Jul 25, 2022 · 1h 4m · capital-allocators
Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263)
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gold bands on the timeline = statements, start to end. Hover to read, click to jump. CC turns on captions
Josh Friedman, co-founder and co-CEO of Canyon Partners, reflects on his career through the high-yield bond revolution and shares Canyon's disciplined approach to credit underwriting, navigating market liquidity, and managing multi-decade institutional growth. He also explores macro credit market shifts and governance lessons from serving on top endowment boards.
How this conversation actually went
Every chapter scored 0–10 on four independent dynamics. Hover any point for the reasoning behind the score. Ted holds 20.3% of the talking time here. How this is scored →
Ted as informed peer 5.1 Guest teaching 3.2 Guest disagreement 1.0 Ted pushing back 0.4
speaking balance: gold is Ted, purple is the guest (3 minute bins)
Sharpest disagreement ▶ 40:54 Josh rejects zero-sum label and condemns creditor violence
Josh firmly rejects Ted's framing of distressed investing as a zero-sum game, explicitly condemning unprincipled creditor-on-creditor behavior and engineered defaults.
Hardest push from Ted ▶ 19:07 Ted presses on fundraising difficulty without an allocation boxTed directly challenges Josh on how Canyon managed to raise institutional capital in the early 1990s when their multi-faceted credit strategy didn't fit into any allocator's predefined bucket.
Biggest teaching moment ▶ 38:57 Josh explains the anatomy of systemic liquidity crisesJosh breaks down the exact mechanics of financial panics throughout history, proving how leverage paired with liquid liabilities funding illiquid assets creates systemic failure.
Ted holds their own ▶ 55:18 Ted prompts analysis of asymmetry and board insightsTed displays sophisticated understanding of institutional portfolio construction by steering the dialogue into how trustee oversight of venture and equity shapes credit underwriting.
the scores for every segment, with the reasoning behind each
| Chapter | Topic | Ted as informed peer | Guest teaching | Guest disagreement | Ted pushing back | Why |
|---|---|---|---|---|---|---|
| Josh Friedman's Early Background and Entry into Finance | 4 | 2 | 0 | 0 | Ted opens with a broad question on Josh's early background. Josh walks through his academic detour and early M&A career at Goldman Sachs in a highly conversational, non-adversarial manner. | |
| Transition to Drexel and the High-Yield Revolution | 5 | 3 | 1 | 1 | Ted notes the rarity of leaving Goldman pre-IPO. Josh explains the birth of new-issue high yield under Milken and how it weaponized buyout financing. | |
| The High-Energy Culture of Drexel's West Coast Desk | 4 | 2 | 0 | 0 | Ted inquires about the internal culture at Drexel and its eventual collapse. Josh describes the entrepreneurial problem-solving environment and early signs of trouble. | |
| Launching Canyon Partners Amid the S&L Crisis | 4 | 4 | 1 | 0 | Josh recounts founding Canyon during the S&L crisis, describing the massive price dislocations when the government liquidated paper with no market-makers. | |
| Canyon's Core Philosophy: From Complexity to Simplicity | 5 | 3 | 0 | 0 | Ted asks for Canyon's core philosophy. Josh details targeting complex credit situations with clear simplification paths where traditional buyers could not participate. | |
| Navigating Categorization and Becoming Multi-Strategy | 6 | 3 | 2 | 2 | Ted probes the difficulty of fundraising without an established category box. Josh admits they were artists rather than business builders until the multi-strategy label emerged, contrasting their early approach with Oaktree's structured products. | |
| Organizational Scaling, Compliance, and Global Expansion | 5 | 3 | 1 | 0 | Ted asks about scaling assets and headcount. Josh highlights early SEC registration for transparency and the legal nuances of international distressed debt across jurisdictions. | |
| Investment Team Organization: Industry Specialization vs. Products | 5 | 4 | 1 | 1 | Ted asks about organizing teams by product versus industry. Josh outlines pool sharing between generalists and specialists like CLO desks while maintaining shared diligence. | |
| Cultivating Culture, Fair Compensation, and Talent Retention | 5 | 2 | 0 | 0 | Ted inquires about retaining talent during dry yield environments. Josh explains compensating analysts for restraint and describes the balance in his long-standing partnership with Mitch Julis. | |
| Sponsor Message: Ridgeline Investment Management Technology | 4 | 3 | 0 | 0 | Includes mid-roll sponsor message followed by Ted initiating discussion on banking structural changes and Josh outlining the shift from public markets to private credit. | |
| Secondary Market Liquidity Fluctuations and Dealer Dynamics | 5 | 3 | 1 | 0 | Ted asks about secondary market dealer liquidity. Josh explains how reduced bank balance sheet commitment creates periodic voids that penalize retail sellers but offer opportunities for patient capital. | |
| Asset-Liability Mismatches and Systemic Financial Risk | 6 | 5 | 2 | 1 | Ted asks if liquidity mismatches in ETFs/funds threaten systemic stability. Josh delivers a masterclass on historical financial crises driven by asset-liability mismatches combined with leverage. | |
| CDS Market Maneuvers and the Realities of Restructuring | 6 | 4 | 3 | 1 | Ted raises the zero-sum, aggressive nature of distressed debt. Josh rejects the zero-sum framing and critiques unethical creditor-on-creditor maneuvers and manufactured CDS defaults. | |
| International Credit Markets, European Stress, and Global Risks | 5 | 3 | 1 | 0 | Ted asks about opportunities outside the US. Josh outlines European stress opportunities and risks, citing geopolitical, energy, and rule-of-law differences across jurisdictions. | |
| Analyzing Inflation Realities, Fed Policy, and Recession Risks | 6 | 4 | 2 | 1 | Ted asks how Josh assesses inflation. Josh provides nuanced macro commentary, noting Fed jawboning effects and explaining why structural energy supply bottlenecks differ from transitory supply chain snarls. | |
| The 'Prepare, Don't Predict' Credit Underwriting Framework | 5 | 4 | 1 | 0 | Josh articulates Canyon's underwriting philosophy of 'prepare, don't predict,' using historical stress-testing models from 2008 rather than trying to forecast macro inflection points. | |
| Translating Equity Optionality Insights into Credit Portfolios | 6 | 3 | 1 | 0 | Ted explores how trustee governance work informs credit investing. Josh explains how observing equity positive optionality on endowment boards provides perspective on debt asymmetry. |
Statements from this episode (30)
Friedman: Drexel Under Milken Taught How to Buy Businesses Without Capital
“I worked in the magical world of Mike Milken in 1984 to 1990, which was just an unbelievable place. It was a great place to learn how to buy a business if you didn't have any money, because we were financing people buying businesses who didn't have that much m…”
Friedman: Drexel and Milken Created the Original New-Issue High-Yield Bond Market
“There was no such thing as a new issue high yield bond before Mike and Drexel. The only high yield bonds were fallen angels, investment grade bonds that had been downgraded.”
Friedman: Drexel's 1980s high-yield market fueled massive private equity expansion
“The first three years that I was there, from 1984 to 1987, were a period of exponential growth, exponential creativity. Explosion in the size of the market that we were creating and the characteristics of it, and explosion in the private equity market because …”
Friedman: 1990s bond prices collapsed despite an expanding US economy
“The prices get absurdly low on pretty good credits, and it's also a time when the US economy was recovering from a recession in the late eighties, so you had an economy pointed up and bond prices going down, and it made no sense.”
Friedman: Hedge fund structure beats daily liquidity mutual funds in credit
“We knew that the hedge fund structure was much better than a daily liquidity mutual fund, given the lack of liquidity in the markets from time to time, and particularly at that moment.”
Friedman: Buy unloved, complex credit assets that will eventually simplify
“So what was complicated today was going to be simple in the future because the bankruptcy process has run its course or because the buyer was going to divest of things and then be a nice, pure play, simple company or whatever. But generally speaking, complex t…”
Friedman: Oaktree Outpaced Early Canyon by Targeting Institutional Asset Allocation Boxes
“I remember when our good friends, Bruce Karsh and Howard Marks left Trust Company in the West to start Oak Tree and almost instantly had more capital than we did, or at least as much, and we had started a few years earlier, and part of it was that they underst…”
Friedman: Handicapping investment odds is easier in corporate than sovereign debt
“It's a lot easier to do that in corporate settings where you understand the rules of play than it is in sovereign settings.”
Friedman: Transparency gives LPs a reason to stay during underperformance
“And I also think that no investor will always do a great job at every point in every cycle. So you may as well give people a second reason to stick with you if you happen to do a poor job on the investing side, and I think having good transparency and complian…”
Friedman: Predictable Rule of Law and Restructuring Processes Are Critical for Credit Investing
“When you buy mostly credit-oriented securities, predictability of rule of law and of the way in which restructurings are handled when there's an over-leveraged credit, those are critical elements of being able to be a successful investor. That doesn't work equ…”
Friedman: Credit firms must compensate their analysts for not investing
“You have to reward people for not investing, as well as for investing, because there's a time when their areas are not particularly attractive, and you don't want to push people to invest, so you want them to own a piece of the overall firm carry, if you will,…”
Friedman: Private high-yield issuance surpassed public high-yield around 2019
“Two or three years ago was the first year that the high yield market privately issued high yield exceeded publicly issued high yield.”
Friedman: Private credit makes the financial system safer than before 2008
“The nice thing in the private markets right now is you don't have as many critical players in terms of being in a position To take down the economy or threaten the liquidity of the whole financial system. As long as the banks are forced into a more conservativ…”
Friedman: Dry credit liquidity creates huge profit for market makers
“If there's no liquidity, there's usually a lot of profit in making liquidity.”
Friedman: Public versus private structure barely affects true credit market liquidity
“It will never be perfect in these markets. Whether they are technically public or technically private doesn't seem to matter that much.”
Friedman: Financial crises are always caused by leverage and liquidity mismatch
“The entire history of the financial world is one of crises that are born of exactly what you say, where you have a combination of illiquid assets held by a firm that has liquid liabilities, like a bank, and is leveraged. So leveraged and a mismatch is always t…”
Friedman: Distressed investing is value creation rather than a zero-sum game
“I don't necessarily see it as a zero sum game at all. I look at it as us and our colleagues against the house, if you want to think of it that way. And sometimes there's an equity holder who's trying to steal stuff that should belong to the creditors at this p…”
Friedman: Intra-tier creditor conflict is unethical compared to inter-tier disputes
“They don't rank high on the ethics scale, in my view, and some of that creditor on creditor violence that you get, particularly if it's from people who are in the same asset class as you. It's one thing to fight against people who they own the subordinated, yo…”
Josh Friedman: Bankruptcy restructurings reliably trigger aggressive, desperate behavior among participants
“There's usually a reason why a bankruptcy occurred, and someone's going to win and someone's going to lose, and you can expect a certain amount of caged animal behavior from the participants.”
Friedman: Corporate distress is delayed by low coupons and cov-lite debt
“I would expect there will be some distress, but I think it's going to take a little while before that develops because a lot of the paper that's been issued doesn't have covenants or has very, very light covenants, and coupons are really low.”
Friedman: The Federal Reserve will over-tighten rates to restore damaged credibility
“And the Fed has to show its seriousness after losing some credibility last time, so they'll probably raise rates even if they don't really need to.”
Josh Friedman: Global energy depletion is roughly 10% per year without new supply
“Depletion is Something like 10% a year, and there's no new supply, and demand keeps coming from different parts of the world.”
Friedman: Fed COVID facilities worked mostly through signaling, rarely requiring funding
“Most of the programs that they established to buy securities were never funded at any material degree because the market reacted almost instantaneously and said, ah, the Fed's going to be there to the rescue, so I'm okay.”
Friedman: The US will avoid a deep recession despite persistent inflation
“I do think the inflation is going to be a little more persistent, but I'm not one who believes that we're going to have a gigantic and deep recession when you're starting with 3.6% unemployment and healthy consumer balance sheets.”
Friedman: Canyon Operates Under the Mantra 'Prepare, Don't Predict'
“We try to prepare ourselves as opposed to predict. That's one of the mantras we repeat often here is prepare, don't predict.”
Friedman: Institutional allocators copy foolish market trends due to peer benchmarking
“Sometimes they get a little too caught up in the competition of what everyone else is doing because they all get benchmarked and paid based on how everybody else is doing in the industry. So if everybody's doing goofy things, they might just do the same goofy …”
Friedman: New CIOs must accept high early turnover to reshape their teams
“The first thing they need to do is create their own organization in their own image so they can achieve what their goals are. They were hired to achieve their goals. They weren't hired to work with a team that's already doing everything that needs to be done. …”
Friedman: Institutional boards should provide governance, not act as investment committees
“I tend to prefer boards that work as boards as opposed to boards that work as investment committees. If you have a great team of people and they do their work, there are parameters so that the board or the, quote, investment committee is informed, they rarely …”