← How I Invest with David Weisburd
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- [00:00]
A
Robert, you're a founder and CIO of a $7 billion fund focused on emerging markets. Everybody that I've ever met tells me emerging markets is a trap. Why is emerging markets not a trap?
- [00:11]
B
Look, I think that's a great question, and I think people perceive it to be a trap because of the way that they've approached the asset class. And what I mean by that is I think most investors have thought of emerging markets more of an afterthought and more of a yes, no, digital, should I do it or should I not do it? As opposed to how I should do it. So what do they end up doing? They end up kind of buying the wrong thing at the wrong time. They stick with it for too long, they capitulate, and then they blame it on the asset class. But that's not necessarily how they invest in developed markets. In developed markets, they think about, where do I want to be? Where do I be? Do I want to be in fixed income, do I want to be in equity, do I want to be in growth, do I want to be in value? But in em, it just seems to be yes, no, or they'll go and do one investment in one country doesn't work out, and they say the entire asset class makes no sense to them.
- [00:51]
A
I invest in Indonesia. Emerging markets doesn't work.
- [00:54]
B
There's been times where someone say, give an example of somewhere you're working right now and say, oh, well, we're working in Turkey right now. Oh, Turkey would never invest there. I was like, well, let me guess. You did one private equity investment. The Currency was at 1.5. Today it's at 43. The company's in great shape, but you're not. I said, exactly. They said, well, that's about how to do the asset class, not if to do the asset class. Because at the same time, you probably could have gone in and done a private credit structured loan in US Dollar, gotten collateral, uncorrelated collateral, and not needed some sort of super monetization event to get your capital back. So look, I just think it's all about how people do it. And they tend to come in late cycle and they come in with very low conviction. And when does low conviction ever work out?
- [01:37]
A
It's absurd. If somebody did that to the US they would invest into some factory in Ohio and then they would say, the United States doesn't work. People do that for emerging, man. For emerging markets. When we last chatted, you said that emerging market indices have done more harm to emerging markets than almost anything. Why is that?
- [01:53]
B
Let's continue on the last concept, which is now someone's made up their mind to go into the market and quite frankly, they're usually chasing last year's returns when they do it. And they look at an index and then they buy some sort of index tracker. So they made their decision probably later than they should have. And by definition, when you go into an index, you're going into low conviction. You're buying what somebody else told you to buy. In our case in emerging market debt, it's JP Morgan. So they create the JP Morgan Emerging Market Bond Index and it does some really bad things to investors. So when I started GRAMERCY Back in 1998, 99, Argentina was 18% of the index. We were already writing research about the coming default in Argentina. Why the heck is it safe to be market neutral or benchmark neutral? Argentina at 8, 9 or whatever? And you can say that was a long time ago, but in 22, the same index forced you to own Russia and Ukraine just as Russia was invading Ukraine.
- [02:43]
A
The issue is that these indices are just completely passive. What's the issue exactly?
- [02:49]
B
By definition, when you buy an index, you don't buy what you've necessarily decided you want to buy. You've decided what someone else should tell you that you should own. But then, look, I get the whole ETF effect in developed markets. I don't get it in emerging markets. And what I mean by that is if you look at the last five years in emerging markets debt, the blended index has maybe done an average of, not an average, pardon me, 8 or 9% total return over that period. Over that five years, the dispersion of outcomes within that index have been down 95% and plus 200%. So to me that seems like an environment that at a bare minimum is target rich for active management. Or another way of saying it, you're somewhere between negligent and grossly negligent to take that approach as opposed to a high conviction approach.
- [03:32]
A
What's the right way to approach emerging markets and what has worked?
- [03:36]
B
I'll start with the notion of high conviction and the emerging market story over the past 20, 25 years, if you were Rip Van Winkle, actually came true, which is you've got these upwardly mobile economies, populations, GDP growth, and you've had better returns than the U.S. comparable risk elsewhere. The challenge has been, is that people haven't been Rip Van Winkle. They have been trapped by the cycles that have occurred within emerging markets. And each of these cycles has had a name, right? So dislocation events. One was called the Tequila crisis. Then we had the Asian debt crisis, then we had the Vodka crisis, then we had the Caparina crisis, then we had the Tango crisis in Argentina, then we had the global financial crisis. You would think that a monkey could figure out how to allocate and trade into this market. There's very identifiable cycles that have occurred, but people have done this strange dance between fear and fear of missing out. So last year was a great year for emerging market debt and quite frankly for local markets and emerging markets. What do people want to buy this year? Local emerging market debt. The FOMO has kicked back in. And what will happen is people will allocate to the wrong thing, there'll be a gap, they'll capitulate and they'll blame it on the asset class. So how should you do this? Take a high conviction approach. Try and capture the return that's embedded in the asset class, but avoid the downside that has become embedded in people's minds, the behavioral mistakes that people have made. So take a top down and bottoms up approach. I call it a barbell. Anchor the barbell in high conviction yield. So once you have high conviction yield that comes from your single best ideas. Underwrite everything you own, underwrite everything you don't own. And what you don't own is equally important. And then when you have high yield, the opportunity cost to move away and make the other mistakes that people have made, which is people tend to buy distressed when it's not distressed and opportunistic when it's not opportunistic in special situations when they're not special. And David, that's because they don't really have the conviction on the other side of the barbell. And they get shaken out of volatility really quickly. If you don't have conviction, you end up capitulating.
- [05:28]
A
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- [07:34]
B
I couldn't believe more. I mean, we call that something different here. We call that planning the trade and training the plan. And so when you underwrite something, you say, this is where I want to buy it. This is where I think there's value. And because of the thesis, this is where I think I should exit it. So what, what do people typically do as it approaches their target? They talk themselves out of it because, you know, volatility has made them rethink it. And when it, when it's well below their actual target, they, they, they tend to sell too early. So we like to do what I call the happy trade, not the grumpy trade. Plan three levels on the way in and plan three levels on the way out. So what does that mean? I want to own this thing at X? Well, I should give myself some Ramona at Y and Z because there's all sorts of reason I'm not smart enough to pick the bottom. But what a lot of investors do is they wait for X. X doesn't come and they miss the trade, right? So for us it's plan the trade, buy it in three levels. If I buy it after the first level and it keeps going down, I'm happy. But if it grips, I'm happy as well. The worst thing is the grumpy trade where you did nothing. And I think that's a derivation of what you're talking about, which is, you know, people took all the risk. They said, I think it's worth X and I should get out at Z, but they change their mind at Y. Not because any information changed, they just their psychology changed.
- [08:47]
A
You have the job of deploying $7 billion into emerging markets. How do you go about investing that? And tell me about your first principles.
- [08:57]
B
This is an asset class where you should come in with high conviction. We like to think about this asset class less about beta and more about how you get returns. It's a place to go and get returns. It's a lonely place. I think people put too much emphasis on liquidity in this market. So the idea that the safe way to emerging markets is through liquid emerging market debt, liquid fixed income, it's like the gateway drug to emerging markets. And then everybody buys it. And what do they find out? One, they didn't really need the liquidity because a lot of allocators, pension funds that have been on your show, what have you, they make a decision, it's strategic, right? We're going to be 2, 3, 4% for a long time and if we change our mind, it'll take two years. But they park all their money in T +1. So number one is the liquidity is not there when you want it, but the opportunity cost for parking and liquidity when you don't need it, is too high. And what do I mean by that? Where we see a lot better return potential is in structured private credit in emerging markets, 2, 3 year duration paper, not one year, but you can get 1,000 basis points over what liquid's getting you. And you get more return, you get less risk, and you explicitly give up some liquidity, not a lot. And you get handsomely paid for it. I think that to us is what is one of the most interesting opportunities in emerging markets today.
- [10:05]
A
Give me an example of this kind of investment.
- [10:07]
B
If you were buying the index, you would buy Mexico. And one of the things you would buy in Mexico is a company called Pemex, which is the quasi sovereign oil and gas company of Mexico. And over the past few years, if you had purchased short duration bonds in Pemex, you'd get about 5, 6% yield. But what do you get and what do you not get? So when you buy a bond, how is it baked? So the way bonds are written in our market is JP Morgan or some bank calls you at 8:15, they say we're doing a billion dollar deal for Pemex. It's 10 times oversubscribed, how much do you want? So there's no opportunity to get your DNA on the establishment of that credit at all. And by the way, it comes with a bond trustee which isn't really there for bondholders, they're there for themselves. And it has a collective action clause. So what does that mean? You don't bake the credit and you don't have the opportunity to work it out because of collective action clause. You get forced into what others want and for all that you get 5% or 6% and it's liquid, except for when you need liquidity. In these dislocations that I talked about before, an alternative would be we lend to suppliers of Pemex, people who lay the pipes or build the platforms or whatever it may be. We get correlated collateral which is a receivable from Pemex itself. And then we get uncorrelated collateral, things that have nothing to do with the business, shopping malls, real estate, whatever the family groups may have. And we're coming in at 1,000 basis points over that, like 16, 17%. This is 12 to 18 month paper. We're not talking about 10 year infrastructure paper or what have you. It's amortizing, it's not pick, it's cash pay, et cetera. So give up 12 to 18 months of liquidity, pick up 1000 basis points, pick up collateral and pick up uncorrelated collateral. I think that's a trade off you're supposed to do all day long.
- [11:49]
A
Tell me about your philosophy on currency risk. Do you always hedge it out? Is there sometimes times to take it on?
- [11:56]
B
I'll say that generally that we look at currencies in emerging markets as nothing more than opportunistic. From time to time there's distress. Now we run a lot of different return streams. We have fixed income, private credit, special situations, whatever it may be. So if I think about it from a private credit, which we just talked about, the Pemex loan, we're going to lend in US dollars and if not in US dollars, it's going to be Pesos hedge back to dollars. If one's getting mid teens returns in dollars and you can mitigate that currency risk, why take
- [12:28]
A
just adds another Layer of risk that's unnecessary.
- [12:31]
B
Another layer of risk that's unnecessary. And to your point, what's the thesis? What's the target return and what's the safest path to that target return? So if target returns mid teens and you can get that in dollars and get collateral, uncorrelated collateral, the currency just becomes noise. And let's talk about private equity in emerging markets. And that's kind of the Turkish example I gave you a moment ago. When you buy private equity in emerging markets, you commit to something for 10 years and you have currency headwind in your face the entire time. And over 10 years, why take that risk when you can lend in dollars? Get private equity type returns. Like a private equity manager will say, well I got you a MOIC. They like to talk MOIC two, three times MOIC. Well you give me money for 10 years, I'll get you MOIC too, right? But if you look at their IRRs, right, the IRRs that we're putting up, the yields that we're getting in private credit in short duration and then turn it over and over again, let's just take our number for 10 years, it's more than three times, right? Why take that extra risk?
- [13:26]
A
People talk about assets as if they're priced but there's always supply and demand dynamics. Once some asset gets really out of favor, the price goes to price where it's very favorable to come in. You were talking about you people do the exact opposite. They, they ride momentums versus trying to go in for value. Is that why this trade exists? In that there's not many investors that want to own suppliers to Pemex?
- [13:50]
B
It's a couple things. I mean I think private credit emerging markets day like we talked about in the, in the case of Pemex, you're typically, you want to be solving for market failure and you want to be getting paid for market failure. And I think that's what developed market private credit was doing in the US in 2009 and 2010. The market failure was the sucking sound of capital that left the banks proprietary capital that was no longer available to be lent out. Well we've seen that in places like Mexico and Turkey and whatever it may be, which is if you go to a place like Mexico and Pemex, bond investors are buying bonds, banks are being told that they have to lend senior secured locally and they don't really have the capacity for the supplier credits. They're lending directly. They use up their entire line on Pemex Direct, not on the Pemex Suppliers, there's nobody left to lend, despite the collateral that's there. If I go to Turkey. 2018, we were getting high teens returns in dollars, LTVs of 33%. Gas stations, shopping malls, land at the new airport as our collateral. And why were we getting that? Because Turkey was in the midst of a financial crisis and banks were being told they can no longer lend. And we were able to find borrowers that had great assets and had mismatches between those assets and the liabilities that they had created for themselves. We had one borrower. They were a supplier. They would take postdated checks for their product. We call it postdated checks. They call that commercial paper. January, February, March, April. And then they would take all those checks and they would go to a bank and they would factor them. Well, in the midst of a financial crisis, the bank stopped funding. So all of a sudden they've got these liabilities and they can no longer turn their assets into cash. So we're able to turn the assets into cash and rely upon the value of the assets.
- [15:29]
A
Started the conversation talking about how absurd it is to group all emerging markets as one trade. Turkey, Indonesia and other countries. But at the same token, aren't each of these markets very specialized, have specific relationship networks, specific diligence? How are you able to have a fund that focuses on all of emerging managers? When you want more, you start your business with Northwest registered agent. They give you access to thousands of free guides, tools and legal forms to help you launch and protect your business all in one place. With Northwest, you're not just forming an llc. You're building your complete business identity from what customers see to what they don't see, like operating agreements, meeting minutes and compliance paperwork. You get more privacy, more guidance, and more free resources to grow the right way. Northwest has been helping founders and entrepreneurs for nearly 30 years. They're the largest registered agent LLC service in the US with over 1500 corporate guides. Real people who know your local laws and help you every step of the way. What I love is how fast you can build your business identity. With their free resources, you could access thousands of forms step by step guides and even lawyer drafted operating agreements and bylaws without even creating an account. Northwest makes life easy for business owners. They don't just help you from your company, they give you the tools you need after you form it. And with Northwest, privacy is automatic. They never sell your data because privacy by default is their pledge. Don't pay hundreds or thousands of dollars for what you could get from Northwest. For free. Visit northwestregisteredagent.com invest free and start using free resources to build something amazing. Get more with Northwest registered agent@northwestregisteredagent.com invest free when you want more, you start your business with Northwest Registered Agent. They give you access to thousands of free guides, tools and legal forms to help you launch and protect your business all in one place. With Northwest, you're not just forming an llc, you're building your complete business identity from what customers see to what they don't see. Like operating agreements, meeting minutes and compliance paperwork. You get more privacy, more guidance and more free resources to grow the right way. Northwest has been helping founders and entrepreneurs for nearly 30 years. They're the largest registered agent LLC service in the US with over 1500 corporate guides. Real people who know your local laws and help you every step of the way. What I love is how fast you could build your business identity. With their free resources, you could access thousands of forms step by step guides and even lawyer drafted operating agreements and bylaws without even creating an account. Northwest makes life easy for business owners. They don't just help you from your company, they give you the tools you need after you form it. And with Northwest, privacy is automatic. They never sell your data because privacy by default is their pledge. Don't pay hundreds or thousands of dollars for what you could get from Northwest for free. Visit northwestregisteragent.com invest free and start using free resources to build something amazing. Get more with Northwest registered agent@northwestregisteredagent.com invest free when you want more, you start your business with Northwest Registered Agent. They give you access to thousands of free guides, tools and legal forms to help you launch and protect your business all in one place. With Northwest, you're not just forming an llc, you're building your complete business identity from what customers see to what they don't see. Like operating agreements, meeting minutes and compliance paperwork. You get more privacy, more guidance and more free resources to grow the right way. Northwest has been helping founders and entrepreneurs for nearly 30 years. They're the largest registered agent LLC service in the US with over 1500 corporate guides. Real people who know your local laws and help you every step of the way. What I love is how fast you could build your business identity. With their free resources. You could access thousands of forms step by step guides and and even lawyer drafted operating agreements and bylaws without even creating an account. Northwest makes life easy for business owners. They don't just help you from your company, they give you the tools you need after you form it. And with Northwest, privacy is automatic. They never sell your data because privacy by default is their pledge. Don't pay hundreds or thousands of dollars for what you could get from Northwest. For free. Visit northwestregisteragent.com investfree and start using free resources to build something amazing. Get more with Northwest registered agent@northwestregisteredagent.com invest free.
- [19:46]
B
You have to be able to approach the asset class both top down and bottoms up. And the bottoms up for us, which is missing in that question is we have local teams throughout emerging markets. So when I talk about a private credit alone to Pemex, we have a partner in Mexico who's dedicated to us, who has nearly 100 employees on the ground, engineers and what have you that are focused on the supplier credits that we're dealing in Mexico.
- [20:09]
A
Now.
- [20:09]
B
We don't give them the investment decision, nor do we simply pay them to source credit. We require that they co invest alongside with us. So we have lending platforms in places like Mexico, Brazil, Peru, Turkey, Africa, et cetera. And the cool thing about lending platforms and local presence is information in emerging markets doesn't know if it's long only or alternative in nature. It's just information. So one needs to be properly set up to capture that information. So go back to Pemex example. When Covid hit and oil went to negative 30 or 40 or whatever it was. Well, the bonds at Pemex that I told you about that were issued at 5,6% the longer duration bonds in Mexico went from par to 50 cents. At the same time our suppliers were paying us. So we knew that Pemex was paying our suppliers and our suppliers were paying us. So this wasn't a fundamental issue. There was just something technical going on in the market. Now our private credit team could just sit on that. But of course we have an open architecture to capture this information. They're like, hey, by the way, we're getting paid on our credits. There's not a fundamental issue in the oil sector In Mexico in 2020, we're getting paid. Well, that's informative to people who are doing other business elsewhere on the platform to understand that what they're seeing in New York is very different than what's happening in Mexico City.
- [21:24]
A
Tell me about your team. Are you focused on a couple countries and how do you deal with the cyclicality of emerging markets? How do you strategically place your team and your relationships?
- [21:34]
B
First of all, we have four major teams. So we have four different return streams and four teams. And that's different than some Alternative credit shops. I mean we made a decision nearly a decade ago to go from a founder led firm with all the investment processing people around the founder to classic CIO PM construct, align the investment teams with the success of their product, the performance of their product and what have you. So within our business we have four individual strategy groups and four individual businesses. And the cool thing is they tend to be very uncorrelated to each other. So what's going on in public credit can be very different than private credit. And special situations are kind of uncorrelated to both. So one is the way that we're organized. So each one of those teams will have portfolio managers internally, analysts internally, lawyers internally. I mean this is very legal intensive business. But then we also have our platform partners. I mentioned close to 100 in Mexico, 35 in Turkey, another 20 in Peru, whatever it may be that are essential. But even that's not enough. I think a big differentiator for us is we've been around as a team for 28 years. We've been in EM35, 40 years depending on who in the business you're talking to. And we grew up before emerging markets emerged. We were involved when emerging markets was a lesser developed country, debt crisis and so much of the region was in default. And our expertise back then was really on how do you put Humpty Dumpty back together again? Well, in order to do so you needed a U.S. lawyer, a U.S. financial advisor, a local FAA and a local legal advisor. Well, that network remains with us today. So having a great team in Greenwich, Connecticut and London and Buenos Aires and Mexico City is great. Having great platform partners is great. But having a network of relationships for 35 plus years, that can give you color on people. David, I think one of the big differentiators of emerging market credit versus developed market credit is in developed market credit you have to figure out where are you in the capital structure, what judge do you get and what did he or she have for lunch to determine your outcome of bankruptcy? In emerging markets we have to underwrite people, we have to underwrite all the credit. Where do you want to be the capital structure, the structure, what have you. But we underwrite people first. Who are we lending to, what's their credit culture and how they behaved in times addressed in the past to predict how they're going to behave in the future. That's where we start. Because ultimately of course contracts matter and structure matters and jurisdiction matters, but it only matters when you get the people wrong. Because if you underwrite people properly, all that's secondary. That spells and suspenders.
- [24:00]
A
Why is it that people are even more important than the jurisdiction, the paper, the laws?
- [24:07]
B
Because credit is about the ability and willingness for someone to pay you, right? Ability is pretty easy to figure out, right? Financial analysis and da da da da da. The willingness. You can work with someone who's lacking ability, you cannot work with someone who's lacking willingness. So you have to have people of good character who have a credit culture that's supportive of credit. Not just jurisdiction, but the way people behave and then evidence of how they and that culture behaved in times of dress in the past. So we do things like, and maybe we over screen with these biases, but we'll talk about. We think Colombia has a credit culture, a culture of payment, and they pride themselves on the fact that when the rest of Latin America was in default in the 1980s, they weren't they paid. Mexico has a culture of collection. If you work the credit, you'll get paid. There's all sorts of different levels of how to collect upon that credit. There's other countries where I would say credit is an oxymoron. I'm thinking one in particular where you're not even allowed in the courtroom as a creditor when there's a bankruptcy proceeding and you wake up in the morning and read what you got. I'm just not interested. So that's the people part of it. And I've been doing this for 38 years. And a younger analyst will come in and talk about Mr. Or Ms. ABC and why country. I'm like, whoa, let me tell you a story. Let me tell you how they behaved in the past. Or let me give you the names of some people locally that we've dealt with who know these people really well, because it matters. Sometimes I wonder if developed market credit is people agnostic. We cannot be people agnostic.
- [25:40]
A
One of the difficulties of emerging markets and also arguably the opportunity is the geopolitical risk of the specific country. Do you just go risk off on certain countries? And when do you decide whether you're doing any opportunities in the country or is there always an opportunity that you'll take for the right return?
- [25:59]
B
It's talking about geopolitics starting to think about the top down, how macro is affecting what we're doing. And we're clearly not a macro shock. I have the good fortune of working with someone who I think is the most brilliant top down decoder in the world, and that's Mohamed El Erian. And with Mohamed, we have institutionalized the process to Help answer that question, which is we want to make sure that our top down is informing our portfolios, influencing our portfolios, and from time to time, imposing a view on those portfolios. Early on in my career, I didn't have the confidence as the CIO to go and impose and say, you can't be in that country because I think I know it better than you do. Well, when you institutionalize a process for that, it's not about individuals, it's about the process. So another way of thinking about this is when you're strictly a bottoms up shop, you need to make sure that you don't buy good homes in bad neighborhoods. So what we do is we marry the top down with the bottoms up, and every so often we impose a view. And I can give you one example. At the end of 2019, early 2020, if you recall, everything seemed overbought. Nobody knew what to do with their cash. Maybe a little bit like today's environment. So much fomo, there's no value, but felt like musical chairs, but not ready to get off yet. And we wrote a piece about the coming dislocation in emerging market debt. And we said to people, batten down the hatches, but don't be afraid to buy the next dislocation in emerging markets. And lo and behold, it came. It was Covid, right? And everybody told us in 2019. Thanks, great. Give us a call when, when the next dislocation comes, we're ready. We have tons of cash. Well, nobody listened to batten down the hatches and nobody listened to March of 2020, when I had nothing better to do than call them. And they kept saying things like, oh, this sounds great, but we're super busy and we can't get to this till July or maybe the October board meeting, and they miss everything.
- [27:45]
A
I think one of the most underrated things in private markets is LP based. I think LPs can make or break a fund. When you're dealing in something so volatile like emerging markets, how do you think about your LP base and where have you found product market fit between where you're investing, the asset class and also your investors?
- [28:07]
B
We try not to convince people to buy emerging market risk. We try and convince people who already have emerging market risk to take a better approach to it. So I mentioned pension funds, sovereign wealth funds, what have you. They made the decision to be in an asset class. So you don't have to convince them, you just have to convince them that maybe there's a more intelligent way to do it. So that's one Two, and probably I think it's really important that in order to meet and beat your client's expectations, you have to set those expectations properly and you have to educate them properly about what to expect when certain things happen. When I think about optimization of LPs, and particularly as we moved our business more from public credit to private credit over the last decade, you have to have a client that meets the liquidity provision that they're investing in. And I think this is pretty timely. Looking at some of the things that are going on in domestic private credit today and funds that are being gated or what have you. No one's talking about the underlying asset quality. They're talking about a mismatch that you have investors, retail investors who won out yesterday or tomorrow, and assets that aren't liquid till the day after tomorrow. So I think as you are constructing partnerships with LPs, don't convince them to buy something that they're not comfortable with. Try and talk to them about how to solve the problems that they've had in the asset class in the past. Make sure that they have the proper alignment between the assets that you're managing for them and liquidity. And I think the bias is really towards institutions, not retail.
- [29:34]
A
Two great points. You're not trying to sell emerging markets to LPs, you're essentially selling them alpha. Don't just do beta. Beta is not good enough. Do alpha. There's another. I believe you mentioned a thousand basis points for 10%. The second aspect is really partnering with your LP base and making sure that they have a prepared mind and setting the expectations with them ahead of time of what the asset class means, what the fluctuations means, and why that's actually an advantage and not disadvantage to your strategy when it comes to your LP base. You've been running this for quite a while. How have you evolved your strategy and what are some lessons that you learned along the way?
- [30:11]
B
Our evolution has been anchored in the following, which is one, you always have to be responsive to what your clients are asking for today, but you have to think about what they'll be asking for tomorrow or what you think they should be doing tomorrow. And emerging markets is rich with that opportunity to optimize along the way. You have to understand where there's opportunity today and where there isn't. And I think what we've learned in this asset class, if not all, is that if you don't evolve, you're going to die. We started as an emerging market distressed hedge fund in the late 1990s because that's where the opportunity set really was. It was in the patient going in and out of the emergency room. And how do you put Humpty Dumpty back together again? And if we could take our capital and our expertise, we could create alpha for our clients. When the financial Crisis hit in 2008, we stepped back and we said, the entire world's distressed. Should we just do NPLs in Portugal? No, that's not who we are. We bring nothing to the table in terms of Expertise in doing NPLs in Portugal just because we did them in Mexico or whatever. At that point, we just kind of evolved towards what are our clients asking for? It's no longer just about distress. They're asking for fixed income, maybe even in a way that we don't think makes sense for us. But they're the clients, so we should give them what they're asking for today and say, hey, maybe there's a more intelligent way to do fixed income in the future. So we did things like give them US dollar and local, but we gave them corporate and corporate high yield. And then that gave us the ability to do blended strategies. And then more recently, we said, look, we didn't start doing private credit because Apollo and everybody else started doing it. We were doing private credit, emerging markets, because we think that's the right way to get returns from emerging markets for the reasons that we've discussed. Give up a little liquidity, get more return, take more risk. So it wasn't about, that's where the market's going in the U.S. and maybe we can make it go that way in emerging markets. It's like, that's the way to get returns in the asset class. So we evolved towards that. And then ultimately our latest and greatest, if you will, is if you have all the return streams, you can partner with your clients in those return streams or you can run some sort of asset allocation on the top. So we also offer a single best ideas concept for our clients to partner with us there. And that's not just about asset allocation. We've talked a little bit about asset allocation, but it's about governance. I think one of the challenges investors have had in emerging markets is they understand that being tactical is necessary, but they're not necessarily set up to be tactical. And the example I gave before, which is, yeah, give me a call. Well, it takes them six months to make a decision. So when you create some sort of single best ideas multi asset up at the top, it gives the client the ability to underwrite you and the return streams once and then hold you responsible for making the right decisions.
- [32:44]
A
One of the things I see the smartest managers doing is what I would call a form of structural alpha, which is partnering with specific asset class to create specific products. I've had managers do that in the Taft Hartley act, pension funds. In insurance funds. Have you made specific products for specific verticals or is that not something that you do?
- [33:06]
B
So our private credit and our multi asset was intended to be customized, complement to the emerging market debt that people were already doing. So the plain vanilla, the entry, the gateway drug that I mentioned before, we're like, look, there's a better approach. We're not telling you to go all or nothing, but you could complement what you're doing with a better approach. So that was tailor made towards pension funds, sovereign wealth funds, longtime allocators. You mentioned insurance. More recently we have developed the rated Note feeder, which is a way to get a rating around the risk that you're managing and package it in a way that's efficient for the insurance companies. And that clearly came out of developed markets. And the rated Note feeder has been around for a while, but I think we're the first manager to do it in emerging markets because we're one of the first to do private credit here. But we try to solve a problem that our clients in the insurance vertical were talking to us about.
- [33:58]
A
I've had a CIO of a $20 billion asset management firm talk about the need to have an anchor for a new strategy that they built out. Is that your North Star? If you could get a pension fund or strategic partner to anchor, that's when you know you might have like some new strategy.
- [34:13]
B
That's one of the things that you learn along the way, right? When you are myopically thinking about a market and the opportunities in the market, you may think about it very differently than the market, than the LP market. So I think early on we get so excited about an opportunity or return stream, whatever me, that we would just put it together. I kind of called it teenage behavior. And then we would take it to market. And then we grew up a little bit, we matured and we said, hey. And we did this through a series of strategic plans. And I remember one of them, we said, we're not going to launch products without anchor investors. Now that seems like lazy, like, well, of course you shouldn't do that if, if you don't have that first investor. But for us it was like we wanted the first investor to validate the concept, but to help develop the product. Because we manage risk, we manage opportunity. We go get alpha. But I can't tell you that how a state pension fund necessarily has to bring that in on their side. So a lot of what we've done, whether it was a multi asset and SMA form the private credit, we partnered with our LPs early on to not only try and increase the probability of our success, but to make sure certain that we were solving a problem that
- [35:21]
A
they were trying to solve for it's literally a marketplace. You have a strategy that you think is good and then you need something that has demand and you have to find something co centric circles. You have to find something that is both good and is good for the customer base.
- [35:34]
B
David, I think it's different sales and marketing, right? Like sales, you take what you have and you're trying to sell it to the market. Marketing is you're trying to understand what the market really needs and in our case try and develop that with them.
- [35:47]
A
You mentioned earlier on you don't look to educate people on emerging markets. Is that a rule you ever break?
- [35:56]
B
So let me clarify if I said it incorrectly. It's not that we don't want to educate. We don't want to convince them to take a risk that they're not comfortable with. We're all about education and there's so much content and so much material that we have on our platform that we probably take for granted that we're trying to purposely go out there and cascade it to our clients so they understand whether it's a top down macro meeting that's become a weekly for our clients or a quarterly for our clients or whatever it may be. But we definitely want to educate our clients. Again, if you're going to meet and beat their expectations, you have to properly educate them. You have to properly set those expectations. So it's an education that goes from as we talked about before, not yes or no, but how we have to teach them about the cycles that have been embedded in this asset class. We talked a little bit about that Tequila crisis, vodka crisis, Caborina crisis, and why once you continue to expect cycles, what the cause and the effect of those cycles have been and we have to unpack other risks that we talked about, which is in the end we need to talk about political risk and currency risk and governance and liquidity. So no, no, I don't want to leave you with the impression that we don't want to educate our clients. I'm uncomfortable trying to convince someone to do something that they're not comfortable with. My point there before was there are Hundreds of billions of dollars that are already comfortable with emerging markets and what I would call the suboptimal approach. I'd like to talk to them and educate them about a better approach.
- [37:15]
A
It's this thin line between finding people that are sold on emerging markets but not yet sold on, necessarily how you
- [37:23]
B
access them, correct, have it be a compliment, and optimization of something you're doing as opposed to something novel that you've never done.
- [37:32]
A
When it comes to emerging markets, is there a frequent aha moment where investors like, oh, now I get it. And if so, what is that?
- [37:41]
B
I think the aha moment that we've seen recently is around this notion of high conviction. I mean, when you talk to people about the last 20 years has all been about moving towards passive, right? And emerging markets got pulled into that as well. And yes, paying 20 basis points is better than paying 200 basis points or paying 15 is better than 150. But I think the aha moment for people is starting to focus on what's the net return that I'm getting relative to the risk that I'm taking.
- [38:08]
A
If you could go back to 1998, when you had just first started Gramercy, what is one piece of timeless advice you'd give a younger Robert that would have helped you either accelerate your career or helped you avoid customers mistakes?
- [38:20]
B
If I can only choose one, I would say I would seek mentorship early and often. And you know, I, I mentor a lot of young people. I mentor mid level queer people. I myself am getting mentored. I wish I had taken that advice much earlier. I think there's this notion that when people graduate from undergraduate or graduate school that somehow they're baked and they're done and we're supposed to know everything. And the reality is we know very little at that point. And there are always people who have the wisdom and the ability and desire to be mentors that can help you accelerate what you're trying to do and you can learn from their mistakes as opposed to make the same mistakes they made. So definitely seeking mentorship early and often.
- [39:01]
A
Is, is that an ego thing? Is that a fear of rejection? Is that a lack of skills? What, what caused you not to seek mentorship?
- [39:07]
B
I think it was thinking that I would be annoying people. Like, I probably didn't really realize being considerate, being considerate, right? Like, like, does that person really have time for me? And the answer was, yeah, they, they did. People do want to help, right? And they, particularly when they, like if you have a story, right? Like, and what did we do we. We. We came into a market, but we were entrepreneurs. We. We built. Built a business, right. And we had a story behind that business. And it. And it had all sorts of fun narratives to that. People. People really got excited about that. And I wish that, you know, I wish that I had sought that mentorship earlier.
- [39:44]
A
Said another way, by not seeking mentorship, you're oftentimes robbing the other person from. From their mentorship from them. Giving back and giving back to the next generation.
- [39:53]
B
Yeah, absolutely. And, you know, I meant I mentor a young man today, and I learned more from him than he learns from me. We go back and forth, and I'm learning about the way that his generation thinks about things, and he's learning, getting, hopefully some wisdom from me. But I really enjoy it because it's like being on a board. Like, you can be on a board, people think you're on a board to provide wisdom. But actually, when I sit on a board, it's like, wow, like what I learned on board A, I can definitely apply to board B, and it probably applies to grammar C as well.
- [40:25]
A
Well, Robert, this has been absolute masterclass. Thanks so much for jumping on.
- [40:28]
B
Thank you. Appreciate it.
- [40:29]
A
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