The Absolute Return Revival with Tony Yoseloff
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Bloomberg Audio Studios. Podcasts. Radio. News. This is Masters in Business with Barry Ritholtz on Bloomberg Radio.

This week on the podcast, strap yourself in for another spectacular conversation. Tony Osiloff has been with Davidson Kempner pretty much his entire career, past 27 years. What a knowledgeable expert about all things. We used to call it distressed credit. Now it's opportunistic investing.

much more than merely being credit driven. They focus on everything from M&A arbitrage to real estate investing to private equity to public debt

a masterclass in how to think about risk, how to think about diversification, how to put together a portfolio of alternatives that is both non-correlated to your core equity portfolio, but simultaneously creates a form of offset opportunity

or ballast to the volatility of equities. In addition to being CIO and managing partner at Davidson Kempner, he's also chairman of the investment committee for the New York public library. He's vice chairman for the investment committee for New York Presbyterian, as well as sitting on the board of trustees and the investment committee of Princeton university.

I thought this conversation was fascinating, and I think you will also. With no further ado, my discussion with Davidson Kempner's Tony Yoseloff. Thank you, Barry. I was going to say, long-time listener, first-time caller. So I'm kind of amazed. I'm...

I'm kind of overwhelmed by your curriculum vitae and the fact that you've never been in this building, which is kind of amazing because a lot of my guests have similar background, board seats, endowments, investment committees. And I feel like I know everybody, but I don't know everybody. There's a million people I haven't met and you've been on my list for a while. So let's just start a little bit with your background, which is really kind of interesting. Okay.

Undergrad, you go to Princeton School of Public and International Affairs, and then you get a JD MBA from Columbia.

Which leads to the obvious question, what were your original career plans? You know, it's interesting. So first of all, I've got a pretty boring background in the sense that I grew up in central New Jersey in a town called East Brunswick. I went to college. Oh, sure. I went to college half an hour from where I grew up, and then I moved to New York City the day after I graduated from Princeton and haven't left. And so I've lived within a 50-mile radius my entire life. My original...

career plans to the extent that they were fully formed would have been to do a career in law or potentially public policy. My high school happened to have a very good civics type program. I think I was probably at the only public high school in the United States that produced a cabinet member for both the first Trump administration and the Biden administration, which I thought was pretty amazing for a suburban public high school. It was really during my time at Princeton and during my time

at Columbia where I made the decision to pursue money management as a career instead of something in public policy. The 1990s were really the heyday, I'm going to say, of mutual funds. And it was sort of the early days of electronic stock.

trading. My family is a family of academics and book publishers, so it wasn't necessarily through my family background that I got interested in investing, but it was sort of around us in the ether. I did a lot of reading on it in high school and college. I was fortunate enough that I had a number of

my friend's parents were willing to take me out to coffee and kind of educate me on the financial services business. And really the inflection point was when I was at Columbia where I had to kind of choose a path between going to Washington and working for a law firm that would have gotten me in the regulatory side of things versus, you know,

working at a law firm, which I did for a couple of years as a summer associate, where the focus was private equity. And that was the path I chose. And I sort of never looked back. I'm really glad I have the legal background. I'm really glad I have the public policy background. It's actually super helpful as an investor. But it wasn't like, you know, I never set out on this path. It's just sort of the journey found me.

I'm kind of fascinated by the joint JD-MBA. I have a JD, and what I always appreciated about law school was that it didn't teach you so much as what to think as to how to think, whereas an MBA feels more like a deep dive into the specifics of investing theory and a lot of—

quantitative analytics. How do you find the combination that sort of left brain, right brain, JDMBA works for you as a, as an investor? Well, it's, it's super helpful. So, um, first of all, I also went to law school with the same idea that, that you did, that law school was an amazing, um, uh,

education and that good things would come out of it whether I was interested in pursuing law or not. I was very fortunate. I actually finished all my coursework at Princeton in three years and I had a chance to start Columbia Law School during my fourth year at Princeton, which was a program that Princeton and Columbia had with each other at the time, but very few students did. So I kind of had a free look at law school.

I enjoyed my time at law school. My time working in law just sort of made it seem like it wasn't for me ultimately, but I think it's a great field and would highly recommend it to others. The business school side initially started out as –

path to getting a job. I actually found it, you know, it's sort of hard to think today, but it wasn't so easy for someone with a law degree and no work experience to go work on Wall Street in the 1990s. In fact, I had a few HR folks, I'd make it pretty far along in my recruiting process at different places, and they'd say to me, how do we know you're going to wake up caring about finance? How do we know you're going to read the Wall Street Journal every day?

And so questions that kind of seem silly with the benefit of hindsight. But, you know, I had no financial services background there. Once I went to business school, boom, I had the financial services background there. But the courses I took at Columbia were exceptional. Like I really enjoyed taking courses, particularly the ones that were taught by adjunct professors,

where they had real-world experience. And so you could learn derivatives from someone who was trading derivatives every day at J.P. Morgan. Or I learned about the retail business from someone who was a former CEO of a mid-sized regional retailer, department store. There were a lot of department stores in that period of time. And they bring in a different CEO every week to talk to you. And that stuff just fascinated me. And so if I think about my Columbia Business School education, there was a lot of good things I took from that. And so the combination proved to be very powerful for me. Huh.

Really interesting. The data point that always sticks out in my head is something like seven years after graduation, 50% of JD holders are no longer practicing law. It's like a big feeder for other fields.

Yeah, no, I believe that. I mean, look, I'm very fortunate that I went to law school with some folks who are literally among the leaders of their field in the United States as attorneys. And I also went to law school with a number of folks who are no longer attorneys, some of whom found that journey immediately like me, some of whom found it many years into the future. There's no controlling the fact that it's a great education and it's a great way to learn how to think. And especially for the types of investing we do, it's been super helpful.

So let's talk about some of the investing you do. You joined Davidson Kempner in 1999, pretty much the peak of the dot-com boom. We were at that point, you know, a couple of quarters away from everything peaking and heading south.

Tell us about your experience at the tail end of the dot-com situation and how did that affect how you looked at the world of investing? You know, it's really interesting, right? So I didn't necessarily seek out to do the type of investing that we do at Davidson Kepner, which is a combination of opportunistic credit

and event-driven investing. It actually goes back a year earlier to 1998. I was looking for summer jobs for the last summer of my JD/MBA program. I applied to a number of the banks. I applied to some of the investment shops. I found Davidson Kempner because they posted at Columbia for a full-time merger arbitrage analyst. I didn't really know any better, so I sent in a resume.

And I got a call from them and they said, well, we think your background is actually really good for then what would have been called distressed debt. And why don't you come in and talk to us and work for us for the first summer? So I literally met three partners. They offered me a job.

And I said, hmm, these folks have about a billion dollars under management and there's about 15 people working here. That seems like a pretty good ratio in terms of number of people to dollars under management. And I knew a little bit about distressed debt investing just because I had taken a bankruptcy course in law school.

And there was maybe like half of one class was devoted to what this was. It was really a pretty nascent industry. And so I said, okay, I can go be one of 100 or 200 people or whatever at a bank training program for the summer, or I could be the only person who is doing this. And they had hired an intern the year before, so I spoke to him on the phone. His name is Dan Zwern. He went on to found a money management firm that ultimately didn't work out and now runs Arena Partners. And it seemed like a pretty good

in terms of opportunity. And I got there and it just spoke to me. And it spoke to me because I liked the fact that I could do a form of investing that used both my legal background and my financial background. And I felt like there were many areas I might spend time on that might do one or the other, but wouldn't do both of them. So the joke of it is I'm literally the only person who applied for this job. Uh,

They literally got one resume. And that probably speaks as much to the time as it does to anyone else. I mean, so if you weren't doing a dot-com startup in the late 1990s from Columbia, you were going to work in investment banking or you were going to work in consulting. There were like a handful of people who were going to work in money management at all.

That really was not a big area, despite the fact you had a big value investing program there at a time. These would have been the more popular career paths and obviously non-financial services career paths as well. And to me, that was kind of fun. I don't know. So the first two years of my career at Davidson Kempner, I hated most of what I was looking at as an investor. And I kept saying no to things. And what I didn't know is that was actually the right answer.

Right. You know, when you get to an investing job, you want to put, you know, investments on the book and that makes you feel like you're accomplishing things. Most of the companies that were in trouble in the late 1990s deserve to be. And it was because it was sort of a peak of, uh, financial, uh, markets. The really good opportunities probably started three to four years into my, uh,

So I felt very proud of the fact afterwards that I didn't like anything. But at the time, I was like, are they just tossing me the bad stuff that I'm looking at all these investments and not wanting to do them? But it turned out, no, that was actually what most of the opportunity set was in our world in the late 90s. Were you getting guidance from senior partners or other people who have lived through other distress cycles saying, hey, you're doing the right thing. You're looking for a diamond in the rough, but most of the stuff is bad?

too risky relative to the potential upside? Yeah. I mean, look, we obviously would try to steer our time towards things that were actionable. I definitely was getting support. I mean, my senior partners, there was two. There was Tom Kempner and Michael LaFell. I mean, those are the only two folks who really were doing distressed investing there. No Davidson? Marvin Davidson was still running the firm at the very end of his career, but he really deferred to Tom and Michael in terms of running the debt portfolios that we had at the time.

So we found things ultimately that I would call like solid singles, you know, things where like you could, you know, buy a bond in the mid 90s and there was a takeout at 101 and you'd earn a coupon. It wasn't things you were going to earn giant amounts of money, but you were going to earn very good IRRs on them. And so I cut my teeth doing things where you could put relatively small amounts of money to work. And keep in mind, we had a billion dollars at the time. So, you know, a $10 million investment was a 1% investment in the fund. It was still meaningful to what we were doing. I'm intrigued that...

They get one application for one opening. You got the job, and you've been there for 25 years. It kind of talks to how we never know what the future holds and how completely random sometimes these things feel. Had you not applied there, how might your career have been completely different?

You have those what if moments in life. I do believe in fate to some degree. And I got very fortunate with how it all worked out. And look, I liked what I was doing and I liked who I was doing it with. And I would say probably those are two of the most important factors that you have in choosing a career is

What are you doing and who are you doing it with? And so I never felt the need to leave. The other thing I would say is Davidson Kempner is an old school Wall Street style partnership where we make new partners every couple of years. When partners leave our firm, they get an earn out of their shares and the shares are ultimately effectively acquired by the ongoing partners in the firm. And that structure existed in the 1990s. We've made some changes over the years to it, but a lot of it's still substantially similar to what things look like.

And that's because if you look at the founding of Davidson Kempner, Marvin Davidson had been a senior executive at Bear Stearns. And Tom Kempner was a junior person at Goldman Sachs but knew the Goldman Sachs structure quite well. And they didn't know each other when they formed the partnership in the mid-1980s.

And so they came up with an arm's length agreement that took the best of what they knew from Bayer and Goldman. And that structure stuck and it sticks today. And so what I knew for me was if I did a good job, there could be a career for me at Davidson Kepner.

And so not only did I have like people that I liked and a thing I like doing with my time, but I knew if I put my head down and did a good job, there was like a future there for me. And so that was just very, very powerful. I mean, I will say like you look back, I mean, from when I started for the summer, it's almost 27 years ago. It does feel like a long time, but it never felt that way along the way. You know, I mean, you know, with any career, there's always good and bad. But overall, I've had an amazing experience. Yeah.

The days are long and the decades are short. You know, it's funny you mentioned that Davidson Kempner is a partnership. There was a lot of, I don't want to say criticism, but when a lot of the big Wall Street partnerships went public, there was a little bit of pushback and some questions. What is this going to do to risk management? And when not that much long after we have the financial crisis,

The companies that were partnerships still with their joint and several liability somehow managed to not get into trouble. I guess they were highly focused on putting everything at risk. The agency problem with companies that had become public where the partners no longer have joint and several, they look at every company that ran into trouble. None of them were partnerships. It's kind of fascinating how that turns out. Yeah, no, I...

I hadn't thought about it that way, but I agree with you in terms of your conclusion. And look, there's basic building blocks of what you're doing as an investor, as a firm, and who you're doing it for. So I take the basic building blocks of Davidson Kempner today, which by the way, were similar to what they were 27 years ago. We're primarily an investing firm. We're not an asset gathering firm. And so for us to offer an investing fund

My partners and I, we want to invest our own money side by side with our LPs. We're by far the largest single investor collectively in our funds. And so if an investing product is not a good idea, we're not going to offer it even if we have clients who would want it because we can't put our impromptu or whatever –

behind it. Or your own money. You don't want to put your own money into it. So I think that speaks very powerfully. We require all of our partners to reinvest a substantial majority of their net worth back into the funds every year. We all invest peri-pensu across our funds so you can't cherry pick which funds you want. The partnership

Straight across. So if you offer it to clients, the partners and employees of the firm are the largest investors. Yeah, not necessarily in any individual fund, but collectively across the funds. We are in any individual fund. We're going to put a meaningful amount of money relative to the size of the fund. So you eat your own cooking. Yeah, and that's the first test to me. I mean, you know, in investing, how much money do you have?

in the product? How much skin do you have in the game? You know, we obviously use operating partners sometimes in our private market investments. That's the first question I ask. How much money does the operating partner have in the investment? And is it meaningful to them? Right? So sometimes it's not just the quantum of money, it's how meaningful it is to the person who's involved. And again, being a private firm, you know, we're 100% owned by our current and retired partners with our retired partners in an earn out. So they eventually don't own shares of the firm

anymore. And so you're beholden to two constituencies. You're beholden to your LPs and you're beholden to yourself and your employees. And, you know, that's really how we run our business. And so, you know, it kind of keeps you out of trouble. It also keeps you very focused when things are going bad, right? You know, we,

We've lived through a lot of crises. I lived through the global financial crisis. I lived through the COVID crisis. COVID was probably even harder in a way because Tom Kepner had just retired a few months before that. And I joke that he left me a playbook for a financial crisis, but he didn't leave me a playbook for a pandemic. And so some of the HR things we all had to deal with and getting people out of the office and getting people back in the office, we had to kind of invent along the way. It really focuses the mind when you've got your money where your

Yeah, to say the very least. So you brought something up that's really intriguing, and I don't know if there's an answer to this, but I just want to get your take on it. So over the past 27 years, we've had...

a repeated 100-year flood every five or seven years, which, while not statistically impossible, certainly seems unlikely. So we have the dot-com implosion, and then after that, 9-11, and then we have the financial crisis. And then in the 2010s, we have Brexit and the threat of Grexit, and we have the flash crash, ultimately leading a few years later to the pandemic.

Does it feel like we have these situations, these credit crises, which must be great for an opportunistic credit investor? But does it seem like they're coming along more frequently than historically? Like my recollection is growing up is the S&L crisis. And then we really didn't have like a major problem until the dot-com crisis. Are we getting these more frequently or does it just feel that way?

Well, I would maybe say a couple of things for that. So first of all, I think the pandemic was an exception compared to some of the other crises, because I would suggest that the dot-com bubble or the GFC, or maybe some of the European crises in the mid-2010s were very predictable. If you looked at where share prices were in the 1990s for tech stocks, or how levered banks were coupled with the subprime crisis that was going on in the mid-2000s, or some of the

issues with the sovereign credit in Europe in the mid-2010s, those were all with the benefit of hindsight. Like, oh yeah, of course that was going to happen. Predictable, but not well predicted. Predictable, but not well predicted. I mean, hindsight's always 20-20 in these things, right? But they were certainly predictable by people who were following markets. I would differentiate the COVID crisis from the sense that you probably had a month or two head start if you really followed what was going on in Wuhan.

But fundamentally, it was much harder to figure that out. Like six months earlier, no one was going to say a pandemic was going to overwhelm financial markets. And so the reason I want to flag that is, you know, we do a lot of up-down analyses in what we're doing, right? And we try to really stress test investments. And so when you're a credit investor, there's a lot of things that you say, well, this can happen and that can happen, but we're still not going to lose money on this investment, right? Because there's subordination below you one way or another in the capital structure, or

or there's assets that you can climb onto that you can sell off, or maybe not all those assets are markets driven. COVID created a lot of random winners and losers. Sometimes they were winners and losers for a year or two and ultimately made their way back. And so I think there was some more random noise in what happened in COVID. So I probably would take

less lessons on a going forward basis from the COVID crisis than I would take from some of these other crises. I do think that, you know, if you look at a very long period of time, 25 years, you had 12 or 13 of them where you had interest rates at zero, right? Or close to zero, maybe closer to 15 when you add it up.

And then the interest rates for most of the rest of the time, U.S. Treasury has probably peaked around 6%. A lot of it's been 4%, 5%. And so these have been pretty tame periods of time. And so you are going to have an occasional crisis. I mean, you go back over long periods of time in finance. I do think having the economy blow up every 10 years was a very 1880s, 1890s thing.

as well. And so I think history does repeat itself a lot. To me, I don't want to say it's part of the fun of being an investor because I don't mean to be crass. These are people's jobs and livelihoods. I know exactly what you mean by that because if you identify...

If you identify something that is potentially a great investment opportunity, especially if you're one of the few voices talking about it and everybody says, no, no, no, that's not a big deal. When the opportunity comes along, it's got to be deeply satisfying that...

You sussed out something that the rest of the investment community missed. Well, I mean, one of the fun things about doing opportunistic credit is that you need to be a little contrarian, right? Because you are looking at opportunities that other people have turned down, right? So, you know, there's this idea in credit or in opportunistic credit of good company, bad balance sheet, right? And those exist everywhere.

but not often. And the reality is that the market's efficient enough that many people will figure out quickly it's a good company with a bad balance sheet. And so it's not going to price the way it probably would have priced 25 or 30 years ago. But there are a lot of businesses that just go through cycles, right? And they may appear to be bad businesses today, but they're actually going to be great businesses again tomorrow. And it's more of like a temporary thing that happens to the business and not a permanent thing.

And that's where I get really excited. I mean, it's interesting. You have to be a little bit contrarian to do what we do, but you have to also actually be a little bit optimistic when other people aren't optimistic. And so you take a bad situation and you say, hey, this is how we're going to make it good. And sometimes we're actually, especially in our private market investments, we're applying the elbow grease. We're making the management changes to make it better. In our public market investments, we're serving on

creditors committees and often bringing in a new management team to do that, repositioning a business, sometimes selling off subsidiaries that don't make sense for them to have, that can't afford to have anymore. And so, yeah, it does feel satisfying, you know, three to five years later to look at that and say, see how this is perceived today compared to how it was perceived when we got involved in it. You know, we were among the only people who, you know, figured this out at the time or we figured it out first or, or,

or whatever it is. So that, you know, I sort of, you know, as I just said, like that's part of the like enjoyable part of this job. Some of the psychic benefit is being first or among the first to figure these things out. So last question,

Crisis questions, and it might have predated you because you probably were still in school during this, but before the dot-com implosion in the late 90s, we had a series of credit problems. First was the Asian contagion with the Thai bot crisis. Then we had the Russian ruble defaults, and then long-term capital management was the direct result of the Russian defaults.

What was your experience during those periods, or is that really early history to you when you started? It's literally right when I started, right? So I started at Davidson Kempner as a summer intern in May of 1998. And so the Russia crisis and the long-term capital crisis were

August or September of 1998. By the way, thank goodness they liked me at Davidson Kempner and were willing to give me a job because it was a very tough job market in the fall of '98 dealing with those particular things. The Asia contagion I think was more '97. And so I saw parts of it. I mean, that was also a learning lesson. People made a fortune in Asia. We just weren't equipped to do it at DK. We looked at a few things and what we figured out, which was right, was we couldn't invest there unless we had boots on the ground.

and a real knowledge base, and so we didn't. And so folks like Goldman Sachs made a fortune in that era. Those are lessons I corrected later on where we sort of built boots on the ground in places around the world to take advantage of opportunities as they emerged, but I learned that from Asia in terms of what we weren't doing.

But look, I mean, I was on a trading desk when the world was falling apart in August of 1998. And, you know, I've told this to some of our younger people over time, like the best time to be on a trading desk is when you have no responsibility, right? So it's not your fault that things are going bad and you just learn from it and you watch the people around you. And I remember how cool and calm and collected everyone was in the face of, you know, dramatic adversity. And, you know, that was super helpful to me when I was dealing with 07 or 08 or things that,

happened after the fact. And so, you know, I quite enjoyed having that opportunity. Really, really interesting.

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So let's talk a little bit about a piece that you and the firm put out titled The Party is Just Getting Started. Discuss.

Sure. Well, you know, it's interesting. This is something that I reflected on last year. And so the general subject of the party is just getting started, which is a white paper that we put out recently, is about the role of absolute return in a portfolio. And the reason I reflected on this is if you go back to the start of my career, so the 1990s and the 2000s.

you would have relied upon absolute return strategies to be a volust in your portfolio and a diversifier in your portfolio. But you also would have relied upon them to get you home in terms of the overall portfolio objectives, right? So if you look at a typical allocator, right, they've got a 5% spend rate and they want to earn something plus inflation over that. So many allocators are shooting for kind of higher single digit rate return, 7 or 9%, depending on the institution and the needs. And in the,

So, yeah.

So what happened, right? You had a period of time with, uh, 15 years, roughly of 0% interest rates. The longer that period went on, the more and more returns got reduced in the area. I would say by 2020, when the pandemic hit, uh,

and allocators expectations for absolute return strategies would have just been to be a ballast against their portfolios. And what I mean by that is we need a ballast. We need a volatility dampener. We're going to use absolute return for that, but we expect to earn our quote unquote real returns off of our equity strategy. So whether that's a public equities or, or private equities, or maybe if you're a little bit, uh,

growth equity or venture capital, and you pair those two things together and you'd have a great portfolio. So you fast forward to 2024, I think things are very different today and we wanted to figure out why. I mean, Absolute Return Strategies collectively had their best year in a very long time last year. I think they're off to a very good 2025 as well. So why is this happening?

So is it just rates? And so you're unquestionably in a period of higher rates today versus what you were in the 2010s, but it's not just rates. It's actually dispersion. And so what we did is we looked over long periods of time, and there's a high correlation between dispersion and markets and higher rates. And so not only do you get the benefit of an interest rate premium today compared to what you had four years ago, but you actually get about 50% – it's a touch more than that –

of return above the risk-free rate today because of where dispersion is in markets. And that dispersion exists in both credit markets and equity markets. So it's in both those strategies. And that's why you're getting better performance than absolute returns.

We think the rate story is here to stay. But even if it's not for a period of time, even if you have the short-term rate go down, ultimately, we think that dispersion is going to last for a long time, which is kind of what happened in the 2000s as well. And so, again, you have a whole generation of allocators who are trained for absolute return to serve one role in their portfolios. And we actually think it serves a second role in their portfolios as well, which is a return driver.

And so you take those two things together, we think it's a really powerful asset class. And I wrote this paper because I just don't think there's been a lot of work that's out there on it. You see headlines about people getting more interested in absolute return or hedge funds again. You see other headlines that there's not a lot of capital available for the strategy because many allocators are over-allocated to private equity or growth equity or venture capital, and they don't have the liquid capacity for it. But I think for those who do, who are interested in it, they're getting rewarded for it right now. And so that's the root of the paper. Yeah.

So I'm fascinated by so many aspects of that. One is you brought up ballast. And when I think of what's typically been the ballast to offset volatility of public equities, it historically has been bonds. But once yields went down to practically nothing, the question was, what's going to take up that

role. I know a lot of people just said, all right, go 70-30 and the equity will make up for the performance, but not for that offsetting diversified ballast. Is it distressed credit? Is it absolute returns? What is filling that role going forward? And then we'll talk about how the higher rates have changed the calculus somewhat later. But what is the new ballast today that used to be bonds?

Well, I mean, again, I'd start out with like I think absolute return can play that role. So opportunistic credit can be part of a absolute return strategy, whether it's accessed in public format or private format. Some people put opportunistic credit in larger what they would call private credit buckets as well. But I do actually think that absolute return will eliminate the rate risk portion of things. I mean, bonds are a ballast except if they're not.

So you go back to 2022, and 2022 was certainly the worst year for fixed income in 100 years. It may have arguably been the worst year for fixed income in the history of the United States. If you go back over very long periods of time and performance of bonds, you were basically down mid-teens, depending upon what you owned, whether it was treasuries or bonds.

or investment grade or high yield and things along those lines, 2022 was not a great year for the equity markets either. Right? So that was a year where people started to seriously question the 60, 30, 60, 40 or 70, 30, uh, uh, model with where things were. If you were an absolute return type strategies, you did much better that year. If you were an optimistic credit strategies, you did much better, uh,

That you protected capital, I think, at a minimum in those strategies. And that gave you more of a chance to take advantage of upside in 2023 and 2024. I mean, opportunistic credit has the additional advantage that it tends to be pretty inversely correlated into upside.

in terms of when it does well to strategies like growth equity and venture capital. So again, those are like perfectly good strategies. I'm not like put pulling them. I'm just saying they're very cyclical in terms of making investments in those strategies. And so they actually pair very well with opportunistic credit in portfolios because typically opportunistic credit is doing well when those strategies are not doing well and sometimes vice versa. Right. And to put a little meat on that worst year in fixed income in 2022,

The last time you had both stocks and bonds down double digits, I want to say, was 1981, about 40, 41 years earlier. So these things don't come along very often. But when they do, I would imagine event-driven opportunistic credit is a perfect offset.

We completely agree with that. And also, you know, I think that it's tough to just do a simple 60-40 or 70-30 portfolio. I mean, maybe for very smaller institutions, that makes sense. But once you have some degree of sophistication that you can bring into your portfolio, it makes sense to have some alternatives of different sorts to balance out that risk.

So you mentioned higher rates as an ongoing issue. It certainly looks like higher for longer is the Fed's posture, which raises the question, are higher rates a tailwind for absolute return strategies, especially opportunistic credit, or are they a headwind?

Well, I would say a couple of things. So first of all, we're in an environment of higher rates. It doesn't mean that we're in an environment of high rates, right? And so if you look at the 100 – the nice thing about interest rates is you have hundreds of years of history you can actually look at in these things. And so if you look at the 100-year history of interest rates in the United States, I believe the 10-year is between 4% and 5%, right? So that's about where it is today. So you don't have a –

high 10-year today. You only have a high 10-year today compared to what people got used to from the late 2000s until 2021 in terms of rates of return. So first of all, I do think that higher rates is a tailwind for absolute return strategies in general. So that would include opportunistic credit strategies. It would include event-driven strategies, which we do. It would also include relative value strategies. So we've got some of that in our portfolio, but it's not the dominant strategy that we...

have because of the dispersion you have in markets in that period of time. I also think it's a really good tailwind for opportunistic credit specifically, but I give a little bit more of a nuanced answer to that. And in opportunistic credit, I think you need to go back to how we got here, right? So it's not the absolute rate of return in fixed income today that's interesting. It's the 16 months that it took

from early 2022 for the base rate to go from zero into the five. And obviously it's come off of that a little bit since then. So most capital structures that are in the marketplace today were set entirely, or in some cases partially, but meaningfully prior to 2022 when the base rate was zero.

And when you're close to 15 years into a base rate of zero, companies were assuming or people who owned assets were levering them were assuming, and probably rightfully so, that the base rate would stay zero forever. And in fact, it's one of those things where it's so easy to foresee with the inflation we had in 2020 and 2021 that the base rate was going to rise, but it still came as a shock to the markets where it actually rose.

rose. And so you're now in the middle of this, I think, several year period of time where owners of assets are like, hey, I got to actually raise money in my capital structure to delever. I mean, some assets are going to need to be just fully restructured because they aren't worth what the debt is worth anymore. But there are many other asset owners who have assets who have equity value, maybe not as much equity value as they had previously. And they look at their capital structures and

And you probably need to raise $20 to $40 of equity for every $100 of debt that you had before to delever your capital structure. And that's super interesting because there's a lot of different ways companies can do that. They can do liability management exercises to try to whittle down the debt. They can sell assets off to get their house in order in direct corporate lending land, private credit land. They can just pick. They can

They could say, hey, we're not going to pay you interest for a year or two, so just tack it on to the principal and let's sort of try to fix the ship that way. There's a lot of different ways this can get solved for. And that's like the theme in opportunistic credit that we've been living the last couple of years. And it's a theme I think we're going to be living the next couple of years. And so I think that's super interesting because unless you believe that rates are going to rise materially, like there's no bailing out opportunity.

of the situation of these companies. It's just math in terms of where these are. And if you're an asset owner, you're going to play out your lower interest rate coupon to the very end. It's an asset. It's an asset that burns off. And so you're either going to try to be opportunistic and use that to get something from your creditors, or you're going to say, hey, we're just going to pay low rates for a while and we'll see what things happen closer to maturity.

Really interesting. Who knew the mantra move fast and break things would be adopted by the Fed? Yeah. Right. That's more Silicon Valley. So I'm fascinated by the concept of opportunistic credit. You've been with Davidson Kempner for 27 years, 26 years, something like that.

How has the DNA of the firm when it comes to event-driven investing evolved over that time? It can't be the same today as it was in the 1990s. No. I mean – so first of all, I'm a believer in some of the truism of markets, which is that capital chases returns and returns become efficient over time.

There's no getting away from that. If you have an asset class and people are doing well in it, other people will show up in your asset class and eventually change the dynamic, right? That is what it is. We had a couple of strategic inflection points that I think were very helpful in our business. So the first of which was opening our international offices. So I mentioned earlier the fact that we kind of missed the opportunity set in Asia in the late 1990s because we just weren't staffed.

to do it. I'm a big believer if you're going to invest in markets outside the US, you want local people with local relationships and local language skills doing that. You don't want to just be a bunch of smart people in the room doing it from New York or London. We opened our London office, I don't know, at the end of 2000 or 2001, something along those lines. And we really invested in that office. I mean, the story I like to tell is we had a pretty good size office in London.

I make a point of going four or five times a year. I showed up in early January 2009, which I remember because I remember seeing all the Harrods holiday ornaments for sale in the gift shop at the Heathrow Airport on my way home. And I go to see the old Merrills, right? So Merrill Lynch had been merged into Bank of America at this point, but they were still there. And they said, we just want you to know you're the first American who's come to our office in four months. Wow. And I said, oh my God, how is that possible? And they said, well, you know, there's a lot going on in the U.S. This was a

right past fall 2008, right? And I said, you know what? There's an opportunity here. So we did a massive hiring spree in London over the next three or four years. And I said, okay, London, because, you know, all the stuff in the U.S. had cracked. And in London, it hadn't cracked in the same way. And so the European opportunities came a few years later, but they came in big numbers.

And we followed the same playbook in Asia as well. We opened an office in Hong Kong in 2010. We now have smaller offices in Mumbai and Shenzhen as well to access the China and India markets. And that was a fantastic decision. Those markets are less efficient than the U.S. is. Some of that's structural. Some of that, there's just fewer people trying to access those opportunities. You need to have local people. You need relationships. It's much more relationship-driven.

That was like one change that we made that I think set us up for continuing to grow and survive and thrive as a firm. The second one I'd reference is our entry more seriously into private markets. And so if you go back prior to 2010, all the capital we had was sort of hedge fund structure capital. It was reasonably liquid. Maybe you had the small ability to do a side pocket. We generally didn't do that.

And so you had to mostly stick to liquid securities in what you were doing. We thought there was going to be a really good opportunity in buying less liquid, longer duration opportunities where you might own assets for four to six years, let's say, versus things that were mark to market on a daily basis. And we thought there were things that you could do to those assets to improve them over time. This was sort of the first wave of bank selling that probably came to the U.S. in the

2008 to 2011 timeline and probably came to Europe in the 2012 to 2015 timeline. So we had our first sort of private equity style strategy to do operatives to credit, which launched in 2011. And

even though the opportunity to buy from the banks ultimately dissipated, what we discovered was as private markets grew, this just became a bigger and bigger opportunity. And so this has really been a substantial portion of the growth of our business in the last 15 years is being in private markets. And being in opportunistic credit in private markets led us ultimately to being in asset-backed lending, led us to being in real estate as well, which is a big strategy for us with opportunistic credit.

credit. And I think it's really important to have both tools in your toolkit. You know, there's this term for technology investors, which is crossover tech investors, which is basically investing firms like Cotu or Tiger Global that have both big public market and private market businesses. I wanted to be a, uh,

crossover credit firm. And by that, I didn't mean between high yield and IJ. What I meant was between public markets and private markets. Because I think you learn a lot being in private markets that's helpful for public markets. And I think you learn a lot as a public markets investor that's helpful for private markets as well. So it's very complimentary. And especially if you can have both pools of capital in one place and you can kind of toggle how you spend your resources between public and private markets. It's just super...

And so those are maybe two of the bigger things that we've done as a firm in the last 25 years to really help us to thrive where the world is in 2025 versus where it was in 2015 or 2005. Really, really interesting. Leads to a question. You're the perfect person to ask this.

Because whenever we talk about what's going on in Europe and the UK, especially Brexit, you sort of get an academic answer from a distance. You have a major presence in London. You've been there for the past, you know, decade and a half.

Tell us a little bit about the opportunities you see on the continent and in the UK, and how much has the Brexit affected the dynamic, not just London and the UK, but in Europe overall?

I think there's a lot of different things going on in Europe. So first of all, Europe tends to be a lower growth economy structurally than the U.S. I think there's a couple of reasons for that. One is regulatory. But the second one really is the country by country nature and how things operate. I mean, overall, it's a giant market. But when you break it down and you've got Italian companies and French companies and German companies, that's just much of a less efficient market.

There obviously are some multinational companies in Europe, but it's maybe a smaller part of how things work over there. While I'm not sure I'd want to be a tech investor in Europe, I'm super happy to be an opportunistic credit or an event-driven investor there, because these are really very deep value markets in terms of where you're investing.

In terms of the specific impacts of Brexit, I mean, so first of all, it's not been great for the UK in terms of where things are. I keep thinking they're going to turn it around at some point, but it's been a tough seven or eight years there in terms of the economy and

the need really for the human capital that they've lost and maybe have a harder time attracting as a result of where Brexit is. In the continental markets, it's really a country-by-country scenario. And so I look at markets like Greece or Portugal or Italy, and they've actually proven to be really strong markets for us. And those are markets that folks, particularly a pond away, often shy away from because it's

it's complex to be there. They don't know how business is done. They have certain assumptions about the markets that maybe aren't always, uh, uh, true. And then people have assumptions about the Northern European markets that also aren't true. I mean, Germany's in a very hard spot, um, right now. There's no getting around that. Again, I've got confidence that we'll turn around over time, but I do expect there'll be a lot of opportunities, um,

there between now and then. And there's definitely a big macro lens over Europe as well in terms of what can happen in Europe over the next five years, which is not just related to Brexit, but maybe related to some of the geopolitical forces that are in play in 2025 as well. We like complexity. We seek out complexity. When there's very few buyers of assets

or people willing to lend because you have to sort through a lot of stuff, like even just the complexity of understanding how different restructuring laws are in Spain versus Portugal. That's super helpful for us in our strategies. The fewer people who can be involved in assets, the better it is for us. And Europe creates those opportunities. And so it continues to be a fruitful area for us. But if folks in the United States don't want to look at it, that's OK.

I totally get that. It's funny because on the equity side, I don't know, for the past five years, maybe even longer, 10 years, people have been saying U.S. is pricey, Europe is cheap. Now's the time to move money from the U.S. public equity to Europe. And that trade hasn't worked.

So you arguably European stocks are cheap for a reason and U.S. stocks are expensive for a reason. What do you see on the credit side? What do you see on the private side? Do you run into similar valuation issues or the math is the math and when the opportunities arise, it doesn't matter? Yeah, I mean, look, I don't necessarily expect a valuation premium for Europe, but I get it.

So I think we can earn more money on our comparable European opportunities than we can on U.S. opportunities. And maybe some of that's getting paid for the complexity and the things that we're speaking about in terms of how we do that. I do wonder in the equity side, if you take out tech, if there's really such a valuation gap. I mean, it's something like half the market cap in the U.S. is tech at this point. When you look at the S&P, that's not the same in Europe, right? There's very little tech there.

So I do think the tech separation is a big part of the U.S. versus European separation. For better or for worse, you don't do a lot of technology-related investing in opportunistic credit. You get some chances sometimes. Tech companies are not often great for opportunistic credit. Perhaps software will be different if there's ultimately a crack in the software world. But I would say that in the sectors that we invest in, which is basically everything else, you know,

We are getting paid a premium to invest in Europe for the reasons that we said. So you've recently transitioned to becoming executive managing member. That goes back to the pandemic after, was it Davidson or it was Kempner who retired? Yeah, I became our executive managing member with Tom in 2018. And then Tom formally retired on January 1, 2020. So I became the sole manager.

the sole head of the firm at that point. What was that transition like? Because your chief investment officer, I got to imagine $35 plus billion. And how many employees are you guys? About 500. I mean, that's no small task to run. How do you balance the two? What was that transition like?

Well, you know, I'm very fortunate in the sense that the transition with Tom and I took place over many years. And so I'm actually the third managing partner of Davidson Kempner. Marvin Davidson was the first. And Marvin Davidson ran DK for about 20 years before Tom took over. And then Tom ran DK for about 15 years. I was there for the last five years of Marvin's running the firm. And so I got to actually see two models. I got to see Marvin's model and Tom's model, which were very –

different from each other. And then I was the deputy managing partner for several years before becoming the co-head with Tom for two years. Tom was very focused on succession and leaving the place in better shape than he got there with, so to speak. And that's super helpful. I got a lot of calls because we're now third generation and running the business about how you do this. And my first...

thing I say to people, which is sort of a joke, but it really isn't, is the person in front of you has to want to retire. That's step one. Transitions don't go well if the person who's leaving doesn't actually want to retire. I was very fortunate Tom actually wanted to. That's what the chairman emeritus goes for. Tom actually wanted to retire and do other things. I mean, there's things you learn along the way. I mean, again, I wouldn't have wished a pandemic upon anybody, but it was sort of sink or swim.

right? Because it was two months in, the markets were falling apart. No one wanted to be in the office in early March of 2020, right? For reasons that obviously became pretty clear soon afterwards. And how do you make that all work? How do you get everyone on the same page? How do you broadcast your message out? How do you make sure that things that are happening in the portfolio are happening in a way that you want them to happen? How do you empower people when everyone's sitting in their home or whatever? So we rode through the pandemic and we learned a lot. But I did have...

20 plus years of training to do this. And because I've only been at one firm in my entire career, like I didn't have the benefit of being CEO somewhere else, but I had the benefit of really knowing Davidson Kempner cold. And that probably proved to be the biggest advantage. How do you maintain a corporate culture when everybody's working from home and

And you have people in how many different cities around the world? So we have seven offices, although two of those offices are quite small, sub-10 people, and another two of those offices are – but it's still far-flung, different time zones. It's far-flung.

It's far flung. So first of all, like when you go from 15 people to 500 people, you have to understand there's parts of your culture that you're going to maintain and there's parts of your culture that you're not going to maintain. So for example, when I got to Davidson Kepner, every time it was someone's birthday, you get a birthday card signed by the whole office and you get a cake, right? And so we have kept the cakes, but we got rid of the birthday cards at some point, right? Um,

We have brought in different things over the years to speak to what our workforce is today, not what our workforce was 10 or 20 years ago. So the example I give is when I got to Davidson Kempner in the 1990s, I feel like our workforce mostly cared that we had clients.

And by 2008, 2009, they didn't want too many of the clients to be fund-to-funds just because fund-to-funds weren't doing very well at that period of time. That was a transition where more and more investors in absolute return strategies were investing directly. Obviously, there are still a few allocators that are out there of scale in that world. And then by the mid-2010s, people wanted to know not only that we had clients, but what public good are we doing? So we instituted a program called DK Pledge.

And it was a way that people could learn a little bit about what our clients did, so where the returns went to. A lot of our clients are endowments or foundations or pension funds or people who are doing real good. And even our high net worth clients, many of them have big philanthropic arms that are doing very good things with the returns that we generate for them as well. But it was also a chance for our employees to give back to charities, bring charities into the organization. So I don't know. We've given away like $6 million and I think had 1,000 different organizations we've impacted, 2,500 organizations.

hours of volunteer time. That's all stuff that came from like thinking about where our workforce was today. It's not to say that our workforce wasn't very philanthropic in the 1990s and 2000s. It actually was. It's just people did that more outside the office. And by the mid 2010s, our people wanted more of an integrated experience where they could do things that were philanthropic while doing their day jobs. Right. And so you have to just kind of keep a pulse to where people are today and

I've tried to really do that in terms of my role. Again, the place isn't going to be exactly the same. In terms of how do you keep people in seven offices singing from the same page, there actually were really good learning lessons from that in the pandemic. And by the way, I did my best to get people back in the office as soon as humanly possible. We returned to the office, I think, well before many of our peers did. That was important to me in terms of continuity of the

the teams and keeping the culture. But I started doing a bi-weekly email to the entire firm during the pandemic. And I did that because that was the best way to communicate with people. We did some videos and things like that too, but I wanted something in writing. And it was a combination of

pep talk firm news sometimes some market insights i'm not sure i've got amazing market insights every two weeks but over time i certainly do right and when i really had something to say i would i would say it and um we've kept doing those uh even through today it's become like a hallmark of our firm we get very good uh internal feedback on that because it was important to me like i said that's the way everyone knows they're going to hear from me every couple weeks no matter what

Really interesting. Last DK question. So you've been there for 27 years. Kind of unusual these days. Not many people have that sort of longevity with one firm. Tell us what's kept you at Davidson Kempner this whole time. Well, I'm very fortunate. You know, I sort of joke, I show up at my college reunions, right? And if I'm not the only person who's been at one firm the entire time, it's virtually, I'm virtually the only person who's done that. I got very fortunate.

And I got very fortunate that I happened to find people that I really wanted to work with in an industry that I really liked that was growing. And so I think if you hadn't had any one of those three factors aligned, possibly I could have stayed. But if there wasn't going to be growth in the industry, I wanted there at least to be growth for me. I just wanted to be doing different things at a more senior level 27 years in than where I am.

where I started that. But fortunately, all three of those things did align. Look, there's real human capital you get by being at a place for a long time, right? I mean, you don't want to be somewhere for a long time just because of that. But the reality is there are switching costs that you have when you leave roles. And so I was very fortunate that I was able to grow with the organization. And I'm very fortunate that I enjoy what I do. Really, really interesting. You worked hard to lay the foundation for your contracting business.

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where money means more. Talk a little bit about the rise of alternatives and why this has become one of the hottest parts of the investing world for really more than a decade, certainly since the Fed took rates down to zero. People started looking around and

DK has a variety of different strategies. Let's start with distressed investments. Tell us a little bit about the work DK does in distressed investments and why do you think this space has such legs?

I would say a couple of things. We could call it distressed investments. We can call it opportunistic credit. It's probably some combination of the two things. And so for Davidson Kempner, we're actively investing in both public and private markets in terms of distressed debt or opportunistic credit.

So we're buying public securities that have declined in price or where the people have questions as to whether the companies can mature their debt. There can be all sorts of different reasons that things are trading down. And that's one strategy. We also have a very active strategy where we've got more private equity style capital where we can basically take control of assets, fix them, sell off divisions, add things, et cetera. Those are typically more like four to six year type of investments.

And we're able to do this across different asset types. So we've got a big business buying real estate. We've got a big corporate business. You find a lot of things like liquidations that don't necessarily fit into any one neat category. Occasionally sovereign debt. It's not a big part of our book, but every once in a while we've got a big involvement with the sovereign sector.

as well. And I would say a couple of things about that strategy and why people are attracted to it. So number one, the outright rates of return that you can earn on strategies like that, I think are compelling compared to many things in the market over time, but they also are very good diversifiers in portfolios.

And so, why are these strategies attractive to allocators? They're attractive to allocators because you can achieve your overall objectives just being in the strategy. Most people are not, obviously. But you can also do it in a way that diversifies your overall portfolio. And not only does it diversify your overall portfolio in terms of when you earn rates of return, i.e. these strategies tend to do better when other strategies aren't doing well,

It's sometimes when capital is returned to you too. So we did some work a couple of years ago. We actually published a white paper on this in 2023 where there's actually an inverse correlation between when opportunistic credit funds return –

to their LPs versus when growth equity and venture capital funds return capital to their LPs. And that kind of makes sense intellectually. So if you're an allocator, you probably don't want to only have growth equity and venture capital funds in your portfolio. I think the allocators who had too many of those have

Some of them have learned that the hard way in the last couple of years. Those are strategies that manifest themselves over a very long period of time. But if you've got a mixture of both strategies in your portfolio, that's a much more powerful way to earn returns. And when you talk about distressed assets with sovereign nations, I'm imagining that it's not so much the sovereign that's distressed.

as whatever investing fund is the holder of that debt, or am I misreading that? Well, look, I mean, these are all public names, so whether it's Greece or Argentina or Puerto Rico, there's a number of different sovereigns that have gone through restructurings of different sorts over the last several years. There are certainly times when holders of

debt that's at least linked to municipalities you know may want to sell and there's sort of forced selling because of that but i'd say more you know credits are credits right there's only so much that uh any one person can borrow any one entity can borrow and so you know there have been reasons you've had to restructure greece has been an incredibly successful restructuring the greek economy is booming right now right so that would be an example of one and they don't come very often it's not a very big part of our business but they're out there in terms of uh

things that people have invested in. And you mentioned public securities. I'm curious, are you buying equity in distressed companies or are you buying the debt or some combination when we're talking about publicly traded firms? It's a combination. I would say the super majority of what we're doing, certainly in the public markets, is credit and it's not

equities. But there are occasionally times where credit will lead us to the equities. Another strategy I will use sometimes is I may put a tail of equity onto a larger position in credit. You know, often the credit and the equity move the same way. Not always the case, but it happens frequently enough. And so if you like a

credit, a tale of equity. My theory is if it doesn't work, you've just spent some of your coupon on sort of equity optionality. If it does work, you can really juice your return. So again, not something we do every time in all the situations. Many of the companies we invest in public credit actually are private companies, so there's no opportunity to do that in those, obviously. But every once in a while, a credit opportunity will lead us to an equity opportunity.

And you've mentioned also that you're expecting some form of an M&A revival. Let's talk about that. Is this structural because we've gone through such a long period of

low rates, not a lot of M&A activity and some administrative hostility to big mergers? Is this the politics of the moment or is it just, hey, it's been so long since there's been consolidation and we're due? Well, I put it into two categories. And so I've now been at Davidson Kempner long enough that I was at DK for multiple Democratic and Republican administrations prior to the Biden administration.

um, administration. And in most administrations, the people who are setting the antitrust policy are career professionals. It's a science, right? There's a lot of math behind the science. It's something I studied in law school. I'm sure you studied it in law school as well. And so my, my take was that the decisions would mostly be the same whether Republican or democratic, um, administration. And then a couple of times in administration, they'd make a case in something that they really thought, um,

they wanted to go after. So, you know, there were some prominent cases in both the first Trump administration and the Obama administration in that regard. The Biden administration tried to change the antitrust laws and they tried to use the laws as deterrence in terms of

people doing mergers. And it was actually very effective in that regard, because if you're a corporate CEO or you're a board and you think you're going to get stuck in 18 to 24 months of litigation and your merger may not go through, you might just choose not to do the merger, right? And so you fast forward to 2025. It's not totally clear what the new antitrust regime is going to be, but all signs are it's going to be much more accommodating to mergers. Maybe not in every industry. I'm not sure this is true in big tech.

but in many other industries as well. And so you've got a number of management teams and boards that we think have been sitting on the sideline. And then, you know, people need to find growth, right? And M&A is sometimes an easy way for people to find growth in their businesses. There are a lot of businesses that deserve to be consolidated or should be consolidated. And, you know, the financing markets, I think, are very amenable to it.

A lot of pent-up demand. A lot of pent-up demand. A lot of demand for new debt to finance acquisitions for sure because there's a huge amount of demand for performing debt in general right now. So in my mind, this is probably a U.S.-centric story first and foremost. You may see some in Europe, but I think you're going to see a lot more in the U.S.,

I don't know if it's two months into the administration or 10 months into the administration, but I think it's coming. And these things tend to have positive effects. Like the more M&A you get, the more M&A you'll have because all of a sudden if you're in an industry and two of your competitors have done a deal and you haven't, you're behind and it could actually endanger your franchise. And so there's a reason why the M&A comes in buckets in terms of like specific industries. And so once that like flywheel effect happens, I think you'll see a lot more of it.

So that's my viewpoint on where M&A is heading in 2025. So let's talk about real estate. It's certainly been tumultuous, and you've mentioned dispersion earlier in equity and credit.

wide range of different real estate opportunities. How are you looking at the space? What are you seeing in terms of credit and especially distressed and opportunistic credit? Yeah. So I would say a couple of things. First of all, we take a very opportunistic approach into how we invest in real estate. And so we don't limit ourselves by geography. We primarily invest in the US and Europe, but we're willing to invest across those two areas. And we don't limit ourselves in product type. And so we're happy to invest in

self-storage or industrial or data centers or residential or whatever it is that we think provides the best risk return in a given country. Many real estate investors don't invest that way. Many real estate investors specialize in a country or they specialize in a sector.

I think that's hard. I mean, if you look at the last 15 years, right, and you were to go back, you know, I don't know, 2010, right? So I think retail assets and office assets would have been perceived much better in 2010. And I think that...

data center assets and industrial assets would have been perceived much worse in 2010, right? So just like there's, and I don't have a mathematical answer for this, but just like there's substantial dispersion in performance in equity and credit markets, I think there's actually substantial dispersion in performance in

real estate markets as well, and geography too, by the way. There's geographies that have been big winners and geographies that have been big losers. And so you could have been the best office fund manager for the last 15 years, and it's been a really hard place to make money, right? And so we try to take that out by investing across these areas.

So the benefit of doing opportunistic real estate investing, and I don't just mean across geography or product type within real estate, but I mean buying into assets that other people don't want to own, is real estate markets have gotten hit much harder by the rise of interest rates, even that corporate markets have. You know, corporates at least, there's been some growth, right? So real estate, much less growth in terms of rents in most of these areas. Data centers and industrial would be an exception to that. And the covenants in real estate debt are much less forgiving than they are in corporate

debt and the term of the debt is much shorter in real estate debt than it is in corporate debt. And so the crisis in real estate is like here and coming very quickly compared to maybe corporates where companies in some cases have a little bit more duration, a little bit more time to try to solve their problems. And so for us, real estate is a very interesting asset class. It's an asset class many people avoided in the 2010s with

rates where they were. I think there's a lot more allocator interest in it than there was previously. There's different approaches. There's different ways to win in it, but we think it's very worthy of our attention. You mentioned it has been fun to be a manager of

investments in office space outside of the super A's. Everybody else seems to be struggling. You look over at Hudson Yards, a giant layout of capital. Generally speaking, the Castle card swipe tracking is still showing we're 50, 60, 70 percent back to return to office. I remember after 9-11, all of lower Manhattan was

there was just a boom in converting office space to residential. Seems like you kill two birds with one stone if we do that in Manhattan and elsewhere. Is that a viable opportunistic space in real estate or is it just building by building, case by case? It's building by building, case by case. There have been some issues in New York. I think actually we're in among the best positions of any of the cities in the US in terms of- Oh, yeah.

That is not the general consensus. You go to Chicago or you go to San Francisco, some of these places, it's still a ghost town. We have many more people coming to the office here because there's a vibrancy to New York that New York has in terms of residential. Every time someone tells me New York City is dead, I'm like, have you been here?

recently. You can't get front reservations. Broadway plays are sold out. Torsten Slock actually tracks Broadway. It's back to above pre-pandemic levels. Like every time I hear about the death in New York, it's always from people who haven't visited in a decade. Yeah. And I'm very fortunate that I get to go to most of the major cities in the US on a regular basis. And so I get to see it with my own eyes and

I agree with you 100%. Look, it's building by building because office conversion to residential is not so easy. Especially some of the 60s and 70s buildings where there's no windows. That's what I was going to say. As a starting point, right? So a lot of office buildings are square and a lot of residential buildings are rectangle. And it's because there's this rule that we have in New York City where I think every –

a livable room has to have a window in it, right? And so very hard to put a window in all the square floor plan rooms, right? You want to put a huge amount of square footage in the middle of the building that eventually becomes unusable, right? And then it's a huge cost to retrofit, right? So in many cases, you're actually better just tearing the thing down and starting over. But if you look at the price that loans trade at, most of them don't assume you're doing that, right? So you're not buying them for land value or things along those lines.

Maybe occasionally at that opportunity, but it's not regular. So you have to kind of pick your spots. It's not to say there aren't conversions that, that makes sense. There definitely are some of those, but I don't think it's the majority of situations. And so, you know, you do, and it really is the sixties and seventies buildings that are the ones that are in trouble because, you know, I, I think about like Midtown East where we are, uh,

right now, it actually isn't so easy to get space in Midtown East right now because guess what? The Plaza District, which is what it's widely called, is like a super popular place to be. Not everyone wants to be in Hudson Yards, no offense. And so if you want to be in this area and you want office space, there's only so much of it.

And by the way, because rates are high and people are down in office, they're not building a lot more of it. And it's super expensive to build more of it. I mean, the cost of what J.P. Morgan is doing on Park Avenue in the 40s is astronomical. And so not everyone can afford to do that or wants to invest in that. And so if you want to be in the area, actually, people are rapidly running out of space. That's not true for Class B buildings, right? Class B buildings, you can't give them away in terms of where the space is. And so –

Eventually, the market will come to equilibrium, right? But you brought something up that I'm kind of intrigued by. The market has yet to price out a lot of these buildings as only worth land value. They're still valuing as if, hey, we're going to have a 75% occupancy rate for the next 30 years. What's it going to take for that mispricing to get more in line with what's going on online?

on the ground? You know, my experience with private assets in general is eventually buyers and sellers find each other, right? Eventually. And so, you know, that usually is more pain for the sellers and usually buyers get a little bit more realistic about how cheap they're going to buy things. And by the way, it's also banks and owners of assets, right? So, you know, the other thing is

institutions don't like to sell assets at a discount where they're marked at them, right? And so the first place is for marks to get correct, right? So whether that's real estate funds and their marks or whether it's banks and their marks, once things are marked down at levels, they can sell the loan at a profit. They're much more likely to get sold. And that just takes time. I mean, that could take years in terms of where it is. Really? Wow. That's quite amazing. So we've covered opportunistic credit. We've covered M&A. We've covered real estate.

I have to get into the world of acronyms. You have to explain to me what are LMEs and PIKs. I don't know how you pronounce either. So LMEs are liability management exercises. Liability. So if you're an insurance company or more likely a pension fund, and you know you're going to owe out X 10, 15, 20 years from now. Now, these are corporate issuers. So basically, if you look at corporate debt,

So 90% of the debt that gets issued in leveraged loan markets and public markets has fairly light covenants in it. And so what that allows companies to do is basically have carve-outs of baskets where they can offer to creditors a chance to exchange their debt for a smaller amount of debt that might rank ahead of you in the capital structure. So if you own a bunch of unsecured debt,

and they come to you and they say, well, you're owed 100 cents, but we're going to offer you 75 cents of debt that's got a higher coupon and it's higher in the capital structure than where you were. And so you almost are co-opted into having to take that agreement because if everyone else takes it and you don't take it, all of a sudden you've been primed by everyone else in your capital structure, even if it's only 75% of the amount. And so that's a very active exercise that's going on in –

public markets right now. Some of the companies have to do this because they really don't have any other chance to right-size their capital structures. Other companies are trying to do it opportunistically. They're saying, hey, if we can get something from the creditors for nothing, why don't we do that? What's the flip side of that? It sounds like the creditors, all right, they're getting secured where they might not have been earlier, but they wanted the higher yield and they're taking a big hit. Are they unhappy about this or is this just

Hey, it's a risk. It depends on the creditor. So the term that gets used a lot, which I don't think is great, is creditor-on-creditor violence, right? So there's some of it that's driven by the companies and there's some of it that's driven by creditors. And the creditors may say, hey, we're going to put –

some new money in alongside with that 75%. And we're going to make sure we're first in line for that 75 cents. So we're going to get paid first. And the other, you know, usually less than 50% of the capital structure that's not along with us, they're going to get less. And then we're going to look even better than they look because we've gotten a better return on the same credit or violence. That's just a perfect phrase. Violence. Well, I, I, I,

You all may have invented it. I didn't invent it. I've never heard it before, but it's both perfect and amusing. So that's one of the big themes that's going on in the public markets. In the private markets more, people are doing what's called – so PIK is often called

picking. It's payment in kind. And so, you know, if you're a direct corporate lender and there's, you know, there might be five people in your group or there might be 20 people in your group, they usually try to work together on things. Although I think even the fabric of that is starting to fray a bit. And,

They may say, okay, company, you can't pay your debt. We're going to stay marked at par, so we're going to keep the debt at par, but we're not going to make you pay interest for the next year or two while you right-size your business, and we're going to tack that onto the principal. So if it's 10% coupon a year, you're not going to owe us $120 of principal, and during that coupon holiday, you're going to fix your business so the business is magically worth $120 at the end. Okay.

So in other words, they waive their payment stream for that period, but they're not just taking that payment stream and tacking it on at the end. They're taking that payment stream plus additional.

And it sounds like there's a little bit of a markup. There's usually an additional amount of interest that you might get for picking versus paying cash pay. But fundamentally, that lender is marking it at par usually or some high 90s price because they're saying, hey, we're not getting this cash currently, but we're going to get it in the future. And so it's just part of the loan.

And that's a different way of sort of achieving in private markets what is happening in public markets with liability management exercises. But it's been being done in a way where there's no mark to market. That only works if the loan is worth par at the end at the new amount, right? So if the loan is worth the 120 cents at the end of this, that's when that works.

The company isn't worth more and often the companies might be worth less through the end of this process. You wind up with a loan that's got less value. If the company was worth 90 cents to begin with, instead of being 90 out of 100, you're 90 out of 120. So all of a sudden what's left is worth 75 cents. And so it's a way to postpone problems for a few years. It doesn't always solve problems. Liability management exercises are a way to postpone problems for a few years. They also often don't solve problems. You guys manage a lot of different types of

of assets, both geographically, risk-wise, strategy-wise, public, private, equity, debt. How do you manage your risk across all these diverse strategies? You know,

You know, we have a framework where we look at individual strategies. And so there might be a different framework in how we manage risk in our convertible arbitrage strategy, for example, than how we manage risk in an opportunistic credit strategy. And then we try to look at risk across strategies. And risk across strategies is harder to measure than risk in individual strategies. I mean, some of it's obvious, right? If you have the same QSIPs or positions in a public markets fund that happen to be in

different areas, that's an obvious area that you're going to find risk. You know, industry concentration would be the second most obvious area that you're going to find risk. You know, things like how are each of our books going to perform during a COVID type crisis or a GFC crisis? You stress test, but ultimately you don't know, right? Because, you know, there are different markets that do better than you think in different markets and worse than you think in different markets. And so, you know, it goes down to my basics. You know, the thing with having a risk arbitrage approach

business is it allows you to think about risk reasonably simply. The risk arbitrage mantra is, what can you make if your deal closes? And that's a pretty defined amount of money. What do you lose if your deal doesn't close? And we're pretty good at calculating that. What's the probability of success? And then what's the probability the market is implying with its price to success?

And if you can get those four things right, it's basically like poker. You can underwrite everything, right? And ultimately, if you know your odds every time, you can win consistently over time. You know, you try to take that mantra and you apply it everywhere else. Unfortunately, most other parts of our portfolio, there's several different scenarios things can go down. So I go back and credit in particular. You know, one of the questions we like to ask is what are all the bad things that can happen to us when we still get our money back?

Right. And that's how I sort of this trading risk and this ultimate downside risk. And I like investments where you could really, really stress it and you're still going to get most of all your money. All right. So let me throw you one curveball before we jump into our favorite questions. And that's your chairman of the New York Public Library Investment Committee, your vice chair of the Investment Committee at NPR.

New York Presbyterian, and you also sit on the committee for Princeton's endowment. These are three very distinct sort of endowments. That has to be a fascinating set of experiences. Tell us a little bit about all three of those entities that you are either sitting on today or have worked on in the past.

Yeah. So first of all, I'm very fortunate to be involved with all three great institutions. I serve on all of their boards of trustees. They're all institutions that are very near and dear to my heart for different reasons. The super majority of my wife and my philanthropy is in the education space. My wife served for a long time on the board of trustees of her alma mater, Bryn Mawr College.

I'm very fortunate that I can serve these institutions in a way that they find helpful. They've all asked me to serve on their investment committees, which is why I've done so. New York Presbyterian is newer. I got involved in that in 2021, and that was a situation where I felt like the city needed me and the healthcare organization in the city needed me. I had a very close relationship with that institution, so it wasn't random, but it was one where we kind of came to it together.

later on. And in terms of the endowments, they're all very different. I mean, New York Presbyterian is in the low double-digit billions. New York Public Library is between one and a half and two billion. And Princeton is in the 30s in terms of what they are. They require different things in terms of being a trustee. At a smaller institution, you typically have a board-driven model where the board at least formally is approving investments. We're fortunate I've got

Really, really strong teams in all three places. So we've got great, great investment professionals that work at each of those institutions. But smaller endowments tend to be board-driven models and larger endowments tend to be staff-driven models where your role as being a trustee or on an investment committee is more guardrails than anything else. Each of those committees kind of has a different approach in how they want to run their portfolios and manage their portfolios. And I like to think I contribute to the meetings. I also learn a lot.

while I'm there, right? I'm certainly a subject matter expert in each of the areas that we invest in. I think I'm reasonably knowledgeable about all the areas that all the endowments invest in, but I'm not a subject matter expert in venture capital or things along those lines. And so it's been a fantastic experience and a good way to give back.

But when you're at a smaller endowment, I don't view 2 billion as small in the real world, but when you're at a smaller endowment, you have to think about things differently. You're going to have less staffing. You can cover less number of managers. Your institution's needs with respect to your cash flow might be different than a larger institution. You have to put each of them in framework in terms of what you're trying to achieve. And you have to make sure there's buy-in to that model, a

up and down the organization. So the investment committee needs to buy into what the staff is doing, which needs to buy in. There needs to be buy-in from what the management of the organization is doing. There needs to be buy-in from the full board. When you get all four of those things right, you can do really powerful things. So we really don't hear much about the Princeton Endowment, which is probably a good thing.

Because when you look, especially in the Ivies, at some of the endowments that have been in the public eye, it's rarely because they're shooting the lights out. Harvard went through a whole transition when they got rid of the people running the Harvard Management Company, and then they—

wildly underperformed for a decade plus. And then, obviously, the Yale model under David Swenson was unique and once...

began thinking about retiring, that no longer was putting up the sort of numbers they had in prior decades. What is Princeton doing, uh, other than just keeping their head down and quietly doing what they're doing? Yeah. I mean, without maybe speaking, uh,

specifically about what's going on underneath the hood at Princeton. I'll just repeat a couple of things that have been out there in the public markets. So first of all, we had our longtime CIO, Andy Golden, retire during the middle of 2024. Andy was a disciple of David Swenson and worked for him for a few years earlier in his career, had a spectacular almost 30-year run running Princo. And he's been replaced by a brand new CIO, Vince Tuohy, who came from MIT and had a

very long career, uh, there. MIT has been among the best performing endowments as well. And the head of its endowment, Seth Alexander is also a disciple of David Swenson. The second thing, which was, uh, came out in our, in our recent president's, uh, uh, letter, which he publishes annually is that you do have to look that endowment returns have come down over long periods of time. Uh,

And that's nothing to do with Princeton or Yale or any of these august institutions. It has to do with what I mentioned earlier. Capital chases returns and markets become efficient over time. And things that David or Andy were doing that were completely...

visionary in 1980s, 1990s today are commonplace. It's funny. That white space was wide open then and now it's well-drawn. Someone asked me, so I asked Tom Kempner, I said, Tom, is it true that David Swenson invented the term absolute return? And he said to me, it's completely true. And

And it was in the middle of the 1980s. And David decided that was a much more august word to use to describe strategies that people used to call as hedge fund strategies in that period of time. And so that literally just came from David Swenson's head, that term that we all used generically today. I can't substantiate it, but I take Tom's word for it in terms of being a thing. And so you look at what these institutions created and now the incredible industry that's come from it, it's pretty staggering.

Really, really amazing. All right. I only have you for a limited amount of time. Let's jump to our favorite questions. Starting with what are you doing to stay entertained when you're not at work? What are you watching or listening?

So, you know, I don't watch a lot of streamed content because I find when I'm at home, I want to veg. And so the good ways to do that are either watching sports or watching the news. Honestly, news is less good for vegging than sports probably. Two things I am looking forward to, though.

are season three of White Lotus, which is just in the process of being out, and season three of Gilded Age, which I believe is going to come out this fall. Gilded Age. So Gilded Age is an HBO show, and it's basically about life in the 1880s and 1890s, so hence the Gilded Age of the United States. Sure.

And there are characters that are based on Cornelius Vanderbilt or Jay Gould or some of the leading lights of the era. It's always an era I found it very historically fascinating. And I think they've done a great job with the show. It's a great period piece. I mean, if you look around, there's more buildings left here or Newport or Albany from that era than you would think. So they've done a very good job of integrating CGI with some of the older historic buildings. You know, I love the first season of Lotus. The second season...

was a little frustrating, especially with the way they wrapped it up. I'm curious to see the direction they go in season three. I'm going to check out Gilded Age. I'm assuming you've seen The Crown? My wife watches it, so I've seen portions of it. Can I tell you, it's just so good in every episode. If you want that sort of historical run-up, No Stone Left Unturned, their production is...

Like, I am not a historical TV fan, and I got sucked into that. It really, it's just spectacular from start to finish. Let's jump to your career and your mentors. Who helped shape your career? I have a feeling I know the names of a few of them. Yeah, you know, I go back further than the obvious, you know, Tom and Marvin in terms of starting. I mean, first of all, I'm very fortunate financially.

to come from a family where I had a few mentors as well. We had a family business, which was started and founded by my grandfather and my father ultimately ran. It was book publishing. And like I mentioned before, my, I come from a family of book publishers and, uh, and academics. And so it was good to sort of learn over the dinner table when I was a kid, what was working and what wasn't working. Uh,

My mother was very into volunteer work when I was younger. And when I was 13, she said, you don't need me anymore. I'm going to go back to work. And I had a 25-year career as a senior administrator at a local community college. So that was very influential on me as well. Growing up, I ran track both in high school and in college. What did you run? I ran like half a mile in cross country. The worst. The half mile is the top. I ran the half mile in high school and the two mile –

um, relay. And then we would do the three mile because why not? But the half mile is brutal, isn't it? Yeah. Because it's a sprint, right? So you're sprinting for two laps, right? But I had some great, uh, uh, track coaches along the way, um, that really helped me out as well. You know, I mentioned, um,

Earlier that we had this amazing civics program at East Brunswick High School with this legendary teacher named John Calamano, who was super helpful for me in that as well. And then in the working world, you know, I was very fortunate. Like I learned a lot from both Tom and Marvin. They had very different

styles and how they did things. But I also found people out there whose investing style I admired and I would try to figure out what they were doing and reverse engineer it. And so that's super helpful. I mean, some of that you can do just by reading, but there's other portions of it. Like when you see the trades and you see the investments and like you're involved in them and you see how someone did it better. And then you can figure out after the fact, like what you could do next time better. Like I just found that like super helpful. It's a little bit for

further removed from that today. So it's probably a little bit harder for me to do that, but that's some of the ways I really taught myself to invest over time. Really interesting. Let's talk about books. What are some of your favorites? What are you reading right now? Well, I'll start with the ones I'm reading right now, and then maybe I'll talk about some of the ones historically that I've quite enjoyed. So I'm rereading Only the Paranoid Survive by Andy Grove. So I mentioned earlier that I think our business in general is at a strategic inflection point in terms of what's going on in alternative asset management.

one of the main things he speaks about in that, uh, book is strategic inflection points and businesses and how you deal with that. I'm also, um, part of the way through a book called gambling man, which is about, uh, Masayoshi son, um, written by, uh, Lionel Barber. And, um, that's a book where, um,

He's a fascinating character. I think a lot of people know about the last 10 or 15 years of Masa's career. I don't think that many people know about how he got there. All the times he had near misses where the whole thing could have blown up or things along those lines. So that's very interesting to me. Early in my investing career, there were a number of books that are classics that I read. It's actually not The Intelligent Investor by Ben Graham. It's obviously a great book, but it's books like...

Extraordinary Popular Delusions and the Madness of Crowds by Charles McKay or Reminiscence of a Stock Market Operator by Edwin Lefebvre, which was a pseudonym for Jesse Livermore, who was a famous trader in the 1920s and 1930s, or Where are the Customer's Yachts by Fred Swedd.

Very early in my career, even before I started at DK, that's how I learned was reading these books. And so even though they're books maybe I haven't read in a little while, they're all classics I still readily recommend. You know, it's funny. Bill Bernstein, who wrote The Four Pillars of Investing, has a new book out on...

on the delusions of crowds. He's both an investor and a retired neurologist slash physician. And so he takes a very, I want to say almost medical evolutionary approach to looking at why people go mad in crowds. If you haven't seen that, it's kind of fascinating. I'll definitely check it out. I expect you'd really appreciate that. Our final two questions.

What sort of advice would you give to a recent college grad interested in a career in either opportunistic credit or investing generally? Well, I think both pieces of advice would apply to both. So I'll share two. The first of which is I'm going to share advice I got from a law professor I had of mine named John Quigley who had been at Nassau Capital, which was Princeton's in-house private equity firm.

in the 1990s. So he was my professor in law school. When I was considering going to work at Davidson & Kepner, what he said to me was, the best way to learn how to invest is to actually invest. And so if you get a chance to go into an investment firm, take it. Don't worry about not having the training for it. Don't worry about having to do other things first. You know, I was torn early in my career. Do I go work on the sell side first and learn some stuff before I go into investing? And it was great advice. I mean,

You know, we do hire a handful of people out of college every year at DK. And I think it's super great if you can start doing it as soon as you want it. If you know what you want to do, you should go do it, right? And so that's piece of advice number one. Piece of advice number two, I got from my –

post-college roommate's mother. And my post-college roommate ultimately followed the same advice, but it took him 15 years. And the advice I got was, and I'm going to use the Goldman Sachs for this because what she said at the time, but you could apply a number of other firms to it today. She said, don't go work at Goldman Sachs. Goldman Sachs is going to be a rat race to the top. All the top smart people want to go work at Goldman Sachs, figure out what's going to be the next Goldman Sachs and get in on the ground floor there instead.

And I sort of got lucky and sort of felt like I did that with Davidson Counter. That's really, really good advice. And our final question, what do you know about the world of fill in the blank, distressed investing, alternatives, private credit today that might have been helpful 27 years or so ago when you first got started? Well, you know, look, it's...

When you start a career in investing, I think by definition you start pretty broad and then you get an hour and an hour. Like you start with the premise that you want to invest and then you ultimately find a firm and the firm usually has you in a strategy. And if you do a good job, you'll learn that strategy cold over a longer period of time.

And what I'd say today – and this is also colored by my experience on investment committees, but it's also just being a Davidson Kempner – is that investing is a very broad universe. Things are interlinked. So, for example, if you don't know what's going on with technology investing, you may not understand what's going on with opportunistic credit even though there are different things and you need different expertise to do well in each of them.

And so it was something I didn't really think about early in my career. I started broad and then I got really narrow and I've probably gotten broader as both I've gotten more senior and I've gotten more different types of experience in the investing world in general. But to some degree, you should always stay broad even if you're going narrow. So, you know, you're going to have to go narrow to be successful in your career. There's very few people who can do everything as an investor and be successful. But as you go narrow, like don't lose sight of other asset classes and what's going on in the world because you can get blinded to bigger trends if you do that.

Really, really, really interesting. Tony, thank you for being so generous with your time. We have been speaking with Tony Yoseloff. He's chief investment officer and managing partner at Davidson Kempner, overseeing over $35 billion in assets. If you enjoy this conversation, check out any of the 500 plus we've done over the past.

11 years. You can find those at iTunes, Spotify, YouTube, wherever you get your favorite podcasts. And be sure and check out my new book coming March 18th,

How not to invest the bad ideas, numbers, and behaviors that destroy wealth. I would be remiss if I did not thank the crack team that helps put these conversations together each week. John Wasserman is my audio engineer. Anna Luke is my producer. Sean Russo is my researcher. Sage Bauman is the head of podcasts at Bloomberg. I'm Barry Ritholtz. You've been listening to Masters in Business on Bloomberg Radio.

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