The Exchanges

Q If you're going in the credit markets, I think at that point in time, certainly the distressed world and some of these other markets were more long than they were sort of in hedge vehicles, and, and it turned out that Anything you touched then had a nice run, so the world's changed a lot in the markets and the credit markets. How do you map out the credit landscape?

A We purposefully try to address as much, cover as much ground as we possibly can. That was part of the business model, that it wouldn't just be advising on corporate debt, but really, if you wanted to be a credit specialist, you had to be able to speak to consumer debt, household debt, mortgages, corporate credit, financial institutions debt, commercial real estate debt. And ideally, too, you would be able to speak to that in cash form, in structured form, public form, private form, and so we, we try to look across all of those opportunities, and it has been a very interesting nine years, not to go through all Twists and turns, but you were right. Clearly it began in 2009 and 10 with distressed and rebound trades, beginning with, ah, you know, shorter duration corporate credit, which snapped back quickly, but you had some which ran for quite some time. RMBS in particular, CMBS, and other forms of structured credit that took a while to heal, and that was the big play. I mean, our goal and business model at the beginning was getting people in front of those opportunities as quickly As we could.

AI assessment note: “if you wanted to be a credit specialist, you had to be able to speak to”

Q How have you improved the way you make decisions? And has it come from what you've seen on your team? Has it come from what you've seen on external managers?

A Some of the good lessons learned, the six or seven people who work on our investment team We meet all the time. Twice a week, formal meetings, we rarely miss them. Mondays and Fridays. Mondays are more oriented towards research, both manager research as well as industry research and markets research. Fridays more oriented towards portfolios, so we, we sit down every Friday with a different one of our portfolios and pretend we're having a client meeting and say, here, remember, here's our plan, here's how we're working forward, here are the decisions we're making. Are we spending enough time with each of the portfolios? We have to spend a lot of time together, and therefore you get the general cross-pollination of good thinking of ideas, and that comes because we're all asked to do a little bit of specialization, so amongst our team, one person, she specializes in portfolio construction and looking at risk. Great lens to have. Uh, someone else focuses on small banks and Investments related to smaller financial institutions. One person on structured credit, one person on corporate credit, one person historically more on private credit, and this is when we come together and we think about what's going on on the things that we're responsible for. One of the lessons learned, Ted, I think is very good to combine publics and privates. It's really interesting to have somebody who has s…

AI assessment note: “Some of the good lessons learned, the six or seven people who work on our investment team”

Q Leasing. Airplane leasing. Is that part of how you construct portfolios?

A It isn't for GAPSA, but I can understand why people would put it in there. At some .1 needs to draw a line in between where their research ends, and we're leaving some things out. We've generally felt that unless we were investigating true risk of default You know, credit spread type exposures that we, you know, we would forego other opportunities. You know, um, insurance linked debt is very interesting. But in the end, after debating that, okay, they're called cat bonds, or many of the exposures are. We decided that that was not a credit risk as we would come to know it. And frankly, that we think we're good at finding, so we would exclude that. Leasing, we view, is more of an operating business. Now, that said, all of, many of the things that you just mentioned have private debt-like Elements to them, relatively stable valuations, you have return profiles, cash flow. And so I can understand why people do put that into, into those portfolios.

AI assessment note: “It isn't for GAPSA, but I can understand why people would put it in there.”

Q What opportunities in the markets are you most excited about today?

A Really, really hard question. Again, that stands in contrast to the last eight to nine years where I would pound the table about one or two things every year that just were even better than some of the other things we were looking at. It's a really difficult time for what are the credit opportunities that we see there. First of all, we are believers that you should always have exposure to credit, and so the, the idea that you will keep, it's, it's not binary. You know, on the less liquid side, I think Now is the time for people to think about extending themselves out a bit. Most people have private credit portfolios built around middle market direct lending. Great first place to start. Makes a lot of sense for them. What can I be adding to that to make sure that I'm not just hitting the same set of exposures over and over again? Should it be commercial real estate debt? Are there some specialty lending provisions? Some of the, the other strategies like royalties. Should I be Beginning to fill that out so I have a more diversified bucket, and I think that's a very good call for most people in the, in the private credit area. Secondly, I think it's, it's, um, well, I can only speak our own book on this one, which for the first time in eight years, we've, in the allocations that we are allowed to make to more liquid, more quarterly oriented funds, it's the first time in eight year…

AI assessment note: “first time in eight years we've really looked at long, short, and low net managers”

Q And how does that idea generation come about?

A With the specialization in credit, it puts some boundaries around which you're looking. Now, those are, it's still a pretty big playing field, especially as you begin to go deeper and deeper and deeper, but we've always had a balance between Doing our own work that says from the top down, these should be some bigger themes, whether it be at the very highest legacy versus new origination, or drop down a little bit around inefficiencies in small balance commercial real estate markets that we try to think of compelling opportunities that should at the top level demand some attention. But being a multi-manager centric business, you have the wonderful license to go out and talk Talk to some really, really smart people. And I think when you're doing your work best, there's an alignment that brings both of those thought streams together. And, uh, you know, some of the more interesting investments that we've done, I've looked back on it's when we walk, we, we came into a manager said, Hey, we've been thinking about this, or they said this, and you know, our, our chocolate gotten their peanut butter and, and, uh, and they said, why don't we work on something together? And so quite often, especially during the middle part of 2008, nine into a current period, you know, we're fairly active in setting up funds of one with managers that, uh, you know, would do something a little bit speciali…

AI assessment note: “we've always had a balance between Doing our own work that says from the top down”

Q So how did you, how did you get the firm off the ground at a time where you could see great investment opportunities, but at the same time people were scared?

A It took a very good partnership in particular of one institutional investor who we came into the crisis thinking that there might be some opportunities to work on together. And, and thankfully those discussions continued forward and that, uh, you know, so the initial initial capital was, shall we say, more or less organized. The challenge, of course, after that is, I guess it was bringing ideas back quickly because you wanted to get in front of things and that would compel people to take action. One of the things that emerged was the public private investment partnership. As part of the TARP and TALF programs that were being put together, and we could, that had such a short deadline, we could do one of two things. Just let it go, or get people interested and try to accumulate interest that, in this case, really did have a short fuse to it. So, uh, you know, it was trying to make people aware. Combined with a lot of advocacy, you need to be able to draw attention to very compelling Ideas amongst what then was a very confusing set of opportunities. Lucky in the sense that people began to see returns at that point in time. That forced their attention as well. So it wasn't, it wasn't saying, no, no, no, let's, let's stake a claim here with the hope that in three years, things will turn around. I mean, that's expectations were set in that regard. But, you know, as, as, uh, again.

AI assessment note: “It took a very good partnership in particular of one institutional investor”

Q So this legacy to new issue Reminds me a lot of this tremendous interest today in private credit. How does that fit into how an allocator should be thinking or that you advise people should be thinking about the place of private credit?

A Maybe to take one quick step back because a lot of people have very different ideas around what does private credit mean? So maybe just to establish some vocabulary at the beginning, I think when we use, I guess at the highest level, we use alternative credit as a phrase. An alternative as distinct from traditional credit. So traditional credit, we group into investment grade and below investment grade, within below investment grade, high yield, um, levered loans. And then we think about roughly three big categories of, so to speak, alternative credit. We think about direct lending. We think about securitized structures, and particularly where you're holding the MEZ or equity component, and we think about distressed opportunities, each of which needs a special set of, uh, Investment skills, different sets of opportunities, even though they may overlap a little bit. And so depending on how people use it, I think what we're seeing emerge within the investor universe today is this, the sense that, uh, maybe all of those opportunities need to be addressed comprehensively. Maybe not IG, although we can come to that in, in a moment, but maybe I do have an interest in that direct lending piece of it, but should I address that on a singular basis, meaning build out a A singular exposure to private debt into and of itself, and as you know, many allocators have begun to take that approac…

AI assessment note: “should we begin to think about credit, first of all, as a standalone asset class”

Q Yeah, and that Amazon cycle, which I'm sure is happening, feels different, right? Because it's not all of retail that's in distress. It's all of non-Amazon retail. And you have a real estate problem embedded in that, and it's a tough one.

A It is a tough one, but now an active manager should say, but that's perfect, right? Because I got a long and I got a short. And your distressed person should say, that's great. That's why I get paid. I'm going to sort that out, and that's a big trend, and I should be able to, to see that. You shouldn't get to the end of the oil and gas cycle and say, ooh, I missed that one. Or, I didn't know that was a distress cycle. Right, right. Well, and, and that, well, that, that could be. I mean, we had people raising money for European NPLs six years ago, and maybe it's now. I've heard a couple of good pitches for, no, no, no, this time it's, it's, it's, it's, it's, it's really here. So, uh, I, I don't mean to pick on our manager. I think everybody that's, uh, You should not be waiting for 2008 again. That, that's, that I'm pretty sure about overall.

AI assessment note: “It is a tough one, but now an active manager should say, but that's perfect”

Q And do you think that ultimately undermines the better alignment of asset and liability in the institutional structures? So you're talking about these sort of intermediate term vehicles in that certainly in the corporate world, some of these pieces of paper are the same. You have daily liquidity and an ETF and a very long dated liquidity, which could be for the same bond.

A Oh, absolutely. Because I think institutional investors and smarter investors are recognizing too that the liquidity Around the way you structure your, your investment, especially in the bond and credit world, shouldn't simply be driven by, could I sell this today? One of the beauties of credit investing is pulled apart. If you get your credits right, you get your money back, so long as you stay in the trade. Eventually, at some point in time. Maybe coming back to my points earlier around the, thinking about it as the certainty of return over five years. You know, I, so, so coming around to it, I think being smart about liquidity, if you are, if you are, uh, high yield sells off. Ok, great, let's get into high yield. And it's great because we can, it's with an endowment having this discussion where they said, it's great because it's very liquid and we could get out of this. And I made the argument that, well, Actually, we should really treat it as an illiquid asset, because as much as we think the return is this big right now, there's only one way. We're going to be sure about capturing it. It is getting paid back when the bonds are being paid back. Now, I, I view that, therefore, a structure is, a smarter structure is one in which you, uh, literally or figuratively tie your hands for that period of time, and in a perfect world, give yourself an option to get out over time, but…

AI assessment note: “Oh, absolutely. Because I think institutional investors and smarter investors are recognizing”

Q a little bit about two things that we hear a lot about that trading volumes Are challenging because of the streets contraction and this whole wave of ETFs, particularly in things like high yield debt is just a massive mismatch of asset liability. So why don't you take each of those? Talk a little bit about the trading dynamics of these and then, and then a little bit about ETFs.

A Well, I think they're very, very real concerns as much as the changes in banks, maybe, uh, in the credit world have been focused, uh, In marketing pitches around, see, we're replacing banks in terms of lending, but I, I would argue equally important, more important for credit markets than the fact that they've pulled away from trading and supporting trading, and it's a very, very real issue, and I think we've unfortunately been lulled into a little bit of complacency because the last nine years have been a one-way ride with a couple of hiccups along the way, But even in a couple of those hiccups, you just, you begin to see the fact that market liquidity can disappear very, very quickly. Think of the end of 2015, coming into 2016. I think they, they are very real. There's, there's data out there that obviously shows the, the diminution of what the banks themselves, ah, will balance sheet. I think the implication is that one should be very careful about your holding horizon. And if you are an investor in other managers, are the liquidity provisions of funds aligned? And again, I think everyone has learned their lesson from 2006 and seven. And I think assets generally speaking are in better hands and in better structures than they were then. But one needs to be concerned about always structures and what is the worst case scenario. And, and I think that's why you're beginning to se…

AI assessment note: “they've pulled away from trading and supporting trading, and it's a very, very real issue”

Q Reading do you do? Periodical, website, whatever it is that other people might not know about that you find very informative.

A So professionally, personally, actually, I've been doing a lot of recent reading recently because I made it a goal for the next two years to keep up with my kids reading. My kids are both in, and teenagers, and so I've been rereading all the classics along with them. It has been. I've been very good about the shorter classics, not the, not all the longer classics. I mean, I did not get, ah, did not get all the way through. You know, on, on the professional side, you know, one thing I, I did, I have found very helpful recently is spending a bit more time looking at what some of the public pensions put on their websites because of, let alone Freedom of Information Act, but more, a lot of them are just, here's what we post. I think it's a very interesting The perspective on the world where you have allocators who have to be fairly transparent with what they're doing, and to actually get to read in almost live time, certainly not with too much of a lag, you know, how people are thinking, and how are they changing asset allocation. It's very interesting. That's a terrific set of case studies to be able to put together and read, and especially when you put together Six, seven, 20, 25 of them, and you can be trained to draw some lines and, and, and learn about where things are going.

AI assessment note: “looking at what some of the public pensions put on their websites”

Q And what are you seeing people do with those exposures, right? There aren't that many levers. If you own it, you can own it on leverage. You can own it with credit risk.

A Correct. And there isn't anything. I mean, at the end of the day, you cannot recreate A triple A, double A portfolio that's nearly going to get you to your actuary returns. Wish that was there, but we know that's, that's not possible. So I guess the question, and coming back to credit, what, what is pertinent? I mean, you certainly need to, or most growing corpuses and pools that need to grow are equity oriented. Okay, that's it. The question is always, well, do we need to do some things that are not Equity centric, and I, I do believe that credit begins to fit into that world, and again, maybe this is where it's the newer generation of the 40% of that portfolio. Well, okay, let's critique. Let me answer the, or put the question forward before you say it, but, you know, high yield bonds don't get us there right away. You're right, and that doesn't, that doesn't. But between private credit, potentially distressed, if there's more of a distressed cycle, structured credit, those are all returns that begin to play at least part of the role that we think, uh, that, that 40% of the portfolio may play. I mean, they're, They're not fully correlated with equities. Some of them very, not, not much at all. The question I think a lot of times though comes down to, but wait a second, I, I, I've seen marks on CLO equity. I, I, I, I can go to Bloomberg and price my synthetic credit exposure. …

AI assessment note: “between private credit, potentially distressed... structured credit, those are all returns that begin to play”