The Exchanges

Q We haven't really talked about the hedge fund side, because you're certainly spending all your time in private equity now, but for years, BlackRock and Highfields, you were involved. Hasn't been the rosiest time for hedge funds. Any thoughts?

A I'm not the world expert on hedge funds. I do think it's interesting to think about what are some of the downstream consequences of the rise of index investing and the decline of active investing. And if you think about some of the opportunities that used to exist if you were a hedge fund, there would be some news event in a coming out of a company The market would misunderstand it, which meant the mutual funds would sell on the news. You would have a different view. You'd buy it, and, you know, you might hedge, you know, correlated to the other members of the industry, and then you would wait for it to recover, right, for that misunderstanding to be corrected. So, In the extreme, if you had a hundred percent indexation, there would be no sales on that corporate news event and nothing to buy. What if you're halfway there? If you're halfway there, there's half as many shares being sold into that news event than there used to be. Or, like, way more cynically, there's fewer dumb decisions being made in one part of the world That can be profited on from the other. And at the same time, there's more money in the hedge fund industry, not compared to last year, but compared to when a lot of investors were making their returns. So in the fundamental value driven part of the world, I just think it's harder to pick up those misvalued securities. If you move a little off the run into dist…

AI assessment note: “I think should point to, you're going to expect lower returns.”

Q What is the investment strategy for Gallatin Point?

A It is to invest across the capital structure predominantly, but not exclusively in the financial services business with a flexible mandate in partnership with people to bring the right people, the right structures, and the right capital to bear to make outsized returns relative to risk. So in this case, we brought the people of College Avenue together with a structure, which was a warehouse to a securitization on a flow purchase agreement, and the right capital, which is capital that understood that this shouldn't be expected to be a 20% return. We had that open dialogue and said we're going to do some deals like this. We do think this is a mid-teen return deal. We could be wrong, but it seems to be tracking that way. So we're going to sometimes do things that look like 15. And sometimes we're going to do things that look like higher that have more risk. And you shouldn't invest in this strategy if all you want is the more equitized exposure. And we were very, very fortunate to have day one investors come to us who bought into that approach. We made a investment with a family into a family business. Uh, called the, the hunt family, the, not the oil hunts, not the ketchup hunts, not the trucking hunts, but the real estate hunts in El Paso, who are, uh, like a longstanding, outstanding family. They made their fortune in the military housing business and went on to expand their pr…

AI assessment note: “It is to invest across the capital structure predominantly, but not exclusively in the financial services”

Q So what was it like going from this open landscape, go down to Florida, panhandle, do whatever you want, to regimented, structured, highly disciplined environment like Blackstone?

A It was really intimidating. Everyone there just knew so much. They threw me into a deal, and one of the great things, Michael Che, who's now the CFO of Blackstone, was my first deal boss, and he knew how little I knew. So he, even though I was the associate on the deal, gave me the responsibility for doing the financial model. And I looked at like the other financial models that third and fourth year analysts had put together and they're like 50 pages long and really sophisticated. And I had done strategy consultant Excel, which is a different language. So he gave me that to do, and then we progressed the deal and we had to organize the financing. So I had to negotiate the financing documents. And the purchase and sale agreement, and the shareholders agreement, and this was, you know, muscle memory for everybody else, and it was all new for me, but there were great people around me having, in this case, having Harry as an office mate, in addition to being a friend, was unbelievably helpful because I had someone to ask questions of. Michael was great. I could ask questions of him, and so I, I learned a lot in a short period of time From some really smart people. And then I'd say to the credit of the firm, it's a big market leading firm, but it hasn't lost being entrepreneurial. So even though it had this great market presence and mega fund, mega fund back then was 3.6 billion do…

AI assessment note: “It was really intimidating. Everyone there just knew so much. They threw me into a deal”

Q How did you think about the transition private equity to public equity or hedge fund in this case?

A I think incorrectly. I thought investing is investing. You do your work, you understand industry dynamics, you understand competitive positioning, you understand the financial structure and outlook for the company, you value it. And whether it is buying a company in whole or in part through the market shouldn't really make any difference. And that was very much the Highfields mantra, where value investors who are deeply engaged. I learned something important about myself in the process, because I probably always thought of myself as more cerebral, less emotional, less relationship driven. And when I got to Highfields and started investing there, Pretty quickly, I realized that I actually missed the level of engagement that I had with portfolio companies or prospective investment management teams in private equity. I didn't realize how much I needed it or enjoyed it until it was removed a level to the nature of those relationships in a public context. And Highfield is very forward on relationships relative to A lot of public securities firms, but they're still Reg FD, and there are rules, and there are barriers, And so fairly quickly I realized I actually miss sitting down with management and talking about things and thinking through what are our allocation priorities for capital, for time, for people. So I missed that. On the other hand, it was a great environment in which to l…

AI assessment note: “I think incorrectly. I thought investing is investing. You do your work”

Q Why don't you walk through some of the things you've done to give examples of that?

A We've made four investments, and I think we're about to make a fifth. The first one we made was an investment in the student loan pool. And so we looked at a company which we think is a really innovative, it's a FinTech, but it's run by real finance people, credit people, people who come from Sallie Mae. And so they know what they're doing. They created a very slick online app, phone app for students who are still in school. To take out loans, but the niche they focus on is loans where there are high credit quality parents or grandparents who are willing to co-sign, and that financial support from the co-signer allows them to access credit at a much better rate than if they, as a junior in college, went out and tried to get the loan themselves. So we looked at the business, and we think it's a really interesting business, but it's At that point, it was a more venture stage company, the equity of which kind of belonged in the hands of venture capitalists. But we thought the assets which they were producing were really interesting. The average FICO of their loans was kind of seven 67 70, and had some interesting characteristics about non-dischargeability and bankruptcy. Low Default rates through the crisis for this subset of student loans, and yet they price at, call it LIBOR plus 700. And so we created a structure where we just bought the loans as they made them. And we accumula…

AI assessment note: “The first one we made was an investment in the student loan pool.”

Q So you also sit on the boards or board of hospital investment committee. Other nonprofits. And I'm sure you were in front of a lot of big pools of capital in your days, BlackRock and probably some still. What observations do you have about how institutional capital is getting managed today?

A It's really hard to generalize, right? The differences that exist between, I hadn't appreciated how profound the differences are that exist between these different types of institutional capital pools that have nothing in common other than they're institutional because they're not individual. So in my travels at BlackRock, I Was I would go to China and see, you know, SAFE and CIC. I would go to the Middle East and see ADIA, KIA, all the acronyms. Go to Europe and see the pensions and the endowments and foundations, which tend to be smaller as a presence there, and the private banks. Travel around North America and see insurance companies, and life is different than PNC, and pensions, and state pensions are different from Corporate pensions, and Canada is totally different than the U.S., and then Bermuda and its insurers. So, just an incredible array. And I would say, in general, I think many of them are overly siloed and overly valuing of liquidity. If you just said, like, what are the things that stand out as problems? And the ones that manage to Reduce or mitigate the silos and allocate, think about illiquidity and allocate it thoughtfully, are just, I think, heavily advantaged.

AI assessment note: “many of them are overly siloed and overly valuing of liquidity”

Q get to this point in time where you're in a seat, the visions of wanting to do your own thing or whatever it is. You got to make that transition. How did you go about the process from the initial idea to your exit and have it be so smooth that not only is BlackRock supporting you, but you remain an advisor to BlackRock. How did you make that work?

A Well, I think a lot of patience and wisdom on Larry's part helped. It is hard to make that work, but you can't do it unless both sides have respect for each other and patience and a willingness to see past the moment of, you know, separating towards the end state of having a good partnership. And, you know, certainly from my part, I didn't, you know, do anything to hold them up or embarrass them. None of which would have been deserved. And they couldn't have been more supportive and wonderful. Not only did they make the investment, but they did nice things like talk to potential investors and say, we think it's a good idea to invest. So things they, they certainly didn't have to do. But, you know, I think over the span of time, as we work together, we'll be very mutually beneficial.

AI assessment note: “you can't do it unless both sides have respect for each other and patience”

Q of alternatives at BlackRock, right? You talked about infrastructure, hedge funds, private equity, opportunistic investing. As you step back, as you're forming Gallatin Point, there's some objective function of what you want to do, and there's probably something about sort of what's your view of the world at the time. So let's start with the latter. As you look at this whole landscape of alternatives investing, what's your perspective today?

A General markets perspective is things seem expensive, right? So the, you know, the risk you're creating across a lot of assets buying at at least, you know, a couple weeks ago's price is, you know, I think skewed negatively. And I've had that view for longer than it's been evidenced. I don't know if it's early or wrong, but to me, the The implication of that as to how you want to structure your investing activities is to be sort of maximally flexible, particularly given that sectorally, by experience, we're relatively focused in financial services, big universe, but it's not the full world. And so our perspective was that if you're going to be relatively focused in a sector, and if you believe your investment period is likely to include or start with A period that has a lot of risk. What we wanted to have was the ability to invest anywhere in the capital structure. And so, rather than being wedded to, I am the hammer of Control private equity nails. We should be able to do control private equity, minority equity, structured, preferreds, debt, and assets, and look at a situation and say, given where we are in the cycle and valuations, given the nature of the underlying, in this case, I want to be nowhere, or I want to be ring-fenced on these assets, or I want to make this loan, or I want to have this structured piece of, of equity.

AI assessment note: “General markets perspective is things seem expensive, right?”

Q It always takes two to tango, so I'm sure that BlackRock had to play ball. I'm also sure there are other people who probably have left BlackRock over the years that haven't had the kind of experience you did. So if you shine the light on yourself and the process you went through, what did you do to make it smooth?

A One important thing is I wasn't leaving to go to a competitor. Most people who've left are in some way setting up shop or going to work for Something that will be a competitor to what the firm does. What I was doing was so different than what most of the bread and butter of BlackRock that I think it was just naturally a little bit less offensive. Second thing was it was very clear in words and in willingness to leave things on the table that this was not about money. It wasn't about people. It was about truly a different objective function than what people in the firm wanted for themselves. As you said, if we created the mega fund at BlackRock made more money, but this was about wanting to be entrepreneurial, wanting to be structuring, creating companies and deals, and being willing to leave money on the table, take time in doing it and doing it correctly, And lend long-term assistance. I think those are all, you know, proof points of a decision which is rooted in a different objective function rather than dissatisfaction or disagreement.

AI assessment note: “One important thing is I wasn't leaving to go to a competitor.”