Paid to Sweat: Centerbridge's Jeff Aronson on the Growth of Private Markets

0:05Welcome to another episode of Goldman Sachs Exchange's Great Investors. I'm Alison Maas, Chairman of Investment Banking in Goldman Sachs' Global Banking and Markets Division and your host for this episode. Today, I have the pleasure of sitting down with Jeff Aronson, the co-founder and managing principal of CenterBridge Partners. CenterBridge manages over $42 billion in assets across private equity, private credit, and real estate strategies. I'm excited to hear how Jeff built this business and how he's navigated the opportunities and challenges that face private investment managers today. So Jeff, it's a pleasure to have you on Great Investors.

0:44I'm happy to be here. Awesome.

0:50So you started your career as a lawyer, and I want to go way back. When and why did you transition into finance? Yeah, I started my career as a lawyer, not because I knew what a lawyer did, but because it sounded good. It sounded good. And I enjoyed law school. I went to work at a big Wall Street law firm. It wasn't for me. It was not for me. What law firm did you work for? It was called Stricken, Stricken, Levin. It's no longer. It's no longer. And I spent two and a half years doing that. And I found my way into the legal department of a small investment bank. It was called L.F. Rothschild Unterberg Tobin.

1:27And my job as a very young lawyer was to advise the people who are managing the firm's proprietary capital. Two gentlemen, John Angelo and Michael Gordon. And this was, gosh, probably 1986. So I did that and I really enjoyed working with them. And then what happened is the stock market crash in 1987 and L.F. Rothschild went bankrupt. I remember that. So I'm thinking, oh my gosh, it's like, I don't want to be a lawyer. My employer just went bankrupt. I am student loans like up to my neck. I'm newly married. And John and Michael said, we're going to go start a new firm. And I said, well, I'm going with you.

2:08And I remember Michael Gordon kiddingly said, well, you're a lawyer, you can't add. And I said, I'm actually, I'm okay with numbers. I said, give me a chance. I honestly said, I'll work for free. I was hoping they wouldn't take me. And they gave me a chance. And unlike law, you know, I loved investing. It was like doing puzzles and I was interested in it. And the rest is history. That's history. Yeah. So tell us a little bit about what the distressed business was like back then. This was in the late 1980s. Distressed was a complete backwater. There were really three banks that invested in it through their arbitrage departments, Goldman Sachs, LF Rothschild, and Bear Stearns.

2:51And there were a handful, and I mean truly a handful, of firms that invested in these types of assets. And Angelo Gordon was one. And it was not institutionalized at all. The capital was all typically from high net worth individuals. There were no large institutional allocators or anything like that. And it was a backwater of an area. And it really stayed that way until the recession in the early 90s after Drexel went bankrupt and the SNL crisis. And that's when the business really started coming into its own. There are a lot of characters, a lot of characters in this business. I mean, a funny story, not about the distressed debt business per se, but just about being a young person on the buy side.

3:36And we had just started Angelo Gordon and I was an analyst, but they had me talking to a trader at Solomon Brothers, very senior guy, I can't remember his name, a prototypical trader, a little gruff, colorful use of language and things like that. And I talked with him and he says, great, really interesting. Next time, you're my first call. So I got off and I told everyone, it was a small office, a dozen people, and they were all hysterical, laughing that I actually believe this fellow. It always sticks in my mind, but a lot of characters. So tell me how the distressed business has changed over the past decades.

4:11And obviously it's become more competitive, more institutionalized, but how has the opportunity set changed? Well, it's changed. First, it's been around forever. I mean, if you go back to the 19th century where there were people that were speculating in railroad bonds after the Civil War. And there was a well-known speculator named Jay Gould, and there have been books written about him. And all through the 20th century, and Goldman was doing this as well, and Bear Stearns in particular, through the Great Depression and things like that, it was typically involved fallen angels, an investment-grade company that had fallen on hard times.

4:51And the business for decades was marked by two things. One, it was a function of secondary markets. And from a return perspective, it was a total return investment. You bought something at 70 because it was worth 100. There was no yield because often these companies were bankrupt. So definitionally, there was no yield whatsoever. And what happened after the GFC, a couple of things happened. First, private credit came into vogue. Now, private credit, again, is a bit of a misnomer because it means different things to different people. But if you think about it, it's principally direct lending because the banks retreated, regulatory reasons, and Wall Street abhors a vacuum.

5:30And all of a sudden, a new business started of private lenders, non-bank lenders, making loans. And what happened in the distressed business, we even started changing the name. It was no longer called distressed. It was called opportunistic credit. It sounded a little kinder. It's like moving from junk bonds to high yield. Exactly. Exactly. Or from leveraged buyouts to buyouts. And so what happened in the credit business, it started to evolve and we started to evolve. So a business that had been focused on trading and total return started to evolve into a business which is now also focused on primary origination.

6:09We were making a loan, and the return was a function of yield. Cash yield. Cash yield. Yeah. Cash. It was a real sea change. And if I look at our opportunistic credit business today, it is half primary originations where we're making money through yield and half focus on secondary markets where we're focused on total return. And it's been a huge sea change. And I think it's going to continue. Yep. Now, everyone is very focused on the growth of this market. So when did you get the idea to form your own firm? And how did you make that happen? I loved my bosses. John, Angela, Michael Gordon. They were my mentors.

6:49They raised me professionally, but I'd been there. I'd worked with them for a very long time. We had a great relationship. I kind of did my own thing. They left me alone. There was never arguments over comp or anything like that. It was great. They figured out you could count. I could count. I knew how to add. I was a good manager of people and I was good with clients, so that was all good. But what I really wanted was I wanted a chance to drive the bus. I wanted that chance. And, you know, I'll tell you about my partner, but it's a great story. When I left Angelo Gordon, I remember. What year was this?

7:22February 2005. It was 20 years ago. Okay. And my heart was racing. And I went in there and I told him that I wanted to leave. He stood up. He always called me Jeffrey. And he hugged me, uncharacteristic. And he said, Jeffrey, we've thought of you as our son, which is such a nice thing to say. And I told my wife that's, I told her the story that evening. But then I said, that was exactly the problem. Right. Is that I was still 26. Correct. In their eyes. Yeah. And that really summed it up is that why I had to do my own thing. And I did it with a good friend of mine, Marco Logli, who was at Blackstone for many years as well.

7:59Did they invest in your business? I'm just curious. They all did. Yeah. John did. Michael did. Steve did. And Pete. They all invested personally. I want a sign of confidence in you. I'm just curious, where did the Center Bridge partner's name come from? So we struggled with a name because every name was taken. And the idea was pretty simple. Even though the name Center Bridge sounds, it's got a direction in it. It's got a bridge. It's got a view. It's whatever. The idea was we were going to take two strategies, private credit, which was my area of expertise, and private equity, which was my co-founder, Marco Logli's area of expertise, and bridge him to the center.

8:40So there actually was some method behind the madness. And it's now one of the iconic names in your industry. Yeah, it's a real name now. Yeah, absolutely. So how did your relationship with Mark change over the years? And you mentioned that you came from one side of the business, he came from the other, and you worked together to build Centerbridge. But did that change over time in terms of your focus? I'll give you a second on the origin story because that was 25 years ago. And Mark, so it was 2000, thereabouts. Mark was running the private equity business at Blackstone. And he had been at Blackstone since the 80s around the time of inception.

9:17And Mark was interested in credit. And at that point, Blackstone had a financial restructuring advisory business run by a guy named Art Newman, who was like an icon of the industry. And as Mark would tell the story, he went to Art, his partner at Blackstone, and said, I'm interested in credit, but it's not my thing. And Art said, you know, I've got someone for you. You should meet Jeff. And I first met Mark and I'm thinking, very nice guy, but we're literally on different sides of the balance sheet. Yes. But what we did is we developed a partnership. The name of the project at both firms was called Project Spock for where no man had gone before.

9:55And the idea simply was that we would pool our intellectual capital, that we would look at a company and Mark and his team, their alpha was on the left-hand side of the balance sheet, and our alpha was on the right-hand side of the balance sheet, and we were 50-50, just on a handshake, and we looked at everything together. Did you invest in a number of things together? Oh, yeah. We did, and it was hugely successful, and like myself, Mark had been at Blackstone basically since the beginning. Mark also wanted a chance to, like, you know, to drive, so we decided to leave. That's a great story. Yeah, I did not know that story.

10:32Right. So what were the hardest parts of building the business? And what were the unexpected challenges? If I ask you now, looking back 20 years, what were the things you didn't anticipate? Well, we were fortunate in that we both had followings in the LP community. I did and Mark did. With different LPs though, right? With different. There were a couple of LPs who overlapped, but very few did. And so we were able to start with a fair amount of capital. So we weren't struggling to try to raise money, which is typical in startups. The hard thing about it, particularly in retrospect, I mean, we all know it's people business.

11:09I mean, the business, what we do, what all firms like us do is really complicated. At its core, it's pretty simple. It's our people and our clients' capital. That's it. And the clients were either going to choose to invest with you or not. And you do a good job for them and they will and they trust you. That's all good. But that's their decision. So what can we do as people? And as an investor, I like to think about probabilities because there is no certainty in investing, zero certainty. Sometimes I think investors try to fool themselves with certainty and beautiful models and everything looks great.

11:45And when a young analyst gives me a model, which I couldn't do in a million years, I say, and jokingly, in a nice way, the only thing I know about your model for sure is that it's wrong. And as I think about it now, I never asked myself once, what's the probability of hiring 30 A-plus people in a row? I never thought about it. And the probability of that is zero. And so what happened, again, it's a startup. So I also know why people don't invest in first-time funds, because it's hard. It's hard to build an organization that's cohesive with a culture and communicative and collaborative and all those good things.

12:28We hired people, and sometimes it's like investing. Sometimes you just get that twitch. You know, you know it's not right. And Mark and I, we had that twitch with certain people. We didn't do anything about it. So you would have taken action sooner. Yeah, we let it go. And that was a mistake. And we made some mistakes as a result. So for me, that was the biggest learning is, you know, don't, again, you have to look at the world. You have to look at people as well, dispassionately. In fact, that they're people is on the one hand hard. You develop relationships. But we have a business to run and can't forget that.

13:04Right. And I always say in the medium term, you're doing them a favor too, because they belong in a place where they're well suited. So they can flourish. I think with people, you almost have to, in terms of decision making, you have to be ruthless. But in terms of carrying it out, you have to be empathetic. Yep. I would agree with that. So today, is there a specific profile for people that you hire at Centerbridge? Or are there specific attributes you look for? And how has that changed in the recent last 10 years? I mean, attributes, it's the same thing that you folks look for, people who are smart and hardworking and driven.

13:40I want people who are curious, really intellectually curious. I think great investors would also be great investigative journalists. So you're always looking and looking under a rock and asking a question and yet to be a great listener and then posing the question a different way and see what types of answers you get, people who are contrarian. So, again, I don't really interview young people anymore, but I used to do it this way. So, pretend I'm interviewing you. Okay. So, Allison, do you have a lot of friends in the by side? Yes, I do. Great, great. Do you compare notes with them a lot? Yes, I do.

14:16Exactly. Right? Now, what I'm saying in my inflection is I'm trying to encourage you to say yes. Right. I want someone on comparing notes. No, I do my own work. So I'm trying to look for people who, and not many people, if you're being interviewed by me, are going to, because you heard the inflection in my voice. And what I'm trying to encourage, who will have the gumption to say. I have my own mind. I make my own decisions. So things like that. So basically you wouldn't hire me now. Well, of course I'd hire you. Okay. but it's it's the because we operate our the way we operate the firm is a bit differently so we have three strategies we have private equity private credit and real estate the standard operating model for firms and you know this incredibly well you have different investment teams and again hearkening back to my original experience with mark where we partnered with blackstone and it was the same people we took a different approach we said for example if you're going to invest in financial services at Centerbridge, you're going to invest up and down the cap stack within financial services, as opposed to having one team of investors focus on private equity financial services investments, and a completely different set of people focus on private credit financial services investments.

15:39We said, just do both. Just do both. The result of that is the people who want to join us, young people, it's self-selecting. It's people who are Intellectually curious about financial services. Intellectually curious, but it's not someone, I only want to do private equity, or I only want to do private credit. It's someone who wants to do both. And are the incentives aligned? Yes, that was critical because you didn't want to get into, you know, don't copy my homework. Right, and this is my fund and I only have carried this money. So we spread it, I mean, really broadly. And it's easy to say that, well, but if only 5 % of the economics are allocated to a different team, are you really aligned?

16:19no, it's substantial. That's great. So you opened a second office in London in 2011. Tell us about that decision, because I know it was a consequential one for you and for the firm. Yep. We had always invested in Europe. Mark had at Blackstone, I had at Angelo Gordon. And even when we started Centerbridge, we had invested in Europe. I think to be able to invest in another jurisdiction, you need people on the ground. You just can't do it from Park Avenue in New York City. that would be a mistake. And so we did that. But again, I think our eyes were bigger than our stomach. So it's like all the mistakes that you would look for, we fancy office in Mayfair, check.

16:59Hire a bunch of people, quickly, check. Raise a lot of money, check. And that was, it was the same thing. We were almost a victim of our own success. And we made some mistakes. now. What did we do? We like stop, stop, stop, stop. And we had to really look hard at the portfolio. We looked hard at the people. We made some difficult changes and it was the right decision. Those are all growing pains of building a business. Yeah. You have to learn by doing it though. It's hard to learn the book. Yes, absolutely. We always say that. It's hard to learn deal execution. I tell the young bankers at Goldman by watching the person next to you work on a deal.

17:38You've got to do it yourself. Over the course of your career, is there one particular investment that you can point to that you're particularly proud of or that was pivotal for you as an investor? And tell us about that deal and the story. I would say less pivotal for me and more pivotal for our firm and even what I'll call the private credit industry. So this was an investment in a finance company called CIT, which you'll probably remember. And it was around the time of the GFC. The IT Financial. Financial company. And Goldman was a very large investor in this situation. And, you know, the world was ending and CIT was basically, it was a non-bank bank.

18:17They didn't have deposits. They financed themselves through, you know, through the markets, issuing notes and things like that and everything dried up. But they had ongoing maturities. So they were in trouble. But they had a book of loans, which were like really, you know, they were excellent. They were principally an asset-based lender. They were lending on inventory and receivables as opposed to enterprise value. So the loans were, the assets themselves were bulletproof, but the capital structure was just like off. And a lot of investors, including ourselves, we were loading up on the bonds as much as we could do.

18:50And again, that was in the secondary market. And we were buying something at 60 because we thought it was worth 100, that kind of old school way of doing it. Up to that point, people in my world, in the private credit world, up to, and this is probably 2009, it was rare that we did a primary financing. And if we did, we often did it to protect our existing position in a different part of the capital structure, to play defense or maybe to enhance it. But that loan in and of itself wasn't really to make a lot of money. It was more to prevent someone from doing something bad to us or enhancing our position.

19:31And what happened in CIT, and I think it was the first time it was done, it was an enormous debtor in possession financing. It was, I think it was three or four billion dollars. And it in and of itself was hugely lucrative. And not just because of the spread, because of what we designed with make holes and call protection and things like that, that when CIT worked itself out and we converted debt to equity and it was a great home run, but that dip loan also became a huge profit generator for us and the other participants in it. And I think it was a moment that everyone, whoa, maybe there's another way to make money in these restructurings rather than the old-fashioned way of buying a bond in the market at 70 cents and hoping it's worth par, maybe we can proactively originate a new loan at 100, but through bells and whistles and structure, turn that into really profitable unto itself.

20:33So it was like a sea change in the industry. So for our listeners, explain what a dip loan is. Sure. A dip loan is a - You mentioned debtor and possession. Debtor and possession. So it's a loan to a company which is in a chapter 11 proceeding and a bankruptcy proceeding. And the virtue of a dip, debtor in possession loan, it gets paid before anyone. So what's the common problem with a restructuring? There's never enough to go around. That's why it's a restructuring. It's pretty simple. And so it's a limited pie for that dip loan provider, that lender gets paid before anyone. So historically, the spread on that loan was tight because it was very low risk because you were first in the waterfall.

21:19But what we saw with CIT was it was wide and it became wider through a lot of structural enhancements. So it became, rather than using a dip loan to protect yourself, it became an offensive tool as well. Yeah, that's an interesting part of financial history. So I'd also like to ask you about another investment that Centerbridge made with Bloomberg and with Goldman Sachs in a program to train, mentor, and hire students for careers in the financial sector. Tell us more about that and your involvement in City University of New York, known as CUNY, and why you specifically describe the 11 schools that are part of CUNY's network as incredible, undiscovered jewels right in our backyard.

22:02Yep, that is true. So we, like all firms, we're always looking for talent. Okay, and we talked about this earlier, young, hardworking, driven, and we all recruit from the same places. I joke with people, I couldn't get a job at my own firm. None of us could. I didn't go to an Ivy League school. I didn't graduate Phi Beta Kappa. I don't speak six languages. I didn't discover the cure for cancer when I was nine years old. You weren't an Olympian. Yeah, I didn't do any of that stuff. So we're all scrambling and tripping over ourselves, looking for the same people. And I thought about it, and we had done, my wife and I had done some private philanthropy with City University.

22:39So City University of New York, CUNY, is the largest urban university in the United States. There are 275 ,000 students there. When I tell people that, it's like, that's a mind-boggling number. Huge. And a huge engine of social mobility here in New York City. And I had met some of these kids, and they were smart, and they were hardworking. But you know what else they had? They had grit. There was no millennial stuff or - No entitlement. Zero. They had grit. Most of them worked their way through school. And so we started hiring them. And all they wanted, it reminded me a little, like when I started, I just wanted a chance.

23:19Give me a chance. And we started hiring these kids and they were great. And so this was before COVID. And I said, there's gotta be something to do here because the financial services industry, which is the biggest economic driver of New York City, is always, we're all falling all over ourselves. Small firms, medium-sized firms, giant firms looking for talent. In the meantime, there's this huge pool of talent right in our own backyard, the undiscovered jewel, that no one's thinking about. Now, the problem is you've got all these students, you've got employers on the other side, all right? How do you create that bridge?

23:58How do you get rid of the gunk at CUNY and bureaucracy and things like that. And so I called John Waldron, President Goldman. I called Mike Bloomberg and I said, I have an idea. Why don't we all invest in CUNY? And ultimately the three firms, we collectively invested millions of dollars in CUNY to build out the infrastructure, to build the bridge, to take these kids who just want a chance and build the bridge to get them a great job. And it doesn't have to be a job as a banker, as an investor. There's so many great, well-paying jobs in our industry, like tens and tens of thousands. And so we started it, and it's been a great success, and it's been a huge win for these students.

24:46It's been great for New York City, and it's been smart business. It's been good business. They've got philanthropy. Hire really talented people, yeah. What year did you do this? Gosh, I think we started in 2019. And we've kept it going and we've opened it up to competitors. That's phenomenal. Yeah, well, that's a smart thing to do. Yeah. And that's why I wanted Goldman as like representing a gigantic financial institution and Bloomberg, which wasn't a financial institution, but just integral to our network, so to speak. So it's been terrific. So let me ask you a little bit about the current environment.

25:20Across all of the types of assets and different structures that Centerbridge invests in. Where are the biggest opportunities today? Yeah. I think, you know, this is going to sound like a cliche, but in today's world, particularly in the alternatives world, you want to be a solution provider because people, you know, and you read about this in media, there's lack of liquidity and lack of transactions and things like that. And why is that? I mean, in the private equity world, a lot of deals were done a few years ago, the rate environment was different. Everything was different. And how do you exit those?

25:56Similar dynamic in the real estate world. So how can you help free things up? How can you create liquidity? Particularly because owners of assets want to sell at the old price. Buyers of assets want to buy at the new price. So this notion of being a solution provider, and I think about it both from a private equity, private credit, and real estate perspective is what we've been focused on. In private equity, we're trying to do what we call structured equity transactions, where we'll inject equity into a business, a business that we believe in, you know, at a good price, not a crazy price, but we're not trying to, you know, it's not bottom fishing exercise.