The Exchanges

Q So when you went to start, you'd spent that decade or so in brokerage, and now you're going into a business where most of the lines weren't the things you were doing. So what was that initial launch like for you?

A It was actually pretty seamless for me. And, and what I started doing actually in 1992 was managing separate accounts on a discretionary basis. So while I was on the brokerage side, I was in the asset management side of the business as well, and so I was able to then, when I moved to Prudential and then moved to Oppenheimer, I was able to port my track record, and I had a very good track record, long, only large cap, GARP as a strategy, if you will, or style, and so when I started the firm, we had a lot of alternatives investments that we effectively rolled up into a fund of hedge funds, And then we had the separately managed accounts business that we were able to move over intact. The thing that obviously none of us expected was a month after we started the firm, nine, 11 happened. And so that created some interesting dynamics around the start of the business, but the actual launch of the business was pretty seamless because that already been on the pure asset management side.

AI assessment note: “It was actually pretty seamless for me.”

Q It does seem like the way you approach investing today is a little bit different from large cap stocks and hedge funds and private equity. So What was the evolution of CAS from where you started to where you crystallized what you've evolved into?

A Certainly the business model in the original design was always we're investors of our own money first, and then we're going to figure out what else we're going to do in the marketplace and then open it up to our investors. And the large cap long only that gave us a good core, if you will. And then the satellite was all of the alternative investments we did on the hedge fund side and on the private equity side. And where the transition really began to occur was in the mid-two thousands, particularly when we shorted subprime with John Paulson. I had a great relationship with John, went back to literally 1994. The opportunity to invest in shorting subprime with John Paulson was something that we really wanted to be able to do for all of our investors. And so, yes, we had a fund that they could do that through, but we really wanted a dedicated, specific vehicle for that. And ultimately, that is what we were able to create We saw that that was very appealing to our investors. We were able to totally align our interests with theirs to where we were the largest investor in what we were doing. We didn't take a management fee. We just took a percentage of the profits, and that was just perfect alignment in their eyes and perfect alignment in our eyes, and ultimately we have a saying that where there's maximum alignment, there's maximum profits, and ultimately that's really what caused u…

AI assessment note: “where the transition really began to occur was in the mid-two thousands”

Q A bunch of these different themes, you know, if you talk about GP stakes, you're really referring to a dial, a bond accord, trying to take advantage of that. And in some of these others, there's open doors at a specific company. How do you decide when to invest in a fund, when to invest directly?

A It's one of the places where the science becomes art. And with the right sizing and the right amount of diversification, everything becomes logical and makes sense For us and our personal capital and obviously for our ecosystem. So in some cases, the theme is best executed by owning a basket of multiple things within that theme. And in other cases, it's really just a specific company. So we're an investor in a company based in Austin by the name of Icon. And it's a really good example of a company that we literally were a seed investor in the company. We have a relationship with the team there. Most people don't know Icon unless they read the Wall Street Journal article two weeks ago that talked about how Lenar Homes was partnering with this company in Austin to print with a three D printer a hundred homes outside of Austin. Well, that is Icon. And if you have not seen the video, go to YouTube and type in Icon three D printed homes and you'll be fascinated. But why did we invest in that specific Company. It's because of the fact that there was no diversified way to invest in three D printed homes. We believe that this falls under the category of doing well while doing good. It's great for the environment. It's great for the people that need clean, safe housing. And at the same time, it's great from an economic model perspective to be able to change the way that homes are litera…

AI assessment note: “It's because of the fact that there was no diversified way to invest”

Q So what was the impetus for starting your own firm?

A Yeah, I always loved the asset management side of it. The brokerage side of the world was incredibly valuable and lucrative and interesting, but it was also a hamster wheel, and it took me farther and farther away from actually managing dollars and managing money and finding investments. So really, from the time I was 21 years old, and it goes back to actually the relationship with Tony Robbins, My wife and I actually in 1991 did Tony's tape series, and part of the goal setting workshop that we did there, I actually set the goal of starting a firm within 10 years by the name of Kaz Investments, and I knew exactly what it was going to be, and so every step along the way for the next decade was to prepare me for that opportunity, and so literally nine years and nine months later, we opened the doors of Kaz.

AI assessment note: “I always loved the asset management side of it. The brokerage side... was also a hamster wheel”

Q This started with Subprime, as you mentioned. And so why don't you start by walking through the story of how you found that opportunity and then how it played out?

A So I've always been a very thematic investor. And for us, being thematic just allows us to refine our thought and refine our efforts and our energy. And so in 2006, it became very, very clear to us that the housing bubble was going to burst. And I literally was So frustrated because of the fact that I had no idea how to short a house. So I didn't know how to take advantage of that bursting of that bubble. But I was literally in Los Angeles airport and I was doing some manager meetings out there and Ditek funding came on the TV there in the airport with this commercial saying they would give me a 120% of the home's value, no credit check, no income verification. And I yell out loud, that is nuts. And everybody in the waiting area thinks I'm nuts, but I like, this is insane. My literally very next trip was to New York, and I was with John and his team, and they were talking about what they were doing in housing, and it took me 45 minutes to say, I'm in, we definitely want to do this. It took me 45 days to understand what the heck they were talking about, CDS's and CDO's and CDO Squared's and all these things, but it was clear that they had come up with a very, very good way to take advantage of The housing bubble bursting. And so we knew that it was a way to make a profit from something we believe was going to happen, but that it also would be a significant hedge for the rest of …

AI assessment note: “in 2006, it became very, very clear to us that the housing bubble was going to burst.”

Q How do you think about it going forward, right? We've gone through this period of time with ultra low rates and Private equity, basically anything you touched in private equities performed really, really well. Are you still as excited about these opportunities going forward as the success you would have had in them over the last couple of years?

A For us as an owner of the GP business, the vast majority of the success is going to be the success of the franchise as opposed to an individual fund. So don't get me wrong. If a fund has a two, two gross versus a two gross, it's better for us. But ultimately it's about their ability to grow their business and to grow their platform and to be consistent. And one of the things that I'm involved in outside of the workplace is that I was nominated and approved by the Texas Senate to be on the state of Texas Pension Review Board. And so we are the watchdog for the hundred public funds in the state of Texas. Well, one thing I can tell you Definitively is that those folks have a problem. They have a six or seven percent actuarial assumption that they've got to meet, and there's zero chance that their public equity or fixed income buckets are going to meet that need, so they're having to do more privates. That is that big tailwind that I was talking about. Obviously, the tailwind of the growth of private equity and private investments is an asset class, but here's the interesting thing. And we've heard this from sponsor after sponsor after sponsor. Most of the investors recognize and realize they may not get as high returns at this valuation level that they did 10 years ago simply because EBITDA multiples are higher, valuations are higher, exit values maybe are higher, maybe they're no…

AI assessment note: “they have a six or seven percent actuarial assumption that they've got to meet”

Q When you create a particular conduit in one of these themes, what goes into it? So you can imagine a fund, there's GP stakes, there's, oh, the public stocks. How does that all come together?

A In most cases, it's going to be either considered a public vehicle or a private vehicle. And so a private vehicle is very rarely going to get involved in anything in the public markets. So that doesn't mean we'll always do that, but that's where we have been historically. So from there, it becomes very thematic. And so one theme, one conduit. So just talking about GP stakes, we have our private equity ownership fund one, our private equity ownership fund two, and our private equity ownership fund three. And those are going to be a combination of fund and co-investments alongside of that fund and or direct investments that we choose to make in that space. And in the case of like an open door, it's going to be a literally a fund of just open door. And so our investors know They're buying a piece of Opendoor, and that is specifically the only thing that they're buying. We do have what we refer to as our fund of everything, which is our diversified private investments vehicle, the market diversifier, if you will, to be able to do anything that we do. That's more of a traditional blank check type situation. We don't have one right now that's available for investors, so I can talk about it, but it's something to where we are able to make investments In everything that we do, as opposed to the standalone vehicle that's a conduit into a particular theme or a particular investment. But …

AI assessment note: “those are going to be a combination of fund and co-investments alongside of that fund”

Q So what have you learned from 20 years in the business?

A That's a long list. I actually put in our, it's on our website. Everybody can go. It's up open for public review, but it was our second quarter letter was our 20th anniversary. So in that letter, I actually put a list that's a very long list of everything we've learned over the last 20 years. So some highlights that I would hit is that ultimately maximum alignment equals maximum profits. If you're not aligned with your investors, if we're not aligned with our team, if we're not aligned with our own philosophies, Usually it's a challenge. Doesn't mean it can't work, but it's less likely to work. So maximum alignment equals maximum profits. The other thing is having a clearly understood primary outcome. When I was involved in helping with a number of people solve the Houston pension crisis a couple of years ago, the reason why it was stuck in legislation, and even though the mayor was for it, and the legislature was for it, and the employees were Where fourth, the reason it was stuck is that nobody could come up with what was the key priority. So one of my contributions was refining everybody down to what's our key priority. Number one, take care of the taxpayer. They're the one that are paying the bills for this. Number two, keep our promises to the people that we made promises to, the employees, the retirees. And then number three, if we can, try to make the politicians happy. …

AI assessment note: “some highlights that I would hit is that ultimately maximum alignment equals maximum profits.”

Q How about on the investment side, your biggest investment pet peeve?

A People that literally are all in it for themselves and are focused purely on what's in it for them. We have a big, hairy, audacious goal as a firm, and it's to make twenty billion dollars in profits for our investors over the next 20 years. Everything about our life every day is how we're going to make money for people, for them to support their family, their causes, their charities that they want to support. It is a pet peeve when investment advisors come in and just talk about how You know, they're great, and they're great, and they're great. And by the way, did they mention that they're great? And that's the entire reason why they're saying why we should invest in their opportunity. And they may be great, but it should be a lot more about what's in it for the client as opposed to what's in it for them.

AI assessment note: “People that literally are all in it for themselves and are focused purely on what's in it”

Q What are some of the favorite aphorisms you use inside the business?

A Where focus goes, energy flows. When would now be a good time to do that is another one that I would say is a Tony ism. Another one is complexity is the enemy of execution is another great quote there. Another one that I talk about all the time is, is in his course business mastery. They talk about the seven forces of business mastery and how basically all businesses can be broken down into seven categories. And one of which is raving fans. When we built our promises, our number one promise that we make to our team, and as well as publicly to our investors, is number one rule, do what's best in terms of the partners and make raving fans of our partners. So we use the raving fan concept extensively. Another one would be constant and never-ending improvement in canning, C-A-N-I, and just optimization. And I could literally go on and on because what blew Tony away, And I'm going to quote him and he's not going to mind me quoting him in this way is he says of all the people that have ever been through my programs, I'm not sure that anybody actually compared it back as well as Christopher can, because I have a bit of a photographic memory. And so I can literally say the things that I learned eight years ago at date with destiny or at business mastery, and they still are very much on the top of my tongue. And we use them literally every day in the way we manage the business.

AI assessment note: “Where focus goes, energy flows. When would now be a good time to do that”

Q the last couple of years? There was always this question of serving multiple masters. The GPs going out, they're investing on behalf of LPs, but now there's an ownership of a business and they're thinking about the shareholders, whether that's you as a stakes buying, certainly we could talk about the public companies too. How have you seen that evolve in the behavior of the GPs that have sold stakes?

A I think it does depend. It was one of the things that we really, really focused on and still do on what is the motivation for the sale of a stake. Again, this is something that's public knowledge. We sold a minority interest in our business to Tony Robbins earlier this year. Why? Because of the fact that we believe that together we could grow the business much faster with the balance sheet capital than we would individually. So do we think today, and I'll just use us as an example, Do we think differently today because of the fact that we have Tony and AJ and Josh and the rest of the team as shareholders? And the answer is absolutely not. Do we have more responsibility to them? Yes, but we've had shareholders in our business going back since I founded the firm in 2001. So we don't think any differently, and most of these private equity firms are exactly the same way. They own 75, 85, 90% of their business after we've bought our stake. Their number one objective is to make sure that they're growing their business, doing the right thing for their clients, and then ultimately to make sure that everybody wins as a result of that. Now, that said, there are a couple of cases that we're aware of where it has become much more about, there's an old joke when I was chair of the Texas Head Fund Association, which I founded, we had a big debate, this was in the early 2000, about whether or…

AI assessment note: “Do we think differently today... absolutely not... most of these private equity firms are exactly the same”

Q What does your due diligence process look like on one of these themes?

A Long and painful is the easiest way to explain that. And, and, The themes themselves, they happen a lot more organically and gradually over time, and going back to that statement of the power of the ecosystem is the ecosystem, the power of our network is that we have so many different relationships that we can triangulate around to both people, team, process. Candidly, I said this actually to my wife last night about something that we're looking at. If after three phone calls, we can't find someone who knows this team, Then there's a reason why they're not known, and we're probably going to pass. Not always, but that's a good litmus test. So we're able to really triangulate across our investors, the sponsors that we work with, and then obviously everything we know sector-wise, industry specialists, people that we know that are focused on that particular industry, as an example. So once we identify that theme, then we start broadcasting to the world that we're interested in a particular theme. Well, everybody who has a fund in that space should be calling us at that point because they want our money, and I understand that, and I would call me if I was them too, but we then are able to have both inbound and outbound, but a lot of our really successful investments have been us calling people and saying, hey, we're looking for the very best in agricultural technology as an example.…

AI assessment note: “we have so many different relationships that we can triangulate around”

Q I'd love to dive into some more of the themes. Before we do that, it'd be great to talk a little bit more about, as you've gone through these experiences, how do you think about investing that then can lead to the identification of these themes?

A So thinking about investing is, it's well used, but you know, where's the puck going? Skating where the puck is going to be, to quote Mr. Gradsky. We really, really like to have the wind at our back. Now to be very clear, we will invest with the wind in our face, But we have to be paid exponentially better to be willing to go counter trends. So in 2009, 2010, we were clearly contrarian when we were buying up everything that had gotten destroyed during the global financial crisis. But because we shorted subprime, we literally had the benefit of all of this cash coming into us, and we were like a child in a candy store. I mean, it's like, oh my gosh, I'll buy that, I'll buy this, I'll buy this. Well, we were very much contrarian then, but we knew the opportunity set justified investing with the wind in our face. But most of the time, we're going to look for the wind at our back. And then from there, it's going to be where's the highest probability adjusted outcome that's going to give us the best opportunity to be successful with the highest level of confidence. And that's really, really difficult to do today, but there are still pockets of that. But in so much of what we do, and if you look at everything we've done Whether it be GP stakes or midstream energy or things of that nature, we have always looked at it from the standpoint, it's really kind of hard for us not to make mon…

AI assessment note: “thinking about investing is, it's well used, but you know, where's the puck going?”