Tony Yoseloff – Forty Years of Davidson Kempner (Capital Allocators, EP.313)

23:38And then you realize you can keep replicating what you're doing it and you can bootstrap the capital. I think that's a big part of this is a lot of these things that we've done, we've put no additional capital to or very little additional capital. I found that sometimes, especially in the public markets, management teams have their own ideas as to how they want to invest capital. They're not always the best ideas of these things. Working with entrepreneurs who want to be heavily incentivized alongside you to be able to do that. So if you win, they win in that regard. And none of these are investments that I see working in the public markets.

24:06First of all, just from a simplistic perspective, in the public markets, if you're lucky, you might own 10 % of something along those lines. And so while you're meaningful, you're not in a control position in these more private equity style strategies. If you don't own 100 % of it, you probably own at least 30 or 40 % of it. And maybe you've got one like -minded fellow investor side by side with you. And we're not proactively going out and looking for those people. This is not a growth strategy, but there are times when those people's businesses are out of favor or people don't realize what the upside is in those businesses.

24:35Those would be examples of opportunities that just work much better in a private setting than in a public setting. How does the lens that you bring of downside protection translate over into, say, private investments as compared to what you might see in, say, private equity? I would start out with a couple of things. First of all, there's a lot less leverage on the strategy than there would be in private equity. In a lot of cases, there's no leverage. In some cases, there's limited leverage. Real estate, if you're doing more distressed or opportunistic real estate, that likely will have some leverage on it.

25:05But in the corporate space, it's a much less levered strategy. You're buying assets typically at much lower multiples of cash flow, but there's a reason why you're buying them lower multiples of cash flow. Not all private equity, but a lot of private equity is buying in favor businesses at higher multiples because you think you can operate it better, or you think EBITDA is going to continue to grow, or sometimes it's just a financing arbitrage as to how you do that. Although I think very few people would say that, but that's the reality of some private equity deals. There's none of that with typically what we're doing.

25:35You're buying businesses at lower multiples because people think there's something wrong with the business, or you're buying a business at a lower multiple because it's out of favor at a period of time. So think retail two or three years ago, or think jurisdictions like Italy, where not everyone's always wanted to invest in those jurisdictions, or people have gotten burned in the past in terms of where those things are. There's some reason why the cost of capital on that business is dramatically higher. Our job is to figure out if that's secular or cyclical. Part of the downside protection is that even if it is cyclical and not secular, we want to make sure we get our money back in it.

26:13So that's a downside protection. So what are the hard assets that you have that you can sell off? How much cash flow might you earn over the short period of time to take your basis down, even if your long -term multiple in the business is less than you think or zero? Is there someone else who might strategically want this asset from you, or even if you can't maximize full value, you'll get something out of it? Those are the types of questions that we're constantly asking in these businesses. And again, because there tends to be less leverage in this model, your first cash is not going to a lender, it's going to you in a lot of those cases on the corporate side.

26:43When you're thinking about a new strategy to include in the portfolio, what's the process for evaluating if that new strategy can be adopted and then how do you go about doing it? First of all, if you think about, I think, both who we are and who we want to be, our expertise as a firm is a combination of opportunistic credit and event -driven investing. And that's what guides us. Number one, I want to make sure we stay true to that knitting in terms of the types of things that we want to invest in. I think there's plenty of room to run in those general fields. And then number two, I want to make sure that whatever we're doing, number one, we can risk manage.

27:25And number two is additive to everything else that we're doing here. I don't know what we would do with like a commodity strategy or I don't know what we would do with a growth equity strategy here. I don't think those are things that we either could risk manage properly and or wouldn't necessarily fit in with everything else that we're doing. Where I get really excited is, I think, different than maybe some of the, let's say, pod shop models. We actively encourage our teams to talk to each other, to work together, et cetera. The individual portfolio managers make their own decisions. But if we happen to have an industry, healthcare, for example, it's likely going to have healthcare -related investments in different portfolios.

28:02And so you want to make sure that the individual team, whether they're doing equity or credit, whether it's special sets or whether it's long -short equity hedge, you want to make sure they're talking to each other, they're sharing resources. We have some commonality of resources that we share here. We've got a quantitative research team. We've got a more qualitative investment research team. If there's a working group on healthcare or a working group on some particular geography, they'll share resources, they'll talk to each other, they may make their own investment decisions. So to me, that's very additive.

28:30The sum is worth more than the sum of the individual parts together. Anything that we're gonna add to what we're doing, I wanna make sure it adds to the overall flavor. The other thing is on the credit side, I'd much prefer to enter into businesses that we think we can be additive to already versus businesses where we'd have to go find the deal flow. As an example, it's public that we have a joint venture in the insurance space. And that's an area where we had a tremendous amount of expertise in BBB -rated structured products. It happens to work very well in insurance -related portfolios. And so it was something that I thought early on we could be successful in, whereas I could think of other credit -related businesses that may sound interesting, but I don't know what we're going to bring to the table that might be different than 100 other people in those strategies.

29:15I want to make sure if we're doing new things that we're maximizing our chances of success And I think you can maximize your chance of success if you're already doing it in some guise or it fits in nicely and neatly to what you're doing versus going too far afield. Curious to hear how you've structured and grown your team going from simpler strategies a long time ago to much more complex multiple offices, multiple strategies today. This has also been an evolution over time, although I would say the stages of this have been fewer. When I started at Davidson Kepner, there were a couple of analysts and a couple of portfolio managers doing what we did.

29:50And so it was a team of quote unquote smart people. And you were basically expected to jump from industry to industry and geography to geography and go where the opportunities were. And because you were trained in what I'm going to call very deep value investing, you would of course be able to master that. The reality is that the world is a very big place and certainly the investing landscape has become far more global in the last 25 years. And And so I think there are a few things that are wrong with that model. First of all, I'm not sure outside the United States without local language skills or local relationships are even going to source the best opportunities.

30:24But even within the United States, there's all sorts of expertise in specific areas. And it tends to be that people want to do business with people who know stuff about their areas. So there's people who do aircraft related investing. If you're not an expert in aircraft, you're not going to be a member of that club, so to speak. Or shipping would be the same thing. Or banks would be something similar where these are pretty specialized. skill sets. As we built out our team, if you go back 20 years ago, we were typically hiring host MBAs or maybe people who had worked as an analyst for two to five years and training them in what we were doing.

30:56It turns out that you're investing overseas. You've got a European operation. You need people who have language skills and local relationships in France and Germany and Spain and Italy. Same thing in Asia with China or India or whatever major geography you want to be invested in. And then the other thing is while we started out early in my career doing corporate investing, we do just as much investing in structured products and real estate today as we do in corporate related investments. And those are very specialized areas with specialized skill sets. And so we made a big change about 15 years ago, where rather than organizing ourselves as one opportunistic credit team, we'd always had a separate team for risk arbitrage.

31:35So they were always their own team that just did risk arbitrage special sets. But as we started to reorganize ourselves. I said, let's reorganize ourselves around these individual areas. So that was number one. So we now have five areas, which is a corporate area for the US, Europe, and Asia, and then global teams for both real estate and structured products. So that was step number one of this. And then step number two of this was to build underneath those teams to make sure internationally we had expertise across industry and across countries and across product type, and to make sure in the US we had expertise across product type and across industry.

32:07One of the unique features I think of Davidson Kempner is that our teams work across all strategies. They don't just work on one fund or another fund. And the reason I think that's very important is when you find investment opportunities in nature, so to speak, sellers are not coming to you and saying, hey, we think we've got a great opportunity for XYZ fund. They're typically saying, hey, I've got this asset I don't know what to do with. I want to get rid of it. Can you help me here? We wind up being capital solutions providers, but the reality is if you're an expert on, say, hotels, you work on hotels in the United States, you can do just as good a job lending to hotels as you can do buying hotels and just as good a job as buying public securities are owned by REITs that own hotels versus private securities.

32:51Your expertise becomes hotels. It's that asset class. I think that we have a double benefit where our funds benefit from the fact that we have people with really, really deep expertise and far broader teams working on each fund than you might be able to afford if the folks were just on that fund. And then from attracting and retaining talent, I think it's a super interesting thing for our analysts that they can go from debt to equity or go from publics to privates. And so typically, they always have something to do. I think if you have the cyclicality in it, your team may not have as much to do.

33:24So number one, it's not great for talent retention, but also number two, that's when people stretch on things. That's when they pursue things that are not optimal related investment. So that's how we set up our structure. This was right before the GFC, but it's really stayed with us today. How do you think about managing this organization philosophy of leadership and management in this team? Well, what I would say generically is I want the people who have experience, who are the closest to the investment to make the initial decisions as to whether we're going to be invested in certain things. So even though I think investing is a team sport, that does not mean that there shouldn't be a team captain for any individual investment.

34:06And rather than having a smaller number of team captains who make a lot of the decisions or all the decisions, I want to have a larger number of team captains who are people who have been here for a long time, who we've seen their work product, we trust their work product. And those people can be empowered to make decisions on individual investments because those people are quite frankly going to be better placed to make those decisions than I am or another person in a very senior role is going to be. We do have oversight and risk management, both on public portfolios and particularly on approval processes for private investments as well.

34:38With a public investment, if you decide you made a mistake, you can generally get out of it. Whereas in a private investment, not only can you not get out of it, but you may take a lot of work to even get your money back in it if you can do that. So you have to have different processes along those lines. But I want to make sure our teams are empowered to do so. And then for me, with the CIO seat, I have the benefit of being able to see what all of our teams are doing across the globe, across different asset classes. So not just opportunistic credit or risk arbitrage, but long -short equity and long -short credit and converts.

35:09And I find that there's a crowdsourcing element of that where a lot of times the teams collectively will help inform my judgment, either good or bad, because if I can see what a lot of smart people are doing, they often are saying the same thing, even if they're coming at it from different angles in different places. While some of the macro that we may think about is top down, there's also a portion of it that's bottom up where you've got teams of people who are working at DK who are collectively telling you something about the markets. And that could be, it's time to buy or it's time to step back and really be more cautious.

35:41As you're aggregating individual that bottom -up, whether it's ideas, sourcing, or doing that diligence. How do you think about the difference between the wisdom of crowds and the madness of crowds? I would say generically, while we may have limits on individual teams can put to work here, we don't force teams to put money to work here. I think about omission and commission being quite different things. And so to me, someone actually proactively putting money to work that you don't necessarily have to put to work is far more powerful than someone not putting money. to work. There are times where I do try to step up on things and express opinions on things.

36:18I'm a little bit reluctant to let my macro viewpoints really inform people entirely, because if you put a top -down macro viewpoint on all the funds and the macro viewpoint is wrong, then all of a sudden the whole funds are wrong from it. But I do express my opinion. I express my skepticism internally about the growth equity markets in November of 2021. I actually sent around an email firm wide, comparing it to the video game crash in 1983, which I thought was a very interesting paradigm. Hopefully, at least some of the people on the team took that to heart. The video game industry collapsed by 90 % in that period of time.

36:53While not predicting that for growth equity, I just thought it was a very interesting paradigm. We talk about the nifty 50 a lot here as well and what happened in the early 1970s to the growth stocks too. And so you share your viewpoints, you share your information. I try not to impose on the collective, obviously with specific teams. If we're uncomfortable with positions, we're uncomfortable position sizes, we do impose there. But that's more proper risk management as opposed to general philosophy. How do you think about what types of ideas your team is working on? I like to keep an open mind towards things.

37:25There's different types of investments that we see at DK. And again, it's after 40 years of pattern recognition. And there are investments that fit very squarely into things that we've done in the past. And I think those investments are very ripe for just doing simplistic credit reviews where typically myself and one of our other portfolio managers and the members of the team who worked on the investment would just sit down in a room for an hour and going over it. And then there are ideas that the analysts themselves are super excited about, but may not nicely and neatly fit into that box. And so we have a process internally that one of our retired partners has named Scream If You Hate It.

38:03And so we do a lot of Scream If You Hate It. The idea is I'm going to give you the shape of the investment. We're not fully done on our work yet. I want to steer as to whether if this all checks out, this is worth our time or not. And so I'll give you a perfect example of this. We've been very active in the alternative energy space in the last five years. And this started as a Scream If You Hate It, where there was an opportunity to buy some biogas assets in Scandinavia. We didn't have a lot of experience with these sorts of assets, and it was going to be an operationally intensive play where not only we were going to purchase these assets, but we were going to have to be able to actually work them out and build, continue to build out their pipeline of assets that were half built.

38:44And that was one where, again, downside protection, very comfortable we'd get our money out of it if we were wrong. There were rules in the country that gave you a floor on profitability, and so you knew you could actually sell the biogas. Fundamentally, that would have been something where we didn't really, maybe the analysts didn't really know, and we got very comfortable with it. And we ultimately made several investments in the space. There were things that we were super comfortable with. Generally speaking, we're not doing the sorts of things that we did 20 years ago. They may show up sometimes, but you can't rely upon that as your bread and butter.

39:14And so you have to learn and be open. There are other times that things come where we're more skeptical of them. Rightly or wrongly. We've been very skeptical towards cryptocurrency. And so we've done very little investments that have any angle related to cryptocurrency on them, not zero, but very, very few of those. And that's one where I just couldn't get my arms around it over time. And so the ones that we did had to have real downside protection to them. You mentioned the scream if you hate it. I'm curious in that investment process as ideas are working their way through, what are some of the other Davidson Kempner aphorisms and lingo that comes up?

39:48Everyone has their own theories on investments. Tom used to always say that you should never let a winner turn into a loser. We've done a bunch of mathematical work on that. I'm not sure it's entirely correct. You should never let a winner turn into a loser, except when it comes back to be a big winner again, which happens occasionally. We produce something periodically we call the dead money report. So investments we've had for long periods of time that have earned typically between low single digits and minus low single digits. We find that everyone focuses on the winners and everyone focuses on the losers, but no one focuses on the eh.

40:20And if you've got a cost of capital of say 12 % and something is zero for two years, all of a sudden it's 25 % return you haven't gotten on that investment. I do like to think of investing to some degree as probability weighted outcome. And when you're looking across hundreds of investments, which we would have here across our portfolios, I think that's a good way to look at it. Risk arbitrage gives you a really in my mind, crisp mindset to look at investments. A risk arbitrage team typically knows in some cases to the penny what they're going to make on an investment if they're correct. We're very adept, we think, on modeling what we're going to lose on an investment if we're wrong.

40:56And the market's giving you a price on that. And from that, you can compute what the market probability is of a transaction closing. And then you can know what you think your probability is of a transaction and closing. And that can tell you how big of a position you may want to take, both in terms of the gap between those two things and also in terms of what your downside is if you're wrong. And then you can set a risk budget based upon that and decide how much of your risk budget you might want to spend. Opportunistic credit is more complicated because it's more path dependent. And also there's many more paths things can go around.

41:29And so maybe realistically, you're modeling five or six things versus modeling one thing. But I like to put that same framework in terms of how we invest on that part of the portfolio. And I find it very helpful. You know, in any given year, no matter what we do, there are going to be investments we lose money. And even our best performing portfolios may only be right 80 or 85 % of the time. So I think the better you can set the odds, the better your path is. How do you think about risk management and managing the downside in terms of the entire portfolio construction? I think of risk management as being very different in a private equity style strategy than I think of it in a public market strategy.

42:05And so a private equity style strategy would typically have 30 to 35 positions in it that you're typically putting in place over a few years. In any one year, you might do 10 or 15 investments plus or minus. And so while you might look at aggregations across industries or across geographies, it's a fairly concentrated portfolio. So where I think about risk management in that context is if you've got a position that's north of 5%, you need to make sure it's things that are not going going to blow a hole in your fund if you're wrong. PE style funds typically have large preferred returns on them as well, which I view as the minimum level that your investors will think you did something reasonable for them.

42:41If you have a big loser and the pref suggests over five years, you should have made 50 % on your money. That's just a huge gap. You have to fill somewhere else. And so if you have that in a 1 % position, that's very different than if you have that in a 10 % position. Public markets work a little bit differently. And again, there's a big path dependency to public markets. I think most PE funds are generally by how you do at the end of the fund, whereas public securities funds are typically judged on a monthly basis. And so we use fairly traditional risk management tools on our relative value parts of our portfolio.

43:11So things like long -short credit or long -short equity or convertible arbitrage lend themselves to daily tests in terms of how much interest rate risk, credit spread risk in the portfolio, how net long you can be, whatever it is. We tend to operate differently than some of the pod shops in that regard, where typically hitting a test leads to a conversation versus an outright sellout, although typically it's conversations well in advance of hitting a test as people get closer to tests. We do actively manage that, but it's a little bit less cut and dry. We're going to sell you out in 15 minutes if you exceed some limit.

43:42And that's because typically our hedge fund strategies don't involve leverage. You're able to play within the system a little bit more. Risk managing, risk arbitrage, and opportunistic credit works very different. To use a credit term on risk arbitrage, there's a lot of what I'm going to call jump to default risk in risk arbitrage, where if a deal goes bad, it typically is going bad very quickly and in an unexpected way because a lot of risk arbitrage deals have probabilities north of 80 % in terms of closing. And so you have to really have managed your risk well in advance of that. There's no trading out of it.

44:15Sometimes you might be fortunate and you might be a couple of days ahead of the market, and then you have to be willing to respond very quickly to that. And so you're making very severe decisions on your portfolio in a very short period of time. Opportunistic credit works differently. First of all, things take place over much longer periods of time. Secondly, there's just much greater ranges of outcome. And then third, maybe similar to risk arbitrage, things can move very quickly, but typically when they move very quickly, they become quite illiquid at that time as well. So there's not even a guarantee that you're going to be able to get out of it.

44:43And so you have to always be prepared to work out whatever you're going to purchase, which we are. We certainly look at concentrations across industries and across countries in that part of our portfolio, but you have to be much more qualitative in how you manage it and not just quantitative. So it's a mixture of those two things. And then again, because we run our portfolio without leverage and because of how we manage our portfolios, we don't use macro overlays. And I'm not even sure that macro overlays often would be risk reducing. I think it might be an additional risk that you're putting on the portfolio that may or may not work out.

45:15So each of our portfolios is effectively hedged in the portfolio level. When something's going against you and you have one of those review processes, let's say in long -shrot equity, what is that review meeting like? The review meetings that we do in the equities portfolio, because they tend to be public, they tend to be more holistic across the portfolio than you may specifically focus on one or two names. One of the lessons that we try to impart to our portfolio managers there is to move your feet and not let your portfolios get stale. We typically find that if our teams have held stocks for too long, it's usually not a good thing.

45:48It's better to be trading in and out of them. There's also a risk of thesis creep, quite frankly, where you start out in something for one thing and then you wind up in it for something else. We tend to give our portfolio managers in long -short equity more autonomy in terms of what they're doing. They don't have a lot of autonomy that they're limited in terms of industry or geography or things along those lines, but we tend to give them more autonomy on an individual position level. It's a smaller strategy as an aggregate of our portfolio compared to some of our other strategies. So any one position is likely to move the needle less.

46:17One of the things that we do do is supersize the best positions that we like in those portfolios in another part of our book. And for those positions, there is a lot more risk management. It's a separate team that's ultimately evaluating that and choosing to do it. And so that goes through a second process to enable that. In your business, you've extended somewhat from the original strategy to some of these longer duration capital. You've seen a lot of other firms your size may sell a stake in their business. And DK has been a private partnership for a long time. And I'd love to hear your perspective on the importance of that ownership to you.

46:51When we started as a business, which predates me, but certainly one of the things that enticed me about Davidson Kepner when we started was that we have a partnership that's structured very similar to how some of the old school Wall Street partnerships like Goldman Sachs were structured. And that was relatively simple. Tom Kepner came from Goldman Sachs and Marvin Davidson came from Bear Stearns. And those were both partnerships in the period of time that they were involved with them. And they didn't know each other before they went into business together. So it was very much an arm's length relationship.

47:18So we make new partners every few years and partners retire from our business and basically return their shares over a period of time. One of the things I learned early at DK that I very much believe in is alignment of interests. I would say a couple of things. Being a private firm, our duty is not to outside shareholder. Our duty is exclusively to our limited partners and making sure we do right by them. We also have a philosophy that we want to be an investing organization at heart. And so we require all of our partners to keep the lion's share of their net worth invested at Davidson Kempner.

47:50And we want to be one of the largest investors in any individual vehicle. And we are collectively by far the largest investor across all of the vehicles. And so I never want to offer a product to a client that I myself or our partners are not excited to put our own capital in. And that's something that I think has sometimes been forgotten in the course of this industry. I want to make sure that you're on cooking, so to speak. But more importantly, I want to offer funds that we in our hearts care about and think that they can do a good job versus doing something that maybe some clients are excited about, but we're not excited about it.

48:21Because I feel like if we prove to be correct in that regard, they'll ultimately be disappointed clients on the other end of it. So it's really not helping anyone to do that. I expect we're going to stick with this approach. It's worked very well for 40 years at this point. It's become more old fashioned. But because we continue to invest our own capital, we fortunately have had the balance sheet that we've been able to not do that. Over this 40 years, you've now had two leadership transitions from Marvin to Tom and to you. We'd love to hear some about what's made those transitions successful.

48:55I would give a few answers to that. We get a lot of questions on this. Both Tom and I get a lot of phone calls. Hey, how does this work or why does this work? So the first thing I tell people is that the person in charge has to actually want to retire for this to be successful. A lot of times the person in charge may pay lip service to wanting to retire, but they don't really want to leave. That's what creates some of the problems or some of the issues. We've gone through two transitions. So Tom became the managing partner in 2004, and I became the co -managing partner in 2018. And then Tom retired two years later.

49:25I was around for the last six years of Marvin and Tom's transition. And so I had a bird's eye seat from both perspectives in terms of what was going on and how it was working. And obviously, Tom had been through that himself. And so that was really valuable when we did our own transition several years later. Number two, you can't just say, hey, I want to retire. Let's get this set up for six to 12 months and expect it to succeed. This is something we worked on in different guises for a decade. And I think there was grooming well before that in terms of my taking over the firm. And so by the time we announced it publicly, which would have been in April in 2019, I think for most of our client base and people internally, it largely happened already.

50:04So it wasn't a surprise really to anyone in that regard. And that's very important. I think the structure of our organization helps as well. But fundamentally, it's a process over a very long period of time. I'm sure I made many mistakes along the way in learning things. I'm sure Tom did as well. But having a long period of time over which to correct it matters. I was either very unlucky or Tom was very lucky that Tom's retirement date was December 31, 2019, because obviously COVID hit two months later. I joked for a long time that Tom forgot to leave the playbook on COVID behind when he left the office.

50:35In some ways, it made our transition harder, but in other ways, it made it easier. Tom had left at that point. It was up for us to figure out how to manage the business through COVID. And even though it was a very tough time for the country, I think it was a very good bonding time for our organization in terms of getting through it. You spend a bunch of time on a couple prestigious investment committees, Princeton, New York Public Library, Columbia Presbyterian. We'd love to hear when you sit on the other side of the table, what have you learned from that experience? Look, it's super interesting to be able to do it and to be able to do it with three organizations.

51:08And I've done a couple others over the years, too, of organizations that I really care about. My wife really cares about as well. So first of all, I find it fascinating to be able to learn about all asset classes versus what we do. To me, I just really enjoy investing as a sport. It's one of my favorite times to spend on things. So even if I was not working in the investing world, I think I'd still be spending a lot of time thinking about investments and how to invest. And so there's really, really interesting things you learn about areas like venture capital or macro investing or whatever it is.

51:37There are things that are just different than what I do here. I do think when you serve on an IC, you have to remember that you're a coach and not a player in that regard. I have the benefit of seeing ICs from multiple angles, not just serving on them, but also we obviously have a lot of ICs that we present to here as well. And so from my perspective, if I'm going to serve on an IC, I want to make sure I'm in a coaching position where you're talking about asset allocation, you're helping to mentor the CIO, you're helping to provide insights on areas that you're an expert in with the CIO. But that's the nature of the relationship in a committee is to make sure that teams are doing their jobs and staying within the fairway, so to speak.

52:16And fortunately, I've had the ability to do that. But it's been super interesting in terms of educating myself as an investor as well. What are some examples of ways you've been able to help coach some of the CIOs that you've worked with in that capacity? Just like our portfolios don't go straight up every day. I think for most allocators, their portfolios don't go up every day. When we have problem children here, there's specific positions. typically for allocators or specific funds. Things go wrong in this period of time. And I've also had the benefit of both mentoring first -time CIOs and then working with people like Andy Golden, who's one of the all -time greats in terms of doing this.

52:51You see from all different angles how these things work. I think we've learned a lot at DK over a long period of time, at least I have, in how to run a money management business. And so while there are things that are quite different about what we're all doing, There are things that are quite similar about what we're all doing. How you mentor younger people, I think, is pretty similar. How you hire younger people. We'd all like to see more diversity across our portfolios and our businesses. How you go about doing that is quite similar. And then the other thing I would say, and this is a little bit of a bias, is over time, credit investors know first when things are going wrong.

53:26So I do actually think that there is a benefit to having at least some credit investors on any given committee. A good committee will have growth equity investors on it as well. And so you want a little push and pull from people on your committee of having different opinions. But we tend to see the heart of the problems when things go bad. I think if you look over time at endowment performances, and this is not specific to any of the organizations involved with it, it's just a general trend. What happens is people change strategy and or panic sometimes in really bad times, and that can set you back for a long period of time.

53:58And or organizations take on way too much risk at what appears to be a great time, but is absolutely the absolute worst time to be investing in strategy. And that sets them back for a long period of time. None of us are perfect in this regard, but I do think it's important at the IC level you're having those conversations. You mentioned opportunistic credit to spend a lot of time as being able to see when things are going wrong. I'd love to ask, how do you view opportunistic credit in the context of one of these portfolios in terms of the benefits that can provide? We think that opportunistic credit is a great diversifier for portfolios.

54:35And there's a couple of reasons for that. First of all, I think the returns, and again, we just look at Cambridge data and things along those lines in addition to our own performance. But looking at Cambridge data across the industry, you've earned very good returns in this asset class over a long period of time. You've also earned them with minimal correlation to growth strategies like venture capital or growth equity. I do think that these are strategies that can drive returns in your portfolio, particularly at times that other strategies can't drive returns or aren't able to drive returns. So if you go back to the early 2000s, as an example, that was a golden era of opportunistic credit.

55:10It was a terrible era for the equity markets. People put a lot of money into venture capital firms in 1999 and 2000. It took them, in some cases, 14 years to get their money back. So there's a real balance that it provides against other things in your portfolio. I think you could say similar things about the GFC in terms of returns. Time will tell on the 2020, 2021 vintages of growth equity or venture capital, even going back several years, the DPI, those funds is quite low in a lot of cases, even still today. I think if you look over very long periods of time, it's a heavily uncorrelated asset class that works very well with other things in people's portfolio to drive performance.

55:45The things that sometimes people forget is there's really no 100 -year money. So there are institutions that have money that will be around for a long time, but most institutions have a spend rate. And even the best institutions may have enough reserves that they can not spend from their endowment for a year or two. But fundamentally, they're going to need to spend some money from their endowment if you're a university to pay your professors and provide financial aid, if you're a healthcare institution to subsidize your mission, if you're a high net worth investor to pay for your lifestyle, if you're a pension fund to fund retirees who have earned their benefits over a long period of time.

56:17That cash has to come from somewhere. And so in bad markets, you need a source of that cash. And opportunistic credit happens to be a great source of that cash in bad markets to fund strategies for other periods of time. And so no one really knows when a bad market is coming. So I think you need to be a continuous investor in that asset class. But it's a super good diversifier. Even if you like growth strategies, it's a great way to make sure you have that bolest in your portfolio for when those strategies are not working because those strategies are also quite volatile. What do you think DK looks like 40 years from now?

56:51First of all, I still hope we're with us. 80 years in business is very different than 40 years in business. I don't know. Look, you have to be responsive to markets and responsive to your investors. I would say our switch from having exclusively hedge fund strategies to having a mixture of hedge fund strategies and private equity type opportunistic credit strategies was driven by two things. It was driven by our belief that there was a substantial amount of investments that we couldn't make without that sort of capital that we would be good at. And then quite frankly, it was enabled by our limited partners early on having confidence in us that we could actually do it.

57:28And then over a long period of time, as I think we demonstrated performance, that more people became interested in doing it. And all of a sudden, it went from being a relatively small part of our business to a much larger part of our business. Success begat success in these things. And so it's hard to have a crystal ball in terms of exactly where the markets are going. But I think that there will be a need for opportunistic credit, event -driven investing in people's portfolios 20 years from now and 40 years from now, just like it is today. One of the really interesting trends that's going on right now is the move into retail.

58:02On the one hand, you really need to make sure that you have products that make sense for retail investors. But I am a believer of the fact that retail investors, especially high -end worth retail investors, may be under -allocated to some of these asset classes. You go back and you just haven't had this for a long period of time, but you made very little money in equities in the 1970s. There still are folks out there who are not investing in these sorts of strategies where it could be beneficial to their portfolios. I just use that as an example because I just know we're going to need to adapt as a firm to continue to be successful.

58:31I think the core of this will still be opportunistic credit and event -driven investing. how that manifests itself in terms of strategies is a little harder to tell. As you look at over the next five to 10 years, what are some of the ways that you can envision you may need to adapt? As we've gotten to be larger as an organization, we've probably embraced more very large allocators versus what we've done previously. It's not that we were against them, just our client base is far more diversified probably than most of our peers were, and that was by design. But the larger your AUM, the more by necessity just the math works in that regard.

59:07And so it turns out that people want more customization at those levels. They want to mix and match your strategies maybe in ways that are different than how you've thought about mixing and matching your strategies. And so I think there are ways underneath the hood that we can make sure that we are responsive to all of our clients in as many ways as we can be. We're always going to be true to the things that we think we can invest in and how we can invest. We're not going to offer things that we don't think we're going to be good at. But the ways in which you deliver that product make sense. One of the ways I like to think about what we're doing is more open architecture versus closed architecture.

59:37There are managers who might say, I have a dozen strategies, but we're going to offer one fund. And you can either do it through that fund or not do it through that fund. I'm a believer that we should be offering multiple products. And our clients are very smart. And each of them have their own objectives and how they want to achieve their investment returns and let them mix and match a little bit. But making that as easy for clients as possible is one of my current goals. Tony, I can't let you go without asking a couple of fun personal closing questions. What is your favorite hobby or activity outside of work and family?

1:00:07I'm a big sports fan. I grew up in the New York area and enjoy rooting for the New York teams. We go to a lot of games. I'm also a baseball card and memorabilia collector. It was something that I did as a kid. I only half kid when I say I learned how to invest by trading baseball cards in the 1980s. And I actually had a small mail order business when I was a teenager doing that as well. It's something I put down in college and in my 20s and I picked up later on in life, especially as eBay got to be very popular. So those are certainly hobbies that take a lot of my time. What type of investment do you gravitate to like a moth to the flame?

1:00:40There are a couple of sorts of investments that particularly intrigue me. And I'll separate out a public market investment from a private market investment. So in the public markets, when you get opportunities to buy large amounts of debt in companies that we think are perfectly fine, but there's some sort of exogenous issue that has the market concerned about the companies. And it's particularly companies that were formerly investment grade. Those get me very excited. A very early example of this would have been the California utilities in the early 2000s. What I like about that is you have indiscriminate sellers who often want to get out because of ratings downgrades.

1:01:18You typically have extremely good collateral backing you, and you've got large volumes of debt. So you can put both a lot of money to work and you can put money to work at big margin of safety. And so those tend to be really exciting public market investments to me. For private market investments, I like to find things with good downside protection. We're typically looking at industries that are either out of favor or distressed. Hopefully we're finding something where we think there's growth and there's typically some complexity to the investment. And that to me is usually a recipe for success.

1:01:56What's your biggest investment pet peeve? I always want to know in advance why we're going to lose money. And so one of my big rules is you always need to know in advance what can happen for it not to work and what are the consequences of that. I get really disappointed in our team when they didn't know in advance why they were going to lose money. Which two people have had the biggest impact on your professional life? I'm going to exclude all family members from this. I don't offend my mother or anything. I'll give you two. The first obvious one is Tom Kepner. I worked for Tom starting when I was 24.

1:02:30He was a great teacher. He was a great partner. He was and is a great friend to me. And I learned a lot both about how to invest and how to live life from Tom and also about philanthropy. Tom is extremely philanthropic and involved in organizations. And he and one of our other retired partners were very influential in that regard in terms of teaching me. That would be one. The other one, I'm going to say, would have been the mother of my post -college roommate who gave me probably the best career advice I ever received. And so she was someone who was a consultant in the financial services world when we were in college and afterwards.

1:03:04And what she said to me, which always stuck with me, so this is from the mid to late 1990s, is you don't want to go work at Goldman Sachs. And that would have been considered the premier job to get in that era. There are a lot of really smart people who are going to go work at Goldman Sachs. It's going to be a rat race to get to the top. It's going to be very difficult. Try to figure out what's going to be the next Goldman Sachs and get it on the ground floor. That was advice that always stuck with me. That's probably why I wound up at a firm that had 20 people, was completely under the radar in a cottage industry that no one else wanted to go work for in that period of time.

1:03:36It's the advice that I give people today. It was really, really good career advice. What was the most challenging moment in your career? It's hard not to say the global financial crisis. And with the benefit of hindsight, I feel like I probably stayed reasonably calm in that era, although I'm sure none of us were particularly that calm in that era. And I think part of it was having the perspective that I knew where my next meal was coming from. I knew I wasn't going to lose my home. I knew I was going to be able to continue to live my life. And sadly, a lot of people in our country were not able to say those things in that period of time.

1:04:09Things got to be hard for a lot of people, and that's maybe what kept it going. Also, even though it took many years for the country to bounce back during that era, a lot of funds, including ours, had very strong 2009s. And so if you made it through 08, actually, it could wind up OK reasonably quickly. The other answer I would give to that question actually goes back well before starting at Davidson Kempner. I went to a large public high school in New Jersey where I was one of the best students and I was one of the better athletes in the school. and then I got to Princeton University as an 18 year old and I was probably an average student and a very mediocre athlete.

1:04:45And when you go from a place where you're used to being among the best at everything and you go to a place that you realize everybody is among the best at everything, it's a very humbling experience. Learned a tremendous amount from my time at Princeton and I'm very grateful for it and proud of it. But the reality is it's not always easy to go through that. And what I like to say to people is East Brunswick taught me how to win, but Princeton taught me the game I should be playing. That was certainly a humbling time in my life. What teaching from your parents has most stayed with you? Just like we may have Davidson Kempner aphorisms, my parents have their own aphorisms as well.

1:05:19And so I'll give you one from my mother and one from my father. The teaching from my mother is to always be appropriate in what you're doing. And so what she really means by that is you're going to be in a lot of circumstances in life. Sometimes you're going to be with literally royalty or heads of country or heads of countries. and sometimes you're going to be in a taxi cab or walking to work or whatever. And always act the part, always act the way towards people in that circumstance that you should act. So that's something that has always stuck with me. For my father, it's going to sound a little bit more cynical, but his belief in life was that the secret to happiness in life was low expectations.

1:05:52And that's something that I've always thought about as well. If you have hopefully not limited expectations, but reasonable expectations on things, you may be surprised to the upside. If you think everything's going to be great and rosy, you're inevitably going to be disappointed. at some point. So a lot of times your perspective just depends upon where you start in these things. Maybe that's part of why we're so focused on downside here, but that's one that stuck with me. All right, Tony, last one. What life lesson have you learned that you wish you knew a lot earlier in life? This is a lesson I learned at Davidson Kempner that I was admittedly less good at in my teenage years, which is not to burn bridges and to make sure that you always treat people well because you're going to run into them again and again.

1:06:31The way optimistic credit works, especially in workouts for distressed situations, is literally at the same time, you could be on the same team as somebody or you could be on a different team as somebody all at the same time. And so sometimes other actors in the business are your friends and sometimes they're your enemy and sometimes they're your enemy and your friend at the same time. I did a lot of debate and model UN and model Congress as well in high school and college. And when those things like in politics, you're on one team and people are on another team and it's adversarial to some way by definition.

1:07:00And that's not really how investing works. That's not really how workouts work. I would say the restructuring community is an amazing community. I'm fortunate to have a lot of good friends in that community. And so that's something I learned very early and quickly in my investing career. And I wish I had learned it a few years sooner, but fortunately I learned it in my twenties and not later on in life. Tony, thanks so much for sharing this story with DK and your career through it. Great. Thank you so much. I appreciate it. I was going to say, I feel like I'm a long -time listener, first -time caller.

1:07:29Thanks for listening to the show. If you like what you heard, hop on our website at CapitalAllocators .com, where you can access past shows, join our mailing list, and sign up for premium content. Have a good one, and see you next time.