endowment called McKenna Capital. We all worked together there for eight years in various roles and asset classes and investment types, hedge funds, private equity, natural resources, real estate. So really had a flavor for all of the quote unquote alternative asset classes. And then all three of us went out to found Cordillera in 2014. I did want to ask, and this is a little bit crass, but what is a Cordillera? It sounds a little bit like something I would order off a Taco Bell menu. Like I'll have two Chalupas and a Cordillera.

6:07So what is a Cordillera? So I think another thing lesson learned as we look back, you know, maybe we would have come with a different name, it's not easy for people to pronounce. And we get Cordillera 90 % of the time. We get Cordelia 5 % of the time. And then the other piece we get is people just not saying our name, trying to avoid saying our name altogether. That being said, Cordillera, and I will not pronounce it in Spanish very well, is Spanish for mountain, mountain range. Gus, my partner, is from Santiago, Chile. And the mountain range just behind Santiago was called La Cordillera. Ashley and I grew up in Denver, very mountainous state.

6:45And there was a resort, which is no longer in business called Cordillera. At the time I got married there, Ashley has some very personal stories and has good memories there. And so it was something that brought us all together and it wasn't taken. When we asked the lawyers if it was taken, it wasn't taken yet. Shocker. That's a shocker that it wasn't taken. Yeah, correct. When did you kind of come to the realization that you wanted to focus more on these uncorrelated, as you call them, weird investment ideas. Did that start at Stanford or was that later at McKenna? We kick ourselves. We should have figured it out sooner, quite frankly.

7:20But it really started back, and I think it was an evolutionary process from when we were at the Stanford Endowment all the way through when we were at McKenna, which was it was becoming more and more apparent that, and I'm putting this term in air quotes, alternative asset classes or assets were becoming less and less alternative. Nearly every institutional investor had representation in the portfolio of private equity, hedge funds, real estate, natural resources. And as there became more and more adoption of those assets and asset classes, you know, what you would expect happened. Returns came down, whether you were trying to do individual deals or make investments in those spaces or whether you were investing in managers.

8:03And so we noticed that as a sort of slow degradation of returns. That isn't to say there aren't periods that are good and periods that are bad. But as a whole, you know, there's a pretty slow degradation in returns. And at the same time, another thing was happening, which was that correlations amongst those asset classes were increasing. Just as fundraising cycles increased and the amount of capital plowed into these asset classes, when we went through 2008, we got very little diversification from our, quote, unquote, alternative asset classes. again should have been smarter should have tried to figure it out sooner but you know the light bulb went on that you know if we are going to generate the returns for our investors that we would like to at a level of acceptable risk with diversification in a portfolio we're going to have to go back to the basics of investing in truly alternative assets and that's really just what we think about our business it's back to the basics of investing in alternative assets and that has two prongs to it.

9:03One prong is being early to an asset class before competition and capital has competed away returns is useful and beneficial. And we came at this first and foremost from a return perspective. You can be early to a place where the world hasn't found yet. That's a benefit. And you can extract outsized returns. And then secondly, trying to find places that have really non-correlated risks. Without a doubt, the things that we invest in have risks. We haven't found some panacea of riskless arbitrage. It's just that there are different risks that run through our investments. And they're likely not correlated with the other risks that most institutional investors have in their portfolios, which is some sort of equity factor risk and some interest rate factor risk.

9:52And so really the answer is, as we were watching this in slow motion, we said, look, if we just went back to the basics and found truly alternative assets, that would be an exciting place to be. So why do you think then that people and institutions still plow billions and billions of dollars into traditional alternative investments? Well, look, they're still attractive and there are still very attractive spots. And I don't want to poo-poo that at all. And certainly we've seen a great run for venture and growth equity. But I also think, and I say this coming from them, there's just a lot of institutional momentum that's hard to stop.

10:28You set firms up in a way that are siloed. You hire people to invest in certain asset classes. That is their job. It's really hard to change course midstream and start doing very different things. And I would say, we love that. You know, we love the fact that that exists. And to the extent that that ever broke down or that wasn't the case, you know, the opportunity for us would not be as attractive. So we are happy that that happens. You know, it's not like those are terrible asset classes. We just thought there's a more interesting way to do this. We can extract a lot of return per unit of risk, and we should focus on it full time.

11:05We talked about this in the past that what is alternative evolves over time, right? So if you went back to the 70s, investing in international stocks or real estate might be considered alternative or unique. And then we kind of got to this phase where I would say our traditional alternatives are really hedge funds, private equity. But who knows what traditional alternatives will be in the future? So things are always changing. It's a fantastic point. A hundred years ago, just stocks. And once you introduce bonds, it was like, wow, this is crazy. And just in our moment of existence from 2014, there's been a massive amount of evolution.

11:44So when we were early on, we were investing in things like music publishing and litigation finance, which was, in our minds, very cutting edge at the time in 2014. Fast forward to today, and the whole world has found music and litigation finance. And subsequently, returns have come down, and it's not something that we do anymore. And so our ethos and our mandate is to constantly be at the leading edge of what will be interesting and new and generate outsized returns, hopefully prior to the world finding them. And then when the world does find them, moving on and being in that next spot. And so it's what we strive to do.

12:26And it's what I think we've gotten better at over the eight years that we've been doing this. How do you balance this all out? Yes, you want to find that undiscovered alpha. But to paraphrase Warren Buffett, he talks about investments not being the Olympics, that you get no points awarded for difficulty. So how do you avoid complexity for complexity's sake? Yeah, that is such a critical question to what we do. Whenever we tell our story to anybody, the most common response is, wow, that must be risky. And we love that. We love that comment. And I think the moment we don't hear that comment, the opportunity is gone because it is the perception of risk in our space that keeps people away.

13:13Our business is predicated on exploiting that gap between perceived risk and actual risk. And I think that response to something is weird, it must be risky. It's just a behavioral heuristic that we as humans have used for thousands of years. You know, you're loping along the meadow and something comes into view that doesn't look like it belongs there. You know, it elicits a fight or flight response, which I think has been a great, you know, a great thing for humankind for a long time. But it's also something that we can take advantage of, that this view that something is weird so it must be risky and they stay away is really helpful to us.

13:53Now, that being said, it's a heuristic that's been developed, you know, amongst humans for good reason. And in the investment community also, not everything that is weird is a good investment. And to your point, lots of things that are weird are really bad investments and are not invested in for good reason. You know, we are in the business, and I say this a lot, of kissing a lot of frogs. So we look at lots of things and lots of deals, say no to a lot of them because lots of things in our fishing pond are not attractive. But the ones that are, the things that we find that really have what we think is outsized return potential for undersized risk, and we think the things that we find in this pond are really attractive relative to the more competed ponds.

14:42And some of that is in the return perspective, which I talked about, being early and extracting outsized returns before the world finds them is attractive, but also from a risk perspective. Because we have time, we are not in a bake-off or a competitive process where we have to have a deposit down and an LOI down within two weeks, otherwise we're going to lose a deal. Most of our underwriting takes six to 12 months. And so we have time to structure deals. We have time to structure with our operating partners in a way that limits our downside. And so we think about when we find something that's pond, it's got outsized return potential and then potentially mitigated risk.

15:16And so we really like this space, but not everything is perfect. And to your point, investing in weird stuff just for the sake of investing weird stuff is a very bad recipe. Yep, that makes perfect sense. So let's actually get to some specific examples. And one that we talked about that maybe it's a personal favorite of mine, whiskey aging. So tell us how you could invest in whiskey aging. We have been investing in the whiskey space for almost four years now. It is a space that has gone through a lot of structural change. We always look to invest in places that have gone through structural change.

15:49It is a space that was a slowly, pardon the euphemism here, up until the early 2000s was a, brown goods were a slowly melting ice cube. It was not a growth industry. Clear Spirits had taken over pretty significantly. And so distilling capacity in the space had been taken out. And then comes what is now called the bourbon boom. Nobody knows exactly why it was. Some credited to Mad Men, the show. But demand for brown goods and whiskey and bourbon accelerated quite significantly in the U.S. And so you had sort of less distilling capacity, more demand. And that created all kinds of interesting dynamics in the space that for us made it investable.

16:29You had a space that used to be fully integrated, vertically integrated from the majors. They would distill, they would age, and they would distribute the product to an industry today that has become massively fragmented. There are folks who distill. There are folks like us who age in the middle, and then there are brands that distribute. And so this was a moment in time investment for us. We buy whiskey. It's a perfect space for us to, because we have patient capital, we age it. All we do is we sit on the whiskey and we age it. that aging curve today is as deep as has been seen in the industry in a long time and the aging curve refers to the price of a barrel of whiskey at any age along the aging curve and so as we age that whiskey it becomes more valuable and then we sell it to brands that want to buy already aged whiskey to put it in their bottles and take it to market it's been a really simple business and it's been lucrative for us.

17:29We're excited about that business and it's one that is not institutionally invested in and we like that. If you could take the experience from investing in commodities and apply it to something that's a little bit more bespoke, it seems like you can apply a lot of the same principles. I think that's right. As I think through whiskey, what is the strategy of whiskey? It is purely inventory finance and we do have themes around how we source and those themes often come down to very simple observations but one is providing inventory finance in niche-y, weird, off-the-beaten-path places is a really interesting space for us.

18:03And whiskey is purely inventory finance. We buy something, we have patient capital and have a balance sheet that can age it for someone else that wants to buy it because they didn't have the capital and they didn't have the time to buy it and age it themselves. And so to your point, this is not novel. I think how we're applying it is novel and where we're applying it, but inventory finance is not something that is novel. We also have expressions of this in wireless spectrum licenses that we invest in. There's some precious metal strategies that we invest in. And then we're looking at a deal right now in cheese, in aging cheese.

18:43So inventory finance, while simple, can be applied in many different ways. It's interesting, too. It also kind of reminds me a little bit of timber, right? So you can look at timber and if you like the price of timber, you can harvest it and sell it. But if you don't, you can just wait. It actually appreciates over time. And whiskey, bourbon appreciates over time. A 10-year aged whiskey is better than a four-year aged whiskey. So you sort of have the benefit of time in this investment. That's right. And, you know, I think what we like about it, maybe relative to a timber or other commodities, is the predictability of the pricing.

19:20You never know how steep or how flat that aging curve might be, but it is typically positively sloped. Whereas some other commodities can be up, can be down. You know, if you didn't sell your corn or your wheat or your timber this year, next year you might be kicking yourself because the price is down. And so one of the things that we really like about whiskey is it's, while you don't know exactly how much it will appreciate, it's fairly predictable that it will appreciate. Yeah. And you don't have to worry about trying to define things like contango or normal backwardization or any of those crazy commodity terms.

19:55I love that example. I wanted to ask you, what is the maybe weirdest or what somebody else might consider kind of weirdest idea that you've either invested in or have gotten close to investing in? So there are lots of things that we get shown and we have an open door policy. Like we will listen to weird stuff because that's what we do. But I think probably the weirdest thing that we looked at, got close to, but ended up not doing is alligator farming. Really fascinating business, quite frankly. We spent a lot of time on the business, spent time visiting the alligator farm, which is quite fascinating.

20:29We actually really like that investment from an economic perspective. we ended up saying no to that investment from an ESG perspective. And we have a pretty heavy ESG overlay to our fund. We like investing in ESG assets. There are some quirky, niche ESG assets. And while there were some actual things about alligator farming and the university of Florida has done a lot of studies about actually how good alligator farming is for the alligator population that was almost extinct. At the end of the day, you were using alligators to essentially make wallets and purses and boots. And from an ESG perspective, we ended up saying no.

21:06But we had a lot of fun doing diligence on that, as we have in whiskey. I think one of the things that we've looked at quite often that we often say no to are, when we get shown a lot, are things in the luxury goods space. So art, automobiles, diamonds, wine, those investments for us are really tough because they are not non-correlated. They are tied to the economic cycle. art, wine, diamonds become much more valuable as the economic cycle accelerates. And then as it turns, so does the price of those things. And so we do not, we get shown those things quite often, and they're typically of very little interest to us.

21:47I wanted to ask about sourcing. Other than having an open door policy and maybe people bring you ideas, where do you find them on your own accord? There are a lot of different ways. And I would say we've gotten better at this over the eight years that we've been in business first. And probably the most interesting is thematic. You know, so we tend to spend a lot of time taking a step back and thinking about certain themes that may or may not be interesting. And those develop over time. Some of them we run down and they end up not being interesting. And some of them run down and we end up with a lot of significant deal flow from them.

22:24Interesting things, I'll give you some past ones, maybe not some that we're working on right now to divulge too much, but water in California has been a theme of ours for quite some time. Income share agreements is a theme of ours that we can talk through, and we have found some interesting deals. We've never done a deal in that space, but we watch it. Getting a share of a person's income over time, we've looked at a lot of things within in the athlete income share agreement space, student income share agreement space. There are income share agreements for entrepreneurs. So you can obviously think of an income share agreement across lots of different sectors and lots of individuals.

23:03And it's kind of an interesting space for us to look at. We've looked at inventory finance, I mentioned before. And then another one for us has been, and I mentioned that we don't like collectibles, But we have looked at how do we apply AI and sort of big data to weird niche spaces to potentially unlock some interesting arbitrage in automobile auctions. We've looked at some things around sports and actually providing guarantees in art and all kinds of different places. And so that's been a theme of ours. We're constantly evolving those themes. And that's a good source for us. Also, we've just been in this business now over 20 years.

23:44So there's just a deep pool of our network that is bringing us deals. Now, Cordiera has been in business for eight years. Not that we're a household name, but those who tend to traffic in the kind of weirder, nichier spaces kind of know that we exist. And so that has become a much more fruitful channel over time, over the eight years that we've been in business. And so we have also evolved in a way that we are better at vetting and triaging these opportunities quickly and knowing what is or is not a quarter year a deal. You know, for fun, our first fund and early funds, our first one, we looked at three over 360 deals and invested in 14.

24:26And I think we've become a lot more efficient and better at kind of tracking what is a Cordier deal. So it's helpful for us to have been in business for eight years to help the sourcing. We're going to take a quick break in the action to tell you about SRS Aquium. Want to make sure your M &A processes aren't stuck in the past? Partner with a company that's been defining the future of dealmaking for nearly two decades instead. When it comes to M &A innovation, SRS Aquium has reshaped the way that deals get done, streamlining processes for maximum efficiency and minimum headaches. Professional shareholder representation, online M &A payments, digital stockholder solicitation, SRS Aquium pioneered each and continues to set the bar for game-changing innovation.

25:18So leave the days of disjointed deal management behind and define your future with SRSAquium, the smartest way to run a deal. Learn more at srsaquium.com. That's S-R-S-A-C-Q-U-I-O-M.com. And now, back to the show. What about diligence? Does it take a different skill set than traditional manager due diligence or traditional investment due diligence? So there are some parts of the skill set that are almost identical. And that is what I would call in the people, where we are still in a people business, we are always partnering with operating partners to do what we do. And so that piece of it, sitting across from somebody, talking to somebody about their skill set, are they trustworthy?

26:08Do they have what it takes to execute on what you want them to execute on? You know, I would say that is nearly identical to what anyone in the investment business or picking managers does for a living. And I think that is a very transferable skill set. In terms of the sourcing, structuring, diligence, it is different. And we, as we recruit, we try to find people from that don't come from a traditional background of private equity. We try to recruit from different backgrounds, more creative, who can think about the world differently. And I think one of the critical things we have on the diligence side here is time, right?

26:46We can take time. Oftentimes, something comes to us that, quite frankly, we don't know a lot about at the beginning. You know, we first started looking at music publishing almost 10 years ago. We didn't know a lot about music publishing, but we took a year and a half to understand the business. We first started looking at alligator farming. We didn't know anything about alligator farming, but we had time. We first started looking at whiskey. We were not very familiar with drinking whiskey, not familiar with underwriting whiskey as an asset. And in all those examples, we took 12 months. And so we have time in this space to both diligence the opportunity.