The Exchanges

Q I'd love to turn to where we are today. What do you mean by late cycle?

A Having seen past cycles, they're all different, but there are certain behaviors which always come to the fold. Cycles of tension between fear and greed, and we're very much in greed mode now. There's tremendous complacency. You see it in spreads. Spreads are super tight. They're tighter now than they were before the GFC in the investment grade world, which is mind blowing. Spreads tightened the tightest level since pre-long-term capital management in the late nineties. You see investors willing to accept opacity rather than transparency. You hear the phrase, got to put the money to work, deployment, deployment, deployment, far more than risk and safety. You see a spate of frauds. All of these are indications of late cycle behavior. It doesn't mean that things are going to turn tomorrow, or when they turn, it's going to go kaboom. Who knows? But you just have to be really careful, and everyone has done well for a long time. It's ironic, but when you're on a hot streak like that, and you think you can do no wrong, risk is rising, even though mentally you're thinking, oh, I must be good. I got this. I got to cover it.

AI assessment note: “All of these are indications of late cycle behavior.”

Q Why don't you take me back to your upbringing?

A I was raised in suburban Boston, town called Needham, Mass. My mom and dad were from Springfield, Mass, Western Massachusetts. That's why I don't have a Boston accent. My dad was an educator. He was a teacher. He was a coach. My dad taught gym, physical education, a junior high school in Needham. I remember when I was eight, we moved to Washington State, and my father had a job there for a year, literally a town in the middle of nowhere. They were known for their rodeo. That was about it. Then we moved back a year later, and my dad worked at Needham High School. Then he eventually got a job, again, in physical education at Lowell Tech, which became University of Mass at Lowell. And we were a very middle-class family. We never had a lot, but we always had enough. And I have a brother who's five years younger than me. He also lives here in New York City. Very ordinary upbringing with a split-level house and all that stuff.

AI assessment note: “I was raised in suburban Boston, town called Needham, Mass.”

Q So when you go to form this strategy, pretty novel to combine those two parts of the capital structure, 20 years ago, how did you think about what product to put together?

A Our first product Was a private equity fund, but it was designed to do more than buyouts. So of course it was going to do buyouts, but it was also going to do distress for control, which is a lost art these days, but distress for control is just a buyout. The only difference between a distress for control transaction, buying debt, converting it to equity to own a company is that in a traditional bio you're using leverage to acquire a company. Distress for control. You're de-levering to acquire a company, but that's just the means to the end. The end of both is you own the company. So it is truly a private equity strategy. And we were also doing structure equity, but we told our clients that we don't have a set bucket. We can be a hundred percent bias, a hundred percent distress for control. We were indifferent. And then talk about luck. We raised our first fund in spring of oh six, so a very large fund. Then for the first year, we didn't do much because we kept bidding and losing. Oh six through the beginning of oh seven, there was no distress. Most people forget most distressed companies are distressed for a reason. They're lousy. You don't want to go near them. So there's nothing good to do there. And we kept losing in buyout space. And then the world toppled. We had a huge pool of capital. We did some buyouts, which were hugely successful. We did some distress for control de…

AI assessment note: “Our first product Was a private equity fund, but it was designed to do more”

Q When you're seeing that late cycle behavior, particularly in the credit markets, how does better talent end up translating into returns if someone's looser at underwriting or willing to pay more?

A I'll give you two examples in the news. First Brands and Tricolor. We looked at both for years. People said there's never been a picture of Patrick James. We flew to his office. We met him in person. We had the Tricolor management team at our office. We spent a lot of time with both these businesses. We didn't invest a dollar. How do you measure that? That's a good question, because we didn't do it. So how does that show up in our returns? Well, I guess we avoided a loss. That's a good thing. The fact that we didn't do it is real alpha. I think it's undeniable. I still don't know how to measure it, how to quantify it, but it's a real thing.

AI assessment note: “how does that show up in our returns? Well, I guess we avoided a loss.”

Q What was notable in your path from knowing some math to the decade and a half you spent with John and Michael?

A I was hard worker. I went to NYU at night, not to get a degree, but literally to take accounting and corporate finance and security analysis, and it was the first time I had ever gone to school to learn something as opposed to going to school to get an A. Very different. I was really into it, and my wife would tease me. I remember this book, it was called Principles of Corporate Finance by Brilliant Myers. It's like a Samuelson for macroeconomics. Like a pleasure book. I was really, really interested, and I immersed myself. I read as much as I could. I asked a thousand questions. Of my coworkers. And when we started Angelo Gordon, end of 88, beginning of 89, there were maybe a dozen people, 15 people max. I didn't want to be a pest, but I was always asking questions, including dumb questions. Unlike law, I enjoyed it. I had an aptitude for it. I always describe investing. It's like doing puzzles. People say, well, what else would a good investor be good at? I said, like an investigative journalist. You're always asking questions, you're looking under rocks, you ask a question one way, you listen, listen, listen, then you ask the same question, but you rephrase it to see if you get a different answer. It was like being a journalist and investigating and learning, and I really liked that.

AI assessment note: “I went to NYU at night, not to get a degree, but literally to take accounting”

Q In that type of environment, how would you define the skill set that you needed to succeed?

A A lot of investors in credit are former lawyers. I don't think that's surprising because understanding how something works from a legal perspective is critical to investing in credit, particularly in situations where something has gone awry. Company isn't performing. Maybe there's a big litigation judgment. Having an understanding of how credit agreements work and legal processes and bankruptcy processes is really important. The way I describe it is I put in the context of a company's balance sheet, the classic T, and that the alpha of a credit investor, particularly in a special situation, credit investor, opportunistic credit, call it what you will, the alpha is on the right hand side of the balance sheet. Understanding how things work, relationships, and you get into court, litigating, and all those things. What I learned back then, and it remains true to this day, no matter what anyone else may say to the contrary, credit investors do not know companies as well as private equity investors, and no one will ever convince me otherwise. And the reason for that is simple. Credit investors don't own companies. They're not supposed to own companies. They'll never know a business as well as a true owner of a business and someone who is trained over years and over decades to understand how the businesses work from the inside, not how the capital structure works, how to identify firs…

AI assessment note: “understanding how something works from a legal perspective is critical to investing in credit”

Q What do you think happens with the renewed interest from private wealth coming into private credit, potentially private equity?

A It's a question of when, not if. I think alternatives are perfectly appropriate for individual investors with one gigantic caveat. They have to understand what they're buying in terms of the risks, in terms of liquidity, and in terms of the fees. And there can't be any obfuscation on any of those things. If people go in eyes wide open and they know what they're buying, I think it's perfectly appropriate. The challenge will be is that they don't, and they do it anyways. That's an area for concern. There's a regulatory pendulum. A lot of capital will come in from the wealth side. Inevitably, there'll be an issue, and it's just the way it is. And I don't know what it'll be about, but there'll be something. If we're now dealing with small investors who don't have the sophistication level of a large university endowment or a big pension plan or a sovereign wealth fund, And it's perceived as the little guy is being hurt. Well, then you could see regulatory backlash, even if the providers have done everything correctly. I think that's a known risk going in. It could happen. Wouldn't surprise me if it does happen sometime down the road, but that doesn't mean that a bad incident with a lousy outcome shouldn't impact an entire marketplace.

AI assessment note: “A lot of capital will come in from the wealth side. Inevitably, there'll be an issue”

Q I'd love to pick apart some aspects of the investment approach with those sides. When you went to source, on the credit side, the paper's already existing. Private equity, it's a big world. How did you think about where to look for the opportunities?

A When we started the firm, we had two strategies. Typically, a firm with multiple strategies will have multiple teams. You have private equity team and a private credit team. Rarely did the two interact. From day one, we didn't do that. We said, we'll have one team. We'll follow certain industries, but if you're within the industrials vertical, you will invest up and down the capital structure. Within industrials, as opposed to having a team of investors focus on industrial buyouts and a completely different set of investors focused on industrial distress or credit. We said, just have one team invest up and down the capital structure, everything from distress debt to buyouts and everything in between. We've continued that to this day. It's our single biggest differentiator in terms of the way our investment team operates. I thought back then, and I continue to think today, it leads to better thinking, because if I were to overly generalize, the private equity investors think everything is going to the moon, the credit investors think everything is going to zero, and it's good to have some balance. We also thought, and it remains true today, it would lead to differentiated sourcing, because you could source through different networks that weren't available to a traditional buyout investor or a traditional credit investor.

AI assessment note: “have one team invest up and down the capital structure”

Q As you've evolved before you were an owner, how do you think about the differences in risk reward, particularly when those loans themselves are complex and maybe there's some hair on them?

A Investing in credit, you have to remember the three C's. Capacity, which is the ability to pay. There is collateral, which is the guarantee, the backstop to pay. And then there's character, willingness to pay. Those are timeless. You still have to focus on all of those. I look at what we've done in our lending business, rate returns for a long period of time, and dozens and dozens of deals, billions of dollars of capital with minimal losses. That's a function of just being careful. Think about safety, safety, safety, safety. There's less of a focus on safety today than there used to be. Again, another manifestation of late cycle behavior, but safety first. When you invest in credit, particularly when you're originating, you lend a hundred cent dollars, you have to get back a hundred cents because your return is purely contractual. There's no convexity on the upside. You can only make so much money, so you have to be really careful to be good at this.

AI assessment note: “return is purely contractual. There's no convexity on the upside.”

Q So Mark retired a few years ago, and you are still full on. What do you think it is that keeps you going?

A I love what I do. I find it intellectually interesting. I love the people I do it with. As a group of partners, we've been together a long time. My son is also in the investment business, and he used to work at a big bank, and one day he was bellyaching to me, and I said to him, did you ever hear the expression, work sucks? And he goes, yes. I said, well, that expression is there for a reason. Sometimes it does, but the most part, it doesn't. I like the notion of building. The past five years, that has been a new thing for me. In addition to investing, which I've been investing since the eighties, building is also rewarding intellectually. It's really been fun as we build some of these adjacencies. It's an opportunity for young people who work here to take a leadership role. I find that rewarding, and I don't mean financially. I mean, almost emotionally, intellectually.

AI assessment note: “I love what I do. I find it intellectually interesting.”

Q So when you go to start Centerbridge, what did you want to do differently?

A I left in 2005. Around year 2000, I met my to-be business partner, a fellow named Mark Gologli. Mark was at Blackstone. Mark ran Blackstone's private equity business. That was when Blackstone was a much different firm. There was no real estate. There was no credit. Mark ran the private equity business and the current leadership of Blackstone. They all worked for Mark because they were all in the private equity business, and Mark, like myself, had joined Blackstone in the eighties. We were introduced by another partner at Blackstone, a guy named Art Newman, passed away a while ago. Art ran Blackstone's financial restructuring business, so they had an advisory business, which They spun out 10 years ago, which became PJT. And Mark and others at Blackstone, they were interested in credit, but they were also quite self-aware. They knew it wasn't their thing. So Art suggested to Mark, you should meet Jeff. You'll get along. You look at the world similarly. So we met, we became friendly, and we decided that we should partner on some deals together. Fifty-fifty on a handshake. No document, no nothing. And we will combine our investment teams effectively. One of Mark's analysts at that point was David Blitzer, and Blitz was like one of the team members working on all of these joint projects. The name of the project was called Project Spock, as in Mr. Spock from Star Trek, and the idea w…

AI assessment note: “they were experts on the left-hand side... our team, we were good on the right-hand”

Q What was the breadth of investment activities at Angelo Gordon?

A My focus was exclusively credit. I helped build and start our real estate business, but that was also a function of credit. This was now in the early nineties, there was a recession, Drexel had imploded and the savings and loan crisis. And as part of our investment strategy, so it was principally focused on distressed securities and special situations, all with a credit bent. There was a lot of real estate credit around. Learn the real estate business, and that led us to start eventually what turned out to be a huge real estate platform at Angelo Gordon. Putting that aside, my mandate was to focus on our credit businesses. It's funny, nomenclature change. It used to be investing in bankruptcies. That sounded too harsh. Then it went to distressed debt and securities. That sounded a little kinder, and now it's called opportunistic credit. Leverage buyouts are now buyouts. Risk arbitrage is now merger arbitrage. But things don't change. It was investing in credit, but trying to generate, I'll call it an equity-like return, as opposed to a credit return.

AI assessment note: “principally focused on distressed securities and special situations, all with a credit bent.”

Q When you bring that down to your sector meetings, your investment decisions, how is that impacting the incremental decision in any of the portfolios today?

A I don't know if it's impacting individual decisions, but people will generally know that I'm going to approach things. I'll be very curious. What about this? What about that? Have we thought about this? Have you reached out to this person? You got to be creative and trying to get an angle. We're looking at some businesses in the UK, which are regulated now. Well, how's it work in the EU? Even though the UK is not part of the EU, how's it work here? How's it work in Asia? What makes a good investor? I think it's the ability to see something before someone else. It's the ability to see something before someone else, and that's what we're always trying to do.

AI assessment note: “I don't know if it's impacting individual decisions, but people will generally know”

Q What have you seen on the differences in underwriting from the concept of left-hand side of the balance sheet? They think about the growth and the right side's downside protection. When that gets into the underwriting of individual positions, what's subtly different than the two?

A There are different ways of approaching the same investment. People look at investment through a different lens. And that is one of the great things about our firm is that we can look at one particular company, but because we have investors around the table with different backgrounds and different skill sets and different experiences, it becomes a really interesting and vigorous conversation. What about this? What about that? That's what investing is. It's pushing each other and Challenging. Not in an aggressive way, but even our investment committee process, it's not that a deal team goes away for six weeks and then they show up with a beautiful deck. It's iterative. Multiple investment committees and workshops and pushing and prodding and things like that.

AI assessment note: “that is one of the great things about our firm is that we can look”