Jeff Aronson – Building Centerbridge Across the Capital Structure (EP.468)
Summary
Private Credit: Extensive discussion of the shift toward non-bank lending with equity-like returns, safety-first underwriting, and covenants driving strong performance and minimal losses.
Opportunistic Credit: Evolution from secondary-market trading to primary origination (e.g., L+900 with protections), now more than half of activity and spanning transitional, complex, and non-sponsored capital.
Direct Lending: Focus on founder/family-owned, non-sponsored borrowers via a Wells Fargo partnership to avoid crowded sponsor deals, leveraging proprietary sourcing and rigorous risk controls.
Distressed for Control: Framed as a deleveraging path to ownership akin to buyouts; used successfully around the GFC and remains a flexible tool within their private equity toolkit.
Middle Market: Firm positions itself as a full-spectrum middle-market investor across PE, credit, and real estate with a single-team model to enhance sourcing and underwriting edge.
Market Outlook: Late-cycle signals cited—tight spreads, complacency, opacity, and rising fraud—leading to a cautious, risk-focused stance.
Companies Mentioned: Contextual references include Blackstone (BX), Apollo (APO), KKR (KKR), Goldman Sachs (GS), and Wells Fargo (WFC), plus insurance partnerships (e.g., MassMutual/Martello Re), not specific stock pitches.
Opportunities & Risks: Anticipated private wealth inflows could compress returns and spur regulation; edge sought via proprietary sourcing, insurer partnerships, and disciplined underwriting.
Transcript
When you're on a hot streak like that and you think you can do no uh no wrong, risk is rising. Even though mentally you're thinking, "Oh, I must be, you know, I'm good risk. I I got this. I got it covered. I got it covered. [music] Jeeoff, excited to do this with you. Ready to go." Me, too. >> Why don't you take me back to your upbringing? >> I was raised in suburban Boston. a town called Neita, Mass. My mom and dad were from Springfield, Mass, Western Massachusetts. That's why I don't have a Boston accent. And my dad was an educator. He was a teacher. He was a coach. My dad taught gym, physical education, uh, at junior high school in Needam. I remember when when I was like eight, we moved to Washington State and my father had a job there for a year and we to literally a town in the middle of nowhere. They were known for their rodeo. That was about it. And then we moved back a year later and my dad he worked at Nem High School. And then he eventually got a job again in physical education at a state school in Massachusetts college. It was called Lowel Tech which became uh University of Mass at Lel. And we were a very middle class family. Uh the way I described it, we never had a lot but we always had enough. and I have a younger brother who's uh five years younger than me. He also lives here in New York City and uh very um I I would say ordinary uh upbringing in need of mass with the split level house and all that stuff. >> Were there any lessons you remember from your dad as a coach that he imparted on you guys as kids? >> He never pushed me nor my brother for that matter into athletics. I think he was highly highly conscious of not doing that. And my father had been like he was a great athlete all his life. He was a boxer. He was a gymnast and like like you know at the highest competitive level. He probably realized his sons didn't get that gene. But to his credit, he never pushed us. And if it's a lesson, but you know, you don't push people beyond their capabilities. You know, put someone in a position where they can't succeed. And I suspect he he thought I I would love for my uh son to be uh you know, a division one athlete. It wasn't going to happen. >> So, as you went through school, you got on the law track. What were your thoughts of your capabilities at the time? So, I went to college at Johns Hopkins and um I was always interested in government and public policy and I liked the fact Baltimore was close to Washington. So, I thought that was cool and I knew nothing about being a lawyer. I thought if I was interested in government and policy, law school made sense. Um and I I got into a bunch of law schools. I got a big scholarship at NYU. So, I said that sounded good. And law school was enjoyable. You I made a lot of great friends there. I said it was another three years of college. And you know, I I learned what it was like to understand the law, but I had no idea what it was like to practice law. And I found myself in a job in a big law firm. This is like in 1984. And it was like, oh, [laughter] wasn't what I was wasn't what I thought. I had this vision. and I was going to practice international law, which doesn't sound really cool. I thought I would fly to London and I would uh negotiate a deal and stay in a beautiful hotel. And I learned international law meant staying up all night in an office building downtown pouring through a stack of documents looking for typos. It was like this was not for me. >> So, what did you do? >> Well, I I spent the first year uh working like incredibly hard. I spent the second year working incredibly hard at both my job and looking for a new job and I found a job in the legal department as an in-house lawyer at a uh a small investment bank. Uh it was called LF Rothschild Underberg Tobin. And my, you know, I was in my mid20s. I didn't know anything, but my job was to effectively be the in-house counsel to the team that managed the firm's proprietary capital. And that team, they had a couple of strategies. One was uh it's now called merger arbitrage. Used to be called risk arbitrage. And they also invested in bankruptcies because again event driven. And they also had a convertible bond h convertible bond hedging strategy. Buying converts shorting stock against it. And the two people who ran that department were John Angelo Michael Gordon. >> Familiar names. >> Right. So this is continuing the story. So I I really liked working with them. I tried to befriend them even though I didn't want to be a lawyer. And then, you know, I'm not I consider myself a super lucky person, although I don't have a superstitious bone in my body. The stock market crashed in 1987. Uh, and that led to the demise of Ella Rothschild. Eventually went bankrupt. So, I'm thinking I'm a I'm a in-house lawyer. I don't want to be a lawyer. The firm that I worked at just went broke. I was newly married and I had student loans up to my neck. I'm screwed. And uh John, Angela, Michael Gordon said they were going to start their own firm. And I I said, "Give me a chance. I want to become an analyst." And I've told this story before. Michael Gordon would joke, but maybe a little half serious. Well, you're a lawyer. You don't know anything about math. And I said, "I'm actually I'm I'm decent at math." I said, "Just give me a chance." I I literally said, "I'll work for free. just give me a chance and they took a chance on me and uh it all worked out. >> So, what was notable in your path from knowing some math to the you know decade and a half you spent with John and Michael? >> Well, I really I mean I was hard worker. I went to night school. I went to NYU at night not to get a not to get a degree but literally to take accounting and corporate finance and security analysis. And it was the first time I had ever gone to school to learn something as opposed to going to school to get an A. Very different. And I was really into it. And my wife would tease me because I there was I remember this book. It was called uh Principles of Corporate Finance by Brilliant Meyers. It's like it's like a Samuelson for macroeconomics. And I would like take it. It was like like a pleasure book. I was really really interested and I just immersed myself. I read as much as I could and I asked a thousand questions of my co-workers. And when we started Angelo Gordon, this is like end of 88, beginning of ' 89, there were maybe I don't know a dozen people, 15 people max. So, but I was I I didn't want to be a pest, but I was always asking questions, including dumb questions because I I knew I I didn't know. And unlike law, I enjoyed it. And I had an aptitude for it. And I always describe investing, it's like doing puzzles. And people say, "Well, what else would a good investor be good at?" I said, "Like an investigative journalist. You're always asking questions. You're like looking under rocks. You ask a question one way. You listen, listen, listen, then you ask the same question, but you rephrase it to see if you get a different answer." It was like being a journalist and investigating and learning and and I really like that. >> As you look at the building blocks required to go from what the basics of corporate finance to investing, how would you describe that progression from when you started to when you were ready to go out on your own? >> You have to be I think to be a good investor, you need a lot of skills. Being a good listener, that's hugely important. You have to be inquisitive. You have to be naturally curious and never willing to accept conventional wisdom. And I would watch carefully the people around me. So I I tell people that John Angelo and Michael Gordon, they kind of raised me professionally speaking. Michael Gordon taught me how to invest. He was a brilliant is a brilliant investor. Uh, and I I saw how he did it and I kind of adapted it to myself and John taught me how to like deal with clients and how to build a business and things like that. So over time I was always observing, always listening, always asking questions and I was successful. You know, I was, you know, it's sounds cr I was a money maker. I I was I was doing really well. And what happens in firms is when you see talent and they they they saw something in me, they kept like giving me more and more responsibility over time. So I started I would first Michael had to approve every investment and then he only had to approve the larger investments and then he didn't have to approve any investments and so but that that takes time. I mean I was there for again late 80s I left uh 20 years ago I left in February of05 always learning. >> What was the breadth of investment activities at Angela Gordon? >> So what I did my focus was exclusively credit. I helped um build and start our real estate business but that was also a function of credit. So we were this was now um in the early 90s there was a recession and Drexel had imploded and the savings and loan crisis and as part of our investment strategy so it was principally focused on distress securities and special situations all with a credit bent there was a lot of real estate credit around so we kind of learned the real estate business and that led us to start eventually what turned into be a huge real estate platform at Angelo Gordon But putting that aside, my mandate was to focus on our credit businesses. Um, and again, it was started, it's just funny, nomenclature changed. It used to be investing in bankruptcies. That sounded too harsh. Then it went to distress debt and securities. That sounded a little kinder. And now it's called opportunistic credit. It's like how leverage buyouts are now buyouts or how risk arbitrage is now merger arbitrage. So, but things don't change. Things don't change. and it was really investing in credit but trying to generate I'll call it an equity-like return as opposed to a credit return. >> What did the various credit cycles look like in your time at Angela Gordon? Okay. So when we started it was uh it was a pretty exuberant time and then uh things started to crack and you know the cycle was getting old in the tooth and then you as I said Drexel and executive life and savings and loans and and there was a recession. It wasn't a wasn't a like a a a a steep recession but there was a recession. And what had happened in the 80s was that leverage finance really came to the four and you know high yield bonds, junk bonds and and and buy and leverage buyouts with using like you know a fraction of equity and things like that and that was probably the origin of the phrase good companies with bad balance sheets which became you know terribly overused. defaults skyrocketed and you had a lot of owners of these instruments that was first that wasn't their mandate to hold something that was defaulted. There was no it was people bought it. It was credit supposed to be a yield. All of a sudden no yield and so that led to more sellers than buyers. The buy side was was um not well defined. There were a handful of investors by side investors in the space but a handful uh and the and the banks were sizable players for their own balance sheet. So Bear Sterns in particular, Goldman raised a third party fund called the Wall Street Fund back then, but it was not uh it was not an institutionalized market at all. I think most of our investors at Angelo Gordon in the early days were um you know high net worth individuals, family offices, only a handful of institutional investors >> in that type of environment. How would you define the skill set that you needed to succeed? A lot of investors in credit are former lawyers. I don't think that's surprising because um understanding um how something works from a legal perspective is critical to investing in credit particularly in situations where company isn't performing uh maybe there's a big you know litigation judgment or something like that something has gone arai so having an understanding of how um credit agreements work and legal process processes and bankruptcy processes is really important. I the the way I I I I describe it is I put in the context of a company's balance sheet the the classic T and that the alpha of a credit investor particularly in a special situation credit investor opportunistic credit call it what you will the alpha is on the right hand side of the balance sheet understanding how things work and and relationships and you get into court and litigating and all those things. What I learned back then is, and it remains true to this day, no matter what anyone else may say to the contrary, credit investors do not know companies as well as private equity investors. And no one will ever convince me otherwise. And the reason for that is simple. Credit investors don't own companies. They're not supposed to own companies. So, they're not on the inside. They'll they'll never know a business as well as a true owner of a business and someone who is trained over years and over decades to understand how to businesses work from the inside. Not how the capital structure works, how to identify first class management, not understanding who's the smartest lawyer who's going to do the best job litigating in bankruptcy court. It's a completely different skill set. That skill set uh I think resides with private equity investors on the left hand side of the balance sheet. But again, they'll never know the credit stuff as well as the credit people. That's not their thing. >> How did you decide to leave Angela Gordon? >> Well, I had been there a long time. I I loved it there. I love my bosses and by the end I really didn't have a boss. I I did my own thing. I raised the capital. I built the team. I I I I was doing all the investing. Um but I I uh I I really enjoyed working there. Um we never argued over money or compensation. I mean I always got paid fairly, you know. I they made me wealthy. I I returned the favor many times over, but I was happy to do so. What I wanted was a chance to do my own thing. the way I I wanted to drive the bus and uh that was something uh that they were not prepared to do and uh you know when I left and I've told this story as well and my heart was racing and I told them that I wanted to leave and kind of build my own business and John Angelo who's kind of a a larger than life Wall Street personality. He stood up. He hugged me. He always called me Jeffrey. He said, "Jeffrey, we've thought of you as our son." Incred. And I'd been with these guys forever. It super nice thing to say. But as I told my wife that evening and she said, "How was the day?" I said, "That was exactly the problem." That in their minds, I was still 25, but I was 45. >> Yeah. >> So, it was time for me to do my own thing. So when you go to start Centerbridge um what did you want to do differently? >> I should tell you like how the idea of centerbridge came about. So I left in 2005 around year 2000 I met my uh 2B business partner a fellow named Mark Goggley. Mark uh was at Blackstone. Mark ran Blackstone's private equity business. That was when Blackstone was a much different firm. There was no real estate. There was no credit. It was Mark ran the private equity business and the current leadership of Blackstone. They all worked for Mark because they were all in the private equity business. And Mark, like myself, had joined Blackstone in the 80s. And we met, we were introduced uh by another partner at Blackstone, a guy named Art Newman. passed away a while ago. Art ran Blackstone's um financial restructuring business. So they had an advisory business which they spun out 10 years ago which became PJT. And Mark and others at Blackstone, they were interested in credit, but they were also quite self-aware. They knew it wasn't their thing. So Art suggested to Mark, you should meet Jeff. You'll get along. You look at the world uh similarly. So, we met and we became we we became friendly and we decided that we should partner on some deals together 50/50 on a handshake. No document, no nothing and we will combine our investment teams effectively. So I remember one of Mark's analysts at that point was David Blitzer and Blitz was like one of the one of the team members working on all of these joint projects. The name of the project was called Project Spock as in Mr. Spock from Star Trek. And the idea was for where no man had gone before because usually companies don't partner together but we did. We were open books and it was it was relatively simple. Mark and his team, they were experts on the lefthand side of the balance sheet and our team, we were good on the right hand side of the balance sheet and it was a huge success. Huge success. We we invested a lot of money, we made a lot of money, and we did it together. And again, Mark, like me, had been there, you know, from the 80s. And I think he also aspired to uh drive the bus, so to speak. And so we got to talking and because we also both decided the likelihood of us driving the bus anytime soon wasn't high because the founders were in charge and they were doing a great job and they enjoyed it and continue to. And we said, well, we maybe we should go do our own thing. And so we left. Mark also left in '05 and the idea was let's build a business together. The name center bridge even though it sounds like just one of those other names involving a direction or a structure or whatever. There was some uh thought to it in that we were taking two strategies, private equity and now what's called private credit but that phrase didn't exist 20 years ago and bridging them to the center. And and that was the idea. What was it about bringing those two sides together as you looked back or getting ready to form the business that you felt made it a success in a way that might not have if you weren't working together? >> A couple things. First, the people. There was no like don't copy my homework. Everyone was an open book on both teams. It was really productive and there was no tension or jockeying for credit or anything like that. that's like we wanted to win uh collectively. So culturally I think there was um there's a lot of merit to it and then just combining the skill sets people good investors are inquisitive everyone we were really interested how black how do folks look at the business they were really interested well how do you look at this crazy capital structure and what's going to happen and the game theory behind it and so we that you had avid students on both sides um and the fact that we're 5050 So when you go to form this strategy, pretty novel to combine those two parts of the capital structure 20 years ago, how did you think about what product to put together? So um our first product was a private equity fund, but it was designed to do more than buyouts. So, of course, it was going to do buyouts, but it was also going to do distress for control, which is kind of a lost art these days, but distress for control is just just another way of it's just a buyout. The only difference between a distress for control transaction, buying debt, converting it to equity to own a company, is that in a traditional buyout, you're using leverage to acquire a company. distress for control. You're delevering to acquire a company. But that's just the means to the end. The end of both is you own the company. So it is truly a private equity strategy. And we were also doing structure equity. But we told our clients that we don't have a set bucket. We can be 100% bias, 100% distressure control. We were indifferent. We were indifferent. And then you know talk about luck. We raised our first fund in called spring of06. So a very large fund and then for the first year we didn't do much because we kept bidding and losing. You think this is like 06 or the beginning of 07 there was no distressed of like anything. Most people forget most distressed companies for a reason. They're lousy. You don't want to go near them. So there's nothing good to do there and we kept losing in buyout space. Uh and then the world uh toppled and we had a huge pool of capital and we did some buyouts which were hugely successful. We did some distress for control deals that were hugely successful and it was like it was a big success. I'd love to pick apart some aspects of the investment approach with those sides. When you went to source >> on the credit side, the paper's already existing, private equity, it's a big world. How did you think about where to look for the opportunities? >> Well, what we did when we started the firm, um, we did not so we had call it two strategies. Typically a firm with multiple strategies will have multiple teams that stand. So if you have if you have private equity team and a private credit team and rarely do the two interact and and we from day one we didn't do that. We said we'll have one team. We'll follow certain industries, but if you're within the industrials vertical, you will invest up and down the capital structure within industrials as opposed to having a team of investors focus on uh industrial buyouts and a completely different set of investors focused on uh industrial distress or credit or whatever. We said just have one team, you know, invest up and down the capital structure. Everything from distress debt to buyouts and everything in between. And and and we've continued that to this day. And I think it's our single biggest differentiator in terms of the way our investment team operates. And I can get like deep deep into this, but I thought back then and I continue to think today, it leads to better thinking because if I were to uh overly generalize, the private equity investors think everything is going to the moon. The credit investors think everything is going to zero. And it's good to have some balance. And we also thought, and it remains true today, it would lead to differentiated sourcing because you could source through different networks that weren't available to a traditional buyout investor or a traditional credit investor. I'd >> love you to tell me more about how the team operates and what you felt special about it. >> So, let's stick with industrials. That's one of our verticals. Things evolved over time. So initially our hope was that every member of the investment team, you're going to be a pure switch hitter. Doesn't matter. You could do equity, you could you could do debt. And what we learned over time, there are rarely, it's rare that you find someone who can hit uh 300 from both sides of the plate. And people who are natural lefties are natural righties. So we kind of evolve that terminology of being a switch hitter to having majors and minors. So you can major in private equity and minor in private credit or vice versa. But the idea was we wanted people to be deeply involved in both in terms of their day-to-day work as well as in terms of compensation because we eventually raised credit funds. We wanted to make sure that everyone was properly incented. So back to industrials, the entire industrials team meets weekly. That team is comprised of private equity majors, private credit majors who may focus on opportunistic credit but industrials or direct lending a big direct lending business. Now the people within our direct lending business who focus on industrials, they're at the meeting. in our leverage loan and CLLO businesses, the analysts who focus on industrials, they're at that meeting. We may have someone from real estate at that meeting to the extent they're doing industrial properties or warehouses. They talk about everything under the sun from what's happening in the portfolio across the entire firm to what are they seeing in the market to what's happening in terms of sourcing and that is it sounds like oh it sounds pretty simple took years to develop that operating model but it it really works because there's so much intellectual capital in firms like ours. So we have 300 just over 300 people here and we have 130 investment professionals and we have private equity, private credit and real estate. And we're not unusual. There are lots of firms with multiple strategies. How do you figure out a way to harness all that intellectual capital and get everyone moving in the right direction? And that it's a function. Yeah, sure. compensation is like important, but it's also culture. And I think like people, young people for example, who come here, it's a bit of a self- selecting crowd. If you only want to do buyouts, that's it. You're probably not going to even send us your CV. And the same thing with credit. It's people who are curious and they kind of know what they're signing up for. It's just a different experience. Not necessarily better, just different. What did you figure out about what in particular is complex from that simple idea of bringing the people together? It takes a lot of practice. So, it's natural. I'm going to go do my own thing and I'm focused on what I'm doing. I'm focused on the deal I'm doing as opposed to, yeah, I'm sure I'm doing my own thing. I'm running a deal. I'm doing diligence. But a big part of my job is working with my colleagues and making them better. And a big part of their job is working with you and making you better. That is like that's a learned behavior. Takes time. >> Are there any ways you tried to manufacture that to work better? >> Process is important. I talked about these these weekly sector meetings. You just can't like wing it. You actually have to have process. We talk about how we how we compensate people, you know, with the appropriate incentives. I mean, team building is important here. We have uh we do a lot of team events as a firm. We have a uh we have a foundation that um we started that we started the firm before other before it was a thing. Now it's a thing. Everyone has a foundation but everyone participates in the foundation in terms of making grants and things like that. There's if you walk around here we have an open floor plan. Very few offices. I didn't have my own office until maybe six years or so ago. I sat on the floor with everyone. Remember my parents once came here. Where where where's your corner office? Like on that chair uh that was by design all to encourage communication. >> How do you structure the compensation to keep everyone aligned? >> So we have we have private equity funds, we have private credit funds, we have real estate funds. We make sure that people have meaningful components of their compensation come from across the firm. Across the firm. You still may have a major which is perhaps a majority of your compensation but a substantial minority and I mean substantial will come from other areas in the firm. So you really do feel you feel it culturally and your uh your economics reflect that you are truly part of one team. >> How do you cross fertilize information across the different sectors to connect the dots? >> It would probably be more at the senior level but that would be a bit more ad hoc. >> What have you seen on the differences in underwriting from the concept of left hand side of the balance sheet they think about the growth and the right side's downside protection. when that gets into the underwriting of individual positions where where the what's subtly different in the two? >> Well, there are different ways of uh of approaching the same investment. people look at investment through a different lens and that I think is one of the great things about our firm is that we can look at you know one particular company but because we have investors around the table with different backgrounds and different skill sets and different experiences we it becomes a really uh like interesting and vigorous conversation. What about this? What about that? And that's what investing is. It's like it's pushing each other and and you know challenging not not in an aggressive way but like it's it's iterative. It's not even our investment committee process. It's not that an investment team, you know, a deal team goes away for six weeks uh and then they show up with a with a beautiful deck. It's iterative multiple investment committees and workshops and and pushing and proddding and things like that. When it comes to owning positions on those two sides, credit distress side, there's a lot now about the game theory of the different participants, LME, all that stuff, private equity, totally different. What are the lessons you've pulled out from when you bring those two things together? Well, hopefully the two never meet. [laughter] But look, we've had tough deals, you know, like like like all like all bio firms. And I am quite confident in saying that if we have a tough deal, we know what to do. I don't want to say it's too bold to say better than anyone, but better than most. We know what to do. Not just in terms of thinking about how to improve the value of the business, but what do we do with this capital structure? what's what's the best way to, you know, preserve value and grow and things like that. Again, I think because people have been here, the the tenure of partners here is very very long that people they get it and they they know they know enough to ask questions and because it's some so collaborative, you know, when we're done, you should go upstairs and walk around. You'll just get a feel. They they know to ask questions. In the last 20 years, you've had a bunch of different types of cycles from GFC sector cycles, pandemic rates now. And also alluded to like there aren't really legal bankruptcies. Haven't been in a long time the way there were. I'd love you to take me through what you learned in these different cycles and how you adapted the investing approach. All cycles they're different. Uh and and they are few and far between these days. I do believe in cycles. Predicting the timing of cycles is impossible. I'll answer your question. But as I look at the world today, there are lots of manifestations of what I'll call late cycle behavior and signals. We can talk about that. But as the cycles have progressed, so the last big cycle was really was really the GFC. I mean co was brief and what happened as a result of that if I think about opportunistic credit for example so opportunistic credit again investing in credit to make an equity-like return it's been around like since 19th century there was a speculator named Jay Gould who bought up railroad bonds you know post civil war so it's been around been around through the 20th century through the depression and it was always marked by uh two things. One, it was a a strategy focus on on markets, secondary markets that you bought, you know, a bond, a defaulted bond, a fallen angel, or even a loan from a bank, but you bought it in a market. And second, it was a total return opportunity, not yield, because company's bankrupt, there is no yield. So was buying something at 70 that you thought was worth par. And what happened after the GFC? So we know the story. Banks retreated. Wall Street hates vacuums. Non-bank banks came to the four. this notion of direct lending and credit started shifting away from banks to non-bank lenders, principally lenders that were financing buyouts. What did that mean for opportunistic credit which again had focused for a long time on secondary markets and trading and total return? We started evolving our opportunistic business post GFC particularly I would say in the early to mid- teens call it mid- teens 10 years ago 10 11 12 years ago in that in addition to keeping that traditional playbook of of markets and total return we started getting into the origination business. So it was an evolution from pure secondary market focus to now focusing on primary origination and from a return perspective migrating from a total return strategy to a strategy that was focused on yield. And so we started lending money but we weren't lending money at or the you know liebore the predecessor to sofur you know lie plus 350 we wanted to do it at how's libbor plus 900 sound with all types of bells and whistles and covenants and structural protection uh and call protection all the result of which was to generate the same equity like rate of return and that was really a sea change in opportunistic credit investing to the point that It's more than half our business now as opportunistic credit investors. We're lenders. We're l and not just LME. In fact, LMES are only a small portion of it. But it's transitional capital. It may be capital needed for growth. It may be capital to uh non-sponsored businesses. That's where most of our business is. It may be capital to a sponsor that that needs capital and doesn't want to part with equity because it's too expensive. But it's but it's some hair on it. It's complex. So it's not a traditional direct lending solution. So that's been a huge change in our business. >> As you've evolved to having half of it as a lender, >> if not more >> before you were an owner, how do you think about the differences in riskreward particularly when those loans themselves are complex and maybe there's some hair on them? Look investing in credit you know you have to remember uh you know the the three C's okay there's uh there's what capacity which is the uh ability to pay uh there is collateral which is like the guarantee the back stop to pay and then there's character willingness to pay those are timeless you still have to focus on all of those you still have to focus on all those so you know I I Look at what we've done in our lending business. It's like we've done great returns for a long period of time in dozens and dozens of deals, billions of dollars of capital with minimal losses. And that's a function of just being careful. Think about safety, safety, safety, safety. You can talk about again what's happening in the world today, but there's less of a focus on safety today than there used to be. Again, another manifestation of late cycle behavior, but safety first. When you invest in credit, particularly when you're originating, you you lend a hundred cent dollars, you have to get back a hundred cents because your return is purely contractual. There's no uh you know, there's no convexity on the upside. Can only make so much money. So, you have to be really really careful to be good at this. >> I'd love to turn to where we are today. So, late cycle, what do you mean by late cycle? I think you know having seen past cycles they're all different but there are certain behaviors which always come to the fold ultimately you know cycles of tension between you know fear and greed fear and greed and we're very much in greed mode now so what what do you see there's there's tremendous complacency you see in spreads spreads are super tight tighter they're tighter now than they were before the GFC in the investment grade world which is kind of mind-blowing I think spreads tightened uh last month, the tightest level since uh pre- long-term capital management in the late 90s. You see investors willing to accept uh opacity rather than transparency. You hear the phrase got to put the money to work, deployment, deployment, deployment far more than like risk and safety. You see a spade of frauds. Again, all of these are indications of late cycle behavior. And it doesn't mean that things are going to like turn tomorrow or when they turn it's going to go kaboom. Who who knows? But you just have to be really careful. You know the and everyone has done well for a long time. So I, you know, it's ironic, but as when you're on a hot streak like that and you think you can do no uh no wrong, risk is rising. Even though mentally you're thinking, oh, I must be, you know, I'm good risk. I I got this. I got it covered. I got it covered. >> What are you seeing in the operating performance of the businesses you're either lending to or owning? >> We have not seen um softness. You know, any given company can go through a patch. You know, we have some building products companies that we own. They're going through some stuff now, but that's not we haven't seen like a particular sector of the economy start to keel over and we listen very carefully to, you know, to what banks are saying, what lenders are saying and we have big big credit exposure. So, we see it. We have multiple angles. We don't necessarily have to go to an economist at a bank to understand what's happening on the ground. We have our own private data set, our library. Talk to our portfolio companies. We talk to the management teams. We don't, you know, we're we're I'm always anxious because I'm from the credit land. Um, but we don't we don't see it. We don't see it. You know, you wonder about, you know, subprime auto always blows up as long as I've been doing this for nearly 40 years. Always. It's constant. So, people people do dumb things. I I like to say one of the best things about working on Wall Street is people can't remember what they did yesterday. It's people make the same mistakes over it's like unbelievable. Everyone always says they're really really careful. But you got to do it. You got to say no to deals. So how do you invest through this environment >> carefully nervously? You know my role at the firm has also evolved over a long time. my role now it's like I'm just focused on risk you know from an investment standpoint it's like you have to trust the judgment of your of your partners and your colleagues and we've been together for a long time and I know that everyone has strengths and weaknesses including myself and I try to be cognizant of that but my job really is you know if we're going to looks like we're going to drive into a wall I don't do at don't do that. So have to be really careful >> when you bring that down to your sector meetings, your your investment decisions. How is that impacting the incremental decision in any of the portfolios today? I don't know if it's impacting individual decisions, but people will generally know that I'm going to approach things from a I don't want to say skeptical, but I'll be I'll be very curious. What about this? What about that? Have we thought about this? Have you reached out to this person? You know, you got to be creative in in trying to get an angle. We're looking at some businesses in the UK, which are regulated now. Well, how does it work in the EU? Even though the UK is not part of the EU, you got how does it work here? How does it work in Asia? So you just what what makes a good investor? I think the it's the ability to see something before someone else. And that's what we're always trying to do. >> Where does that vision come from? >> I think some of it is learned and some of it is kind of who you are. I always ask when we're interviewing someone or talking about someone, I I'll say, "Do they get the joke? Do they really get it? It has nothing to do some of it is intuition. You got to be a very hard worker. Uh you have to be detailoriented, but you also have to be a good decision maker like and and a lot of it is is intuition and pattern recognition. Um that's just I think it's how someone is built and it's years and years of uh of doing it. So, it's both learned and it's I don't want to say it's native, but it's it's somewhat intuitive. >> I'd love to turn to talking a little bit about the business that you're in. >> Um, that's also changed quite a lot during the last 20 years. >> Oh, yeah. >> The alt business credit. >> Um, >> just love your perspective on where you sit today >> in that ecosystem. >> Well, we sit in the middle market. Uh and and I'm happy we sit there. We we have just under $45 billion of capital. That's a lot of money. It's a ton of money on the one hand. On the other hand, it's not compared to some of the giants out there and some of the public alternative managers. And so what we have decided to do is to stay focused on midcap on middle market. Um but presented or we think about in terms of full spectrum investing. So we look at we have fully built built out private equity business, a fully built out private credit business, a fully built out real estate business. um a lot of the giant managers of the world, the big public ones, they have the same, I think you'd be hardressed to find um another firm built like us in the middle market. And um that's how we approach it. That's our that's our edge, so to speak. It's it's obviously our people, but it's the part of the market we play in. It's our sourcing capabilities within that. It's all it's all goes in the mixing bowl. >> What are some of the competitive challenges you face on both sides? So to start with, you're in a market where there are much larger, say, credit providers. I'm always thinking, how are we going to compete? How are we going to compete if someone has, you know, $300 billion in credit? How are we going to compete? And I think there are two principal ways. one, we either have to be better at it, like literally like we have great investors. That all ultimately manifests itself in a record and I look at our track record and I feel pretty good about it. That means we have great talent. So that's one way we can compete against someone with hundreds of billions of dollars. The other way we can compete is um through and I use the phrase reluctantly because everyone uses the same damn phrase is proprietary sourcing and everyone you I'm sure Ted everyone you speak to has proprietary sourcing. I think we really do and it's demonstrable. And so we either have to understand something better than anyone else because we've got great investment talent or we need a sourcing channel that just belongs to us and can't be replicated. Finally, the third thing that we do goes really back to the beginning of the firm. Operating as a single team, I think gives us an advantage. It gives us an advantage both in terms of I think the skill that our investors have because they do have a broader perspective than for example someone who only does credit. Uh and I think it gives us access to different sourcing channels compared to someone who does credit. So it's those three things. It's like it's talent, it's sourcing, and it's our our operating model operating as one team. when you're seeing that late cycle behavior particularly in the credit markets how does better talent end up translating into returns if someone let's say is loose for an underwriting or willing to pay more >> I'll give you two examples in the news first brands andricolor we looked at both for years people said they never there's never been a picture of Patrick James we flew to his office we met him in person we had thericolor you know that's the subprime management team at our office. We spent a lot of time with both these businesses. We didn't invest a dollar. We didn't invest a dollar. Now, how do you measure that? That's a good question because we didn't do it. So, how does that show up in our returns? Well, I guess we avoided a loss. That's a good thing. But I think the fact that we didn't do it is real alpha. I think it's undeniable. I still don't know how to measure it, how to quantify it, but it's a real, you get what I'm saying? It's a real thing. >> Yeah. And how about relative to smaller players in the credit markets? >> What what >> a kind of competitive disadvantages? >> Oh, I mean, one of my metrics I always uh acronyms around here is ROE, which is what I call return on effort as opposed to return on equity. We won't look at something small because the ROE is lousy. doesn't won't move the needle on our fund. The same way that you know um Apollo or Blackstone or KKR may may not necessarily look at a midcap investment size because doesn't do it for them. Doesn't move the needle. >> One of the things you mentioned earlier is IG spreads are tighter than they were pre-inancial crisis and probably one of the approximate causes the lower cost of capital of insurance subs at some of the big asset managers. Sure. um how have you thought about the strategic activities that you've seen in accessing capital at some of your competitors? >> We've done the same. So, we have um we have a long-standing relationship with Mass Mutual and um we have a partnership with Mass Mutual where we're managing um credit assets for um a reinsurer called Martell Ree that we put together with Mass Mutual and some other institutional investors. That's perfect example. Perfect example. because we weren't going to go build an insurance company from scratch. So, we we we partnered with one. What we've done with direct lending, you know, how are we going to compete with direct lenders who are focused on financing sponsor buyouts when that's an incredibly competitive business. And we know that business well because we're a we're a sponsor. So, we know how competitive it is. and and uh credit investors are, you know, they have a lot of capital to deploy. So, we partner with Wells Fargo to focus on companies that have nothing to do with Wall Street, that are familyowned or founder owned. So, we we've tried to do this with great intentionality, like find uh partnerships that will enable us to compete at the highest levels and also not compete. We're not competing with Mass Mutual. We're not competing with Wells Fargo. Really important, but that enables us to compete with managers, you know, who are in the mega space. >> What do you think happens with the interest, let's say, renewed interest from private wealth coming into starting private credit, potentially private equity. >> It's a question of uh when, not if. I think alternatives are perfectly appropriate for individual investors with one gigantic caveat. They have to understand what they're buying. They have to understand what they're buying that in terms of the risks, in terms of liquidity, and in terms of the fees. And there can't be any obfuscation on any of those things. And I think if people go in eyes wide open and they know what they're buying, I think it's perfectly appropriate. The challenge will be is if they don't and they do it anyways and that is that's an area for concern. You know, there's a regulatory pendulum. So, I do think that um I think a lot of capital will come in from the wealth side. Um, inevitably, because it's life and it's Wall Street, inevitably there'll be an issue and it's just the way it is. And I don't know what it'll be about, but there'll be something. If we're now dealing with uh small investors who don't have the sophistication level of a large university endowment or a big pension plan or a sovereign wealth fund for that matter and if it's perceived as um you know the the little guy is being hurt well then you could see regulatory backlash even if the providers have done everything correctly. But that's just that's that's I think that's a known risk going in. It could happen. Wouldn't surprise me if it does happen sometime down the road. But that doesn't mean that, you know, a bad incident with a with a lousy outcome shouldn't impact an entire marketplace. >> Where do you think [snorts] Centerbridge goes from here? >> I think firms like ours, we're we're we're faced with a choice of do you want to remain like small? Do you want to be in the middle or do you want to be large? I think being in the middle, you can't you're not going to shrink your way to greatness. You have to grow. You have to grow. And we have decided to grow and we've grown a lot over the last five years um in terms of strategies um mostly but not exclusively that are credit related because our view has been and not just my view the entire management team of the firm. We should grow but only in adjacencies. So are we going to start a long short equity fund that focuses on uh stocks in lat Latin America? No. Even if and this is important even if it's the flavor dour. So even if there's tons of enthusiasm about it we're not going to do it. We have no edge. Number one and number two it does nothing for our existing businesses. So if you look at how we've grown, it's always been in adjacencies that we understand and it's always been in uh businesses that will enhance our entire franchise. It broadens the funnel and we've been able to do that as opposed to let's just go do something because it happens to be topical today. If you could snap your fingers and fill asset capacity at whatever size you thought was optimal for what you do, where would you go? [snorts] >> Oh gosh, I don't know, Ted. Um, you know, I like the idea of like doubling our AUM over the next five years kind of pretty ambitious double over that's like 15% keer between performance and and growth. That'll be good. When you look at the evolution of the industry over the I don't know 40 years you've been involved [snorts] what most concerns you would say commoditization. At some point alternatives are no longer going to be an alternative and they're like mainstream and mainstream and and when that happens it means um it will be harder to generate outsized returns. That that's that's that's what worries me that I I think about that in terms of influx of wealth capital. Okay. All that capital is going to come in. It's going to need a home. And you know what does that do? What does that do to returns? Usually when more capital comes into a space, returns tend to be depressed or decline. That that that's better phrase. It's a better phrase. So, it could be harder to outperform unless you're doing something that's that's kind of nichy unless you have like talent that is just like worldclass talent. Unless you do it differently. So, I would argue we do it differently, our operating model, unless you've got sourcing channels that no one else has. So, there are lots of ways to um address that. But I I think about that at some point alternatives no longer be an alternative which is the height of irony. >> What are you most excited about in the opportunity set for the next couple of years? >> The fact that it's changing so rapidly is um intellectually quite engaging and exciting and how do we stay ahead of the curve? How do we stay ahead of the curve? and we're not a mega firm and we don't want to be a mega firm kind of like what we have but how do you stay ahead of the firm how do you make sure that you're not you don't become commoditized so you all everything we do we're think what's what's our edge so all those things that I just described it's all about finding the right edge and what are the things today that you think on the margin are new or different in how you're staying ahead of the curve >> again this is a bit it's repetitive it's capitalizing on what we already know. So I think what we've done um with our insurance solutions business by partnering with Mass Mutual and now talking to other large insurers that's different because we're not competing with them and we have no aspirations to compete with them. I think what we've done with Wells Fargo was pretty novel. There have been lots of copycats, lots and lots of copycats. Um that feels good. You know, imitation is what the sincerest form of flattery or something like that. Those are those are two recent examples. Those are new examples. >> So Mark retired a few years ago. And you are still fullon. What do you think it is that keeps you going? >> I love what I do. I mean, I really um I I really enjoy what I do. I find it intellectually interesting. I love the people I do it with. You know, as group of partners, we've been together a long time. And I I know my my son is also in the investment business and he used to work at a big bank and one day he was belly aching to me and I said to him uh did you ever hear the expression work sucks and [laughter] he goes yes I said well that expression is there for a reason sometimes it does but on on the most part it doesn't uh and I like it um I like the notion of building like the past five years that has been a new thing for me in addition to investing which I've been investing since the 80s uh building is also um rewarding intellectually and it gives opportunity I mean it's really been fun as we build some of these adjacencies it's an opportunity for young people who work here to like take a leadership role I love I um find that really um rewarding and I don't mean financially, I mean uh almost emotionally, intellectually. >> Jeeoff, I want to ask you a couple of closing questions before I let you go. What is your favorite hobby or activity outside of work and family? >> I love to ski and I love to uh cycle. And I I think I like both of those because when I'm doing both, I'm focused on saving myself [laughter] and my mind is not drifting back to uh you know to my office in Midtown. I'm I'm just focused on the moment. I kind of like that. >> What was your first paid job and what did you learn from it? >> My first paid job uh it was a after school job in high school. I worked at a high-end butcher shop. Uh, and uh, my job um was to clean some stories there. [laughter] Um, I don't mean to put all these together. I know how to make hamburger and I to this day I can wrap like any type of deli meat or a steak in the blink of an eye. It looks perfect. [laughter] But that I remember that job vividly. >> What's your biggest investment pet peeve? >> Second guessing. drives me. I'm I'm an even kill person, but when people get into the should a would a could a game, it drives me bananas because we all make mistakes. It's the nature of investing. If you're a professional, you don't need to be told by your co-workers, well, we should have done this, could have done that, it would have done that. It's like the money is gone. It's lost. It's water under the bridge. You have to learn from that. If you're a professional, you know, you don't need to be second-guessed by colleagues. And I think that type of behavior is uh is really culturally corrosive. I have it's the only time I get agitated. >> All right, Jeeoff, last one. How has your life turned out differently from how you expected it to? >> I am so lucky. I am I mean I didn't I look I still my parents are elderly, but they still joke with me, you know, why'd you give up law? [laughter] And uh I said well first that was in the 80s and this other thing has worked out. Um so I am uh I am incredibly lucky. I am fortunate. Um I've done really well. My wife and I were giving away all our money which is like fantastic. And for all the stuff in the country and this is the greatest country. So how did it turn out different? I had no idea I'd be sitting here and I'm here and um you know hard work and luck and be in the right place right time. Jeff, thanks so much for sharing your insights. >> Sure. Glad to be here. Thanks. [music]
Jeff Aronson – Building Centerbridge Across the Capital Structure (EP.468)
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When you're on a hot streak like that and you think you can do no uh no wrong, risk is rising. Even though mentally you're thinking, "Oh, I must be, you know, I'm good risk. I I got this. I got it covered. I got it covered. [music] Jeeoff, excited to do this with you. Ready to go." Me, too. >> Why don't you take me back to your upbringing? >> I was raised in suburban Boston. a town called Neita, Mass. My mom and dad were from Springfield, Mass, Western Massachusetts. That's why I don't have a Boston accent. And my dad was an educator. He was a teacher. He was a coach. My dad taught gym, physical education, uh, at junior high school in Needam. I remember when when I was like eight, we moved to Washington State and my father had a job there for a year and we to literally a town in the middle of nowhere. They were known for their rodeo. That was about it. And then we moved back a year later and my dad he worked at Nem High School. And then he eventually got a job again in physical education at a state school in Massachusetts college. It was called Lowel Tech which became uh University of Mass at Lel. And we were a very middle class family. Uh the way I described it, we never had a lot but we always had enough. and I have a younger brother who's uh five years younger than me. He also lives here in New York City and uh very um I I would say ordinary uh upbringing in need of mass with the split level house and all that stuff. >> Were there any lessons you remember from your dad as a coach that he imparted on you guys as kids? >> He never pushed me nor my brother for that matter into athletics. I think he was highly highly conscious of not doing that. And my father had been like he was a great athlete all his life. He was a boxer. He was a gymnast and like like you know at the highest competitive level. He probably realized his sons didn't get that gene. But to his credit, he never pushed us. And if it's a lesson, but you know, you don't push people beyond their capabilities. You know, put someone in a position where they can't succeed. And I suspect he he thought I I would love for my uh son to be uh you know, a division one athlete. It wasn't going to happen. >> So, as you went through school, you got on the law track. What were your thoughts of your capabilities at the time? So, I went to college at Johns Hopkins and um I was always interested in government and public policy and I liked the fact Baltimore was close to Washington. So, I thought that was cool and I knew nothing about being a lawyer. I thought if I was interested in government and policy, law school made sense. Um and I I got into a bunch of law schools. I got a big scholarship at NYU. So, I said that sounded good. And law school was enjoyable. You I made a lot of great friends there. I said it was another three years of college. And you know, I I learned what it was like to understand the law, but I had no idea what it was like to practice law. And I found myself in a job in a big law firm. This is like in 1984. And it was like, oh, [laughter] wasn't what I was wasn't what I thought. I had this vision. and I was going to practice international law, which doesn't sound really cool. I thought I would fly to London and I would uh negotiate a deal and stay in a beautiful hotel. And I learned international law meant staying up all night in an office building downtown pouring through a stack of documents looking for typos. It was like this was not for me. >> So, what did you do? >> Well, I I spent the first year uh working like incredibly hard. I spent the second year working incredibly hard at both my job and looking for a new job and I found a job in the legal department as an in-house lawyer at a uh a small investment bank. Uh it was called LF Rothschild Underberg Tobin. And my, you know, I was in my mid20s. I didn't know anything, but my job was to effectively be the in-house counsel to the team that managed the firm's proprietary capital. And that team, they had a couple of strategies. One was uh it's now called merger arbitrage. Used to be called risk arbitrage. And they also invested in bankruptcies because again event driven. And they also had a convertible bond h convertible bond hedging strategy. Buying converts shorting stock against it. And the two people who ran that department were John Angelo Michael Gordon. >> Familiar names. >> Right. So this is continuing the story. So I I really liked working with them. I tried to befriend them even though I didn't want to be a lawyer. And then, you know, I'm not I consider myself a super lucky person, although I don't have a superstitious bone in my body. The stock market crashed in 1987. Uh, and that led to the demise of Ella Rothschild. Eventually went bankrupt. So, I'm thinking I'm a I'm a in-house lawyer. I don't want to be a lawyer. The firm that I worked at just went broke. I was newly married and I had student loans up to my neck. I'm screwed. And uh John, Angela, Michael Gordon said they were going to start their own firm. And I I said, "Give me a chance. I want to become an analyst." And I've told this story before. Michael Gordon would joke, but maybe a little half serious. Well, you're a lawyer. You don't know anything about math. And I said, "I'm actually I'm I'm decent at math." I said, "Just give me a chance." I I literally said, "I'll work for free. just give me a chance and they took a chance on me and uh it all worked out. >> So, what was notable in your path from knowing some math to the you know decade and a half you spent with John and Michael? >> Well, I really I mean I was hard worker. I went to night school. I went to NYU at night not to get a not to get a degree but literally to take accounting and corporate finance and security analysis. And it was the first time I had ever gone to school to learn something as opposed to going to school to get an A. Very different. And I was really into it. And my wife would tease me because I there was I remember this book. It was called uh Principles of Corporate Finance by Brilliant Meyers. It's like it's like a Samuelson for macroeconomics. And I would like take it. It was like like a pleasure book. I was really really interested and I just immersed myself. I read as much as I could and I asked a thousand questions of my co-workers. And when we started Angelo Gordon, this is like end of 88, beginning of ' 89, there were maybe I don't know a dozen people, 15 people max. So, but I was I I didn't want to be a pest, but I was always asking questions, including dumb questions because I I knew I I didn't know. And unlike law, I enjoyed it. And I had an aptitude for it. And I always describe investing, it's like doing puzzles. And people say, "Well, what else would a good investor be good at?" I said, "Like an investigative journalist. You're always asking questions. You're like looking under rocks. You ask a question one way. You listen, listen, listen, then you ask the same question, but you rephrase it to see if you get a different answer." It was like being a journalist and investigating and learning and and I really like that. >> As you look at the building blocks required to go from what the basics of corporate finance to investing, how would you describe that progression from when you started to when you were ready to go out on your own? >> You have to be I think to be a good investor, you need a lot of skills. Being a good listener, that's hugely important. You have to be inquisitive. You have to be naturally curious and never willing to accept conventional wisdom. And I would watch carefully the people around me. So I I tell people that John Angelo and Michael Gordon, they kind of raised me professionally speaking. Michael Gordon taught me how to invest. He was a brilliant is a brilliant investor. Uh, and I I saw how he did it and I kind of adapted it to myself and John taught me how to like deal with clients and how to build a business and things like that. So over time I was always observing, always listening, always asking questions and I was successful. You know, I was, you know, it's sounds cr I was a money maker. I I was I was doing really well. And what happens in firms is when you see talent and they they they saw something in me, they kept like giving me more and more responsibility over time. So I started I would first Michael had to approve every investment and then he only had to approve the larger investments and then he didn't have to approve any investments and so but that that takes time. I mean I was there for again late 80s I left uh 20 years ago I left in February of05 always learning. >> What was the breadth of investment activities at Angela Gordon? >> So what I did my focus was exclusively credit. I helped um build and start our real estate business but that was also a function of credit. So we were this was now um in the early 90s there was a recession and Drexel had imploded and the savings and loan crisis and as part of our investment strategy so it was principally focused on distress securities and special situations all with a credit bent there was a lot of real estate credit around so we kind of learned the real estate business and that led us to start eventually what turned into be a huge real estate platform at Angelo Gordon But putting that aside, my mandate was to focus on our credit businesses. Um, and again, it was started, it's just funny, nomenclature changed. It used to be investing in bankruptcies. That sounded too harsh. Then it went to distress debt and securities. That sounded a little kinder. And now it's called opportunistic credit. It's like how leverage buyouts are now buyouts or how risk arbitrage is now merger arbitrage. So, but things don't change. Things don't change. and it was really investing in credit but trying to generate I'll call it an equity-like return as opposed to a credit return. >> What did the various credit cycles look like in your time at Angela Gordon? Okay. So when we started it was uh it was a pretty exuberant time and then uh things started to crack and you know the cycle was getting old in the tooth and then you as I said Drexel and executive life and savings and loans and and there was a recession. It wasn't a wasn't a like a a a a steep recession but there was a recession. And what had happened in the 80s was that leverage finance really came to the four and you know high yield bonds, junk bonds and and and buy and leverage buyouts with using like you know a fraction of equity and things like that and that was probably the origin of the phrase good companies with bad balance sheets which became you know terribly overused. defaults skyrocketed and you had a lot of owners of these instruments that was first that wasn't their mandate to hold something that was defaulted. There was no it was people bought it. It was credit supposed to be a yield. All of a sudden no yield and so that led to more sellers than buyers. The buy side was was um not well defined. There were a handful of investors by side investors in the space but a handful uh and the and the banks were sizable players for their own balance sheet. So Bear Sterns in particular, Goldman raised a third party fund called the Wall Street Fund back then, but it was not uh it was not an institutionalized market at all. I think most of our investors at Angelo Gordon in the early days were um you know high net worth individuals, family offices, only a handful of institutional investors >> in that type of environment. How would you define the skill set that you needed to succeed? A lot of investors in credit are former lawyers. I don't think that's surprising because um understanding um how something works from a legal perspective is critical to investing in credit particularly in situations where company isn't performing uh maybe there's a big you know litigation judgment or something like that something has gone arai so having an understanding of how um credit agreements work and legal process processes and bankruptcy processes is really important. I the the way I I I I describe it is I put in the context of a company's balance sheet the the classic T and that the alpha of a credit investor particularly in a special situation credit investor opportunistic credit call it what you will the alpha is on the right hand side of the balance sheet understanding how things work and and relationships and you get into court and litigating and all those things. What I learned back then is, and it remains true to this day, no matter what anyone else may say to the contrary, credit investors do not know companies as well as private equity investors. And no one will ever convince me otherwise. And the reason for that is simple. Credit investors don't own companies. They're not supposed to own companies. So, they're not on the inside. They'll they'll never know a business as well as a true owner of a business and someone who is trained over years and over decades to understand how to businesses work from the inside. Not how the capital structure works, how to identify first class management, not understanding who's the smartest lawyer who's going to do the best job litigating in bankruptcy court. It's a completely different skill set. That skill set uh I think resides with private equity investors on the left hand side of the balance sheet. But again, they'll never know the credit stuff as well as the credit people. That's not their thing. >> How did you decide to leave Angela Gordon? >> Well, I had been there a long time. I I loved it there. I love my bosses and by the end I really didn't have a boss. I I did my own thing. I raised the capital. I built the team. I I I I was doing all the investing. Um but I I uh I I really enjoyed working there. Um we never argued over money or compensation. I mean I always got paid fairly, you know. I they made me wealthy. I I returned the favor many times over, but I was happy to do so. What I wanted was a chance to do my own thing. the way I I wanted to drive the bus and uh that was something uh that they were not prepared to do and uh you know when I left and I've told this story as well and my heart was racing and I told them that I wanted to leave and kind of build my own business and John Angelo who's kind of a a larger than life Wall Street personality. He stood up. He hugged me. He always called me Jeffrey. He said, "Jeffrey, we've thought of you as our son." Incred. And I'd been with these guys forever. It super nice thing to say. But as I told my wife that evening and she said, "How was the day?" I said, "That was exactly the problem." That in their minds, I was still 25, but I was 45. >> Yeah. >> So, it was time for me to do my own thing. So when you go to start Centerbridge um what did you want to do differently? >> I should tell you like how the idea of centerbridge came about. So I left in 2005 around year 2000 I met my uh 2B business partner a fellow named Mark Goggley. Mark uh was at Blackstone. Mark ran Blackstone's private equity business. That was when Blackstone was a much different firm. There was no real estate. There was no credit. It was Mark ran the private equity business and the current leadership of Blackstone. They all worked for Mark because they were all in the private equity business. And Mark, like myself, had joined Blackstone in the 80s. And we met, we were introduced uh by another partner at Blackstone, a guy named Art Newman. passed away a while ago. Art ran Blackstone's um financial restructuring business. So they had an advisory business which they spun out 10 years ago which became PJT. And Mark and others at Blackstone, they were interested in credit, but they were also quite self-aware. They knew it wasn't their thing. So Art suggested to Mark, you should meet Jeff. You'll get along. You look at the world uh similarly. So, we met and we became we we became friendly and we decided that we should partner on some deals together 50/50 on a handshake. No document, no nothing and we will combine our investment teams effectively. So I remember one of Mark's analysts at that point was David Blitzer and Blitz was like one of the one of the team members working on all of these joint projects. The name of the project was called Project Spock as in Mr. Spock from Star Trek. And the idea was for where no man had gone before because usually companies don't partner together but we did. We were open books and it was it was relatively simple. Mark and his team, they were experts on the lefthand side of the balance sheet and our team, we were good on the right hand side of the balance sheet and it was a huge success. Huge success. We we invested a lot of money, we made a lot of money, and we did it together. And again, Mark, like me, had been there, you know, from the 80s. And I think he also aspired to uh drive the bus, so to speak. And so we got to talking and because we also both decided the likelihood of us driving the bus anytime soon wasn't high because the founders were in charge and they were doing a great job and they enjoyed it and continue to. And we said, well, we maybe we should go do our own thing. And so we left. Mark also left in '05 and the idea was let's build a business together. The name center bridge even though it sounds like just one of those other names involving a direction or a structure or whatever. There was some uh thought to it in that we were taking two strategies, private equity and now what's called private credit but that phrase didn't exist 20 years ago and bridging them to the center. And and that was the idea. What was it about bringing those two sides together as you looked back or getting ready to form the business that you felt made it a success in a way that might not have if you weren't working together? >> A couple things. First, the people. There was no like don't copy my homework. Everyone was an open book on both teams. It was really productive and there was no tension or jockeying for credit or anything like that. that's like we wanted to win uh collectively. So culturally I think there was um there's a lot of merit to it and then just combining the skill sets people good investors are inquisitive everyone we were really interested how black how do folks look at the business they were really interested well how do you look at this crazy capital structure and what's going to happen and the game theory behind it and so we that you had avid students on both sides um and the fact that we're 5050 So when you go to form this strategy, pretty novel to combine those two parts of the capital structure 20 years ago, how did you think about what product to put together? So um our first product was a private equity fund, but it was designed to do more than buyouts. So, of course, it was going to do buyouts, but it was also going to do distress for control, which is kind of a lost art these days, but distress for control is just just another way of it's just a buyout. The only difference between a distress for control transaction, buying debt, converting it to equity to own a company, is that in a traditional buyout, you're using leverage to acquire a company. distress for control. You're delevering to acquire a company. But that's just the means to the end. The end of both is you own the company. So it is truly a private equity strategy. And we were also doing structure equity. But we told our clients that we don't have a set bucket. We can be 100% bias, 100% distressure control. We were indifferent. We were indifferent. And then you know talk about luck. We raised our first fund in called spring of06. So a very large fund and then for the first year we didn't do much because we kept bidding and losing. You think this is like 06 or the beginning of 07 there was no distressed of like anything. Most people forget most distressed companies for a reason. They're lousy. You don't want to go near them. So there's nothing good to do there and we kept losing in buyout space. Uh and then the world uh toppled and we had a huge pool of capital and we did some buyouts which were hugely successful. We did some distress for control deals that were hugely successful and it was like it was a big success. I'd love to pick apart some aspects of the investment approach with those sides. When you went to source >> on the credit side, the paper's already existing, private equity, it's a big world. How did you think about where to look for the opportunities? >> Well, what we did when we started the firm, um, we did not so we had call it two strategies. Typically a firm with multiple strategies will have multiple teams that stand. So if you have if you have private equity team and a private credit team and rarely do the two interact and and we from day one we didn't do that. We said we'll have one team. We'll follow certain industries, but if you're within the industrials vertical, you will invest up and down the capital structure within industrials as opposed to having a team of investors focus on uh industrial buyouts and a completely different set of investors focused on uh industrial distress or credit or whatever. We said just have one team, you know, invest up and down the capital structure. Everything from distress debt to buyouts and everything in between. And and and we've continued that to this day. And I think it's our single biggest differentiator in terms of the way our investment team operates. And I can get like deep deep into this, but I thought back then and I continue to think today, it leads to better thinking because if I were to uh overly generalize, the private equity investors think everything is going to the moon. The credit investors think everything is going to zero. And it's good to have some balance. And we also thought, and it remains true today, it would lead to differentiated sourcing because you could source through different networks that weren't available to a traditional buyout investor or a traditional credit investor. I'd >> love you to tell me more about how the team operates and what you felt special about it. >> So, let's stick with industrials. That's one of our verticals. Things evolved over time. So initially our hope was that every member of the investment team, you're going to be a pure switch hitter. Doesn't matter. You could do equity, you could you could do debt. And what we learned over time, there are rarely, it's rare that you find someone who can hit uh 300 from both sides of the plate. And people who are natural lefties are natural righties. So we kind of evolve that terminology of being a switch hitter to having majors and minors. So you can major in private equity and minor in private credit or vice versa. But the idea was we wanted people to be deeply involved in both in terms of their day-to-day work as well as in terms of compensation because we eventually raised credit funds. We wanted to make sure that everyone was properly incented. So back to industrials, the entire industrials team meets weekly. That team is comprised of private equity majors, private credit majors who may focus on opportunistic credit but industrials or direct lending a big direct lending business. Now the people within our direct lending business who focus on industrials, they're at the meeting. in our leverage loan and CLLO businesses, the analysts who focus on industrials, they're at that meeting. We may have someone from real estate at that meeting to the extent they're doing industrial properties or warehouses. They talk about everything under the sun from what's happening in the portfolio across the entire firm to what are they seeing in the market to what's happening in terms of sourcing and that is it sounds like oh it sounds pretty simple took years to develop that operating model but it it really works because there's so much intellectual capital in firms like ours. So we have 300 just over 300 people here and we have 130 investment professionals and we have private equity, private credit and real estate. And we're not unusual. There are lots of firms with multiple strategies. How do you figure out a way to harness all that intellectual capital and get everyone moving in the right direction? And that it's a function. Yeah, sure. compensation is like important, but it's also culture. And I think like people, young people for example, who come here, it's a bit of a self- selecting crowd. If you only want to do buyouts, that's it. You're probably not going to even send us your CV. And the same thing with credit. It's people who are curious and they kind of know what they're signing up for. It's just a different experience. Not necessarily better, just different. What did you figure out about what in particular is complex from that simple idea of bringing the people together? It takes a lot of practice. So, it's natural. I'm going to go do my own thing and I'm focused on what I'm doing. I'm focused on the deal I'm doing as opposed to, yeah, I'm sure I'm doing my own thing. I'm running a deal. I'm doing diligence. But a big part of my job is working with my colleagues and making them better. And a big part of their job is working with you and making you better. That is like that's a learned behavior. Takes time. >> Are there any ways you tried to manufacture that to work better? >> Process is important. I talked about these these weekly sector meetings. You just can't like wing it. You actually have to have process. We talk about how we how we compensate people, you know, with the appropriate incentives. I mean, team building is important here. We have uh we do a lot of team events as a firm. We have a uh we have a foundation that um we started that we started the firm before other before it was a thing. Now it's a thing. Everyone has a foundation but everyone participates in the foundation in terms of making grants and things like that. There's if you walk around here we have an open floor plan. Very few offices. I didn't have my own office until maybe six years or so ago. I sat on the floor with everyone. Remember my parents once came here. Where where where's your corner office? Like on that chair uh that was by design all to encourage communication. >> How do you structure the compensation to keep everyone aligned? >> So we have we have private equity funds, we have private credit funds, we have real estate funds. We make sure that people have meaningful components of their compensation come from across the firm. Across the firm. You still may have a major which is perhaps a majority of your compensation but a substantial minority and I mean substantial will come from other areas in the firm. So you really do feel you feel it culturally and your uh your economics reflect that you are truly part of one team. >> How do you cross fertilize information across the different sectors to connect the dots? >> It would probably be more at the senior level but that would be a bit more ad hoc. >> What have you seen on the differences in underwriting from the concept of left hand side of the balance sheet they think about the growth and the right side's downside protection. when that gets into the underwriting of individual positions where where the what's subtly different in the two? >> Well, there are different ways of uh of approaching the same investment. people look at investment through a different lens and that I think is one of the great things about our firm is that we can look at you know one particular company but because we have investors around the table with different backgrounds and different skill sets and different experiences we it becomes a really uh like interesting and vigorous conversation. What about this? What about that? And that's what investing is. It's like it's pushing each other and and you know challenging not not in an aggressive way but like it's it's iterative. It's not even our investment committee process. It's not that an investment team, you know, a deal team goes away for six weeks uh and then they show up with a with a beautiful deck. It's iterative multiple investment committees and workshops and and pushing and proddding and things like that. When it comes to owning positions on those two sides, credit distress side, there's a lot now about the game theory of the different participants, LME, all that stuff, private equity, totally different. What are the lessons you've pulled out from when you bring those two things together? Well, hopefully the two never meet. [laughter] But look, we've had tough deals, you know, like like like all like all bio firms. And I am quite confident in saying that if we have a tough deal, we know what to do. I don't want to say it's too bold to say better than anyone, but better than most. We know what to do. Not just in terms of thinking about how to improve the value of the business, but what do we do with this capital structure? what's what's the best way to, you know, preserve value and grow and things like that. Again, I think because people have been here, the the tenure of partners here is very very long that people they get it and they they know they know enough to ask questions and because it's some so collaborative, you know, when we're done, you should go upstairs and walk around. You'll just get a feel. They they know to ask questions. In the last 20 years, you've had a bunch of different types of cycles from GFC sector cycles, pandemic rates now. And also alluded to like there aren't really legal bankruptcies. Haven't been in a long time the way there were. I'd love you to take me through what you learned in these different cycles and how you adapted the investing approach. All cycles they're different. Uh and and they are few and far between these days. I do believe in cycles. Predicting the timing of cycles is impossible. I'll answer your question. But as I look at the world today, there are lots of manifestations of what I'll call late cycle behavior and signals. We can talk about that. But as the cycles have progressed, so the last big cycle was really was really the GFC. I mean co was brief and what happened as a result of that if I think about opportunistic credit for example so opportunistic credit again investing in credit to make an equity-like return it's been around like since 19th century there was a speculator named Jay Gould who bought up railroad bonds you know post civil war so it's been around been around through the 20th century through the depression and it was always marked by uh two things. One, it was a a strategy focus on on markets, secondary markets that you bought, you know, a bond, a defaulted bond, a fallen angel, or even a loan from a bank, but you bought it in a market. And second, it was a total return opportunity, not yield, because company's bankrupt, there is no yield. So was buying something at 70 that you thought was worth par. And what happened after the GFC? So we know the story. Banks retreated. Wall Street hates vacuums. Non-bank banks came to the four. this notion of direct lending and credit started shifting away from banks to non-bank lenders, principally lenders that were financing buyouts. What did that mean for opportunistic credit which again had focused for a long time on secondary markets and trading and total return? We started evolving our opportunistic business post GFC particularly I would say in the early to mid- teens call it mid- teens 10 years ago 10 11 12 years ago in that in addition to keeping that traditional playbook of of markets and total return we started getting into the origination business. So it was an evolution from pure secondary market focus to now focusing on primary origination and from a return perspective migrating from a total return strategy to a strategy that was focused on yield. And so we started lending money but we weren't lending money at or the you know liebore the predecessor to sofur you know lie plus 350 we wanted to do it at how's libbor plus 900 sound with all types of bells and whistles and covenants and structural protection uh and call protection all the result of which was to generate the same equity like rate of return and that was really a sea change in opportunistic credit investing to the point that It's more than half our business now as opportunistic credit investors. We're lenders. We're l and not just LME. In fact, LMES are only a small portion of it. But it's transitional capital. It may be capital needed for growth. It may be capital to uh non-sponsored businesses. That's where most of our business is. It may be capital to a sponsor that that needs capital and doesn't want to part with equity because it's too expensive. But it's but it's some hair on it. It's complex. So it's not a traditional direct lending solution. So that's been a huge change in our business. >> As you've evolved to having half of it as a lender, >> if not more >> before you were an owner, how do you think about the differences in riskreward particularly when those loans themselves are complex and maybe there's some hair on them? Look investing in credit you know you have to remember uh you know the the three C's okay there's uh there's what capacity which is the uh ability to pay uh there is collateral which is like the guarantee the back stop to pay and then there's character willingness to pay those are timeless you still have to focus on all of those you still have to focus on all those so you know I I Look at what we've done in our lending business. It's like we've done great returns for a long period of time in dozens and dozens of deals, billions of dollars of capital with minimal losses. And that's a function of just being careful. Think about safety, safety, safety, safety. You can talk about again what's happening in the world today, but there's less of a focus on safety today than there used to be. Again, another manifestation of late cycle behavior, but safety first. When you invest in credit, particularly when you're originating, you you lend a hundred cent dollars, you have to get back a hundred cents because your return is purely contractual. There's no uh you know, there's no convexity on the upside. Can only make so much money. So, you have to be really really careful to be good at this. >> I'd love to turn to where we are today. So, late cycle, what do you mean by late cycle? I think you know having seen past cycles they're all different but there are certain behaviors which always come to the fold ultimately you know cycles of tension between you know fear and greed fear and greed and we're very much in greed mode now so what what do you see there's there's tremendous complacency you see in spreads spreads are super tight tighter they're tighter now than they were before the GFC in the investment grade world which is kind of mind-blowing I think spreads tightened uh last month, the tightest level since uh pre- long-term capital management in the late 90s. You see investors willing to accept uh opacity rather than transparency. You hear the phrase got to put the money to work, deployment, deployment, deployment far more than like risk and safety. You see a spade of frauds. Again, all of these are indications of late cycle behavior. And it doesn't mean that things are going to like turn tomorrow or when they turn it's going to go kaboom. Who who knows? But you just have to be really careful. You know the and everyone has done well for a long time. So I, you know, it's ironic, but as when you're on a hot streak like that and you think you can do no uh no wrong, risk is rising. Even though mentally you're thinking, oh, I must be, you know, I'm good risk. I I got this. I got it covered. I got it covered. >> What are you seeing in the operating performance of the businesses you're either lending to or owning? >> We have not seen um softness. You know, any given company can go through a patch. You know, we have some building products companies that we own. They're going through some stuff now, but that's not we haven't seen like a particular sector of the economy start to keel over and we listen very carefully to, you know, to what banks are saying, what lenders are saying and we have big big credit exposure. So, we see it. We have multiple angles. We don't necessarily have to go to an economist at a bank to understand what's happening on the ground. We have our own private data set, our library. Talk to our portfolio companies. We talk to the management teams. We don't, you know, we're we're I'm always anxious because I'm from the credit land. Um, but we don't we don't see it. We don't see it. You know, you wonder about, you know, subprime auto always blows up as long as I've been doing this for nearly 40 years. Always. It's constant. So, people people do dumb things. I I like to say one of the best things about working on Wall Street is people can't remember what they did yesterday. It's people make the same mistakes over it's like unbelievable. Everyone always says they're really really careful. But you got to do it. You got to say no to deals. So how do you invest through this environment >> carefully nervously? You know my role at the firm has also evolved over a long time. my role now it's like I'm just focused on risk you know from an investment standpoint it's like you have to trust the judgment of your of your partners and your colleagues and we've been together for a long time and I know that everyone has strengths and weaknesses including myself and I try to be cognizant of that but my job really is you know if we're going to looks like we're going to drive into a wall I don't do at don't do that. So have to be really careful >> when you bring that down to your sector meetings, your your investment decisions. How is that impacting the incremental decision in any of the portfolios today? I don't know if it's impacting individual decisions, but people will generally know that I'm going to approach things from a I don't want to say skeptical, but I'll be I'll be very curious. What about this? What about that? Have we thought about this? Have you reached out to this person? You know, you got to be creative in in trying to get an angle. We're looking at some businesses in the UK, which are regulated now. Well, how does it work in the EU? Even though the UK is not part of the EU, you got how does it work here? How does it work in Asia? So you just what what makes a good investor? I think the it's the ability to see something before someone else. And that's what we're always trying to do. >> Where does that vision come from? >> I think some of it is learned and some of it is kind of who you are. I always ask when we're interviewing someone or talking about someone, I I'll say, "Do they get the joke? Do they really get it? It has nothing to do some of it is intuition. You got to be a very hard worker. Uh you have to be detailoriented, but you also have to be a good decision maker like and and a lot of it is is intuition and pattern recognition. Um that's just I think it's how someone is built and it's years and years of uh of doing it. So, it's both learned and it's I don't want to say it's native, but it's it's somewhat intuitive. >> I'd love to turn to talking a little bit about the business that you're in. >> Um, that's also changed quite a lot during the last 20 years. >> Oh, yeah. >> The alt business credit. >> Um, >> just love your perspective on where you sit today >> in that ecosystem. >> Well, we sit in the middle market. Uh and and I'm happy we sit there. We we have just under $45 billion of capital. That's a lot of money. It's a ton of money on the one hand. On the other hand, it's not compared to some of the giants out there and some of the public alternative managers. And so what we have decided to do is to stay focused on midcap on middle market. Um but presented or we think about in terms of full spectrum investing. So we look at we have fully built built out private equity business, a fully built out private credit business, a fully built out real estate business. um a lot of the giant managers of the world, the big public ones, they have the same, I think you'd be hardressed to find um another firm built like us in the middle market. And um that's how we approach it. That's our that's our edge, so to speak. It's it's obviously our people, but it's the part of the market we play in. It's our sourcing capabilities within that. It's all it's all goes in the mixing bowl. >> What are some of the competitive challenges you face on both sides? So to start with, you're in a market where there are much larger, say, credit providers. I'm always thinking, how are we going to compete? How are we going to compete if someone has, you know, $300 billion in credit? How are we going to compete? And I think there are two principal ways. one, we either have to be better at it, like literally like we have great investors. That all ultimately manifests itself in a record and I look at our track record and I feel pretty good about it. That means we have great talent. So that's one way we can compete against someone with hundreds of billions of dollars. The other way we can compete is um through and I use the phrase reluctantly because everyone uses the same damn phrase is proprietary sourcing and everyone you I'm sure Ted everyone you speak to has proprietary sourcing. I think we really do and it's demonstrable. And so we either have to understand something better than anyone else because we've got great investment talent or we need a sourcing channel that just belongs to us and can't be replicated. Finally, the third thing that we do goes really back to the beginning of the firm. Operating as a single team, I think gives us an advantage. It gives us an advantage both in terms of I think the skill that our investors have because they do have a broader perspective than for example someone who only does credit. Uh and I think it gives us access to different sourcing channels compared to someone who does credit. So it's those three things. It's like it's talent, it's sourcing, and it's our our operating model operating as one team. when you're seeing that late cycle behavior particularly in the credit markets how does better talent end up translating into returns if someone let's say is loose for an underwriting or willing to pay more >> I'll give you two examples in the news first brands andricolor we looked at both for years people said they never there's never been a picture of Patrick James we flew to his office we met him in person we had thericolor you know that's the subprime management team at our office. We spent a lot of time with both these businesses. We didn't invest a dollar. We didn't invest a dollar. Now, how do you measure that? That's a good question because we didn't do it. So, how does that show up in our returns? Well, I guess we avoided a loss. That's a good thing. But I think the fact that we didn't do it is real alpha. I think it's undeniable. I still don't know how to measure it, how to quantify it, but it's a real, you get what I'm saying? It's a real thing. >> Yeah. And how about relative to smaller players in the credit markets? >> What what >> a kind of competitive disadvantages? >> Oh, I mean, one of my metrics I always uh acronyms around here is ROE, which is what I call return on effort as opposed to return on equity. We won't look at something small because the ROE is lousy. doesn't won't move the needle on our fund. The same way that you know um Apollo or Blackstone or KKR may may not necessarily look at a midcap investment size because doesn't do it for them. Doesn't move the needle. >> One of the things you mentioned earlier is IG spreads are tighter than they were pre-inancial crisis and probably one of the approximate causes the lower cost of capital of insurance subs at some of the big asset managers. Sure. um how have you thought about the strategic activities that you've seen in accessing capital at some of your competitors? >> We've done the same. So, we have um we have a long-standing relationship with Mass Mutual and um we have a partnership with Mass Mutual where we're managing um credit assets for um a reinsurer called Martell Ree that we put together with Mass Mutual and some other institutional investors. That's perfect example. Perfect example. because we weren't going to go build an insurance company from scratch. So, we we we partnered with one. What we've done with direct lending, you know, how are we going to compete with direct lenders who are focused on financing sponsor buyouts when that's an incredibly competitive business. And we know that business well because we're a we're a sponsor. So, we know how competitive it is. and and uh credit investors are, you know, they have a lot of capital to deploy. So, we partner with Wells Fargo to focus on companies that have nothing to do with Wall Street, that are familyowned or founder owned. So, we we've tried to do this with great intentionality, like find uh partnerships that will enable us to compete at the highest levels and also not compete. We're not competing with Mass Mutual. We're not competing with Wells Fargo. Really important, but that enables us to compete with managers, you know, who are in the mega space. >> What do you think happens with the interest, let's say, renewed interest from private wealth coming into starting private credit, potentially private equity. >> It's a question of uh when, not if. I think alternatives are perfectly appropriate for individual investors with one gigantic caveat. They have to understand what they're buying. They have to understand what they're buying that in terms of the risks, in terms of liquidity, and in terms of the fees. And there can't be any obfuscation on any of those things. And I think if people go in eyes wide open and they know what they're buying, I think it's perfectly appropriate. The challenge will be is if they don't and they do it anyways and that is that's an area for concern. You know, there's a regulatory pendulum. So, I do think that um I think a lot of capital will come in from the wealth side. Um, inevitably, because it's life and it's Wall Street, inevitably there'll be an issue and it's just the way it is. And I don't know what it'll be about, but there'll be something. If we're now dealing with uh small investors who don't have the sophistication level of a large university endowment or a big pension plan or a sovereign wealth fund for that matter and if it's perceived as um you know the the little guy is being hurt well then you could see regulatory backlash even if the providers have done everything correctly. But that's just that's that's I think that's a known risk going in. It could happen. Wouldn't surprise me if it does happen sometime down the road. But that doesn't mean that, you know, a bad incident with a with a lousy outcome shouldn't impact an entire marketplace. >> Where do you think [snorts] Centerbridge goes from here? >> I think firms like ours, we're we're we're faced with a choice of do you want to remain like small? Do you want to be in the middle or do you want to be large? I think being in the middle, you can't you're not going to shrink your way to greatness. You have to grow. You have to grow. And we have decided to grow and we've grown a lot over the last five years um in terms of strategies um mostly but not exclusively that are credit related because our view has been and not just my view the entire management team of the firm. We should grow but only in adjacencies. So are we going to start a long short equity fund that focuses on uh stocks in lat Latin America? No. Even if and this is important even if it's the flavor dour. So even if there's tons of enthusiasm about it we're not going to do it. We have no edge. Number one and number two it does nothing for our existing businesses. So if you look at how we've grown, it's always been in adjacencies that we understand and it's always been in uh businesses that will enhance our entire franchise. It broadens the funnel and we've been able to do that as opposed to let's just go do something because it happens to be topical today. If you could snap your fingers and fill asset capacity at whatever size you thought was optimal for what you do, where would you go? [snorts] >> Oh gosh, I don't know, Ted. Um, you know, I like the idea of like doubling our AUM over the next five years kind of pretty ambitious double over that's like 15% keer between performance and and growth. That'll be good. When you look at the evolution of the industry over the I don't know 40 years you've been involved [snorts] what most concerns you would say commoditization. At some point alternatives are no longer going to be an alternative and they're like mainstream and mainstream and and when that happens it means um it will be harder to generate outsized returns. That that's that's that's what worries me that I I think about that in terms of influx of wealth capital. Okay. All that capital is going to come in. It's going to need a home. And you know what does that do? What does that do to returns? Usually when more capital comes into a space, returns tend to be depressed or decline. That that that's better phrase. It's a better phrase. So, it could be harder to outperform unless you're doing something that's that's kind of nichy unless you have like talent that is just like worldclass talent. Unless you do it differently. So, I would argue we do it differently, our operating model, unless you've got sourcing channels that no one else has. So, there are lots of ways to um address that. But I I think about that at some point alternatives no longer be an alternative which is the height of irony. >> What are you most excited about in the opportunity set for the next couple of years? >> The fact that it's changing so rapidly is um intellectually quite engaging and exciting and how do we stay ahead of the curve? How do we stay ahead of the curve? and we're not a mega firm and we don't want to be a mega firm kind of like what we have but how do you stay ahead of the firm how do you make sure that you're not you don't become commoditized so you all everything we do we're think what's what's our edge so all those things that I just described it's all about finding the right edge and what are the things today that you think on the margin are new or different in how you're staying ahead of the curve >> again this is a bit it's repetitive it's capitalizing on what we already know. So I think what we've done um with our insurance solutions business by partnering with Mass Mutual and now talking to other large insurers that's different because we're not competing with them and we have no aspirations to compete with them. I think what we've done with Wells Fargo was pretty novel. There have been lots of copycats, lots and lots of copycats. Um that feels good. You know, imitation is what the sincerest form of flattery or something like that. Those are those are two recent examples. Those are new examples. >> So Mark retired a few years ago. And you are still fullon. What do you think it is that keeps you going? >> I love what I do. I mean, I really um I I really enjoy what I do. I find it intellectually interesting. I love the people I do it with. You know, as group of partners, we've been together a long time. And I I know my my son is also in the investment business and he used to work at a big bank and one day he was belly aching to me and I said to him uh did you ever hear the expression work sucks and [laughter] he goes yes I said well that expression is there for a reason sometimes it does but on on the most part it doesn't uh and I like it um I like the notion of building like the past five years that has been a new thing for me in addition to investing which I've been investing since the 80s uh building is also um rewarding intellectually and it gives opportunity I mean it's really been fun as we build some of these adjacencies it's an opportunity for young people who work here to like take a leadership role I love I um find that really um rewarding and I don't mean financially, I mean uh almost emotionally, intellectually. >> Jeeoff, I want to ask you a couple of closing questions before I let you go. What is your favorite hobby or activity outside of work and family? >> I love to ski and I love to uh cycle. And I I think I like both of those because when I'm doing both, I'm focused on saving myself [laughter] and my mind is not drifting back to uh you know to my office in Midtown. I'm I'm just focused on the moment. I kind of like that. >> What was your first paid job and what did you learn from it? >> My first paid job uh it was a after school job in high school. I worked at a high-end butcher shop. Uh, and uh, my job um was to clean some stories there. [laughter] Um, I don't mean to put all these together. I know how to make hamburger and I to this day I can wrap like any type of deli meat or a steak in the blink of an eye. It looks perfect. [laughter] But that I remember that job vividly. >> What's your biggest investment pet peeve? >> Second guessing. drives me. I'm I'm an even kill person, but when people get into the should a would a could a game, it drives me bananas because we all make mistakes. It's the nature of investing. If you're a professional, you don't need to be told by your co-workers, well, we should have done this, could have done that, it would have done that. It's like the money is gone. It's lost. It's water under the bridge. You have to learn from that. If you're a professional, you know, you don't need to be second-guessed by colleagues. And I think that type of behavior is uh is really culturally corrosive. I have it's the only time I get agitated. >> All right, Jeeoff, last one. How has your life turned out differently from how you expected it to? >> I am so lucky. I am I mean I didn't I look I still my parents are elderly, but they still joke with me, you know, why'd you give up law? [laughter] And uh I said well first that was in the 80s and this other thing has worked out. Um so I am uh I am incredibly lucky. I am fortunate. Um I've done really well. My wife and I were giving away all our money which is like fantastic. And for all the stuff in the country and this is the greatest country. So how did it turn out different? I had no idea I'd be sitting here and I'm here and um you know hard work and luck and be in the right place right time. Jeff, thanks so much for sharing your insights. >> Sure. Glad to be here. Thanks. [music]