Transcript: Brian Higgins, King Street

 

 

The transcript from this week’s, Transcript: Brian Higgins, King Street, is below.

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00:00:09 [Speaker Changed] This is Masters in business with Barry Riol on Bloomberg Radio.

00:00:15 [Speaker Changed] I’m Barry Ritholtz, you are listening to Masters in Business on Bloomberg Radio this week on the podcast, what can I say? Brian Higgins has put together a amazing track record handling distressed and stressed debts, as well as other forms of credit real estate collateralized obligations. King Street is a fascinating firm. It was formed in 1995. Over the course of the past, I don’t know, 25 years, they’ve put together really an impressive track record. They have already returned about 80% of the net gains they’ve had to their, their limited partners. Really, there are a few people in the world who have a better sense of distress, asset credit, real estate, and how to not only do the fundamental research, but tactically trade around the positions. As an example, institutional investors mentioned King Street in 2022, perhaps the worst year for hedge funds since oh 8 0 9. They were down 3.8%. Their benchmarks were down. You know, fixed income was 15%, equities was 20 something percent. To to be low single digits is really just a, a testament to their performance. There are a few people who are more knowledgeable about fixed income credit real estate and distressed investing than, than Brian. Hi Higgins. I found this conversation to be fascinating and I think you will also, with no further ado, king Streets, Brian Higgins.

00:01:58 [Speaker Changed] Well, thank you very much, Barry. I appreciate you having me.

00:02:00 [Speaker Changed] I appreciate you being here. I’ve been looking forward to this conversation for a while. Let, let’s jump right into it. You get a bachelor’s in, in business administration from Villanova University. What was investing always the career plan?

00:02:13 [Speaker Changed] Well, actually I started out electrical engineering.

00:02:16 [Speaker Changed] Me too. That’s funny you say that. First,

00:02:18 [Speaker Changed] First two years, electrical engineering. You graduated from high school. I’m good at math and science and you know, I always had an idea what go into business, but I felt that electrical engineering would be a good foundation. And, and that’s what I started at. But after two years it was sort of not very interesting. And I was intrigued by the markets at the time, in the mid eighties, you had a lot of stuff going on in terms of the merger boom. And Wall Street was rocking and I said, Hey, this is sort of interesting. I was probably the only electrical engineering major that had a subscription to the Wall Street Journal. Right. So my, my roommate, who was a mechanical engineer, said to me, what are you doing? Why don’t you just switch over to finance? Which I, I said Sure.

00:03:01 [Speaker Changed] Makes, makes a lot of sense. So you come out of Villanova, you end up at first Boston in, in 1987 in the Special Situations Fund and Distressed Securities Group.

00:03:11 [Speaker Changed] Yeah, we started out, I started on banking, the two year banking program, which merchant banking was the group I was in. My co-founder was an analyst. He came into Yale. He was in the bankruptcy advisory group. So we’re in the analyst program together, 65 of us. And after two years, I went down to Trade Distress Proprietary. I got promoted to associate with without going business school. I had done undergraduate business and felt that, you know, hey, I can do this and I, but I wanna get something different, just rather being, the analyst had never left. I wanna get some markets experience, but, you know, stay in the proprietary side. So they, there was a proprietary trading group that was forming, and I, I was joined that and it was a interesting time in, in high yield as you know, shortly thereafter, Drexel, which goes from one day issuing commercial paper, and the next day they go bankrupt. Right.

00:04:04 [Speaker Changed] So, so what was it like trading distress securities in in the late eighties that had to be, you know, a pretty, let’s call it target rich environment? Well,

00:04:13 [Speaker Changed] I would say it was interesting because the market sophistication that we have today in terms of really the fluidity of capital structures of trading desks, et cetera, the seamlessness, which you had, you had, it was interesting. You’d see things go from, say the investment grade market to the high yield market. There was a big disconnect as they move positions that started to trade wider. The buyers didn’t have the ability to go cross assets and cross, let’s say, ratings as, as they are today. You know, mutual funds were very siloed and, and now they’re, they’re a bit wider mandates. So it was, yes, you had, you know, NAIC ratings changed for your insurance companies post Drexel. And so there was a number of less liquid markets that made for quite wide spreads. You had a default cycle, so you had trading with accrued and trading flat. And so there was certainly a number of different movements, but there was certainly downside of these things. So one had to be very rigorous in your investing, in your, in your analysis to do the investing. So

00:05:24 [Speaker Changed] You’re at a big bank in, in 87, you know, obviously there were a lot of market dislocations later that year. What was that experience like for you?

00:05:33 [Speaker Changed] It was, it was interesting. I mean, it certainly was a indoctrination into the world of finance. You go from, you know, these big parties during the summer as you welcome to the new analysts to the market crash, obviously in October of 87. I, I think the, the volatility that ensued and then, you know, the world’s gonna end and then, you know, it, it, it comes back. I I think that just spoke to the resiliency of markets, but also the, certainly the volatility and fragility of certain sectors that one has to be mindful of. And you know, I think ultimately there was a number of opportunities that came out. I had no money back in 87, but certainly, you know, some of the managing directors and other people that had some money, they, they made quite a, quite a bit of of profits on, on some of the left for dead Microsoft and others that were just, you know, sold to very low levels as

00:06:28 [Speaker Changed] Opposed. So, so that sort of dislocation sounds like it was a formative experience.

00:06:33 [Speaker Changed] Sure. And you know, many of these things I look at, you know, growing up, you know, gas lines in the seventies and, you know, we had real recessions back in the seventies and eighties, right. These days, you know, it sound like an old cranky old guy. But when you, you know, that’s the challenge of prosperity that it, it doesn’t really prepare oneself. Investors too. Right. You know, if you always have the, the Fed put, if you always have, you know, just QE forever, that, that does have a lot of complacency. And you see it as you’ve gone from active to passive investing, people are like, well, why do I pay, you know, for active investing, I could just, you know, it, it’s easy. And now as dispersion has increased in fixed income, I think it’s brings back, you know, the act of investing. But, you know, structurally there’s, there’s a lot of money that’s gone into to pass investing, which we believe will sow the seeds for the opportunity set for some time going forward. And, and

00:07:30 [Speaker Changed] Arguably passive doesn’t work nearly as well on the fixed income side as it does on equities.

00:07:35 [Speaker Changed] Well, I mean, again, passive, you know, it’s, nowadays if you look at the big banks, they’re doing portfolio trading with large swaths of, of their institutional clients. And so some will say, I want gimme a triple B single A exposure and these industries, and they go out and dial it up or down in terms of exposure that creates opportunities within the trading market. So for our long short credit hedge fund, you know, there’s, there’s dislocations and opportunities to trade to make money in, in, in those situations. But I mean, you know, it’s in, in these, these markets as we, as we pivot going forward, again, if, if you’re saying, I’m gonna earn five and change percent, you know, my cash and, you know, fixed income, no problem. Default rates are near zero now, fault rates are, are kind of skewed a bit because you, you do have perhaps in high yield, if you look at, you know, with these liability management exercises and other restructurings outta court, it doesn’t default. But then there’s a, a lesser consideration you get for your, your claim. So it does factor into it. But you know, you’ve had a very benign default environment as we’ve had a lot of money printed for quite some time. If you look at the Fed’s balance sheet, the M two that has been printed, you know, there’s, there’s been a great tailwind.

00:09:00 [Speaker Changed] Huh, really interesting. So let’s fast forward to 1995. What led you guys to depart and co-found King Street?

00:09:09 [Speaker Changed] So going from, you know, first Boston Banking, trading distress proprietary, then we started internal hedge fund at first Boston, and that was from 91 to 94. So if you think about, I already had started in effect helped form to these businesses. And so at the end of 94, again, many issues with first Boston, which became Credit Suisse, which became UBS. They’ve, I think I had five CEOs I worked under for, for the seven, eight years I was there. And so we said we could do this. And my co-founder and myself, we, we left around a few months apart and in 94 formed King Street started trading in 95. We never thought we’d start with the princely sum of $4 million, which is what we started with. We, we, we thought, oh, we’re gonna start with 50. All these people are like, yeah, I’ll give you five, I’ll give you 10, you know, no problem in encouraging us to leave.

00:10:02 So be it. We started with four. One of the, the first million dollars came from Jimmy Kane who was chairman at Bear. Yeah, yeah. Chairman, CEO of Bear Stearns. I had met him through another friend of mine, Vince tsi, and known him through golf and, and got to be friendly with him. And he, he heard what I was doing and he said, you know, I’m happy to give you a million dollars of my money to manage and you can use my name in marketing. Wow. And so, you know, it was, it was quite comical because, you know, I have back then a list of references, right. It felt like I was going for a job interview asking for money back then. And we were two guys, 29 years old as you know, my brother called us two guys capital and we would, you know, go around to all the usual suspects begging for something.

00:10:47 And we ended up, as I said, with 4 million. But, you know, Jimmy took a personal pride and he took, he, and people would say, you mean I can call this guy he’s CEO Bear Stearns. And I said, yeah, yeah, call him up. So he’d call him up and then immediately he’d call me up, he said, you know, how did I do you get the money yet? So, you know, it was, it was, it was very humbling. It was a, a very sweet, you know, mentor of mine as, as a Irish Catholic kid. You know, it was nice to have a rabbi such as, such as Jimmy and, and Vince, you know, introduced us. And also Vince was incredibly helpful. So having two, you know, fathers of, of King Street, if you will. And they asked for nothing in return except the satisfaction that they received by seeing us grow and prosper, which was again, very, very fortunate and, and blessed to have that, those two people in my life.

00:11:34 [Speaker Changed] So, so from $4 million, you eventually grow assets over time to 26 20 $7 billion. That, that’s an incredible track record over 25 years. And I also can’t help but notice it’s been reported by places like institutional investor that you guys have distributed about 80% of those gains, which is really impressive. It tells me that you’re concerned about scaling up too large. Tell us a little bit about why you kept the firm at a fairly modest size in terms of, of capital that you’re trading.

00:12:15 [Speaker Changed] Well, I think there’s opportunities that ebb and flow and I think it’s important to have the right structure. And so we have a number of business lines. We have our cloudize loan obligation business, CLO business that is, is super interesting business. It does help feed into our long short credit business, which is our longstanding business that we started in 1995. We also have number, the drawdown businesses draw down, meaning draw down credit distress businesses. And those have longer duration attached to ’em, which is commensurate with the opportunities we’re investing in. We also have a real estate business that we, so it used to be the credit hedge fund business had what’s called side pockets a couple years ago we removed them and it just, the liquid long short credit business and the side pockets come into form, form of these draw down fund structures. That is something the industry has gravitated towards the last say 10 years. And so

00:13:11 [Speaker Changed] Meaning as each of those things mature, they get paid out to the correct,

00:13:15 [Speaker Changed] Right

00:13:15 [Speaker Changed] To the LPs. Right?

00:13:16 [Speaker Changed] So you got three or three year, one year extension perhaps, which three year investing through harvesting and then payout traditional, but they can vary. And so that’s really having different buckets and one has to, you know, it’s, it gets complicated ’cause you have different investors and different buckets and then there are different vintages and then they say, okay, I need distributions. You know, which vintages you do and the timing. They can be, oh, I don’t have money this year for next year. So there’s a, there’s a, a whole planning that goes on in terms of when you launch different funds. But it for, for, for us in the longshore credit business, there’s lots and lots of opportunities as a number of the people that we used to see all the time in the markets are no longer around. And so that we believe has shrunk the competition, if you will, in the long short credit trading business for stress distress.

00:14:08 And I think also it’s, it’s where are we in the cycle? Do we ever, do we believe that there’ll ever be a credit cycle? Do we think we’ll ever have defaults again? Or, you know, will we continue to grow depending on your math one and a half, 2 trillion of deficits and you know, then all these other amounts of debt around the world in the government side that is being printed to support global economies. I, I think at certain point we see this competition for capital, if you will, between, you know, what the public sector, government sector and, and the, and the private sector is trying to, you know, so I, I think it’s gonna be hard for rates to go low because there’s still, you know, a lot of deficit spending out there. I mean, think about the deficits we, we have when it’s pretty much full employment, economy’s still pretty strong.

00:14:55 [Speaker Changed] What are we, 1.8 trillion a year in the

00:14:58 [Speaker Changed] Us? Something like that. Yeah, I mean, one to some say two. You know, I, it always, I I see different numbers all the time, so it’s always kinda like, who’s math if you will?

00:15:06 [Speaker Changed] Huh. Really interesting. And, and it seems like everybody and their brother managed to refinance both household and corporations in the 2010s when rates were low except Uncle Sam couldn’t, couldn’t get around to it. Yeah.

00:15:20 [Speaker Changed] And you know, ing you say that the, I joke, the greatest asset and, and many people’s portfolio is their 30 year two 3% mortgage. Right? Right. And so affordability is, has been problematic because of the supply, you know, we’re short whatever, 5 million homes, but the, you know, the affordability is still because of that and, and other factors has been difficult. So I mean, I I think they’re, they’re, you know, it’s a very, it’s a complicated landscape on the consumer side

00:15:54 [Speaker Changed] To, to say the least. I mentioned earlier the institutional investor lifetime Achievement award, you and your co-founding partner received. Tell us what that meant to you. That that is not something that many people get tagged with. I I think there have been 40 recipients of that from institutional investor. Tell us what that meant, that sort of recognition.

00:16:20 [Speaker Changed] It’s a, it’s a incredible honor and, and an honor shared by all the current and past, you know, people that worked at, at King Street. And so we are some of the effort that has put forth over the 30 years, not just the partners but, and also the investors that believed in us and continue to believe in us and counterparties, et cetera. And it sounds trite, but it, but it is very appropriate and true that, you know, we’re just beneficiaries of, you know, some amazing people that we lucky to deem us worthy over the years. It’s very humbling. It’s very exciting. And it also, you know, it’s interesting ’cause you know, there’s, there’s always, well, why now? Why are you doing these podcasts? Or, or why would you do that? And I guess it’s, it’s really, we have a story to tell and, and I’m very proud of King Street and the people, and I think it’s a great opportunity and it also is a sign of the times of where we are.

00:17:25 And I think evolution personally and professionally as a firm, as an institution is so critical. And I think that’s part of our staying power, is our desire to continuous improvement. And, you know, you look back and people might say, well, why do you focus on the past? Well, you know, focus on the past so that there is a future. I think the lifetime achievement award is, it is kind of, I thought they give it to dead guys, whatever, but you know, we’re not dead yet and don’t plan on ever being, so we’re, we’re, we’re excited about the going forward.

00:17:59 [Speaker Changed] I, I, I like that concept. You, you don’t know where you’re going unless you understand where you’ve already been. May makes a lot of sense. Let’s talk a little bit about what you guys do. You mentioned earlier stressed and distressed. I know that they’re two very different things, but, but there’s some nuance there. Help us understand the distinction between stressed assets and distressed assets. Yeah,

00:18:23 [Speaker Changed] I, I think it is kind of nuance in a way. I think, you know, distressed assets, you know, you’re, you’re on their way to default most times or restructuring stressed assets, you know, can be out of favor assets. I, I think you’re splitting hairs, you know, some would say, oh, triple C bucket, that’s all distressed and if you look in single B double B, oh that’s stressed and you know, I, I think it, it also depends on where we are on the cycle, what can be stressed, distressed. And also if you look at a, a stress infrastructure situation, that might not be that wide in terms of total spread. So let’s say you have, you know, a thousand basis points over the treasury is a, say a distressed situation. And then if you look at something that normally trades say a hundred over, but it’s trading at 200 over, and that could be stressed. Now you would say, well that’s in high yield, that’s nothing. We, we can see a, you know, 2050, a hundred, 200 spread widening or tightening, you know, in, in high yield. Now that is, I’m giving a historical perspective, it seems like the last couple years, this is not your father’s high yield market when they, you know, high yield meant junk bonds. And these days high yield is trying to be a investment grade market given, right? The, the security that

00:19:47 [Speaker Changed] Is 5% is high yield these days

00:19:49 [Speaker Changed] You had the, the Fed come in and, and push a lot of the banks and say, Hey, you, you can’t have a tunnel of leverage on the high yield issuance. And so they kind of help create the private credit market, if you will, or it went into or into loans. And so, and lack of covenant protection, but the, the, the quality of the high yield market is, is dramatically different than, you know, one say I came up. So,

00:20:13 [Speaker Changed] So it sounds like it’s not so much that there’s any real distinction other than a spectrum of riskier debt is gonna have a higher yield, but greater risk that comes along with it and stress distressed or just different points along that spectrum. Is that fair? Yeah, I think

00:20:31 [Speaker Changed] That’s fair. I mean, again, I’m sure some would have their own classification system as it were. I would, I would just liken it into, you know, distressed is, you know, real operational issues or financial issues that, as I say, inevitably preponderance of outcomes is to a restructuring or a bankruptcy outta court or others. And, and so versus a stress which is not always heading that way.

00:20:59 [Speaker Changed] So, so let’s delve into not your father’s high yield market. How does the high yield market differ today than when you began in the nineties? And how much credit or blame lay at the feet of the Federal Reserve?

00:21:14 [Speaker Changed] Well, I wouldn’t say it’s the Fed. I think the markets have evolved dramatically. And if you look at markets around the world, you know, the, the US capital markets are the envy of the world because the banks have had less and less responsibility, if you will, meaning they’re 25% banking traditional banks and 75% capital markets, which would be, you know, all sorts of bonds, private and public. You go to Europe, it’s 75% banks, you go to developing markets, it’s 9500% banks. And so they’re more susceptible to boom and buck bus because there’s that lack of, you know, cushion and, you know, and the more systemic in terms of their issues when, when the economy turns. But if you go back to the, the question on, you know, high yield and, and how it’s differentiated, there was just a lot more leverage back then. I remember doing the Allied Federated deal, now granted the risk-free rate was higher, but you had, you know, 16% loans, 70% loans, you had, you know, eight times, 10 times leverage, right? So, so you have less leverage, you have lower spread going in, as I said, a higher quality and then, and the, the greater leverage is, is being found at times in, in some of the private credit or, or other, other loans. But I, I think this extreme leverage is not as prevalent as it once was. And so I would, I would argue that, you know, the markets have been more rational in terms of their approach to leverage than than ever before. At least, you know, my almost 40 years doing this.

00:22:52 [Speaker Changed] So you also talked about the US markets versus, you know, Europe and, and emerging markets. How much credit goes to places like the FDIC or the SEC or is it just the full faith and credit of the US government standing on top of a very healthy macro economy

00:23:14 [Speaker Changed] In terms of the market construct comparing us versus the rest of the world? I think, you know, there’s a lot of credit due to the innovation, open regulation, but also, you know, evolving regulation and, and also it helps having these large banks. If you look at, there hasn’t been the, the big bang in Europe as they said it was going to be. Right? You look at the, the wrestling going on between Ute Credito and Commerce Bank, and you look at the German banks and some of the issues, the stagnant aspect of that economy, if you look at savings products over there, there’s, there’s not the full depth and breadth of products that we have. E

00:23:55 [Speaker Changed] Even money market. You, you, you don’t have money market funds to the same degree you have ’em here.

00:23:59 [Speaker Changed] Correct. And a lot of times they do it with, you know, okay, like you have Japan post, you have Italian post, you have Deutsche Post, you have, you know, the, the, the regulatory environment for asset management in Europe is quite onerous and is difficult to passport. I mean, they have that these days, but there’s still, the reality is there’s still a lot of inflexibility within the regulatory framework that, and look, I, you know, I’ve spent a, a fair amount of time with regulators and central bankers and participated in a number of forums and, and meetings on the topic. It does get complicated because Europe is Europe, but it’s still a number of different countries within that. And the US having this large deep market does help. And, and look, I, I think we do have innovation sophistication and I think the, the beneficiary of this is the, the, the world being able to buy sophisticated products that really are solution providers in all ways, shapes or form.

00:24:59 [Speaker Changed] So, so I wanna delve a little deeper into what, what makes King Street so unique. Not just its performance, but the way you guys approach the world. You combine a fundamental approach with very disciplined and opportunistic trading approach, which is, you know, usually those are two totally different animals. It’s interesting to see, especially in, in credit and stress and distressed. See those two married. Tell us a little bit about how that set of strategies evolved and, and what sort of opportunities it’s created for you.

00:25:37 [Speaker Changed] I think going back to history, which is 1989, well, so you can go back to 87 with the crash, seeing the importance of tactical trading, go back to 89, the formation of the distress, the prop group, the distress securities group on the trading desk. But being part of that, when you had very wide bid as spreads and you could see that execution and entering and exiting a position, there was a, a massive amount of, of differentiation and performance that could be created if one were to be able to trade a tactically. So for example, if things go quite wide and spreads where they can trade 10 bond points wide, being able to buy on the bid side versus the as side. If it’s 50 60 market for example, that’s 20% differential. Wow. So just your entry point is, is massive. And also we call ourselves short long investors and people say,

00:26:34 [Speaker Changed] As opposed to long short. Correct.

00:26:35 [Speaker Changed] Because because many of our biggest longs started out as shorts. And why that’s important is me, meaning

00:26:43 [Speaker Changed] You cover the short and then go long. Correct. At the end of the, at the end of the short trade, right, it’s like, oh, if, if it’s good enough to cover, maybe we want to completely reverse our original views,

00:26:53 [Speaker Changed] Right? And so initially there’s always the, and we could sit there a bit of time and, and it gets expensive carrying shorts. So you have to be mindful of that. It can take some time. However, it does enable us to have done a fair amount of work in advance. And so let’s say something breaks, hopefully we’ve been short it and we have a fair amount of institutional knowledge about that situation, and then we can cover it or wait, it’s gonna get worse. ’cause you know, oftentimes management comes out and they say, okay, they, they fire find some guy, they shoot him and say, that was the bad guy and now we’re back. And you’re like, wait a minute, that guy, you know, was the janitor. What do you, what do you mean? Or we’re gonna execute on this or that. And, and you say they’ve tried to execute, you know, for the last three years I have how to do it. So it really, having a bit of perspective I is important. And then you can then time it appropriately. Now we’re not market timers, but it, it does give us, I think a relative value perspective. So coupling the trading and understanding, okay, a lot of sellers are coming out, there’s more coming out. Having that supply demand question answered is, is important as well.

00:28:06 [Speaker Changed] So I, I wanna put some flesh on the bones of what it looks like combining the tactical with, with the fundamental, and I’m gonna quote numbers from institutional investors ’cause I know as a regulated entity, I know what I cannot say, I know you can’t give specific numbers, but I could cite what institutional investor had observed. 2022 was the worst year for hedge funds since 2009, the s and p 500 down 20% bonds down 14%. King Street, according to ii, was down only 3.8%. A massive outperformance to either the s and p or the Bloomberg Ag. Tell us what it was like trading in 2022. First time in 40 years, stocks and bonds were down double digits together.

00:28:55 [Speaker Changed] I would say it set the table going back to say 2020, if you look in the pandemic when, you know, world’s gonna end. And then yeah, a lot of liquidity injected and then, then we had the vaccine news came out, everything rallied, but there was so much stimulus being put. And I think, you know, just let’s say I don’t, I don’t like losing money ever. And as my co-founder used to say, you know, relative performance, but you can’t eat your relatives. So it’s, it’s just important to, from our perspective, contextualize that. And, and so we are, you know, very disciplined. I think one of the things that we looked to was like, hey, let’s go up in quality, up in liquidity. And that was a concern. I think one of the things took us by surprise was, okay, you know, how much inflation really rooted and how quickly and how high it went. So I’d say, you know, that was something we missed. Again, we always try to focus on what we did wrong and, and, and we correct those. Hopefully then the, the going gets better going forward trading in 22, it, as I said, I wouldn’t say it’s too differentiated, but again, you know, in absence of a true distress cycle, I think that it, it loses sort of meaning. But if you look at, you know, in 2020 there was a number of things that is really for me, a more signature important time.

00:30:13 [Speaker Changed] So, so I wanna talk about a few specific investment strategies that King Street does. In 2017, you launched a collateralized loan obligation business. Tell us a little bit about that strategy.

00:30:27 [Speaker Changed] So we’ve been investing in CLOs, mezzanine and opportunistically for a number of years, equity and et cetera. We’ve always had this credit expertise and, and we felt that as a compliment for our investors and to benefit our longshore credit business to have the CLO strategy was, we think a distinctive manage. And so we’ve had a, a terrific growth and, and successful business launch and, and continue to grow from strength to strength there in both the US and Europe issuance. During 2020, there was a number of opportunities that came out to rescue finance, a number of the companies we had relationships with. And so it is proven very complimentary to our business. We, we describe our business in, in terms of overlapping circles. And that is that we will have different fund strategies and there might be a a, a bond or a loan situation that we might see in, in different funds if they meet the investment criteria, liquidity, you know, duration that we are looking for in that particular strategy. And so there’s real synergistic effects and ability to analyze these situations quite rigorously.

00:31:43 [Speaker Changed] Let’s talk about another overlapping business line, real estate. What do you guys do in the real estate space? So we’ve been

00:31:49 [Speaker Changed] Doing real estate as we mentioned, first real estate finance and then real estate buying the equity or, or buying actual properties for quite some time. A number of years ago, again, as I mentioned earlier, the demise if you will, the stop doing side pockets and you set up separate real estate funds. And so we’ve set up a number of funds. We’ve also invested in some specialties such as student housing in, in Europe. We’ve done last mile logistics, we’ve done movie studios. We’ve also done a number of financings as the banks have pulled back, has created a great opportunities in that. And then more recently we bought a data center business that specializes in AI and high performance compute, which is a quite an exciting business

00:32:38 [Speaker Changed] That that’s covo Covo. Yes. I, I was reading about that and saying, wow, this seems to be, you know, a little off of what I was expecting. Liquid cooled AI data center, liquid cooled, what, what’s that about?

00:32:53 [Speaker Changed] So to give you the history, so years ago we started focusing on growth lending, growth financing, you know, it’s funny, VC distress. There’s a lot of similarities between the two. You know, you don’t know what’s gonna happen with the company. Is it gonna make it not make it? So for example, Airbnb and DoorDash and 2020, we, we lent them money prior to their IPOs. Now the, the V on the LTV loan to value the value oftentimes is a disparity because when you ask a tech person, what’s this company worth, generally it’s, it’s very, very high numbers, which we don’t always support from our valuation. But if the, the loan percentage is quite small, five, 10%, then there’s a margin of safety. And we have a lot of covenants to protect ourselves. And you’ll say we, we, we did some of that. We looked at GPU financing, which GPU is, is the NVIDIA chip, that’s what they produce.

00:33:52 And so we looked at some financings there, couldn’t get quite comfortable the depreciation curve because you know, Nvidia comes out every other day with a new chip, right? Right. And so we said, why lend your money if every two years you’re gonna have a new chip? And so worry about the value eroding on that chip. And so even though we over-ear in terms of financing, now, there’ll be situations and opportunities that will make sense to lend in that sector. However, that’s, we then, you know, said, wow, this data center business is gonna have legs for quite some time. We looked at the hyperscale business, insanely competitive and said, okay, can’t make a mark or find an edge there. And that’s when we came up with Covo, which was selling itself. They had been doing liquid cooling for 13 years. They started company 13 years, the company 10 years ago, operational in a co-location business in Santa Clara, California, in the heart of all these tech behemoth. And they’ve been DGX certified by Nvidia for over five years. Liquid cooling. The way we do it is it’s full true liquid cooling.

00:34:57 [Speaker Changed] And it’s meaning, it’s, it’s more efficient, more productive. Yeah. So

00:35:00 [Speaker Changed] It’s just think about just the construct, right? So you have the whole data center, you have three foot race floors, you have a intake outtake of water that’s ambient water temperature goes, flows around and goes to the rack. Many will do liquid cooling to the rack, but separately. And that’s very expensive. ’cause in effect, your retrofitting, 95 plus percent of the data centers are air cooled. As we know, air water is 3000 times more effective cooling than air. And so the PUE, which is the efficiency rating that they utilize, we’re like 1.3 and many are 1.56, et cetera. So it’s very efficient. You can have a denser facility and it can handle the AI chips. The other metrics that people use is, is the kilowatts per cabinet. And so we can host up to 250 kilowatts per cabinet where, you know, 5, 10, 20 is these traditional data centers air cooled.

00:35:57 And so as Wayne Gretzky used to say, I skate where the puck is going to be, and the ships are all about, we need liquid cooling. Also, as we look to satisfy the future, which will be inference versus the LLM, the big training models, there will be a need for the data center. So we’re having a number of conversations and across many different verticals, our real estate group is executing, plus the team. It’s super exciting and, and it’s, again, it’s, it’s something that evolved outta our overlapping circles with the financing. You know, we, we don’t, there’s always a, a method to it that we evolve into.

00:36:38 [Speaker Changed] Huh, really fascinating. So let’s, let’s start out talking about why we’re even talking for, for most of King Street’s history. You, you’ve been a, a, a quiet firm. You, you quoted one of your colleagues as saying, Hey, it’s the spouting, well that gets harpooned. Tell us why we’re even having this conversation now.

00:37:02 [Speaker Changed] Evolution is so important. Self-improvement, evolution. I think markets change and I think it’s important to adapt to survive as the trite saying, we might say, we look at the opportunities that we’re facing, the business that we’re building and have built and are quite excited about it. And I think it’s important to communicate for our investors, for perspective partners and, and people that to attract the best and, and make sure we have the best partners to make sure our story’s out there. It’s gotten incredibly noisy, if you will, and everyone’s out there. So to do nothing I think would be a disservice to the people in the business and our, and and our partners really as, you know, the opportunities, you know, come to, you know, as, as they say, squeaky wheel gets to grease. And so one has to, you know, relationships are are great. However, at times people, you know would say, oh, king Street, they, they still in business, you know, ’cause if if you’re, you’re not out there with your LinkedIn presence or, or I think it’s just a sign. Look, we’re not on Instagram, so

00:38:15 [Speaker Changed] No tiktoks from

00:38:16 [Speaker Changed] King Street. No, no, no TikTok videos that you know.

00:38:19 [Speaker Changed] Huh, really, really interesting. You know, there’s some quotes of yours that, that I really like. One of the things you, you had said recently was, what kills you in investing is a false sense of bravado. I have all the answers. I could beat this market or that sort of approach. We say the work is never done and knowledge reduces risk. Explain.

00:38:45 [Speaker Changed] Well, it, it’s, it’s from our perspective, fairly simple as investors that, that focus on out of favor, distress, bankruptcy. We see failure every day. And we would be incredibly delusional to think that without, and, and sometimes it’s no fault of the companies, right? It’s, it’s some unforeseen act. It’s, you know, some fraud was perpetrated on, you know, but it, it’s incumbent upon us to be tireless in our effort as there’s multitude of, of competitors out there globally that we go up against every day. And if we’re not grinding it out, then you know, there’s, there’s going to be a shortfall and we, we don’t plan on having that

00:39:40 [Speaker Changed] Early in your career, someone would ask you what drives you? And and your response would be paranoia and insecurity along the same lines. Yeah,

00:39:50 [Speaker Changed] I, you know, look paranoid insecurity, it’s, it’s, it’s, I try to be humorous and colorful because investors come in and to drone on, you know, that it doesn’t always keep their attention. I, I I think it’s important to look at, you know, we also talk about probability and, you know, proportionality. And so if you take those four things right, so the paranoia insecurity is like, okay, did I do enough work? Does someone else know what, what can happen that I’m not seeing? It keeps that drive to continue to ask those questions. As we said, knowledge reduces risk because, you know, this is a moving picture. This is not a, a still life photograph. And so there’s many different variables that, that happen through a, a business, through a cycle, through, you know, lifetime owning investment and markets do change. So if you think about the number of variables, one would be kidding oneself to think that they can rest in their laurels, if you will.

00:40:53 The work just begon begins when that investment is made. And so, and the paranoia insecurity only paranoid survives, they say, and, and so we, we have to say, did I do enough work? Was there something I missed keeping one up at night? They’re constantly looking at it. I think if you look at any piece of work, you know, an artist or whomever it is, they put some work, they do some work, they put it down, they come back, they look at it from another light and they’re, oh, I missed that. Let me, let me continue to refine it. And so investments in our mind are, are bodies of work that need to be continually refined because the elements, if you will continue to challenge it, and then you look at probability and proportionality, one has to be careful on that, right? Because if you say, well, you know, this hurricane is gonna happen, you know, this tragic hurricanes that we’ve had currently and, and just recently, okay, if you had said, never gonna happen, we haven’t had for a while, and if it happens, it’s, it doesn’t create much damage, well what’s the probability that that could, could outcome?

00:42:02 Now if you look at geological faults and you’re buying a piece of property and you’re building a data center, for example, and you say, well, one in 1.6 million or billion years that right, you know, I feel good about that, right? But if you’re down in Florida and you’re saying, I’m not gonna buy flood insurance now question, can you get it these days? Right. Or afford it. Right? Afford it, right. But like, think about the people that tragedy happened in North Carolina up in the, you know, they didn’t think they’d need flood insurance.

00:42:28 [Speaker Changed] They were deep inland and at a fairly high elevation and yet they still got flooded

00:42:33 [Speaker Changed] Out, right? So these are things in terms of proportionality and probability and proportionality is okay, you can create a scenario with any investment where you’d never make the investment. You could say, well that could happen. And then you could say to certain, well, it’s one in a million years and it’s 2% of the business. Is that really gonna cause you to pass on that investment? So that’s the constant interplay that we feel is, is critical to arrive, you know, the best decision you can make. And again, the best decision make today, tomorrow look at it again and say, oh, I screwed up.

00:43:06 [Speaker Changed] Hmm. You, you mentioned earlier you wanted to be a little public because you wanna attract and retain the best employees. King Street has about 250 people working for them, 70 of whom have been with the firm for 10 or more years, that that’s pretty unusual in the hedge fund world. Tell us a little bit about the 10 year club you guys created.

00:43:29 [Speaker Changed] Well, it really, again, as I said at the outset, it’s, it’s celebrating the, the, the, the people that comprise King Street as, as I thought from the beginning and talked to other people in leadership. Remember that your greatest asset, you know, goes down the elevator every day and you hope they come back up the next day. And so one has to again celebrate the, the teamwork. And that’s the approach that we have at King Street. I talked about the overlapping circles and the ability to work on, on different aspects of the business, but it’s very much a team. And we look at the what, what the operation team, the investment team and the trading team. There’s a lot of collaboration that is constantly occurring and people get paid on the wellbeing of the overall firm. And so it, it, it forces that teamwork and collaboration.

00:44:28 And I think it’s important to celebrate events. You know, we, we have outings, we have different groups elevating our, our women, our diversity, our charitable pursuits, our holiday party. We still have the old school holiday holiday party that we do every year. I think the summer outings, et cetera. These are all, we believe part of the building culture, you know, everyone the month end everyone’s birthday gets celebrated with a, you know, a we, we had ’em happen every day. So we say, wait, we’ll do still once a month, all the February birthdays, you know, which, and then you gotta vote on on it. So little things that I think create the, the family and you spend a lot of time with, with people. And if there’s not that recognition of individuality and, and the effort put forth, then it’s, it, it’s, it’s a miss. We believe it’s, it’s again to celebrate together what we’ve achieved is, is critical.

00:45:30 [Speaker Changed] I’ve heard a number of executives complain or at least raise the issue. It was very difficult to either create or maintain a corporate culture during the pandemic work from home remote. How have you guys navigated that and how important is corporate culture to, to a fund like yours?

00:45:51 [Speaker Changed] Well, culture is becomes what it becomes. It, it’s, you just, everyone hopes that their culture is sustainable and constructive and not toxic. And, and so we strive to make sure there’s that communication openness. We do a lot of surveys. We’ve always trying to better our scores at self-improvement. We focus on, if you go back to pandemic, it was hard, right? ’cause you’re on Zoom and so, you know, holiday party on Zoom or you know, scavenger hunts on, on Zoom. It was how do we create these ties that, that bind us over what it was incredibly challenging personally, professionally for, for a lot of people. And, and frankly the markets, as we all know back in the 2020, as I referenced earlier, were brutal and working incredible amount of hours, the family challenges that people had with their kids at home or trapped in different places.

00:46:52 And so, and the sicknesses and, and loss of life. So those are, are, are obviously in any regular time important. But we believe, you know, corporate culture has to play its role. And not to replace but to be a a a part of it, to be supportive of, of people. But it’s, it’s, and also think about like there’s, there’s, we have offices, as you’ve indicated in in in US and, and Europe and and Asia Middle East. How do we create that consistency? How do we create that, that fabric that runs throughout? And it’s a lot of times we’ll do our similar, you know, furniture and the like, so they feel like, oh, this feels like a King Street office. Things of that nature. Similar events and, and the swag, if you will, that binds people.

00:47:45 [Speaker Changed] So your, your co-founder and partner of Francis Beyondi retired a couple of years ago. Two questions about Francis first. Is he, is he still sitting on the Yale Investment Committee or has he fully retired from, from asset management? And then second, you know, what was that transition like suddenly your co-founder is no longer there every day. How did, how did you adjust to that?

00:48:12 [Speaker Changed] Well, I believe it, the, the website’s correct. He, he, he’s still at Yale. I, I know I’ve spoken to him recently, but I know he’s got a lot of pursuits and, and quite busy and with his family and I, I think he’s enjoying and well-deserved time. He and I had a incredible 25 years together. We called ourselves, you know, old married couple or you know, brothers of King Street, whatever they called us in. I, I

00:48:39 [Speaker Changed] Two guys, capital

00:48:40 [Speaker Changed] Two Guys Capital, right? So, which is funnily enough, my, my brother named that. We grew up in New Jersey and in East Brunswick and there was a a, a TA two guys, which

00:48:49 [Speaker Changed] Was with the giant Alexander Calder on the outside of that building. Am I remembering that correctly in Hackensack or

00:48:56 [Speaker Changed] Something? Well, I was from, I grew up in New J in East Brunswick, so I, I don’t know about the Hackensack one, but in the one it was a discount store and, and went bankrupt in the eighties, which RNA was part of the PLO became then the re so, so if you, it’s funny history, but my brother recently gave me a shirt, you know, two guys capital, that’s very funny. Got on the website somewhere. But anyway, so I had a significance there. But no, so as I said earlier, having this team and this partners with us over 13 years on average and having MDs, 38 plus MDs with us over 10 years on average, we’ve had a very deep, deep bench and fortunate to have incredible depth and breadth to the organization where we didn’t miss a beat. And you know, that’s, that’s something I think testament to the culture that Fran and I built the first 25 years, which we hope will continue for many, many years to come.

00:49:59 [Speaker Changed] Let’s jump to our favorite questions that we ask all of our guests. Starting with what have you been watching these days? What’s been been keeping you entertained?

00:50:09 [Speaker Changed] Well, I’ve been watching The Mets a bit lately. I went to my first Mets game and in

00:50:14 [Speaker Changed] October, which I can’t remember the last time, you could watch The Mets in October, having grown up on Long Island.

00:50:19 [Speaker Changed] Yeah, well, yeah, I mean I grew up in New Jersey and my first met game was 1969, which won the World Series. Yeah. From a despicable like worst team ever. I think Chicago White Sox have taken that over. But anyway, so we went, you know, there watched some of that. Also, I’m a Knicks fan as went to Villanova and they call the Nova Knicks. Funny story, years ago I was fortunate enough, Jay Wright, who’s the coach of Villanova, invited me to speak to the team before the start of the season. They were in New York. And, you know, talking to the team and I, I, you know, I said to ’em, guys, I’m really, really nervous here, you know, 2018 they were reigning national champions and if you guys don’t win the championship, like they’re gonna look at me and blame me. And they were kind of looking at me quizzically and, and I, I picked one of the young players, young freshmen and and I, I sat down right across from ’em right up in his face and I said, you know, look, I’m, I’m really nervous.

00:51:24 I got this big meeting and you gotta help me. What, what you know, can you, what do you, what do you say to me? You know? And he, he had like deer in the headlights look, he was 18-year-old kid. He was sort of like this, you know, old guy with supposedly, you know, successful guy coming in, begging me for advice. What do I, you know? And he said like, quizzically like you, you can do it. And I said, yeah. And it was funny watching the faces of all his, the older upper class and they were laughing ’cause they knew, I was just trying to see. And I, and I said it was interesting ’cause J Wright had called me like four times in advance because it was so, but you go back to leadership and culture, it was so important with, you wanna make sure I was what message I was gonna give.

00:52:13 And I, and I, and I said to the team and I said, see, you all can be leaders, you all can inspire. And when you’re on the court and Jay is, you know, 50, a hundred feet away, who’s gonna inspire and lead each other. And you can’t just rely on the coach. You gotta look to each other for leadership and and to sponsor. And that’s what, when I talk to my team and how do we have the culture, how do we continually have that leadership? If the partner’s not in the room, who’s gonna take that mantle and who’s gonna push forward? And so on the things that I ingest, I got, I gotta have a lot of intake to have outtake, right? ’cause I gotta do a lot of meetings. So I gotta find that time to refill the tank with information. And so, you know, on stuff I’ll watch whether it’s, if it’s not sports, it will be some, you know, mindless spic things I like sort of because it’s, I like to travel and see things around the world and different cultures and understand that and history. And so that usually wraps up in say, a spy things.

00:53:13 [Speaker Changed] I’m gonna give you a recommendation only because I watched this on the flight back from Europe and it’s dead center of, of what you’re talking about. The ministry of un gentlemanly warfare is essentially Churchill’s special teams creation as a way of fighting Nazi submarines during World War ii. I if you like global spy stuff and history, this is right in your sweet spot.

00:53:41 [Speaker Changed] I, I wrote it down and we will, we’ll put it on the list for sure.

00:53:45 [Speaker Changed] Absolutely. And, and again, we’re recording this in October. I can’t remember the last time I was this excited about a nick season, like even injured. They really distinguished themselves last year’s playoffs, you know, you could see, hey, if they were full strength, they could have gone pretty deep into into the finals.

00:54:06 [Speaker Changed] Yeah, I I I’m super excited for the season and, and sort of seeing what they could do as well.

00:54:14 [Speaker Changed] So you mentioned some of your mentors. Tell us about the people who helped shape your career.

00:54:21 [Speaker Changed] Well, you know, I mentioned Jimmy Cain and, and Vince tce. They were, they

00:54:25 [Speaker Changed] Were, Vince TCE was where

00:54:26 [Speaker Changed] Vincent TCE is on the number of boards to this day. He’s, he was banking commissioner state of New York. He was urban development chair. He had been a tax lawyer. He was the commodities trader. So he had this incredible varied career and and life and quite successful entrepreneur. And so he was always a wealth information contacts and, and always great, great advice and perspective. And Jimmy, of course Rand Barr Stearns obviously unfortunate ending to a storied career, but he too was very helpful in, in giving great advice, right?

00:55:04 [Speaker Changed] Le legendary. CEO of of Bear Stearns. Let’s talk about some books. What are your favorites? What are you reading currently?

00:55:12 [Speaker Changed] I would say book-Wise. Just let’s say a genre books, because I listen to ’em. I, I’m not a big reader because I read so much in terms of research and consultants and cell side and our own internal research plus the papers, et cetera. And I try to ingest a lot there. And then content, deeper content on the weekends. And then, you know, just number of emails, et cetera, you go through. So I’ll, I’ll listen to different, whether it’s leadership or let’s self-help type things, but it’s more about I think the, the self-improvement. And so how do you get the most out of life, if you will? There’s, I i, I love hacks, if you will, in terms of health hacks or, you know, efficiency hacks. I, I think that’s critically important technology to utilize to it’s forward. So that, that’s sort of the, the the focal point.

00:56:08 [Speaker Changed] Let’s talk,

00:56:10 [Speaker Changed] And by the way on that, just sorry, is, I found that Blinkist is, is a great thing to utilize because

00:56:17 [Speaker Changed] The website, well

00:56:18 [Speaker Changed] Blinkist is email is sort of the Reader’s Digest version of, of books. ’cause ’cause most books, they have a concept, interesting concept, and they spend two, 300 pages saying the same thing seven different ways. You know, you know, trying to convince you that, that versus Blink is like, all right, here’s the concept, right? You’re like, okay, makes sense. Interesting. And, and next my,

00:56:38 [Speaker Changed] One of my partners likes to say most books should be magazine articles. Most magazine articles should be tweets and most tweets should be deleted. And that’s his same, same sort of concept as, as Blinkist. So now we’re down to our final two questions. What sort of advice would you give to a recent college grad interested in a career in either stressed or distressed investing?

00:57:03 [Speaker Changed] Well, there’s the critical importance of analytical rigor. And so if you’re a recent college grad, you, you can’t necessarily go back and take the courses. That would be helpful. And so it’s, if you see some of the Ivy League kids, they don’t have the accounting background, for example. I think critical thinking is important. I think having some understanding of, of the legal framework as, as that’s become, has always become such a big deal to get into, let’s say stress, distress out of favor. Look, there hasn’t been as much interest, frankly, because the tech world’s been such a, you know, robust world. And so it’s important, again, as I said, to work in the, in the credit business to understand those covenants, understand those companies to get a generalist type experience. Because one never knows, is it the utility sector? Is it the energy sector, is it the TMT sector that will have issues or asbestos or, you know, different issues and then you’re like, oh, I’m an expert in, in this. But at the end of the day, if you understand cashflow generation, you understand balance sheets, you understand legal framework accounting, then you can kind of learn most valuations frameworks. Hmm. Really

00:58:31 [Speaker Changed] Interesting. And our final question, what do you know about the world of distressed credit today? You wish you knew back in 1987 when you were first getting started?

00:58:42 [Speaker Changed] Well, I guess having the hindsight is 2020 perspective on markets in general. I, I think it’s important, you know, pivoting globally also the, let’s say the broad product suite that we now have, I, I think are, are, are super interesting and informative. I, i, I never would’ve thought that we would rebound so easily and quickly in so many different, difficult times. And that, that kind of me speaks to the resiliency, you know, of, of markets and, and the resil, you know, the, the commitment that the governments, et cetera had to, you know, bail us out time and time again. And so now 35 plus trillion of debt, we got, you know, a massive amount of debt and to show for it since oh eight. You know, we’ll see how it all works out. But I think it’s, it’s really the, the sophistication and innovative nature of, let’s say security design has been enabled to have the flexibility of capital that has been transformative, certainly for the US cow markets and then, then finds its way into other markets.

01:00:02 But it enables, you know, people say traffickers in tragedy. You know, it’s, it’s interesting. We had, you know, one of, one of the investors gonna allocate to ESG and he said, well, you know, distress, it’s not ESG friendly. I said, well, we’re a hundred percent ESG. We’re, we’re trying to have companies help companies survive and, you know, they have bad ESG score. We’re trying to transform them into, into productive companies that are, you know, doing better. Think about environment. They might have had some spill that they had a big liability from, or the governance was bad. That’s why they were, you know, in distress ’cause some guy was stealing money or what have you. So, you know, there’s a number of things that we’ve been able to prove upon bringing in new management or cleaning up environmental issues that then the company valuation rebounded.

01:00:50 [Speaker Changed] Thank you Brian, for being so generous with your time. We have been speaking with Brian Higgins. He is co-founder and managing partner at King Street. If you enjoy this conversation, check out any of the past 500 or so discussions we’ve had over the past 10 years. You can find those at iTunes, Spotify, Bloomberg, YouTube, wherever you find your favorite podcast. And be sure to check out my new podcast at the money short, 10 minute conversations with experts about specific topics involving your money, earning it, spending it, and most importantly, investing it at the money wherever you find your favorite podcasts or in the Masters in Business Feed. I would be remiss if I did not thank the crack team that helps the put these conversations together each week. John Wasserman is my audio engineer. Anna Luke is my producer. Sean Russo is my head of research. Sage Bauman is the head of Bloomberg podcast. I’m Barry Riol. You’ve been listening to Masters in Business on Bloomberg Radio.

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