The Exchanges

Q So take me back. You come right out of school. It's a relatively small organization. What was your path from starting as a junior guy who presumably knows very little to alongside the growth of the firm, different roles and escalating as you have?

A I got very fortunate, first of all, in terms of my timing. And so, 1998, 19 99 were pretty fallow years for distressed investing. If you go back, historically, those would have been the heart of internet bubble one point O in terms of where things were. Part of why I was literally the only applicant for the job is my classmates at that point were interested either in investment banking, consulting, or internet related jobs. Those were really the hot jobs of that era. No one was thinking of optionistic credit. It was still very much a cottage industry in that period of time. The benefit of that for me as a younger investor is I really got to learn on the job. I got to do investments that were meaningful to me, but were realistically relatively small relative to the size of the firm's portfolio. We were very leanly staffed, so I got to be the primary analyst on those as a 25 year old. I got to learn the lessons very early on. There was a large wave of fallen angels Fallen formerly investment grade credit that hit in 2000. I was able to run much larger positions at the time. And then by 2001, there was a lot of really exciting stuff going on in the portfolio. And I was one of the senior analysts, if not the senior analyst of the team. And I think if I'd started my career four or five years later, I would not have been as fortunate in the timing on it. And so I got to really learn …

AI assessment note: “I got to be the primary analyst... by 2001... one of the senior analysts”

Q How does the lens that you bring of downside protection translate over into, say, private investments as compared to what you might see in, say, private equity?

A I would start out with a couple of things. First of all, there's a lot less leverage on the strategy than there would be in private equity. In a lot of cases, there's no leverage. In some cases, there's limited leverage. Real estate, if you're doing more distressed or opportunistic real estate, that likely will have some leverage on it. But in the corporate space, it's a much less levered strategy. You're buying assets typically at much lower multiples of cashflow, but there's a reason why you're buying them lower multiples of cashflow. Not all private equity, but a lot of private equity is buying In favor businesses at higher multiples because you think you can operate it better, or you think EBITDA is going to continue to grow, or sometimes it's just a financing arbitrage as to how you do that, although I think very few people would say that, but that's the reality of some private equity deals. There's none of that with typically what we're doing. You're buying businesses at lower multiples because people think there's something wrong with the business, or you're buying a business at a lower multiple because it's out of favor at a period of time. So think like, Retail two or three years ago, or think jurisdictions like Italy, where not everyone's always wanted to invest in those jurisdictions, or people have gotten burned in the past in terms of where those things are. There'…

AI assessment note: “First of all, there's a lot less leverage on the strategy than there would be”

Q How do you think about what types of ideas your team is working on?

A I like to keep an open mind towards things. There's different types of investments that we see at DK, and again, it's after 40 years of pattern recognition. And there are investments that fit very squarely into things that we've done in the past, and I think those investments are very ripe for just doing simplistic credit reviews, where typically myself and, you know, one of our other portfolio managers and the members of the team who worked on the investment would just sit down in a room for an hour and going over it. And then there are ideas That the analysts themselves are super excited about, but may not nicely and neatly fit into that box. And so we have a process internally that one of our retired partners has named Scream If You Hate It. And so we do a lot of Scream If You Hate It. The idea is I'm going to give you the shape of the investment. We're not fully done on our work yet. I want to steer as to whether if this all checks out, this is worth our time. Or not. And so I'll give you a perfect example of this. We've been very active in the alternative energy space in the last five years, and this started as a scream, if you hate it, where there was an opportunity to buy some biogas assets in Scandinavia. We didn't have a lot of experience with these sorts of assets, and it was going to be an operationally intensive play where not only we were going to purchase these as…

AI assessment note: “There's different types of investments that we see at DK”

Q How do you think about risk management and managing the downside in terms of the entire portfolio construction?

A I think of risk management as being very different in a private equity style strategy than I think of it in a public market strategy, and so a private equity style strategy would typically have 30 to 35 positions in it that you're typically putting in place over a few years. In any one year, you might do 10 or 15 investments, plus or minus, and so while you might look at aggregations across industries or across geographies, it's a fairly concentrated portfolio, so where I think about risk management in that context is If you've got a position that's north of five percent, you need to make sure it's things that are not going to blow a hole in your fund if you're wrong. PE style funds typically have large preferred returns on them as well, which I view as the minimum level that your investors will think you did something reasonable for them. If you have a big loser and the pref suggests over five years, you should have made 50% on your money. That's just a huge gap. You have to fill somewhere else. And so if you have that in a one percent position, that's very different than if you have that in a 10% position. Public markets work a little bit differently. And again, there's a big path dependency to public markets. I think most PE funds are generally by how you do at the end of the fund, whereas public securities funds are typically judged on a monthly basis. And so we use fairly …

AI assessment note: “I think of risk management as being very different in a private equity style strategy”

Q Great, Tony. I can't let you go without asking a couple of fun personal closing questions. What is your favorite hobby or activity outside of work and family?

A I'm a big sports fan. I grew up in the New York area and enjoy rooting for the New York teams. We go to a lot of games. I'm also a baseball card and memorabilia collector. It was something that I did as a kid. I only half kid when I say I learned how to invest by trading baseball cards in the 19 eighties. And I actually had a small mail order business when I was a teenager doing that as well. It's something I put down in college and in my twenties. And I picked up later on in life, especially as eBay got to be very popular. So those are certainly hobbies that take a lot of my time.

AI assessment note: “I'm also a baseball card and memorabilia collector.”

Q How'd you go from there to becoming a career?

A I left Princeton a year early to start at Columbia, and I did a joint law business degree at Columbia, and I was a public policy major at Princeton, and I was very torn between doing a career in regulatory law and doing a career in investing slash corporate law. The way it works in law school is your second summer internship really dictates most of the time where you wind up going to work full time, and so I interviewed heavily with both Washington firms and New York firms, and I ultimately got much more excited about the investing side of things than I was about the regulatory law side of things as I spent more time with these firms. I opted to work in New York that summer, really doing private equity law. That was the end of my interest in a career in regulatory law. It's still an area of intellectual interest to me, but not one I spend a lot of time on.

AI assessment note: “I opted to work in New York that summer, really doing private equity law.”

Q So you mentioned on strategies that thought about putting you in merger arb, and then you ended up in opportunistic credit. As you break down the buckets of strategies, what was that simplistic platform back then?

A It was basically opportunistic credit, and opportunistic credit almost exclusively meant corporate credit in that era, and a lot of what we were doing was buying debt between 70 and 90 cents in the dollar. We would sometimes take back equity on that debt, but a lot of times we're just looking to get paid back par or some amount more money than we paid. I would say in risk arbitrage in that period of time, it was almost entirely announced deals, and so you were playing for prescribed spreads. You know, the late 19 nineties, early 2000, you may have had more deals with bumps To them. So you had a little bit of optionality on the upside, but not a lot of optionality on the upside. So I would say with the benefit of hindsight, all those strategies were quite simplistic in that era.

AI assessment note: “It was basically opportunistic credit, and opportunistic credit almost exclusively meant corporate credit”

Q How do you think about managing this organization philosophy of leadership and management in this team?

A Well, what I would say generically is I want the people who have experience, who are the closest to the investment to make the initial decisions as to whether we're going to be invested in certain things. So even though I think investing is a team sport, that does not mean that there shouldn't be a team captain for any individual investment. And rather than having a smaller number of team captains who make a lot of the decisions or all the decisions, I want to have a larger number of team captains who are people who have been here for a long time, who we've seen their work product, we trust their work product, and those people can be empowered to make decisions on individual investments because those people are quite frankly going to be better placed to make those decisions than I am or another person in a very senior role is going to be. We do have oversight and risk management both on public portfolios and particularly on approval processes for private Investments as well. With a public investment, if you decide you made a mistake, you can generally get out of it. Whereas in a private investment, not only can you not get out of it, but you may take a lot of work to even get your money back in it if you can do that. So you have to have different processes along those lines, but I want to make sure our teams are empowered to do so. And then for me with the CIO seat, I have the …

AI assessment note: “I want the people who have experience, who are the closest to the investment”

Q You spend a bunch of time on a couple prestigious investment committees, Princeton, New York Public Library, Columbia Presbyterian. Would love to hear when you sit on the other side of the table, what have you learned from that experience?

A Look, it's super interesting to be able to do it and to be able to do it with three organizations, and I've done a couple others over the years, too, of organizations that I really care about, my wife really cares about as well. So first of all, I find it fascinating to be able to learn about all asset classes versus what we do. To me, I just really enjoy investing as a sport. It's one of my favorite times to spend on things, so even if I was not working in the investing world, I think I'd still be spending a lot of time thinking about investments and how to invest, and so there's really, really interesting Things you learn about areas like venture capital or macro investing or whatever it is, there are things that are just different than what I do here. I do think when you serve on an IC, you have to remember that you're a coach and not a player in that regard. I have the benefit of seeing ICs from multiple angles, not just serving on them, but also we obviously have a lot of ICs that we present to here as well. And so from my perspective, if I'm going to serve On an IC, I want to make sure I'm in a coaching position where you're talking about asset allocation, you're helping to mentor the CIO, you're helping to provide insights on areas that you're an expert in with the CIO, but that's the nature of the relationship in a committee is to make sure that teams are doing their jo…

AI assessment note: “learn about all asset classes versus what we do... you're a coach and not a player”

Q What was the most challenging moment in your career?

A It's hard not to say the global financial crisis. With the benefit of hindsight, I feel like I probably stayed reasonably calm in that era, although I'm sure none of us were particularly that calm in that era. And I think part of it was having the perspective that I knew where my next meal was coming from. I knew I wasn't going to lose my home. I knew I was going to be able to continue to live my life. And sadly, a lot of people in our country were not able to say those things in that period of time. Things got to be hard for a lot of people, and that's maybe what kept it going. Also, Even though it took many years for the country to bounce back during that era, a lot of funds, including ours, had very strong 2009, and so if you made it through oh eight, actually it could wind up okay reasonably quickly. The other answer I would give to that question actually goes back well before starting at Davidson Kempner. I went to a large public high school in New Jersey where I was one of the best students and I was one of the better athletes in the school. And then I got to Princeton University as an eighteen-year-old, and I was probably an average student and a very mediocre athlete. And, you know, when you go from a place where you're used to being among the best at everything, and you go to a place that you realize everybody is among the best at everything, it's a very humbling exper…

AI assessment note: “It's hard not to say the global financial crisis.”

Q When you're going from just a New York presence to a global organization, how did you go through the thought process of when to set up on the ground in a different geography compared to just managing it out of New York?

A There's been a couple of different stages of our global growth over the last 20 years. We've been doing investing in Europe at least since the early 19 nineties. When I got to Davidson Campner in the late 19 nineties, we had a number of European positions. And in that era, we used to manage them by sending people from New York over to London periodically to manage the positions. And we ultimately realized that was very inefficient. We opened an office in London in early 2000 and we slowly grew it over the course of the next seven or eight years. Success begat success. We did more deals on the continent. We really started to grow our office post the GFC. If you look at what happened in the credit markets post the GFC, the American banks were very quick to sell their investments and move on. The European banks were very slow to do that, but there were some really interesting opportunities in public market securities in Europe in late oh eight and early oh nine. As part of managing that business, I used to go to London four times a year or whatever to make sure to spend time with the team, and I went to London in January, 2009. And I remember this precisely because we still have some discounted holiday merchandise in the house from having bought at the airport on the way back that year from the year before. I went to see one of the big brokerage houses and they said to me, literal…

AI assessment note: “we used to manage them by sending people... ultimately realized that was very inefficient”

Q You mentioned the scream if you hate it. I'm curious in that investment process as ideas are working their way through, what are some of the other Davidson Kempner aphorisms and lingo that comes up?

A Everyone has their own theories on investments. Um, Tom used to always say that you should never let a winner turn into a loser. We've done a bunch of mathematical work on that. I'm not sure it's entirely correct. You should never let a winner turn into a loser, except when it comes back to be a big winner again, which happens occasionally. We produce something periodically we call the dead money report. So investments we've had for long periods of time that have earned typically between low single digits, And minus low single digits. We find that everyone focuses on the winners, and everyone focuses on the losers, but no one focuses on the, ah. And if you've got a cost of capital of, say, 12%, and something is zero for two years, all of a sudden, it's 25% return you haven't gotten on that investment. I do like to think of investing to some degree as probability-weighted outcome. And when you're looking across hundreds of investments, which we would have here across our portfolios, I think that's a good way to look at it. Risk arbitrage gives you a really, in my mind, crisp mindset to look at investments. A risk arbitrage team typically knows, in some cases to the penny, what they're going to make on an investment if they're correct. We're very adept, we think, on modeling what we're going to lose on an investment if we're wrong, and the market's giving you a price on that, and…

AI assessment note: “Tom used to always say that you should never let a winner turn into a loser.”

Q When you're thinking about a new strategy to include in the portfolio, what's the process for evaluating if that new strategy can be adopted, and then how do you go about doing it?

A First of all, if you think about, I think, both who we are and who we want to be, our expertise as a firm is a combination of opportunistic credit and event-driven investing, and that's what guides us. Number one, I want to make sure we stay true to that knitting in terms of the types of things that we want to invest in. I think there's plenty of room to run in those general fields. And then number two, I want to make sure that whatever we're doing, number one, we can risk manage, and number two is additive to everything else that we're doing here. I don't know what we would do with, like, a commodity strategy, or I don't know what we would do with a growth equity strategy here. I don't think those are things that we either could risk manage properly and or Wouldn't necessarily fit in with everything else that we're doing. Where I get really excited is, I think, different than maybe some of the, let's say, pod shop models. We actively encourage our teams to talk to each other, to work together, et cetera. The individual portfolio managers make their own decisions. But if we happen to have an industry, healthcare, for example, it's likely going to have healthcare-related investments in different portfolios, and so you want to make sure that the individual portfolio Teams, whether they're doing equity or credit, whether it's special sets or whether it's long, short equity hedge, …

AI assessment note: “Number one, I want to make sure we stay true to that knitting”

Q What do you think DK looks like 40 years from now?

A First of all, I still hope we're with us. 80 years in business is very different than 40 years in business. I don't know. Look, you have to be responsive to markets and responsive to your investors. I would say our switch from having exclusively hedge fund strategies to having a mixture of hedge fund strategies and private equity type opportunistic credit strategies was driven by two things. It was driven by our belief that there was a substantial amount of investments that we couldn't Make without that sort of capital that we would be good at. And then quite frankly, it was enabled by our limited partners early on having confidence in us that we could actually do it. And then over a long period of time, as I think we demonstrated performance, that more people became interested in doing it. And all of a sudden it went from being a relatively small part of our business to a much larger part of our business. Success begat success in these things. And so it's hard to have a crystal ball in terms of exactly where the markets are going. But I think that there will be a need for opportunistic credit, event-driven investing in people's portfolios, 20 years from now and 40 years from now, just like it is today. One of the really interesting trends that's going on right now is the move into retail. On the one hand, you really need to make sure that you have products that make sense for …

AI assessment note: “there will be a need for opportunistic credit, event-driven investing in people's portfolios, 20 years from now and 40 years from now”