[REPLAY] Chris Heller - Weird Alternatives at Cordillera Investment Partners (Manager Meetings, EP.28)

Summary

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

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

Transcript

[Ted Seides]

Capital Allocators is brought to you by ten east, an investment platform for sophisticated investors to access private markets. Ten east brings benefits of having your own family office without the cost and headaches of doing so. It's founded and led by Michael Lefell, former Deputy Executive Managing member of Davidson Kempner. Michael and his investment team offer members the opportunity to co invest by offering at their discretion. Michael and his team source, diligence and commit material personal capital to each investment. The opportunities shared on the tennis platform offer exposure to private credit, real estate, niche venture and private equity and other idiosyncratic investments that typically aren't available through traditional channels. The principals have over a decade track record of investing in these types of exposures across more than 350 transactions post investment. The Tenes team conducts ongoing monitoring and reporting just to you'd expect from an institutional investment organization. I've known Michael for about a decade and after becoming impressed by the quality of 10 east offerings, its research process and high quality investment team, I became an advisor to the organization and investor in multiple offerings. You can learn more and join me as a member at 10 East CO. That's the number. 10 East Coast Capital Allocators is also.

[Michael Lefell]

Brought to you by SRS Acquiam. Want to make sure your M and A processes aren't stuck in the past? How about partnering with a company that's been defining the future of dealmaking for nearly two decades? Instead, when it comes to M and A innovation, SRS Acquiam has reshaped the way deals get done more than anyone else. Streamlining processes for maximum efficiency and minimum headaches. Professional shareholder representation, Online MA payments, Digital stockholder solicitation. Well, SRS Acquiam pioneered each and continues to set the bar for game changing innovation. So leave the days of disjointed deal management behind and define your future with SRS Acquiam. The smartest way to run a deal. Learn [e-mail] that's S R-S-A C Q U I O M.com.

[Ted Seides]

I'm Ted Seides.

[Greg Dowling]

And this is Manager Meetings. This show is an exploration of investment.

[Chris Heller]

Opportunities through conversations with money managers conducted.

[Greg Dowling]

By one of the manager's institutional clients. We'll share the stories and strategies that attracted their attention and capital.

[Chris Heller]

You can learn more and join our.

[Greg Dowling]

Mailing [e-mail] all opinions expressed by Ted.

[Ashley Marks]

Guest hosts and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their respective firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of capital allocators, the firms of guest hosts or podcast guests may maintain positions in securities or managers discussed on this podcast.

[Chris Heller]

On today's Manager meeting, Greg Dowling interviews Chris Heller. Greg is the co CIO and Head of Research for Fund Evaluation Group, an institutional OCIO and investment consultant with $83 billion in assets under advisement. Chris is co founder and co Managing Partner at Cordillera Investment Partners, a $1.2 billion alternative investment fund that invests in niche non correlated assets or what Chris calls weird stuff like whiskey, aging boat marinas, spectrum and water rights. Their conversation covers Chris's background and the founding of Cordillera, the evolution of alternative assets and alternative alternatives, sourc opportunities, conducting due diligence, measuring risk portfolio construction and exit strategy. Please enjoy this manager meeting with Chris Heller from Cordillera Investment Partners.

[Gus Araya]

Chris, would you briefly introduce yourself and Cordierra?

[Greg Dowling]

I will. Thanks Greg, and thanks for having me. I'm excited to be here. I founded the firm with two other co founders, my partner Gus Araya and Ashley Marks. We founded it in 2014 to focus exclusively on the topic du jour, which is niche, non correlated, off the beaten path assets or alternative alternatives. Or for lack of a better word, just weird stuff. My background so I graduated from Vanderbilt University, went to work in investment banking for a number of years both in New York and Menlo park, had a brief stint on Capitol Hill in D.C. then went to the Stanford University Endowment, spent a number of years there. My co founder Ashley Marks also worked at the Stanford University Endowment with me and interestingly enough she and I grew up together in Denver and have known each other since middle school. So a long history with my partner Ashley. My other co partner and co founder Gus Araya was down the street from us at the Hewitt foundation on Sandhill Road. And then all three of us were a part of a firm that itself was a spin out of the Stanford university endowment called McKenna Capital. We all worked together there for eight years in various roles and asset classes and investment types, hedge funds, private equity, natural resources, real estate. So really had a flavor for all of the quote unquote alternative asset classes. And then all three of us went out to found Cordiera in 2014.

[Gus Araya]

I did want to ask and this is a little bit crass, but what is a Cordiera? It sounds a little bit like something I would order off a Taco Bell menu. Like I'll have two chalupas and a Cordier. So what is a Cordier.

[Greg Dowling]

So, you know, I think another thing lesson learned as we look back, you know, maybe would have come up with a different name. It's not easy for people to pronounce, and we get Cordillera 90% of the time. We get Cordelia 5% of the time. And then the other piece we get is people just not saying our name, trying to avoid saying our name altogether. That being said, a Cordillera, and I will not pronounce it in Spanish very well. Is Spanish for mountain. Mountain range, Gus, my partner is from Santiago, Chile, and the mountain range just behind Santiago was called La Cordillera. Ashley and I grew up in Denver, very mountainous state. And there was a resort which is no longer in business called Cordierra at the time I got married there. Ashley has some very personal stories and has good memories there. And so it was something that brought us all together and it wasn't taken. When we asked the lawyers if it was taken, it wasn't taken yet.

[Gus Araya]

Shocker. That's a shocker that it wasn't taken.

[Greg Dowling]

Yeah, correct.

[Gus Araya]

When did you kind of come to the realization that you wanted to focus more on these uncorrelated, as you call them, weird investment ideas? Did that start at Stanford or was that later at McKenna?

[Greg Dowling]

You know, we kick ourselves. We should have figured it out sooner, quite frankly. But it really started back. And I think it was an evolutionary process from when we were at the Stanford Endowment all the way through when we were at McKenna, which was. It was becoming more and more apparent that, and I'm putting this term in air quotes, alternative asset classes or assets were becoming less and less alternative. Nearly every institutional investor had representation in the portfolio of private equity hedge funds, real estate, natural resources. And as there became more and more adoption of those assets and asset classes, what you would expect happened. Returns came down, whether you were trying to do individual deals or make investments in those spaces or whether you were investing in managers. And so we noticed that as a sort of slow degradation of returns, that isn't to say there aren't periods that are good and periods that are bad, but as a whole, there's a pretty slow degradation in returns. And at the same time, another thing was happening, which was that correlations amongst those asset classes were increasing just as fundraising cycles increased and the amount of capital plowed into these asset classes. When we went through 2008, we got very little diversification from our alternative asset classes. Again, should have been smarter, should have tried to figure it out sooner, but the light bulb went on that if we are going to generate the returns for our investors that we would like to at a level of acceptable risk with diversification in a portfolio. We are going to have to go back to the basics of investing in truly alternative assets. That is really just what we think about our business. It is back to the basics of investing in alternative assets. That has two prongs to it. One prong is being early to an asset class before competition and capital has competed away. Returns is useful and beneficial. And we came at this first and foremost from a return perspective. You could be early to a place where the world hasn't found yet that's a benefit and you can extract outsized returns. And then secondly, trying to find places that have really non correlated risks. Without a doubt, the things that we invest in have risks. We haven't found some panacea of riskless arbitrage. It's just that there are different risks that run through our investments and they're likely not correlated with the other risks that most institutional investors have in their portfolios, which is some sort of equity factor risk and some interest rate factor risk. And so really the answer is, as we were watching this in slow motion, we said, look, if we just went back to the basics and found truly alternative assets, that would be an exciting place to be.

[Gus Araya]

Why do you think then that people and institutions still plow billions and billions of dollars into traditional alternative investments?

[Greg Dowling]

Well, look, they're still attractive and they're still very attractive spots. And I don't want to poo poo that at all. And certainly we've seen a great run for venture and growth equity. But I also think, and I say this coming from them, there's just a lot of institutional momentum that's hard to stop. You set firms up in a way that are siloed. You hire people to invest in certain asset classes. That is their job. It's really hard to change course midstream and start doing very different things. And I would say we love that. We love the fact that that exists. And to the extent that that ever broke down or that wasn't the case, the opportunity for us would not be as attractive. So we are happy that that happens. It's not like those are terrible asset classes. We just thought there's a more interesting way to do this. We can extract a lot of return per unit of risk and we should focus on it full time.

[Gus Araya]

We talked about this in the past, that what is alternative evolves over time. If you went back to the 70s, investing in international stocks or real estate might be considered alternative or unique. Then we got into this phase where I would say our traditional alternatives are really hedge funds, private equity, but who knows what traditional alternatives will be in the future? Things are always changing.

[Greg Dowling]

It's a fantastic point. 100 years ago, just stocks, and once you introduce bonds, it was like, wow, this is crazy. Just in our moment of existence from 2014, there's been a massive amount of evolution. When we were early on, we were investing in things like music publishing and litigation finance, which was in our minds, very cutting edge at the time. In 2014, fast forward to today, the whole world has found music and litigation finance, and subsequently returns have come down and it's not something that we do anymore. And so our ethos and our mandate is to constantly be at the leading edge of what will be interesting and new and generate outsized returns, hopefully prior to the world finding them, and then when the world does find them, moving on and being in that next spot. It's what we strive to do, and it's what I think we've gotten better at over the eight years that we've been doing this.

[Gus Araya]

How do you balance this all out? Yes, you want to find that undiscovered alpha, but to paraphrase Warren Buffett, he talks about investments not being the Olympics, that you get no points awarded for difficulty. So how do you avoid complexity for complexity's sake?

[Greg Dowling]

Yeah, that is such a critical question to what we do. Whenever we tell our story to anybody, the most common response is, wow, that must be risky. We love that. We love that comment. And I think the moment we don't hear that comment, the opportunity is gone. Because it is the perception of risk in our space that keeps people away. Our business is predicated on exploiting that gap between perceived risk and actual risk. And I think that response to something is weird. It must be risky is just a behavioral heuristic that we as humans have used for thousands of years. You're loping along the meadow and something comes into view that doesn't look like it belongs there. It elicits a fight or flight response, which I think has been a great thing for humankind for a long time. But it's also something that we can take advantage of. That this view that something is weird so it must be risky and they stay away is really helpful to us. Now, that being said, it's a heuristic that's been developed amongst humans for good reason and in the investment community also, not everything that is weird is a good investment. And to your point, lots of things that are Weird are really bad investments and are not invested in for good reason. We are in the business and I say this, a lot of kissing a lot of frogs. So we look at lots of things and lots of deals say no to a lot of them. Because lots of things in our fishing pond are not attractive, but the ones that are the things that we find that really have what we think is outsized return potential for undersized risk. And we think the things that we find in this pond are really attractive relative to the more competed ponds. Some of that is in the return perspective, which I talked about. Being early and extracting outsized returns before the world finds them is attractive, but also from a risk perspective because we have time. We are not in a bake off or a competitive process where we have to have a deposit down and an LOI down within two weeks. Otherwise we're going to lose a deal. Most of our underwriting takes six to 12 months. We have time to structure deals. We have time to structure with our operating partners in a way that limits our downside. We think about when we find something that's pond, it's got outsized return potential and then potentially mitigated risk. We really like this space, but not everything is perfect. To your point, investing in weird stuff just for the sake of investing weird.

[Gus Araya]

Stuff is a very bad recipe that makes perfect sense. Let's actually get to some specific examples, one that we talked about that maybe it's a personal favor of mine. Whiskey aging. So tell us how you could invest in whiskey aging.

[Greg Dowling]

We have been investing in the whiskey space for almost four years now. It is a space that has gone through a lot of structural change. And we always look to invest in places that have gone through structural change. It is a space that was a slowly. Pardon the euphemism here up until the early 2000s, was a brown goods were a slowly melting ice cube. It was not a growth industry. Clear spirits had taken over pretty significantly. And so distilling capacity in the space had been taken out. And then comes what is now called the bourbon boom. Nobody knows exactly why it was. Some credit it to Mad Men, the Show. But demand for brown goods and whiskey and bourbon accelerated quite significantly in the U.S. and so you had sort of less distilling capacity, more demand. And that created all kinds of interesting dynamics in the space that for us made it investable. You had a space that used to be fully integrated, vertically integrated from the majors. They would distill, they would age, and they would distribute the product to an industry today that has Become massively fragmented. There are folks who distill, there are folks like us who age in the middle and then there are brands that distribute. And so this was a moment in time investment for us. We buy whiskey, it's a perfect space for us to. Because we have patient capital, we age it. All we do is we sit on the whiskey and we age it. That aging curve today is as deep as has been seen in the industry in a long time. And the aging curve refers to the price of a barrel of whiskey at any age along the aging curve. And so as we age that whiskey, it becomes more valuable. And then we sell it to brands that want to buy already aged whiskey to put it in their bottles and take it to market. Market. It's been a really simple business and it's been lucrative for us. We're excited about that business and it's one that is not institutionally invested in and we like that.

[Gus Araya]

If you could take the experience from investing in commodities and apply it to something that's a little bit more bespoke, it seems like you can apply a lot of the same principles.

[Greg Dowling]

I think that's right. As I think through whiskey. What is the strategy of whiskey? It is purely inventory finance and we do have themes around how we source. And those themes often come down to very simple observations. But one is providing inventory finance in niche, weird, off the beaten path places is a really interesting space for us. Whiskey is purely inventory finance. We buy something, we have patient capital and have a balance sheet that can age it for someone else that wants to buy it because they didn't have the capital and they didn't have the time to buy it and age it themselves. And so to your point, this is not novel. I think how we're applying it is novel and where we're applying it. But inventory finance is not something that is novel. We also have expressions of this in wireless spectrum licenses that we invest in. There's some precious metal strategies that we invest in. And so, and then we're looking at a deal right now in cheese and aging cheese. So inventory finance, while simple, can be applied in many different ways.

[Gus Araya]

It's interesting too. It also kind of reminds me a little bit of timber, right? So you can look at timber and if you like the price of timber, you can harvest it and sell it. But if you don't, you can just wait. It actually appreciates over time and whiskey bourbon appreciates over time. A ten year aged whiskey is better than a four year aged whiskey. So you sort of have the benefit of time in this investment.

[Greg Dowling]

That's right. I think what we like about it, maybe relative to a timber or other commodities, is the predictability of the pricing. You never know how steep or how flat that aging curve might be, but it is typically positively sloped. Whereas some other commodities can be up, can be down. If you didn't sell your corn or your wheat or your timber this year, next year you might be kicking yourself because the price is down. One of the things that we really like about Whiskey is it's while you don't know exactly how much it will appreciate, it's fairly predictable that it will appreciate.

[Gus Araya]

Yeah. And you don't have to worry about trying to define things like contango or normal backwardization or any of those crazy commodity terms. I love that example. I wanted to ask you what is the maybe weirdest or somebody else might consider weirdest idea that you've either invested in or have gotten close to investing in.

[Greg Dowling]

So there are lots of things that we get shown and we have an open door policy like we will listen to weird stuff because that's what we do. But I think probably the weirdest thing that we looked at, got close to but ended up not doing is alligator farming. Really fascinating business. Quite frankly. We spent a lot of time on the business, spent time visiting the alligator farm, which is quite fascinating. We actually really like that investment. From an economic perspective, we ended up saying no to that investment from an ESG perspective. And we have a pretty heavy ESG overlay to our fund. We like investing in ESG assets. There are some quirky niche ESG assets. While there were some actual things about alligator farming. And the University of Florida has done a lot of studies about actually how good alligator farming is for the alligator population that was almost extinct. At the end of the day, you were using alligators to essentially make wallets and purses and boots. And from an ESG perspective, we ended up saying no. But we had a lot of fun doing diligence on that as we have in Whiskey. I think one of the things that we've looked at quite often that we often say no to are when we get shown a lot are things in the luxury goods space. So art, automobiles, diamonds, wine. Those investments for us are really tough because they are not non correlated. They are tied to the economic cycle. Art, wine. Diamonds become much more valuable as the economic cycle accelerates. And then as it turns, so does the price of those things. And so we do not. We get shown those things quite often and they're typically of very little interest to us.

[Gus Araya]

I wanted to ask about sourcing, other than having an open door policy. And maybe people bring you ideas, where do you find them on your own accord?

[Greg Dowling]

There are a lot of different ways and I would say we've gotten better at this over the eight years that we've been in business. First, and probably the most interesting is thematic. So we tend to spend a lot of time taking a step back and thinking about certain themes that may or may not be interesting and those develop over time. Some of them we run down and they end up not being interesting. And some of them run down and we end up with a lot of significant deal flow from them. Interesting things. I'll give you some past ones, maybe not some that we're working on right now to divulge too much, but water in California has been a theme of ours for quite some time. Income share agreements is a theme of ours that we can talk through and we have found some interesting deals. We've never done a deal in that space, but we watch it getting a share of a person's income over time. We've looked at a lot of things within the athlete income share agreement space, student income share agreement space. There are income share agreements for entrepreneurs. So you can obviously think of an income share agreement across lots of different sectors and lots of individuals. And it's kind of an interesting space for us to look at. We've looked at inventory finance I mentioned before, and then another one for us has been, and I mentioned that we don't like collectibles, but we have looked at how do we apply AI and sort of big data to weird niche spaces to potentially unlock some interesting arbitrages in automobile auctions. We've looked at some things around sports and actually providing guarantees and art and all kinds of different places. And so that's been a theme of ours. We're constantly evolving those themes and that's a good source for us also. We've just been in this business now over 20 years. So there's just a deep pool of our network that is bringing us deals now. Cordiera has been in business for eight years. Not that we're a household name, but those who tend to traffic in the kind of weirder Nichier spaces kind of know that we exist. And so that has become a much more fruitful channel over time, over the eight years that we've been in business. And so we have also evolved in a way that we are better at vetting and triaging these opportunities quickly and knowing what is or is not a quarter year Ideal for fund, our first fund and early funds. Our first one, we looked at over 360 deals and invested in 14. And I think we've become a lot more efficient and better at kind of tracking what is a Cordier ideal. So it's helpful for us to have been in business for eight years to help the sourcing.

[Gus Araya]

What about diligence? Does it take a different skill set than traditional manager due diligence or traditional investment due diligence?

[Greg Dowling]

So there are some parts of the skill set that are almost identical. And that is what I would call in the people, where we are still in a people business, we are always partnering with operating partners to do what we do. And so that piece of it sitting across from somebody, talking to somebody about their skill set, are they trustworthy? Do they have what it takes to execute on what you want them to execute on? I would say that is nearly identical to what anyone in the investment business or picking managers does for a living. And I think that is a very transferable skill set. In terms of the sourcing, structuring, diligence, it is different. And as we recruit, we try to find people that don't come from a traditional background of private equity. We try to recruit from different backgrounds, more creative, who can think about the world differently. And I think one of the critical things we have on the diligent side here is time. We can take time. Oftentimes something comes to us that, quite frankly, we don't know a lot about at the beginning. We first started looking at music publishing almost 10 years ago. We didn't know a lot about music publishing, but we took a year and a half to understand the business. When we first started looking at alligator farming, we didn't know anything about alligator farming, but we had time. We first started looking at whiskey, we were not very familiar. We were familiar with drinking whiskey, not familiar with underwriting whiskey as an asset. In all those examples, we took 12 months. And so we have time in this space to both diligence the opportunity. How do you make money? How do you lose money? What are the risks? What are the opportunities? And then to diligence the operating partner, if we like this idea, who is the right person or team or people to execute on this idea. And I think that is the advantage to this space that we have vis a vis other investment spaces that are.

[Gus Araya]

A bit more competitive from a risk perspective. You named a few. But if you're doing things like inventory, finance, whatever weird inventory it may be, you have sort of these carry risks, right, that you have A warehouse bourbon that's being aged and it burns down. Are those a lot of the risks that you have to deal with is make sure that you are properly insured and that maybe you have potentially even the rights to the assets that you're financing in case there's a problem? I'm sure there's a lot of risks out there and each one's going to have unique risks. But there's probably some common risks with some of these strategies. Or am I off base?

[Greg Dowling]

No, you're exactly right. What we hope and what the purpose of our portfolios are are that each of those for every investment we make are very idiosyncratic. They could be weird, they could be hard to understand, but as long as they are diligenceable and we can take our time and we can understand that idiosyncratic risk, we will do that. And I think that's the opportunity. A lot of folks who look at these opportunities are like, oh my goodness, I just don't even know what I don't know and I don't know how to get at it after eight years. I think the idea of we don't know what we don't know. We're comfortable with that and we're comfortable going down a path and spending a lot of time to diligence these things. To your very specific point, you're exactly right on Whiskey. So one of the big risks is a lot of where they distill and where we store whiskey. There's tornado risks, there's flood risks, and so that is solvable through insurance. We also have a boat marina roll up company that boat marinas can be subject to hurricane and weather risk, but those are solvable through insurance. They just have to be part of your underwriting. For Whiskey, we insure a year ahead from the aging curve. So whatever the value is today, we actually insure it for a higher value for what we predict the value of the whiskey will be a year ahead. So if we get wiped out for some reason, the collection through the insurance will be priced that is higher than where we hold it today. But that's just a very specific example for a very specific investment. What we hope for, what we do is that we're putting together a lot of assets with their own idiosyncratic risks, some or most of which we can mitigate. Not all we can mitigate. But having diversification helps mitigate all of those idiosyncratic risks. But that what we don't have running through the portfolio is some singular factor risk, some equity factor. Risk or some interest rate or inflation. Inflation, obviously the topic du jour inflation or interest rate risk. Those are things that, as we think through portfolio construction and what assets do we own in a particular fund do we have today? And so how would we want to augment that or what new investment? What might we want to make? We want to make sure that there's just diversification of those idiosyncratic risks and not some universal risk that is running through the portfolio. And that's where I would say portfolio construction is a really important piece to what we do, a big piece of why we founded the firm. I think there are a lot of people and maybe people listening to this podcast who are like, yeah, we invest in some weird stuff. And we have done that and there are lots of people who are really good at this and they do it as sort of a one off rifle shot approach. They kind of have their day job, they invest in what they do and then every once in a while they will invest in some interesting, quirky stuff. And that can work really well. I think as we decided and thought about founding our firm, because that's really what we had done in this space prior to founding Cordiera, we thought that focusing on it exclusively and how you put the pieces together not just haphazardly, but in a portfolio construction that's thoughtful is one of the big important innovations, I think, a part of what we do where we can have an advantage and think through how to put these all together and how the pieces all fit together. So it's important to us.

[Gus Araya]

So it's a private capital structure. You mentioned that earlier, the knock on some of these strategies. And by the way, there's not many strategies that do exactly what you do, but anything that's sort of off the beaten path, sometimes they're easy to buy, their heart to sell. And so you have this great embedded value. But what is the exit strategy? So how does one sell a alligator farm or a spectrum or a boat marina? Oftentimes in private equity, if you're a small buyout shop, you improve a company, you leave a little bit of fruit in the tree and then you sell it to a larger PE company. I don't know if that's the same ecosystem with weird ideas. So who do you exit to?

[Greg Dowling]

When we underwrite a deal, we have to know exactly that there is a viable market to exit that deal today. It can't be, hey, look, this is a great idea. Let's invest in it now and figure out if five years, six years down the Road something will develop to sell it to. We cannot invest in anything like that. This is not a venture fund. We have to know today. And our base case has to be an exit that exists today. And it is viable and probable. Our portfolio looks is diverse in terms of how it gets exited. We have a number of things that are what we call self liquidating. And if we had our druthers, everything would be in this self liquidating bucket. Where you invest in something, you pay money up front for the right to collect some cash flows. Over time, those cash flows pay you back all of your return. And at the end of the period, the asset or whatever you bought has amortized down to nothing. You don't have to sell it. We have a number of things in the royalty space that look like that, which is why we really like royalties. Some things early on that again we don't do it anymore. But in litigation look like that. You invest in a portfolio of cases, they get monetized along the way depending on what a judge or a jury or a settlement happens. And at the end they're all self liquidated. So one thing that we really like, although we can't find an entire portfolio and there just aren't enough good ideas, it's self liquidating. So that is one piece. And then on the side that where we do need exits, I go back to what we said, which is we spend a lot of time underwriting it. It's probably in terms of key metrics on top of who is our operating partner, what are the risks of this? It's how do we exit it and it's probably where we spend the most amount of time and what is the most likely exit. Each one is a bit idiosyncratic to that investment. So hard to generalize. But it has to exist today so.

[Gus Araya]

Much in this world of private capital, we're always trying to put the best numbers forward so we can raise our next fund. And with some of these strategies, if you misjudge and exit, you still may make a lot of money, but your IRR is going to be lower. That's just kind of part parcel with this that there will be times that where you have a longer holding period. And so maybe talk about that and maybe a time where you have misjudged the exit strategy.

[Greg Dowling]

Without a doubt. And I think the biggest risk to what we do would be for those portion of things that we invest in that are non correlated. But where we do need an exit, there can be this secondary correlation effect which says if we go through an 08 time period again where there's just no liquidity for anything even we might have found the most non correlated cash flow stream and most non correlated asset. But there's just no one to buy anything that will extend our hold period for sure on those things that need an exit. But luckily for us, what's good is that if we have found a truly non correlated asset that cash flows in a non correlated way, it's fine. Meaning we'll just keep clipping that coupon. It will march to the beat of its own drummer. It's not going to fall off a cliff like everything else will. And it's okay, we can take a little bit of that duration risk because of the non correlation which is helpful to us. But look to your point, there is just math around. If you hold something longer, maybe that's good for your multiple or clipping a coupon longer. But from an IRR math perspective, that is not good. We haven't had anything so far that has dramatically exceeded expectations. But one is, is certainly in the litigation world, I think the big takeaway, whenever somebody asks me, because we have done lots of things in litigation, what is your takeaway? Is that they take forever and it takes way longer no matter where you are in that space. It just generally takes longer to get liquidity out of cases. And one particular spot that has been long is we invest in international arbitration cases early on, which are sovereign governments against corporates. And there's just a lot of ways through legal tactics to kick that can down the road. And I think that is one space where we have experienced an extension of expected liquidity and lessons learned from early investments. And I would say ours is a space where we have to be very self reflective. What are the lessons we've learned when we've invested in these spaces? How do we get better? How do we continue to evolve? How do we structure things? I think one of the big areas of improvement for us has been around structuring. We're investing in weird, quirky things and I think we have a lot of really interesting innovative structures that help us to have more control over exits. Our recent investments are just much more evolved than some of the early structuring that we had in our early deals. And so you would continue to try to evolve that and get better at that and then learn lessons from things that haven't worked in the past.

[Gus Araya]

Without giving away state secrets, is there a. Can you explain a recent investment you made and maybe how the structure helped make it a good investment?

[Greg Dowling]

Yeah. So I would say One evolution in our firm pretty significantly through structure has been when we find an investment that is really interesting is new. One of our investments called hardware royalties. It's a space that we don't think that anyone has really invested in. I don't think we have time to get into the details of it, but we really like it and has really outsized returns. We think that we're one of the first to do this through an operating partner. But that operating partner that we have partnered with, after they invest our capital that is captive to us, could likely have a really big business around this strategy and they could raise a lot of capital themselves and have a really interesting firm around this strategy. And in our early days we just really got the return of those assets and then kind of picked up and moved on. Today the way that we structure is our funds and our LPs will get a revenue share in that business. So we will get the return of the assets themselves. And then if the operating partner can build a big business around that, our LPs will benefit from that having been the early capital that unlocked value and a track record for them to get upside through a revenue share or some other upside warrant or equity participation in that business. And that has helped evolve returns to a way that is really helpful to us, what we think are already good investments, to have a lot more upside in those investments. And we think we continue to get better at structuring those. I'll say there's an example early on in our life about when we were early to music publishing, helping put people in business then that have turned out to have really big businesses. And early on we did not have those revenue shares and we kick ourselves for not having those.

[Gus Araya]

So you mentioned music publishing and just the royalty space in that area. And I just kind of laughed a little bit like, hey, that's played out, it's not niche anymore. And I thought in my mind, kind of self deprecating way, if a consultant calls you and asks you about it, is it then over?

[Greg Dowling]

Well, look, I will say there are some consultants that are very forward looking and very innovative and then some that aren't. But it is a good question. I mean one of the things we actually track and make note of is how often are we getting inbound questions from our LPs and from other people consultants about a space. There was a good stretch of 18 months, probably in 2019, 2020, where we were fielding at least a call a week, if not more around litigation finance. How does it work? Who's good out there? And those are really good signposts to us of it's time to move on. And that's not to say it's not a great asset class. I think the really, really those are great asset classes. But for our cost of capital in a private structure, it just likely means that those returns are coming in lower than what we had, than what we need to underwrite. But that isn't to say that if I'm running an endowment or a family office that I don't have a pot or a pool of capital that has an expected return. That works really well even today for music publishing and for litigation finance. Just for us who are trying to be on the cutting edge, generate returns that we need. Once everyone's asking about it, probably time to think about moving on.

[Gus Araya]

That's so funny. You've always been such a great resource to us and to me whenever we get some peculiar requests from a client. I had no idea I was being tracked and I might be a contrarian indicator. So it's always good to know that you're a contrarian indicator. At least I'm fully aware now. So that is great. You mentioned Spectrum earlier and I don't want to spend too much time on it, but I do think Spectrum's interesting because we're kind of moving into this 5G area. Is that the play there? Is spectrum auctions a way to invest in 5G that's kind of non tech related.

[Greg Dowling]

That's exactly right. I would say just taking a step back, I think there's a more secular play which is just we like things where demand is increasing at here, demand for wireless broadband at an exponential rate and where the supply of whatever it is is fixed. You cannot create more spectrum. Now you can make it more efficient use technology, you can more efficiently use the spectrum. For most intensive purposes it is a fixed supply with demand against it going as sort of exponential rates. And we like that. Just taking a step back now, 5G happens to be one of the reasons why that demand is increasing. But even going back to 4G and 3G, we think there was just some secular reasons to believe that pricing of Spectrum, if you can buy it, right? And that typically happens through an auction. Sometimes it doesn't. Sometimes they're really expensive auctions, sometimes there are inexpensive auctions. And there's some idiosyncratic reasons around why certain auctions are more attractive than others. But if we can buy the asset at a good basis with those supply demand dynamics. That is really the core thesis around spectrum and 5G is that is a big piece to the demand side and we really like those assets, but they're hard to acquire. You really need a specialized skill set to participate in an FCC auction. Know pricing, know the technicals around what band you want to be in and know what are called peas or what geography or city you want to buy in. And so we also like that aspect to it. You know, a place where good supply, demand dynamics but also a lot of technical moats around how to buy.

[Gus Araya]

Yeah, there's definitely some barriers to entry there. So Chris, even though you invest in some crazy weird things, you seem pretty normal. Are any unusual hobbies or weird hobbies outside of, outside of work?

[Greg Dowling]

I have twins that are six years old, all boys, twins that are six years old and a nine year old. So my hobbies have been subordinated to the hobbies of my children at this point this weekend I have little league baseball coaching football, there's lacrosse, there's soccer. And so that feels to me to be my, my, my, my full time hobby. I do enjoy running, biking and playing this silly game called paddle tennis. So I enjoy that. But you know, for the most part right now I'm barely keeping my head above water keeping up with my kids and their endeavors at this point.

[Gus Araya]

Gotcha. So if listeners wanted to continue to learn more about different niche strategies, are there books or blogs or how do they learn more?

[Greg Dowling]

So just like the conversation we had about when we get called about certain things, I think the moment there's a book or a blog about something we're doing, it's likely not for us. And so I think that the good thing about our space is so far, no, the answer is I don't have any really good examples. But look, I do think the appeal of alternative alternatives are trying to find non correlated assets, particularly in market environments like today, is increasing and I wouldn't be surprised if it doesn't start to happen. I just don't have anything right now that I can really recommend or you can sink your teeth into. But my gut is this space will start to become more covered in the Wall Street Journal, some mainstream press and we get more and more inbound inquiries about, hey, I get it, I need to find more diversified, moderately to high returning assets in my portfolio. Can you tell me about them? Because I'm kind of fearful of equity markets, fixed income markets. While I wish I had a better answer for you today, my gut is that it will evolve over time and I'll have a better answer at some point in the future. There's just really nothing today. That is kind of a one stop shop for weird stuff.

[Gus Araya]

I have a hunch if there was a really good insider's guide, you probably wouldn't tell us anyway.

[Greg Dowling]

I would open Kimono today, but I haven't found anything yet.

[Gus Araya]

Chris, that was fascinating. So I really appreciate you being a part of the manager meeting. I learned a lot about weird investments and maybe more importantly, I learned what a cordiera is.

[Greg Dowling]

Thanks Craig, I really appreciate it.

[Chris Heller]

I hope you enjoyed this conversation and maybe even piqued your interest to explore further. See you next time.