Capital Allocators – Inside the Institutional Investment Industry
Episode: [REPLAY] Chris Heller - Weird Alternatives at Cordillera Investment Partners (Manager Meetings, EP.28)
Release Date: December 2, 2024
Host: Ted Seides
Guest: Chris Heller, Co-Founder and Co-Managing Partner at Cordillera Investment Partners

Introduction to Cordillera Investment Partners

In this episode of Capital Allocators, Greg Dowling interviews Chris Heller, the co-founder and co-managing partner of Cordillera Investment Partners. Cordillera specializes in investing in niche, non-correlated, and unconventional assets—referred to as "weird stuff"—such as whiskey aging, boat marinas, spectrum licenses, and water rights. The conversation delves into Chris's background, the firm's investment philosophy, and the unique challenges and opportunities presented by alternative asset classes.

The Meaning Behind Cordillera

Timestamp: [05:53]

When asked about the origin of the firm's name, Chris explains:

“Cordillera, and I will not pronounce it in Spanish very well. It is Spanish for mountain. Mountain range...” (06:09).

The name reflects the diverse and expansive nature of the firm’s investment strategies, drawing inspiration from the mountainous terrains relevant to the founders' personal histories.

Shifting Focus to Weird, Uncorrelated Alternatives

Timestamp: [07:05] – [10:03]

Chris outlines the evolutionary process that led Cordillera to focus on truly alternative assets:

“It really started back... what we think about our business. It is back to the basics of investing in alternative assets.” (09:05).

As traditional alternative assets like private equity and hedge funds became more mainstream, returns diminished and correlations among these asset classes increased. Cordillera identified the need to seek out less conventional investments to achieve higher returns with acceptable risk levels.

Traditional Alternatives vs. Weird Alternatives

Timestamp: [10:03] – [11:31]

When discussing why institutions continue investing heavily in traditional alternatives, Chris observes:

“There’s just a lot of institutional momentum that’s hard to stop... It’s really hard to change course midstream.” (10:13).

He emphasizes that while traditional alternatives remain attractive and perform well, Cordillera’s focus on niche areas allows them to exploit opportunities with less competition and potentially higher returns.

The Evolution of Alternative Assets

Timestamp: [11:31] – [12:31]

Chris reflects on how what is considered "alternative" changes over time:

“Our ethos and our mandate is to constantly be at the leading edge of what will be interesting and new and generate outsized returns...” (12:31).

Cordillera continuously seeks emerging asset classes before they become mainstream, ensuring sustained competitive advantage and return potential.

Balancing Alpha and Complexity

Timestamp: [12:31] – [15:23]

Addressing the challenge of managing complexity, Chris explains:

“Our business is predicated on exploiting that gap between perceived risk and actual risk.” (15:23).

Cordillera leverages the behavioral heuristic that "weird equals risky" to identify undervalued investments. However, they meticulously assess each opportunity to ensure that perceived risks are manageable and justified by potential returns.

Examples of Weird Investments: Whiskey Aging

Timestamp: [15:23] – [19:47]

One of Cordillera’s flagship investments is whiskey aging. Chris describes the strategy:

“We buy whiskey, it's a perfect space for us because we have patient capital. We age it... and then we sell it to brands.” (15:37).

The bourbon boom created a fragmented market with rising demand and limited distilling capacity. By investing in whiskey aging, Cordillera capitalizes on the predictable appreciation of aged spirits, ensuring steady value growth over time.

Exploring Other Unusual Investments

Timestamp: [19:47] – [21:47]

Chris shares insights into other unconventional investments:

“The weirdest thing that we looked at, got close to but ended up not doing is alligator farming... from an ESG perspective.” (20:08).

While alligator farming presented intriguing economic prospects, Cordillera passed on the investment due to Environmental, Social, and Governance (ESG) concerns. Similarly, assets like art, automobiles, and wine were deemed too correlated with economic cycles, making them less attractive for diversification purposes.

Investment Sourcing Strategies

Timestamp: [21:47] – [24:36]

Cordillera employs a multifaceted approach to sourcing deals:

“We tend to spend a lot of time taking a step back and thinking about certain themes that may or may not be interesting...” (21:57).

Themes such as water in California, income share agreements, and wireless spectrum licenses guide their investment search. Additionally, the firm benefits from its extensive network built over two decades, facilitating access to exclusive and niche opportunities.

Due Diligence in Weird Investments

Timestamp: [24:36] – [26:37]

Due diligence at Cordillera combines traditional and unique elements:

“We have time... we took a year and a half to understand the business.” (24:44).

The firm prioritizes thorough understanding of each asset class and partners with experts to assess both economic viability and the reliability of operating partners. This meticulous approach ensures that investments align with Cordillera’s return and risk expectations.

Managing Risks in Alternative Assets

Timestamp: [26:37] – [30:35]

Risk management is pivotal in Cordillera’s strategy:

“We have to make sure that there's just diversification of those idiosyncratic risks and not some universal risk...” (27:18).

By diversifying across various unconventional assets, Cordillera mitigates specific risks associated with each investment. For example, whiskey investments are insured against natural disasters, and boat marinas are protected against weather-related risks. The focus remains on avoiding correlated risks that could impact the entire portfolio simultaneously.

Exit Strategies for Non-Traditional Investments

Timestamp: [30:35] – [33:13]

Planning exit strategies is essential for Cordillera:

“Our base case has to be an exit that exists today. And it is viable and probable.” (31:22).

Investments are structured to ensure they can be liquidated or monetized through existing markets or secondary buyers. Self-liquidating investments, such as royalties from litigation finance, provide a steady cash flow without necessitating a sale. When exits are required, Cordillera relies on thorough underwriting to identify feasible exit routes.

Lessons Learned from Extended Holding Periods

Timestamp: [33:13] – [36:23]

Chris discusses the challenges of prolonged holding periods:

“In litigation, it just generally takes longer to get liquidity out of cases.” (33:44).

Particularly in areas like international arbitration, legal complexities can delay exits. Cordillera has learned to incorporate longer holding periods and more robust structuring to accommodate such delays, ensuring that the portfolio remains resilient even when liquidations extend beyond initial timelines.

Structuring Investments for Enhanced Returns

Timestamp: [36:23] – [40:00]

Innovative structuring techniques have evolved Cordillera’s investment returns:

“Our funds and our LPs will get a revenue share in that business...” (36:33).

By offering revenue shares or equity participation to Limited Partners (LPs), Cordillera enhances the upside potential of investments. This approach ensures that early capital not only benefits from asset returns but also from the growth of the operating partners' businesses, thereby amplifying overall portfolio performance.

Investing in Spectrum: A 5G Play

Timestamp: [40:00] – [43:21]

Cordillera’s investment in spectrum licenses highlights their focus on secular trends:

“We like things where demand is increasing... demand for wireless broadband at an exponential rate.” (40:36).

With the advent of 5G, the demand for wireless spectrum has surged. Cordillera invests in spectrum licenses through FCC auctions, leveraging their specialized expertise to acquire valuable assets that benefit from fixed supply and rising demand. This strategy underscores their commitment to investing in assets with strong, enduring value propositions.

Personal Insights from Chris Heller

Timestamp: [42:21] – [43:21]

Beyond his professional endeavors, Chris shares a glimpse into his personal life:

“I have twins that are six years old, all boys, twins that are six years old and a nine year old...” (42:35).

Balancing a demanding career with family life, Chris finds fulfillment in coaching his children’s sports and engaging in personal hobbies like running, biking, and paddle tennis.

Learning More About Niche Investment Strategies

Timestamp: [43:21] – [44:39]

When asked about resources for learning more about niche strategies, Chris responds:

“I just don't have anything right now that I can really recommend...” (43:21).

He anticipates that as the appeal of alternative alternatives grows, more educational content will emerge. For now, prospective investors interested in unconventional assets may need to rely on specialized firms like Cordillera for insights and opportunities.

Conclusion

Chris Heller’s discussion provides an in-depth look into Cordillera Investment Partners’ unique approach to institutional investing. By focusing on niche, non-correlated assets, the firm seeks to deliver superior returns while managing risks through diversification and innovative structuring. This episode is a valuable resource for investors looking to understand the intricacies of investing in unconventional asset classes and the strategic thinking required to navigate this specialized field.

Notable Quotes:

• “Cordillera is Spanish for mountain range... beautiful and expansive, much like our investment philosophy.” — Chris Heller, 06:09

• “Our business is predicated on exploiting that gap between perceived risk and actual risk.” — Chris Heller, 15:23

• “If we are going to generate the returns for our investors that we would like... we are going to have to go back to the basics of investing in truly alternative assets.” — Chris Heller, 09:05

• “When they come across something weird, their immediate response is that it must be risky.” — Chris Heller, 12:48

This summary provides a comprehensive overview of the Manager Meeting episode featuring Chris Heller, capturing the essence of Cordillera Investment Partners’ strategies and insights into unconventional asset investing.