King Street's Brian Higgins On Navigating Distressed Markets

29:10Right. And so initially, there's always the - and we could sit there a bit of time, and it gets expensive carrying shorts, so you have to be mindful of that. It can take some time. However, it does enable us to have done a fair amount of work in advance. And so let's say something breaks. Hopefully we've been shorted and we have a fair amount of institutional knowledge about that situation. And then we can cover it or wait. It's going to get worse. Because, you know, oftentimes management comes out and they say, okay, they find some guy, they shoot him and say, that was the bad guy. And now we're back.

29:46And you're like, wait a minute. That guy, you know, was the janitor. What do you mean? Or we're going to execute on this or that. And you say they've tried to execute for the last three years. They haven't allowed to do it. So really having a bit of perspective is important. And then you can then time it appropriately. Now, we're not market timers. But it does give us, I think, a relative value perspective. So coupling the trading and understanding, OK, a lot of sellers are coming out. There's more coming out. having that supply-demand question answered is important as well. So I want to put some flesh on the bones of what it looks like combining the tactical with the fundamental.

30:28And I'm going to quote numbers from institutional investors because I know, as a regulated entity, I know what I cannot say. I know you can't give specific numbers, but I could cite what institutional investor had observed. 2022 was the worst year for hedge funds Since 2009, the S &P 500 down 20%, bonds down 14%. King Street, according to I.I., was down only 3.8%. A massive outperformance to either the S &P or the Bloomberg ag. Tell us what it was like trading in 2022. First time in 40 years, stocks and bonds were down double digits together. I would say it set the table going back to, say, 2020.

31:14If you look in the pandemic when the world's going to end and then a lot of liquidity injected and then we had the vaccine news came out and everything rallied. But there was so much stimulus being put. And I think, you know, just let's say I don't like losing money ever. And as my co-founder used to say, you know, relative performance, but you can't eat your relatives. So it's just important to, from our perspective, contextualize that. And so we are very disciplined. I think one of the things that we looked to was like, hey, let's go up in quality, up in liquidity. And that was a concern. I think one of the things that took us by surprise was, okay, how much inflation really rooted and how quickly and how high it went.

32:01So I would say that was something we missed. Again, we always try to focus on what we did wrong, and we correct those. Hopefully then the going gets better going forward. Trading in 22, as I said, I wouldn't say it's too differentiated. But again, in absence of a true distress cycle, I think that it loses sort of meaning. But if you look at, you know, in 2020, there was a number of things that is really, for me, a more signature important time. So I want to talk about a few specific investment strategies that King Street does. In 2017, you launched a collateralized loan obligation business. Tell us a little bit about that strategy.

32:43So we've been investing in CLOs, mezzanine, and opportunistically for a number of years, equity, etc. We've always had this credit expertise, and we felt that as a complement for our investors and to benefit our long-term credit business, to have the CLO strategy was, we think, a distinct advantage. And so we've had a terrific growth and successful business launch and continue to grow from strength to strength there in both the U.S. and Europe issuance. During 2020, there was a number of opportunities that came out to rescue finance a number of the companies we had relationships with. And so it has proven very complementary to our business.

33:30We describe our business in terms of overlapping circles. And that is that we will have different fund strategies and there might be a bond or a loan situation that we might see in different funds if they meet the investment criteria, liquidity, duration that we are looking for in that particular strategy. And so there is real synergistic effects and ability to analyze these situations quite rigorously. Let's talk about another overlapping business line, real estate. What do you guys do in the real estate space? So we've been doing real estate, as we mentioned, first real estate finance and then real estate buying the equity or buying actual properties for quite some time.

34:15A number of years ago, again, as I mentioned earlier, the demise, if you will, the stop doing side pockets and you set up separate real estate funds. And so we've set up a number of funds. We've also invested in some specialties such as student housing in Europe. We've done last mile logistics. We've done movie studios. We've also done a number of financings as the banks have pulled back, has created great opportunities in that. And then more recently, we bought a data center business that specializes in AI and high performance compute, which is quite an exciting business. That's Colivore? I was reading about that and saying, wow, this seems to be a little off of what I was expecting.

35:04Liquid-cooled AI data center. Liquid-cooled, what's that about? So to give you the history, so years ago, we started focusing on growth lending, growth financing. It's funny, VC, distress, there's a lot of similarities between the two. You don't know what's going to happen with the company. Is it going to make it, not make it? So, for example, Airbnb and DoorDash. In 2020, we lent them money prior to their IPOs. Now, the V on the LTV, loan to value, the value oftentimes is a disparity because when you ask a tech person what's this company worth, generally it's very, very high numbers, which we don't always support from our valuation.

35:49but if the loan percentage is quite small, 5%, 10%, then there's a margin of safety and we have a lot of covenants to protect ourselves. Needless to say, we did some of that. We looked at GPU financing, which GPU is the NVIDIA chip. That's what they produce. And so we looked at some financings there. Couldn't get quite comfortable the depreciation curve because NVIDIA comes out every other day with a new chip. And so we said, why lend your money if every two years you're going to have a new chip? And so worry about the value eroding on that chip. And so even though we're over-earning in terms of financing, now there'll be situations and opportunities that will make sense to lend in that sector.

36:33However, we then said, wow, this data-centered business is going to have legs for quite some time. We looked at the hyperscale business, insanely competitive, and said, okay, can't make a mark or find an edge there. And that's when we came up with Colivore, which was selling itself. They had been doing liquid cooling for 13 years. They started a company 13 years, the company 10 years ago, operational in a co-location business in Santa Clara, California, in the heart of all these tech behemoths. And they've been DGX certified by NVIDIA for over five years. Liquid cooling, the way we do it, is it's full, true liquid cooling.

37:13Meaning it's more efficient, more productive. Yeah, so just think about just the construct, right? So you have the whole data center, you have three-foot raised floors, you have an intake, outtake of water that's ambient water temperature, flows around and goes to the rack. Many will do liquid cooling to the rack, but separately, and that's very expensive because in effect you're retrofitting. 95 plus percent of the data centers are air-cooled. As we know, air, water is 3 ,000 times more effective cooling than air. And so the PUE, which is the efficiency rating that they utilize, we're like 1.3 and many are 1.56, et cetera.

37:55So it's very efficient. You can have a denser facility and it can handle the AI chips. The other metrics that people use is the kilowatts per cabinet. And so we can host up to 250 kilowatts per cabinet where, you know, 5, 10, 20 is these traditional data centers, air-cooled. And so as Wayne Gretzky used to say, I skate where the puck is going to be. And the chips are all about we need liquid cooling. Also, as we look to satisfy the future, which will be inference versus the LLM, the big training models, there will be a need for the data center. So we're having a number of conversations across many different verticals.

38:38Our real estate group is executing, plus the team. It's super exciting. And again, it's something that evolved out of our overlapping circles with the financing. There's always a method to it that we evolve into. Really fascinating. I'm Carol Masser. And I'm Tim Stenevec, inviting you to join us for the Bloomberg Businessweek Daily Podcast. Now, every day, we are bringing you reporting from the magazine that helps global leaders stay ahead. We've got insight on the people, the companies, and trends that are shaping today's complex economy. That's right, Tim. We're all over global business, finance, tech news, all as it is happening in real time.

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40:01So let's start out talking about why we're even talking. For most of King Street's history, you've been a quiet firm. You quoted one of your colleagues as saying, hey, it's the spouting whale that gets harpooned. Tell us why we're even having this conversation now. evolution is so important, self-improvement evolution. I think markets change, and I think it's important to adapt, to survive, as the trite saying might say. We look at the opportunities that we're facing, the business that we're building and have built, and are quite excited about it. And I think it's important to communicate for our investors, for prospective partners and and people to attract the best and make sure we have the best partners, to make sure our story's out there.

40:58It's gotten incredibly noisy, if you will, and everyone's out there. So to do nothing, I think, would be a disservice to the people in the business and our partners, really. As the opportunities come to, as they say, squeaky wheel gets the grease, And so one has to, you know, relationships are great. However, at times people, you know, would say, oh, King Street, they still in business? Because if you're not out there with your LinkedIn presence or I think it's just a sign. Look, we're not on Instagram, so. No TikToks from King Street? No, no TikTok videos, you know. Really, really interesting.

41:44You know, there's some quotes of yours that I really like. One of the things you had said recently was, what kills you in investing is a false sense of bravado. I have all the answers. I could beat this market or that sort of approach. We say the work is never done and knowledge reduces risk. Explain. in? Well, it's, from our perspective, fairly simple. As investors that focus on out of favor, distress, bankruptcy, we see failure every day. And we would be incredibly delusional to think that without, and sometimes it's no fault of the companies, right? It's some unforeseen act. It's, Some fraud was perpetrated on it.

42:39But it's incumbent upon us to be tireless in our effort as there's a multitude of competitors out there globally that we go up against every day. And if we're not grinding it out, then there's going to be a shortfall, and we don't plan on having that. Early in your career, someone would ask you what drives you, and your response would be paranoia and insecurity. Along the same lines? Yeah. Look, paranoia and insecurity. I try to be humorous and colorful because investors come in to drone on. It doesn't always keep their attention. I think it's important to look at. We also talk about probability and proportionality.

43:35And so if you take those four things, right, so the paranoia and insecurity is like, okay, did I do enough work? Does someone else know what can happen that I'm not seeing? It keeps that drive to continue to ask those questions. As we said, knowledge reduces risk because, you know, this is a moving picture. This is not a still-life photograph. And so there's many different variables that happen through a business, through a cycle, through lifetime of owning investment, and markets do change. So if you think about the number of variables, one would be kidding oneself to think that they can rest on their laurels, if you will.

44:14The work just begins when that investment is made. And so in the paranoia and insecurity, only paranoia survive, as they say. And so we have to say, did I do enough work? Was there something I missed? Keeping one up at night, constantly looking at it. I think if you look at any piece of work, an artist or whomever it is, they put some work, they do some work, they put it down, they come back, they look at it from another light. And, oh, I missed that. Let me continue to refine it. And so investments in our mind are bodies of work that need to be continually refined because the elements, if you will, continue to challenge it.

44:56And then you look at probability and proportionality. One has to be careful on that, right? Because if you say, well, this hurricane is going to happen, the tragic hurricanes that we've had currently and just recently. Okay, if you had said, never going to happen, we haven't had it for a while, and if it happens, it doesn't create much damage. Well, what's the probability that that could outcome? Now, if you look at geological faults and you're buying a piece of property and you're building a data center, for example, and you say, well, 1.6 million or billion years, I feel good about that, right?

45:36But if you're down in Florida and you're saying, I'm not going to buy flood insurance, now the question, can you get it these days? Or afford it, right. Or afford it, right. But like think about the people, the tragedy happened in North Carolina up in the, you know, they didn't think they'd need flood insurance. They were deep inland and at a fairly high elevation and yet they still got flooded out. Right. So these are things in terms of proportionality and probability. And proportionality is, okay, you can create a scenario with any investment where you'd never make the investment. You could say, well, that could happen.

46:07And then you could say to someone, well, it's one in a million years and it's 2 % of the business. Is that really going to cause you to pass on that investment? So that's the constant interplay that we feel is critical to arrive at the best decision you can make. And again, the best decision you make today, tomorrow, look at it again and say, oh, I screwed up. You mentioned earlier you wanted to be a little public because you want to attract and retain the best employees. King Street has about 250 people working for them, 70 of whom have been with the firm for 10 or more years. That's pretty unusual in the hedge fund world.

46:46Tell us a little bit about the 10-year club you guys created. Well, it really, again, as I said at the outset, it's celebrating the people that comprise King Street. As I thought from the beginning and talked to other people in leadership, remember that your greatest asset goes down the elevator every day and you hope they come back up the next day. And so one has to, again, celebrate the teamwork. And that's the approach that we have at King Street. It talks about the overlapping circles and the ability to work on different aspects of the business. But it's very much a team. And we look at the operation team, the investment team, and the trading team.

47:35There's a lot of collaboration that is constantly occurring. and people get paid on the well-being of the overall firm. And so it forces that teamwork and collaboration. And I think it's important to celebrate events. We have outings. We have different groups celebrating our women, our diversity, our charitable pursuits, our holiday party. We still have the old school holiday party that we do every year. I think the summer outings, et cetera, these are all, we believe, part of the building culture. You know, everyone, the month end, everyone's birthday gets celebrated with a, you know, we had them happen every day.

48:21So we say, wait, we'll do still once a month, all the February birthdays, you know, which, and then you get a vote on it. So little things that I think create the family. You spend a lot of time with people, and if there's not that recognition of individuality and the effort put forth, then it's a miss, we believe. Again, to celebrate together what we've achieved is critical. I've heard a number of executives complain or at least raise the issue it was very difficult to either create or maintain a corporate culture during the pandemic, work from home, remote. How have you guys navigated that? And how important is corporate culture to a fund like yours?

49:12Well, culture becomes what it becomes. Everyone hopes that their culture is sustainable and constructive and not toxic. And so we strive to make sure there's that communication openness. We do a lot of surveys. We're always trying to better our scores. It's self-improvement we focus on. And if you go back to pandemic, it was hard, right? Because you're on Zoom. And so holiday party on Zoom or scavenger hunts on Zoom. It was how do we create these ties that bind us over what was incredibly challenging personally and professionally for a lot of people? And frankly, the markets, as we all know, back in the 2020, as I referenced earlier, were brutal.

50:06and working incredible amount of hours, the family challenges that people had with their kids at home or trapped in different places, and the sicknesses and loss of life. So those are obviously in any regular time important, but we believe corporate culture has to play its role, and not to replace, but to be a part of it, to be supportive of people. But it's – and also think about like there's – we have offices, as you indicated, in the U.S. and Europe and Asia, Middle East. How do we create that consistency? How do we create that fabric that runs throughout? And it's – a lot of times we'll do our similar, you know, furniture and the like.

50:59So they feel like, oh, this feels like a King Street office, things of that nature, similar events. and the swag, if you will, that binds people. So your co-founder and partner, Francis Biondi, retired a couple of years ago. Two questions about Francis. First, is he still sitting on the Yale Investment Committee or has he fully retired from asset management? And then second, what was that transition like? Suddenly, your co-founder is no longer there every day. How did you adjust to that? Well, I believe the website's correct. He's still at Yale. I know I've spoken to him recently, but I know he's got a lot of pursuits and quite busy with his family.

51:46And I think he's enjoying a well-deserved time. He and I had an incredible 25 years together. We call ourselves, you know, old married couple or, you know, brothers of King Street, whatever they call us in I. Two Guys Capital. Two Guys Capital, right. Which is funnily enough, my brother named that. We grew up in New Jersey and East Brunswick, and there was two guys. With this giant Alexander Calder on the outside of that building? Am I remembering that correctly, in Hackensack? Well, I grew up in East Brunswick, so I don't know about the Hackensack one. But in the one, it was a discount store and went bankrupt in the 80s, which Furnado was part of the – so it's funny history.

52:35But my brother recently gave me a shirt, you know, Two Guys Capital. I don't know if it's on the website somewhere. But anyway, so I had a significance there. But no, so as I said earlier, having this team and this partners with us over 13 years on average and having MDs, 38 plus MDs with us over 10 years on average, we've had a very deep, deep bench and fortunate to have incredible depth and breadth to the organization where we didn't miss a beat. And, you know, that's something I think testament to the culture that Fran and I built the first 25 years, which we hopeful will continue for many, many years to come.

53:20Let's jump to our favorite questions that we ask all of our guests, starting with what have you been watching these days? What's been keeping you entertained? Well, I've been watching the Mets a bit lately. I went to my first Mets game. In October, which I can't remember the last time you could watch the Mets in October, having grown up on Long Island. Yeah. Well, yeah. I mean, I grew up in New Jersey, and my first Met game was 1969, which is when they won the World Series. From a despicable, like, worst team ever. I think the Chicago White Sox have taken that over. But anyway, so we went there, watched some of that.

53:59Also, I'm a Knicks fan. I went to Villanova, and they call them the Nova Knicks. a funny story years ago i was fortunate enough jay wright who's the coach of villanova invited me to speak to the team uh before um the start of the season they were in new york and you know talking to the team and i i you know i said to them guys i'm really really nervous here you know 2018 they were reigning national champions and if you guys don't win the championship like they're to look at me and blame me and they were kind of looking at me quizzically and and I I picked one of the young players uh young freshman and and I I sat down right across from him right up in his face and I said you know look I'm really nervous I got this big meeting and you got to help me what what you know can you what do you what do you say to me you know and uh he had like deer in the headlights look he was 18 year old kid he was sort of like this you know old guy with supposedly you know successful guy coming in begging me for advice what about you know and uh he said uh like quizzically like uh you can do it and I said yeah and it was funny watching the faces of all his the older upper class and they were laughing because they knew I was just trying to see and I And I said, it was interesting because Jay Wright had called me like four times in advance because it was so, but you go back to leadership and culture, it was so important with, he wanted to make sure what message I was going to give.

55:34And I said to the team, I said, see, you all can be leaders. You all can inspire. And when you're on the court and Jay is, you know, 50, 100 feet away, who's going to inspire and lead each other? And you can't just rely on the coach. You got to look to each other for leadership and to sponsor. And that's what when I talk to my team and how do we have the culture, how do we continually have that leadership? If the partner is not in the room, who's going to take that mantle and who's going to push forward? And so on the things that I ingest, I got to have a lot of intake to have outtake, right? Because I got to do a lot of meetings.

56:10So I got to find that time to refill the tank with information. and so you know on stuff i'll watch whether it's if it's not sports uh it will be some you know mindless spies things i like sort of because it's i like to travel and see things around the world and different cultures and understand that and history and so that usually wraps up and say a spy thing um i'm going to give you a recommendation only because i watched this on the flight back from Europe, and it's dead center of what you're talking about. The Ministry of Ungentlemanly Warfare is essentially Churchill's special teams creation as a way of fighting Nazi submarines during World War II.

56:56If you like global spy stuff and history, this is right in your sweet spot. I wrote it down, and we'll put it on the list for sure. Absolutely. And again, we're recording this in October. I can't remember the last time I was this excited about a Knicks season. Like even injured, they really distinguished themselves last year's playoffs. You could see, hey, if they were full strength, they could have gone pretty deep into the finals. Yeah, I'm super excited for this season and sort of seeing what they can do as well. So you mentioned some of your mentors. Tell us about the people who helped shape your career.

57:42Well, I mentioned Jimmy Cain and Vince Tisi. Vince Tisi was where? Vincent Tisi is on the number of boards to this day. He was banking commissioner, stayed in New York. He was urban development chair. He had been a tax lawyer. He was a commodities trader. So he had this incredible varied career and life and quite successful entrepreneur. And so he's always a wealth of information contacts and always great, great advice and perspective. And Jimmy, of course, ran Bear Stearns, obviously unfortunate ending to a storied career. But he, too, was very helpful in giving great advice. Right. Legendary CEO of Bear Stearns.

58:29This is Caroline Hyde. And I'm Ed Ludlow, inviting you to join us for Bloomberg Tech, a daily podcast focusing exclusively on technology, innovation and the future of business. Every weekday, we bring you the top headlines from the world's biggest tech companies. From finance to defence, AI to entertainment and from startups to the magnificent seven. We highlight the latest stories of the people and companies pushing the tech sector to new frontiers and the politics that shape global tech markets. We do this all every weekday, then bring you the most important conversations and analysis in our podcast.

59:03Search for Bloomberg Tech on YouTube, Apple, Spotify, or anywhere else you listen. Join us every afternoon on your commute home and stay ahead of the tech news cycle. That's the Bloomberg Tech Podcast. I'm Caroline Hyde in New York. And I'm Ed Ludlow in San Francisco. Subscribe today, wherever you get your podcasts. Let's talk about some books. What are your favorites? What are you reading currently? I would say book-wise, just let's say a genre of books because I listen to them. I'm not a big reader because I read so much in terms of research and consultants and sell side and our own internal research plus the papers, et cetera.

59:41And I try to ingest a lot there and then content, deeper content on the weekends. And then just a number of emails, et cetera, you go through. So I'll listen to different, whether it's leadership or self-help type things, but it's more about, I think, the self-improvement. And so how do you get the most out of life, if you will? I love hacks, if you will, in terms of health hacks or efficiency hacks. I think that's critically important technology to utilize to its followers. So that's sort of the focal point. Let's talk – And by the way, on that, sorry, is I found that Blinkist is a great thing to utilize because – The website.

1:00:31Well, Blinkist is sort of the Reader's Digest version of books because most books, they have a concept, interesting concept, and they spend 200, 300 pages saying the same thing, seven different ways, you know, trying to convince you that – versus Blinkist is like, all right, here's the concept. You're like, okay, makes sense, interesting, and next. One of my partners likes to say most books should be magazine articles, most magazine articles should be tweets, and most tweets should be deleted. And that's the same sort of concept as Blinkist. So now we're down to our final two questions. What sort of advice would you give to a recent college grad interested in a career in either stressed or distressed investing?

1:01:17Well, there's the critical importance of analytical rigor. And so if you're a recent college grad, you can't necessarily go back and take the courses that would be helpful. And so if you see some of the Ivy League kids, they don't have the accounting background, for example. I think critical thinking is important. I think having some understanding of the legal framework has always become such a big deal. To get into, let's say, stress, distress, out of favor, look, there hasn't been as much interest, frankly, because the tech world's been such a robust world. And so it's important, again, as I said, to work in the credit business to understand those covenants, understand those companies to get a generalist type experience.

1:02:18Because one never knows, is it the utility sector? Is it the energy sector? Is it the TMT sector that will have issues or asbestos or different issues? And then you're like, oh, I'm an expert in this. But at the end of the day, if you understand cash flow generation, you understand balance sheets, you understand legal framework, accounting, then you can kind of learn most valuations, frameworks. Really interesting. And our final question, what do you know about the world of distressed credit today you wish you knew back in 1987 when you were first getting started? Well, I guess having the hindsight is 20-20 perspective on markets in general, I think it's important, you know, pivoting globally.

1:03:07Also, the let's say the broad product suite that we now have, I think, are super interesting, informative. of, I never would have thought that we would rebound so easily and quickly in so many different difficult times. And that kind of me speaks to the resiliency of markets and the commitment that the governments, et cetera, had to bail us out time and time again. And so now$35 trillion plus trillion debt, we got a massive amount of debt to show for it since 2008. We'll see how it all works out. But I think it's really the sophistication and innovative nature of, let's say, security design has been enabled to have the flexibility of capital that has been transformative, certainly for the U.S.

1:04:12cap markets and then finds its way into other markets. But it enables, you know, people say traffickers in tragedy. You know, it's interesting. We had, you know, one of the investors going to allocate ESG. And he said, well, you know, distress is not ESG friendly. I said, well, we're 100 % ESG. We're trying to help companies survive. And, you know, they have bad ESG score. We're trying to transform them into productive companies that are, you know, doing better. Think about environment. They might have had some spill that they had a big liability from or the governance was bad. That's why they were, you know, in distress because some guy was stealing money or what have you.

1:04:54So, you know, there's a number of things that we've been able to prove upon, bringing new management or cleaning up environmental issues that then the company valuation rebounded. Thank you, Brian, for being so generous with your time. We have been speaking with Brian Higgins. He is co-founder and managing partner at King Street. If you enjoy this conversation, check out any of the past 500 or so discussions we've had over the past 10 years. You can find those at iTunes, Spotify, Bloomberg, YouTube, wherever you find your favorite podcast. And be sure and check out my new podcast, At The Money.

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