The Exchanges

Q So before we jump in, I'm really curious to ask you, was there some formative event in your life that precipitated you studying deaf language and culture?

A This is one of the stories where I'm glad that my kids are old enough now that they'll forgive me for my transgressions in my youth, but in sixth grade, my good friend Brandon wasn't prepared for the science tests, so he wanted to cheat on our sixth grade science test. He taught me the manual alphabet. He taught me how to fingerspell from A through E, which is as far as we had to go for the science test. And then from across the room, he would hold up a number of fingers for the question he was stuck on. And I would hold up letter D for the right answer. And that lasted for all of one test where we figured out that Brandon's eyesight wasn't good enough to see across the room to even see what I was holding up. But it got me curious and I wanted to learn more. It didn't make sense to me that deaf people would Finger spell to each other every time they had something to say. So I started looking into how deaf people actually communicate, which is far more robust. It's actually a beautiful thing to see a totally different language and language structure and language modality that just happens to coexist in our backyard that most people just don't have access to. So I studied it on my own. I learned from books. I would get videotapes from the library and learned a bit that way. It wasn't until I was later in high school that I first ran into a deaf person organically. It was at a doc…

AI assessment note: “in sixth grade, my good friend Brandon... taught me the manual alphabet”

Q What was your path from derivatives trading on a bunch of different exchanges over the decades to where you are today?

A So I started, like I said, on the floor of the Philadelphia Stock Exchange. In 1997, the firm was formed in 87. So by that point, we had grown to, I don't know, 350 or 400 people, I think, worldwide in the firm, and I was learning from experienced traders, working as an assistant trader. I quickly moved to a point where I was no longer assisting. I went through a trading class, and I was able to put Susquehanna's capital at risk. Pretty soon after that Got a tap to move to an upstairs trading desk, and moved up to trade American depository receipts, ADRs, which are shares of foreign companies listed in US dollars on US exchanges. There was an arbitrage relationship between where the price was trading in Germany, where it was trading in the US, and the currency exchange rate. We were also trading a bunch of fixed income products like municipal bonds, convertible bonds. We were very big and trading index products, so we were among the first group that really was providing liquidity in ETFs at the very start of ETFs. So all of these areas of trading were growing at the same time. And then I was asked to help open up a new trading operation in Europe. So Early 2000, we started to really expand internationally. We actually changed our name from Susquehanna investment group to a new parent company, which was Susquehanna international group, because we were now international. We had t…

AI assessment note: “I started, like I said, on the floor of the Philadelphia Stock Exchange.”

Q So as you're teaching people how to be traders, there's a bunch of things you could imagine reading and behavioral stuff and basic finance. Once you have all of the fundamental underpinnings of what you need, where do people start to really learn what it takes to being a successful trader?

A There are some things that you cannot teach in a classroom. We know that we're good at teaching the things in a classroom that we need to teach in a classroom. And then there are other parts of the decision process that we model in other ways, like by playing games with our trainees as they're learning. So we play things like poker and board games and chess and other games that model different parts of the decision process. But at the end of the day, there's no substitute for learning how to trade by trading. And there are a couple of ways that happens. One is before ever going through our trading class, our quantitative traders are working directly on trading desks, talking to the traders who are making decisions about the decisions that they're making, and they gain responsibility over time. So they will be responsible for trading a small book before we ever put them through the trading class where the trader can oversee what they're doing and help model appropriate decision making or ask them the appropriate questions that they have not yet built the internal capacity to ask themselves. Once they go through the trading class, in that class, we spend a lot of time mock trading. So putting them in trading situations that we can control and that we can pause at any time, and we can talk about the different branches of outcomes that they might have experienced instead of just ha…

AI assessment note: “there's no substitute for learning how to trade by trading”

Q How have you taken to the pursuit of different opportunities as you've grown and scaled?

A One of the things that I think we've been very good at is making sure that if we get into a business We understand where we're going to stand in that business, and we only pursue it if we think we can be excellent at it. We don't want to raise our hands and just be another participant in something that other people are doing. So we've had the good fortune of success. A lot of that, I think, from good practices and good policies internally, and certainly a lot of that from luck as well. And as we have been successful, that means that we've had more resources available to us that we can deploy in other venues. So we've moved into venture capital and private equity. We've moved into creating a sports trading unit that is trading on sports books in Europe, and that group is in Ireland. All of the growth has been in places where we have said we have a reason to think that we have internal resources that can support this in a productive way, and we're willing to put the capital behind it to be excellent at it. The other thing that's been really consistent is that in all the different products that we've gotten into, It looks different on its surface, but fundamentally, we are talking about risk allocation, or buying or selling risk at the appropriate price. Most recently, in the last few years, we've moved into insurance, which is where I spend all of my time now, is thinking about i…

AI assessment note: “we only pursue it if we think we can be excellent at it”

Q How does that work day to day as you're doing diligence on a potential investment?

A We work collaboratively both within Stockbridge and then across the firm. So across the firm, we chose not to have any walls between the two businesses. It requires us investing in compliance. And fortunately, I think our team members have embraced that on both sides of the firm and being educated and being mindful of the fact that we want to get nowhere near any lines. But we're not looking for information. We're looking for insights, and so that's good. The private equity side is divided into industry teams. We put one of our people on each one of their industry teams, so that way they can learn about what they're learning about the industry. We have access to each other's investment packages. We certainly have one contact database for the firm, and we can use those And we use the investment history over time, and can everyone invest in each other's businesses? So there's all sorts of conversations of just trying to think about what are the trends and what are driving different businesses. Within Stockbridge, we assign a team to every opportunity. There's usually two managing directors on each team along with a principal looking at an idea. Occasionally it's one and one, but we work collaboratively, and then we push everything through a Monday meeting. And so we have a package of material that goes out on Friday, and we discuss all the different investment opportunities on Mo…

AI assessment note: “Within Stockbridge, we assign a team to every opportunity... push everything through a Monday meeting.”

Q Why don't you take me back to both of your backgrounds leading into what became this public effort?

A I graduated from Penn. I worked at McKinsey in consulting for a couple of years and then started at Berkshire Partners actually as an associate on the private equity side of the house. So did that for two years. Never actually worked with Rob while I was a private equity associate. And then left there and went to a firm I think you know quite well, Ted, a firm called Reservoir Capital in New York for two years, where I did a little bit of everything across public and private. And then in 2006, Rob and a couple of the other partners at Berkshire reached out and said, Hey, we're thinking about starting up a public equity effort. We'd love for you to come and join. And the rest is history. I joined in 2007 and have been here ever since.

AI assessment note: “I graduated from Penn. I worked at McKinsey in consulting for a couple of years”

Q As you go and do the work on portfolio companies and try to get from what a public investor might commonly have to something that you hope is closer to what a private market investor gathers in information, what does that work look like, both in terms of time and that extra bit beyond what you think another public investor might typically do?

A One interesting thing about our firm, just to give you a sense, is When we invest in companies on the private equity side and the public equity side, when we have joint investments, we'll share the same material to both sides of the house because they're making independent decisions about a company. You don't know who wrote that material because it looks the same. It's presented the same. The standard of evidence is the same. The way it's written, how we look at the world is the same. And so there isn't a Stockbridge carve out for what we look for in a business or private equity carve out. We try and spend a lot of time and get to conviction on the key questions, and so examples of things we do. Very early on in our history, we looked at a business, at the time it was called Pediatrics, that staffed 25% of the NICUs in the United States, and we built a model of the demand for neonatology over a 10 to 20 year period, based on why were preemies being born, why were Children, babies being admitted to the NICU. And what were the drivers of that over a 20 year period? So very detailed demographic analysis over a long period of time. We own a business today called Vulcan Materials, which is an owner of Quarry's aggregate business around the United States. And it's a business we've looked at multiple times over the years. And one of the things we've done is assembled a database of Eve…

AI assessment note: “assembled a database of Every single quarry in the United States”

Q So what was it that led Berkshire Partners to decide to get into public equity?

A A couple of things happened. First, we always thought that potentially doing more things might make it a more stable business and bringing more people in that were interested in looking at businesses and thinking about businesses and being smart about businesses would help the firm in general. But we noticed in the period before we started, so 2005, six, seven prices in the private equity market, largely fueled by easy ability to get high leverage. Started to go up. For the first time, we did comparable sheets with public companies, and we were seeing private companies go for more than public companies. So the control premium was higher than the liquidity premium. And we started to scratch our heads and say, maybe there's an opportunity that a lot of the companies we've looked at over the years have gone public and doesn't make them really different companies. Why wouldn't those be good investment opportunities if they're potentially cheaper? The one thing we didn't know was whether we could get to conviction on public-only information, so we figured the way to do it was to try, and we put some money together among the partnership and tried with our own money at first.

AI assessment note: “we were seeing private companies go for more than public companies”

Q How did you think about what makes sense to add as a product?

A I think first on a big picture, we looked at a few things over the years. We held everything we looked at to three major tests. One, was there true synergy with private equity? Did we think both sides would be better for being partnered with the other? Second, did we something that we thought our history and our skills would give us a chance to be pretty good at? And then third, was it a place we wanted to invest our own money? We're the largest investor in our private equity funds, and we're also, as a group, the largest investor in Stockbridge. So we like to have the mindset of, we're investing our own money alongside our partners. And so if it passed those three tests, and we thought this did, we thought it was worth a try. And then the key was, did we think we were getting to conviction on the names we were looking at as we started to build a portfolio and build a team? And have some evidence, at least, that that conviction was well placed, and when we got there, that's when we decided to open it up to others.

AI assessment note: “We held everything we looked at to three major tests.”

Q You've alluded to a couple of different aspects of Stockbridge, concentrated holdings, long-term, As you look across a very large universe of public companies, all this information of thousands of private businesses that Berkshire's owned over the years, how have you filtered what it is that you're looking for in investments?

A We ask ourselves a few questions. First, is a company that we can understand? Is it in a business or industry that we have some ability to do analysis on, or are the trends that are going to drive the ultimate result knowable? So we don't invest in things like, is the drug going to be approved, or where commodity prices will ultimately drive the answer. Then, after that, we look for long-term winners, and we define long-term winners as some mix of stability And growth. And so how do we answer that? First, we look for one, is there a secular tailwind in the industry? We've found that it doesn't have to be a huge growth factor, but there can't be negative growth. If a business is shrinking, it's really hard to make money. Second, we ask ourselves, is the company well positioned within that industry? The best thing we can see is that if they have some level of pricing power, if they could charge their customers more and their customers would still want their product, That's a really good sign, but we do a ton of analysis around that. And then finally, is the management team able to execute on the plan? And we found that managements, ah, are really good at executing, continuing to do what they have done in the past, and that you have to be really, really careful before you're asking a management team to do something different. So, that's the hardest thing to judge from the outside,…

AI assessment note: “We ask ourselves a few questions. First, is a company that we can understand?”

Q So the private credit story, you hear that those types of loans are better deployed in the hands of asset managers because of the funding model for them. What creates the risk that you're attuned to that reminds you of a seven or eight going into it?

A The main difference in the funding models that I see is that, obviously, they're not relying on deposits for a source of funding, but they're increasingly reliant on insurance premiums, right, through captive or affiliated insurance and reinsurance entities. Apollo with Athene really got that ball rolling, but now they've all got their insurance affiliate In their reinsurance affiliates. So Blackstone's got theirs. Aries has got theirs. KKR's got theirs. Blue Owl's got theirs, right? They've all got this insurance reinsurance edifice that's been created, and I get it, right? You want the float. You want the essentially permanent capital that exists there, but it reminds me for all the world, like Citigroup and The SIVs, as you recall back in, oh five, oh six, oh seven. You can't destroy risk. It's either created or destroyed. You just move it somewhere else. And my strong belief is that we've shifted around a lot of risk into the insurance, particularly the offshore reinsurance world, where leverage ratio is incredibly high, increasingly invested with affiliates. And we all know what that means, but it's, the reason I say it reminds me of Citigroup and the SIVs is an effort to take risk off balance sheet, but when the shit hits the fan, that risk comes back on balance sheet. And understanding the regulatory arbitrage that's going on here now is where I'm really focused, because…

AI assessment note: “an effort to take risk off balance sheet, but when the shit hits the fan”

Q So you grind out that second year, and then what?

A Then I, on the same day, ended things in a relationship that I was in. I quit my job and packed up this, 1986 Volvo that I had and drove out to Steamboat Springs, Colorado, where my Ex high school girlfriend was living. And this is true story on the drive out. There was an 18 hour drive. I listened to Tony Robbins for 18 straight hours. My cassette player in my car didn't work. So I had a boom box and I had a whole stack of D batteries just to get through the drive. And somewhere in the middle of Utah or something, I decided I was going to start a private equity fund. After getting all pumped up from Tony Robbins, I was like, how could I not do that? I have to go do this.

AI assessment note: “Then I, on the same day, ended things in a relationship that I was in.”

Q Were there particular sections of the book that when it went out into the world and people started reflecting back that really resonated for others?

A There were some. Now, to be fair, the book came out in 2009, and it was not a particular time when investors looked particularly smart, so my timing was not good. Certainly the incrementalism, I think, was something that resonated a little bit. The idea that usually if there's one problem, there's multiple, so you really have to dig and not dismiss a little problem and think it'll go away. And then a third one that I think resonated a little bit with people was the idea that to create a successful and happy workforce, you actually need to be good at your job, and then the happiness follows, or to be successful in whatever endeavor you're going after, rather than let's make everybody happy, and then they'll be good at what they're doing after.

AI assessment note: “Certainly the incrementalism, I think, was something that resonated a little bit.”

Q And what did you find some of the frustrations working at a public pension?

A A couple of them were being under-resourced, so there were basically three of us that were managing eight billion dollars with consultants, but we were doing everything. I think we were hitting the broad side of the barn, but that's about all we could do. So that was one, and then the second was, at least in Rhode Island, the lack of trust in the government. So there was a real suspicion about What we as investors were doing on behalf of the pension. So there was a little bit of guilty until proven innocent, which is impossible to do. So there was a lot of concern that we were not managing the plan well. And at the same time, there had also been some pension reform. So people were already less than thrilled.

AI assessment note: “A couple of them were being under-resourced... and then the second was... lack of trust”

Q So a lot of those strategies, there is a package with a blend of, let's say, idiosyncratic positions and then some type of market beta. How do you measure and then manage the risks so that you can just deliver that portable alpha piece when you will have some residual risks in a portfolio like that?

A So we're not maniacal about taking out all the residual risks. Certainly if you think about macro in general, that usually is directional. What we're looking for is something that's not consistently the same direction. So if it's directional, today I'm long rates and tomorrow I'm short rates, and I'm good at it, that's fine. What we don't do is try to take out the betas underneath. Partly we haven't done it because operationally it's difficult, and then partly because if a manager tells us at the end of the month or even the end of the week that they're along something, by the time we put an offsetting position on, they might be shorted, so it's too hard to try and offset it. What we do look, though, is over time, does anybody have a bias? And if they tend to have a beta bias, then they're probably a candidate to leave our portfolio.

AI assessment note: “What we don't do is try to take out the betas underneath.”

Q How do you think about leveraging your size, so the size of the pool at SWIB, to effectuate outcomes?

A One of the ways that we try to leverage both our assets and again, the delegated authority is by going into managers relatively early on. We have on occasion done day one, but we will often do year one investments, and we are willing to work with managers on what they're looking to achieve from a business perspective and what we are looking for as well. So let me give you a few examples. One, during late 2020 and early 20 21, it was hard for some managers, particularly younger managers, to raise money on the P.E. side because everybody was scared about what was going on in the world. So we had some managers where we had made an initial allocation and we went back to them and said, OK, you're having trouble getting to your final close. What if we give you another twenty five million that'll get you Close enough. And in exchange for us giving you another 25,000,001, you're going to close the fund and stop fundraising and start making investments. And two, we want better terms as a result of this. So that's one way that we've done it. Another thing that we've done is we partnered with one of our multi pad hedge funds. They basically spun out their technology and created a separately managed account platform. So us and UTIMCO together basically anchored this new manager, and as a result of that, we were able to both help them to design the systems and the reporting and all of that,…

AI assessment note: “One of the ways that we try to leverage both our assets and again”

Q So what'd you find when you came out of business school and went to do it?

A It was a lot of fun. I was at J.P. Morgan Asset Management on the buy side, and it was a great privilege because you got to meet with CEOs of the largest companies and was relatively young and relatively uninformed and got to ask them questions and think about the business challenges that they were facing. And at the same time, you didn't have to convince them to do anything. You could talk to them, figure out if you thought they were going to solve their business challenge, and if they weren't, you could just Not participate in the stock, and if they were, then you could own the stock and hopefully go along for the ride with them.

AI assessment note: “It was a lot of fun. I was at J.P. Morgan Asset Management”

Q How do you think about what to do internally versus externally?

A So our default position is to do things internally, but then there are three reasons that lead us to do things externally, and they're pretty reasonable, such that the portfolio ends up being about half internal, half external. So the three reasons that we would do something externally are, one, we just don't feel like we can do it from Madison, Wisconsin, so think emerging markets. All of our emerging markets we do externally. Second, we're looking for some diversification from what our internal teams are doing, because the internal team may be great, but they're going to have a specific style, and we probably want to have some diversity of styles. So for instance, we have an internal team doing high yield. We also have an external manager that just does things a little bit differently. And then the third reason is just to be able to partner with the greatest investors in the world. So Well, I think Madison, Wisconsin's lovely. Not everybody wants to live there, so we don't want to preclude ourselves from accessing the best talent in the world.

AI assessment note: “our default position is to do things internally, but then there are three reasons”

Q How are you thinking about the opportunities in private credit?

A It's a very interesting space. We're active, and I would say a little bit cautious. So on the positive side, if you look at the size of the publicly traded and then bank market, it does seem like private debt is not that huge. So you could say there's plenty of runway to go. On the other side, the private debt markets haven't really been around during a proper distress cycle. Because they really weren't of any size in 2008, which was the last time you had a real cycle. And even if you look at there was a mini cycle in the energy markets in 2014, and there were a lot of distressed folks that didn't do so well in that period. So we're somewhat cautious on that front. Anybody that we're working with on the private debt side, we are looking for people that have some workout and distressed experience. I'm a little cautious around that, though, because everybody says they have it, and if it's been 10 years or 15 years, we'll see who's really got it. We're doing more in MEZ, more in distressed, and a lot of the distressed people that we're working with, we're giving them trigger funds, so that we'll give you a certain amount of money today, and if there's a real proper distress cycle, we'll give you more, but we don't want to pay fees if a proper distress cycle doesn't come around. And then interestingly, in our hedge fund book where we're doing specialty finance, some of that also lo…

AI assessment note: “We're active, and I would say a little bit cautious.”

Q Why don't you take me all the way back to your first entrepreneurial instincts as a kid?

A Gosh. Well, my first would have been mowing lawns around the neighborhood. This was now in suburban Maryland. And as soon as I could push that mower, my dad would pay me an allowance, probably a few bucks to mow the lawn, and I realized my neighbors would pay me more. Sorry, dad. Shout out to the fields. They were across the street. The mooths, also across the street. We did some business, so I mowed a lot of lawns. That was really the start of it. Then I went and got a job at CompUSA when I was 14. And I had this Madonna mic, and I'd be pitching the latest computer peripherals and software to a crowd of people who did not want to hear a fourteen-year-old telling them about a computer mouse. So I went through the worst public experience hell every 30 minutes as people just ignored me, and I'd be like, it's my job to present this mouse to you from Logitech. And I got over so many of my inhibitions around public speaking. That was an amazing job. And I was making websites for strangers on the internet for money, so I was doing that while I was in high school, so I always had a lot of ambition, even at a young age, to just be my own boss and solve people's problems.

AI assessment note: “my first would have been mowing lawns around the neighborhood.”

Q What did you see in that model at the time as some of the successes and challenges in making venture capital work?

A I think in terms of successes, there were a lot of sectors and segments in India that were amenable to investment, to growth, to disruption, to more competition. So from the standpoint of being able to apply A toolkit of analytical skills and decide where there were conceptually compelling opportunities, it was excellent. Where it was difficult was in actually transacting. Anytime we approached an entrepreneur, they'd never seen a lot of the things on a term sheet, and that could be a really lengthy process, getting invested, sometimes for years, even after the idea had been formed. Exits were similarly difficult, and monitoring investments was hard. And some of these things have eased, and some of them have stayed very difficult. So, there are well-publicized cases, even today, where high caliber venture firms have had difficulty enforcing arbitration rights, or put options, or even audit rights. And it's one reason, notwithstanding the fact, that there's all sorts of growth in India That venture and private markets returns have been sort of underwhelming. Of every dollar invested since 2000, something like 35 cents has come back, and I'm sure the industry will come good, but as I was sort of looking over the proverbial wall at other asset classes, it's not exactly apples to apples comparison, but for example, in public markets, the dollar returns over that same period are sev…

AI assessment note: “in terms of successes... Where it was difficult was in actually transacting.”

Q What was John's story in building India Capital?

A John's background as an Indian investor was probably even less obvious than mine. He was born in Khartoum, Sudan, and then found his way to graduate studies at the London School of Economics, where he in turn talked his way onto the EuroBond trading desk at Drexel Burnham Lambert, which in the 19 eighties was about the headiest trading environment you can imagine. And he had a research role that he gave up to finish his graduate degree. And years later, he was a business journalist in Hong Kong in the early 19 nineties, watching this influx of capital into China. And he and a friend of his had a very simple insight, but in retrospect, a pretty powerful one, that that capital was at its core chasing scale And it was chasing growth in that China offered scale that almost no country could touch other than India. And that India too, in the wake of these major economic reforms that had begun to pivot it away from socialists and towards being more welcoming of foreign participation in foreign capital might be able to deliver growth also. With that observation, he decided to launch a fund and spend A couple years passing the hat until he was able to do so and launched in 1994 with all of fourteen million dollars, at which point the market promptly crashed. But John was able to endure and persist and actually strengthen his relationship with limited partners. He found his way to a rese…

AI assessment note: “With that observation, he decided to launch a fund and spend A couple years”

Q Before we dive into how you do that, I'd love to talk about today the case for India, say for public market investing. What is that high level case when people think about where they're allocating capital?

A I think in terms of the public markets, it is a really broad canvas to invest in, and that makes it particularly attractive. There are more than 5000 publicly traded companies. Of which, depending on how you cut it, anywhere from 700 to upwards of 1500 are investable at institutional scale. And it's unusual for an emerging market in that it's not dominated by any one commodity or sector. It's among the most fragmented markets in the world in terms of all the different themes and industries that are represented, and it is among the most liquid for an emerging market. It's also one that is not particularly well covered by research. So you have this situation where there are all these different avenues in which to invest in two thirds or three quarters of companies have one or zero sell side analysts covering them. There's all sorts of dispersion in terms of the kind of earnings and fundamental performance companies produce. Across industries like you'd expect, but even within sectors in share price performance, same situation. Partly as a consequence of that, there isn't a usually wide divergence between what consensus thinks is going to happen to a company in what they actually deliver.

AI assessment note: “it is a really broad canvas to invest in, and that makes it particularly attractive.”

Q story of the potential ability for active management to add value because of the differential opinions and lack of research goes alongside a beta case. And if you go back, not too long, I guess, there were bricks. At one point in time, people talked about Chindia, the importance of China and India. What is the case for India for its long-term, call it beta opportunity, particularly compared to China?

A Yeah, I think that is the comparison people are making now, and maybe making in a slightly different way than they were five or 10 or 15 years ago, where I think it was just universally understood that China was the emerging market star, and maybe India had a role to play somewhere in its orbit. And I think coming from India, China demands and deserves a degree of admiration for what they've achieved. They have delivered wealth in industrial build out at a scale that India has not yet begun to touch. Having said that, there does seem to be this distinction where notwithstanding China's superior growth over the last couple of decades, India, it's translated far better into investor and shareholder returns. So if since 1999 when I started my career, China's GDP growth has been 16 X versus eight X for India, but China's index performance on that 16 X GDP growth has been two and a half X, and India's index performance on that eight X GDP growth has also been eight X. And without knowing China really well, I don't know all the reasons to explain that, but when I think about these stories of these lean capital efficient Indian companies, that may go some way to providing an explanation. Where Indian households are less leverage, Indian companies are a lot less leverage. Private sector debt to GDP in India is like, 53%. I think in China it's a 195%. So that free flow of discounted, ma…

AI assessment note: “India, it's translated far better into investor and shareholder returns.”

Q What is an example of what that deep dive research looks like?

A Sometimes it can be research on a discrete issue. So, for example, there can be a company with a piece of land on the balance sheet where it's only been required to record at cost, and it could have been acquired 80 years ago, and they don't have to tell you where it is, and it's a matter of sifting through land records, figuring out where the contiguous parcels are, peering over the fence wall, seeing what's there, valuing it, that, that type of thing, which is just kind of hard for Other types of investors to do. Usually, it's something more integral to the earnings trajectory of a company. So, for instance, we decided that there was something interesting about a natural gas pipeline that had monopoly position distributing gas to a rapidly industrializing region, and it was being priced like a stranded asset because the cost of natural gas Had come up in the world of valuing a pipeline, you know, the capital investment, you know, the operating costs, the pricing's fixed. It's all about how much volume you can get through there. So the notion was really interesting area, but maybe there won't be anyone buying this natural gas because it's too expensive vis-a-vis power in the grid. And that was a reasonable rough and ready assumption to make for the sell side analysts covering this company, which was A billion dollars in market cap. And the same analyst was also covering 29 oth…

AI assessment note: “Sometimes it can be research on a discrete issue. So, for example”

Q Cliff, before I let you go, I want to ask you a couple fun closing questions. What's your favorite hobby or activity outside of work and family?

A You know, this is embarrassing because it's so on the nose, but I collect comic books and comic book art. It's on the nose for a quant geek to be a radical comic book fan. Possibly outside of my children, the greatest development in my life was when movies, special effects finally caught up. I was watching the Lou Ferrigno was a tough guy, but he didn't look like the Hulk. I still collect those. Thankfully, I have a money manager's income with a child's taste. I'm not competing with Stephen A. Cohn for impressionist paintings. I'm trying to buy the cover of Avengers number 147 in pencil, but I have a lot of fun with that, and I love that stuff.

AI assessment note: “I collect comic books and comic book art.”

Q And how did you come to join the organization?

A So I had joined the organization approximately a little less than eight years or nine years before out of the Harvard Business School. I joined out of school in the predecessor private equity firm they were starting in Brazil. And initially I started as an analyst. I evolved to become a partner, and most of my time there, I spent running one of the portfolio companies. At this company, there was a result of multiple railroad privatizations in Brazil. And that was a continuation of the model that had worked so far. To the extent that the partners were able to acquire a good business, one of the partners would take a CEO role in that business. So I was a continuation of that approach, and I ran the company all the way to taking it public in early 2004. Transitioned to a board role and moved my young family to New York City to start through G Capital.

AI assessment note: “I joined out of school in the predecessor private equity firm they were starting”

Q What was your path from that early experience alongside those cycles in CLOs?

A So initially my job was again, just picking the loans that go into the CLOs. So I did that for about 10 years and then I had an opportunity to start investing instead of the loans, investing in CLO securities directly. So I started buying CLO double B notes, which are backed by pools of leverage loans, and then eventually made my way to investing in CLO equity, which is the riskiest part of the CLO trade, if you will. And then the firms that I worked for fortunately just saw a lot of growth and that enabled me to expand my skillset and to be one of the larger players in the space. Over time. So that's been a lot of fun, and I've been fortunate in that.

AI assessment note: “initially my job was again, just picking the loans that go into the CLOs.”

Q I'd love to dive in a little bit, maybe through your book, about what these investment opportunities are today. So we talked about what the assets are in these pools, Why don't you talk some about what is involved on the right-hand side of these balance sheets?

A So the easiest way to think about a CLO is that it's a simplified bank. So if you buy a share of, for example, Bank of America or JP Morgan stock today, basically you're going to get exposure to maybe 20 or 30 different lines of business. But in a CLO, it's really just a pure play lending vehicle. So the CLO might have five hundred million of assets in it, Again, the loans are almost exclusively first lien floating rate loans, and then to finance that pool of loans, there's long-term financing, and it's sold in tranches, which are rated triple A at the top, and that's most senior and secured, and then down to double B, which is the junior most CLO debt tranche, and then there's the CLO equity. Similar to my bank analogy, the loans that the CLO owns, its assets, They pay a much higher rate than the CLO's financing cost, so that means each quarter there should be a nice amount of profitability that flows to the CLO equity after all the CLO's debt has been paid, and there's a CLO manager as well that earns a fee to look after all the loans in the CLO. So if you're an investor in CLO equity, today you're targeting returns in the mid to high teens, and basically you're exposed to any loss On the CLO's loans. So the risk that you're taking is loans in the CLO default, but fortunately it's not a unquantifiable risk. It's, you can look back 30 years, and by our estimate, the default ra…

AI assessment note: “it's sold in tranches, which are rated triple A at the top... and then there's the CLO equity”

Q You mentioned at the onset that there are now a hundred different managers of CLOs. I'd love to map out what this investment universe looks like. So of these hundred that create these and manage the CLOs, who are these organizations?

A So the biggest alternative asset managers are all going to have large CLO groups. So Blackstone, BlackRock, KKR, Aries, they all have CLO management teams. They earn, call it, 30 to 50 basis points to put together the initial loan portfolio to keep the CLO fully invested. During its reinvestment period and really to make sure the CLO is passing all of its tests. So the CLO managers are competing amongst themselves for capital from people like me. So they do that by having the best performance of the underlying loans in their CLOs. And they also do it by getting the best debt execution on their CLO. So for me, that's the two things. Those are two really of the key ingredients that make for good CLO equity returns. And also for a nice stable performance of double B rated notes.

AI assessment note: “So Blackstone, BlackRock, KKR, Aries, they all have CLO management teams.”