YouSaid · the spoken record

Josh Friedman

lines on the record: 81
first: 2022-07-25
most recent: 2022-07-25
sittings or episodes: 1
sources: podcast

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“Think one of the lessons that I've seen from great organizations everywhere, and we probably could have used a little bit more of this early in our career, was hiring the best people or the way I refer to it internally is I say A people hire A plus people, B people hire C people. You should always be trying to hire the A plus people. And if you do things work out okay.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“My parents were great. My mother was a school teacher. My dad was not college educated but was an engineer. He was very smart. I tell my kids three things and they're really based on lessons from my parents. And my kids know the three things. My parents didn't crystallize him quite as well, but I tell him, work hard, be honest, and have a positive attitude. You can be really brilliant, you cannot be really brilliant, you can't really control that, but you can control how hard you work. You can control if you're honest, and if you're not honest, you can destroy in a day what you create in a lifetime. You got to be honest, particularly treat people the way you want to be treated. And having a positive attitude is in many respects the hardest one. And my dad would always say, meet people, meet people, meet people. If you have a positive attitude, people will follow you. Good things will happen. Those are styles or practices that I think I got very directly from my parents.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Historically, we were probably not as aware and reactive to macroeconomic risks and opportunities as we probably are today. I'm not sure we're perfect at it today, but I think we're much, much better today at taking a step back and saying, hey, everything's overpriced. How do we deal with that and still invest, given that it could stay this way for a long time? And our job is to invest. So how do we deal with that? You can't ignore those types of environments at all, but I think historically we've been probably blindsided one too many times by not paying adequate attention to macroeconomic risks. A lot of these types of events that have an impact on world markets are not predictable in advance, but you still have to protect yourself against them.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“I tend to always like complicated problem solving types of investments, and there are two types. There's the distressed situation. Something's a total mess and the toilet and everybody's selling it. It's Lehman Brothers and it's wildly complex or it's the Puerto Rican bankruptcy. The other ones are the ones where you interact directly with a client who needs money and he has a problem and it has to be solved fast. And there were a number of those right after COVID where people had repo lines being unwound on them or all of a sudden their revenue line was going to zero, but they had a good business and you knew it wasn't going to be zero forever. But how do you bridge from here to there in a way that's safe? Those are always good because you get paid not for taking risk but for solving a problem. I like complexity. I think Mitch likes complexity. I think our whole organization likes things that are a little bit complicated with an outcome that hopefully won't be complicated.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think my dad had tremendous influence on me because from the time I was little, my dad said, you have to have your own business. Don't work for other people. And you have to go to business school and law school. But then you have to have your own business. So my dad had a lot of influence. He gave me the confidence and the sense that it was okay to be an entrepreneur to others. I think the Whitehead Weinberg combination at Goldman Sachs were just such a model of style and integrity, and they did a great job. And I think that Mike Millikan and Peter Ackerman were such extraordinary models of entrepreneurial creativity and client service.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Investors are sometimes exactly counter cyclical in the way they think. When the markets are really getting smacked and you have to think like a contrarian, I think it's difficult for a lot of investors, really difficult. And I understand why it's difficult. It's very unsettling, but by our nature as distressed people we tend to be contrarians, you have to recognize, hey, this is a time to step up as opposed to this is a time to go backwards. It drives me crazy, but I find that capital flows in our business are almost always counter-cyclical from what they should be.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“I've crashed. I'm in the first category. I think everyone's crashed. It's very dangerous. It really is. So I've become a much more careful and prudent cyclist over the years. Most people don't get killed going uphill. So I go a lot slower going downhill than I used to. But it's still dangerous”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Love my work and I love spending time with my family, but I would say my favorite activity or hobby outside is cycling. I've become a pretty avid cyclist over the last 25 years. I go cycling with a group of friends of mine every year to a different place on the globe that one of the guys tells us to show up. We show up, we bring our bike, and we ride. I also think it's a great way to clear your head and think about things in a way that you can't do when everybody's around you in the office.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Be willing to take risk and be very communicative about those risks because they don't always work. It's not always going to work out perfectly.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Greater than that at the board level, and the board should be guiding and making sure you're looking at different areas and figuring out the right compensation schemes and the right areas and matching the objectives of the investment team with the objectives of the university or the charity or whatever it is. That's really important, different endowments and foundations have very different profiles. Some have constant new capital coming in. Most endowments do. Some have no new capital coming in and they're designed to last forever. Some have immediate large capital needs. Others don't. Some entities, pension funds, for example, they might have obligations that are so far down the road they can tolerate a level of volatility that's very different from another type of organization that has more near-term obligations or is in the middle of a major capital campaign. It's really important that the CIO have a really good and open dialogue with the board about what the organization is trying to get at and what they need.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“I've been in several of these situations where we've hired a new CIO or CEO for the organization. And the first thing they need to do is create their own organization in their own image so they can achieve what their goals are. They were hired to achieve their goals. They weren't hired to work with a team that's already doing everything that needs to be done, usually there's a reason why someone leaves and then there's a need. So you have to create your own organization that's going to serve your purpose as opposed to obstruct your purpose. And I've seen in several organizations that done really, really well, even if that means more turnover when you first come in as opposed to later on. Second of all, I tend to prefer boards that work as boards as opposed to boards that work as investment committees. If you have a great team of people and they do their work, there are parameters so that the board or the quote investment committee is informed. They rarely object, etc., etc. But the amount of knowledge from the professional staff should be much.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“So from sitting on these boards, you've seen a lot of your peers in a lot of different personalities impart their wisdom, judgment, maybe ego onto some of these pools of capital. What advice would you give, say, a new CIO if they're forming a new board about how a board member trustee can add value or”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Much more about the equity world and positive optionality part of the game we're doing with debt securities is in some respects debt is negative optionality because the best thing that happens is you get paid off and the worst thing that happens is you lose all your money. You'd rather flip that around so you have unlimited upside and limited downside. That's what equities are theoretically but that can be a bad game too because there's a price to it. We've always thought of distress debt as an interesting trade-off because you have that kind of upside optionality that you don't have on par securities. The same with stress debt. And one of the things that's great when you're on one of these boards if you're looking at a broad array of other types of financial instruments including equities including venture including private equity you get a real sense for what the liquidity versus upside versus downside trade-off should be. I think it helps you identify when in the cycle it's most attractive to be doing what you're doing.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“The benefactor for the endowment is Eli Brode, who has strong opinions and isn't afraid to change his portfolio dramatically overnight. May he rest in peace because we miss that kind of intellectual thought process and energy from Eli? That's very different from a more bureaucratic process, if you will, at a larger institution that's got up different kind of organization. That's got a lot of entrepreneurs involved with it at the broad. So I'm not sure that they miss anything per se. I think they operate within a certain universe. Part of the job as a trustee is to make sure that they think beyond that universe, that they think expansively. If you think there's something they're missing, then you make sure that they're at least paying attention to it. To me, it's a tremendous chance to learn. It widens my peripheral vision in the investing world, tremendously. And the whole game is always to start out by having a really good CEO. That's like any business.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Remember what I do for a living is much more narrow than what they do. We have an area that we focus on. It's generally credit related, it's generally valued, it's generally complex situations that are becoming simple, but there are broad swaths in the market that we don't necessarily focus on, and those institutions very much do. Venture capital, pure private equity investing, et cetera. Sometimes they get a little too caught up in the competition of what everyone else is doing because they all get benchmarked and paid based on how everybody else is doing in the industry. So if everybody's doing goofy things, they might just do the same goofy things. That's true in all capital markets, by the way. Everyone has a fear of missing out. Pricing was insane at the end of last year in the public markets, in the private markets, in the equity markets, in the debt markets. It's hard to change your investment policy on a dime. Some people do it. The endowments that I've served on have been very different in their approaches. When you're sitting in a room.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Turn a little bit to your seat on the other side of the table. You've been on board trustees, investment committees of a number of institutions, knowing what you know from the inside of Canyon. What do you see that those boards or those pools of capital may not fully appreciate from what you know from the inside?”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“A lot of time we try to use historical analogies. So when we're looking at some of these securities that we talked about and we're looking at how bad can it get, and we start saying how bad did things look in 2008 in terms of default rates and credit losses on cars, a serious recession, not necessarily the inflation part, but the recession part. So we try to look at a lot of scenarios that we build from prior episodes either of inflation or recession, and we try to say how much can we tolerate. What's different this time, of course, is that unlike the COVID-induced problem, where the Fed was there to the rescue, the Fed here is the cause. They're not rescuing you. They're doing this purposely because they're trying to deal with inflation. We try to look at all these scenarios. We try to prepare ourselves as opposed to predict. That's one of the mantras we repeat often here is prepare, don't predict. And you have the ability to hedge, you have the ability to protect your positions. The nice thing.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“At the end of the day, most of the programs that they establish to buy securities were never funded at any material degree because the market reacted almost instantaneously and said, ah, the Fed's going to be there to the rescue, so I'm okay. And the markets did it themselves. And this time, the Fed is saying, we're going to raise rates and we're going to suppress demand like crazy. We might cause a recession. It's going to be kind of tricky not to. Consumers immediately reacted by suppressing demand somewhat. Supply chains are starting to come into balance. Oil prices are coming down. Sometimes the market does it because the Fed said it and then the Fed doesn't actually have to do it. In this case, I do think the Fed has to do it a little longer because their credibility's been low, and maybe that means that they oversteer a little bit, and that's what it takes. I do think the inflation is going to be a little more persistent. But I'm not one who believes that we're going to have a gigantic and deep recession when you're starting with 3.6% unemployment at healthy consumer balance sheets.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“About transitory inflation, but fairly substantial transitory inflation. Since then, a lot of other things have happened, including what's gone on with Russia and the Ukraine, including what's happened with additional shutdowns in China, which prevent the supply chain from reacting the right way. And on top of it, rather than remove the punch bowl, the Fed went all in the other way, and so did the Treasury with a big stimulus plan under Trump and then another one under Biden. So it doesn't surprise me that inflation would be quite a bit worse than people said. And at this point, the Fed has to restore credibility by not only being tough once, but even if it looks like the market's adapting, they have to be tough again. I think some of the inflation will be self-curing in the sense that the Fed's signaling often means the Fed doesn't have to do what it's signaling that it's going to do. The Fed signaled in COVID that they were going to buy all sorts of securities. Well, they did a certain amount of quantitative easing.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think that some of the inflation will take care of itself, some of the supply chain things, and some of it is much more difficult, and no matter what the Fed does, it's very hard to take the inflation out of it. Look, they've gotten energy prices down quite dramatically if you look at the stock prices of all the energy complex. They're down 30% already. That doesn't mean they're really going to solve the energy problem. You can't solve it just by suppressing demand. You have to figure out alternative supply because at the end of the day, depletion is something like 10% a year, and there's no new supply and demand keeps coming from different parts of the world. It's complicated. And no matter what the Fed does, that's an issue. Inflation comes from different things. It was quite clear to us that there was going to be a certain amount of inflation driven by the quick recovery of demand from COVID and the extreme disruption of supply chains that had just been shut down and they don't come back online immediately. I remember speaking with one of the senior Goldman partners about this 18 months ago. And at the time we were talking.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“You always have to be careful in certain markets that you know the jurisdictional rules, but we've been down that path for 33 years as a firmer. We know the difference between working on a bankruptcy or a distressed situation if things go in the wrong direction in England versus France versus Spain versus Italy, etc. Those you do have to always watch out for. What I worry about more is that we don't have our arms around in a highly confident way of exactly how deep a recession will be in Europe. The energy situation is complex, a change of regime in the UK, the war in the Ukraine. These are exogenous things that just come from left field. I don't think five years ago anyone would have expected any of these things or even a year ago. You have to expect the unexpected and then say, how is that going to affect what is already a significantly weakening economic picture?”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Or other special situation type of capital that can solve an important problem they have in their balance sheet, it's a less of a plain vanilla market. We like the UK, we like Western Europe, but we're being very cautious in those environments”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Obviously, China, the property sector has had more than its share of significant stress. For us participating in that kind of a market is difficult because it's non-transparent. The rules of engagement and the practices aren't completely clear. But it has reverberations in other ways. So, for example, we made a loan that was a first lien real estate loan on a project in London where the developer was a Chinese developer who was having refinancing problems for exactly that reason. We looked at it just as a UK property loan on a partially constructed building. We just got taken out of that loan. But it was take one step to the left or one step to the right to try to figure out a way to take advantage of the fact that there's some disorder going on in one part of the world, but you don't have to really be right in that part of the world. Europe has been a very interesting place for making direct loans as well because it's probably a little slower and looks a little weaker than the US. There are more companies that are closer to the edge that need our kind of money.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Say structured products are a fourth area. If you look at the prices for securitization tranches of things like home improvement loans, which are unsecured loans to people with pretty good FICO scores, those junior tranches are trading at probably triple to four times the spread that they traded at just a few months ago. That's an enormous explosion in the rate of return that you can earn on that kind of paper unless you think this truly a massive fundamental hit in the risk that you're taking.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“But I think we can wait a little while for the real distressed. Right now, there's just tons of stressed paper that's just trading stress. The second area we see it is in direct lending, and I don't mean the general unitranche private lending, but more special situation sponsor needs to move quickly, et cetera. It reverberates for exactly the same reason. The commercial banks were competing with the direct lenders, and they got jammed with all sorts of paper that they now have to sell at 90 or 85 or whatever. It happens in every cycle. They get aggressive, they want to be competitive, they don't like having someone else show up ed of them on the league table, so they compete, and they might make a lot of money along the way, but then the last few they get stuck with. So if you're deciding to make a new loan in a special situation to someone, that loan has to be competitive with what you're buying off the bank's balance sheets directly. All these markets are tied together, so primary lending gets to be much more interesting as well. The secondary market for bonds, there's help the banks get rid of inventory they're stuck with types of trades, there's new lending that has to be competitive with all that.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“hopefully not too long duration paper because then you have more exposure to other trading. There might be some distress. There might not be some distress. We'll see. I would expect there will be some distress, but I think it's going to take a little while before that develops because a lot of the paper that's been issued doesn't have covenants or has very, very light covenants. Coupons are really low. A company can be distressed long before they default on their debt. So you might be waiting a long time for real distress. It's hard to predict just how deep a recession might be. I have my views, others have different views. Some people think it's going to be a horrible, awful recession to ring inflation out of the world. My tendency is to be a bit more moderate on that. I think people are already pulling in their horns in terms of consumer demand and supply chains are starting to get rectified, but other parts of inflation won't. And the Fed has to show its seriousness after losing some credibility last time. So they'll probably raise rates even if they don't really need to. But in any event, predicting exactly how deep a recession is is a tough one.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“The first thing that happens when the Fed starts raising rates like this is a lot of mutual funds that own long duration low rate paper find that it immediately drops in price rather than that attracting new people to put money in those mutual funds and say, oh, look, it's all cheaper. It tends to attract sellers who say, I didn't know this thing could go down as well as go up. They're selling into a lousy secondary market. So the first areas of opportunities tend to be just simple secondary market securities that have dropped fifteen or twenty points without all that much happening to the issuer. Some of them you have to watch them a little more closely because they're more cyclical industries or whatever. There are a lot of very good securities that are all of a sudden buys that were certainly not buys 20 points higher if you've managed to preserve your firepower and not suffer too much damage on the way down. That's the first place in my opinion that one looks. That's just conventional high yield super beaten up paper in creditworthy companies.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“So as we go into this first leg down, and we'll see what happens from here, curious where you start assessing the opportunities you're most excited about across the different disciplines you participate in.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“That's also become less of a thing. There were some very famous ones. I think there was an article on Bloomberg or somebody. They likened it to buying insurance and then setting fire to the building and then putting out the fire after you collect the insurance money. And it is like that a little bit. Those also, I think, got a lot of disapproval. And I think they attract a lot of attention of regulators whose attention you don't want to attract. We haven't seen much of that lately, but we also haven't had a full-blown ugly distress cycle. We had one post-08. Some of those names took many years to play out, then we had some of these larger later bankruptcies like Caesar's and like Puerto Rico, but there was less of that type of manipulation. Bankruptcies are rough game. Not everybody's getting out making money in most bankruptcies. There's usually a reason why a bankruptcy occurred. And someone's going to win and someone's going to lose, and you can expect a certain amount of caged animal behavior from the participants.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Probably around the same time there were a fair number of transactions in the CDS market where people would touch multiple sides of the same incentive structures within the balance sheet. Curious how that's played out the last couple of years.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Speaking, some of those things are really distasteful. They don't rank high on the ethics scale, in my view. And some of that creditor on creditor violence that you get, particularly if it's from people who are in the same asset class as you. It's one thing to fight against people who they own the subordinated, you own the senior, or you own the subordinated, and they own the senior. That's a legitimate battle that gets fought out. There are legal rights that you have, that you assert, there are things that you do. Generally, you should be similarly treated if you're similarly situated. There was a period where returns were so scarce that there was a lot of pretty rough behavior within creditor groups that way. We try to avoid that. I don't like that game.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Don't necessarily see it as a zero sum game at all. I look at it as us and our colleagues against the House, if you want to think of it that way. And sometimes there's an equity holder who's trying to steal stuff that should belong to the creditors at this point because they've already blown up the company, and the game for the creditors is A, to restructure it, but then to figure out who should really run these assets to create value. So it's not always a zero-sum game, but sometimes it's treated that way. There was definitely a phase a couple years ago. I was pretty vocal about this, where you'd have to watch out for creditors who were in the same category of assets that you owned. So you might own the fulcrum security of whatever it is, and then you find out that your colleagues who own the same security are organizing some special rights offering that basically gives them benefits that you're not entitled to. There are certain lines that you have to draw in terms of how you behave in general. And it's not that you can be stupid and sometimes you have to make sure you have sharp elbows too.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Love to go from some of the market structure issues to a little more micro in the work that you do with people who touch the stressed investing in particular. So much of the right side of the balance sheet investing can be a zero-sum game. And so many of the principles that you espoused for Canyon trust and treating people well are not necessarily the same features you see commonly displayed by people in the distressed market. I'm curious how you bring those two things together.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Which are the absolute center of the financial world, then it becomes systematic risk. That's a very dangerous system. We don't have that right now. The banks are not leveraged up to crazy levels, and they don't own tons of illiquid securities. A lot of those securities have gone to other balance sheets in the shadow banking system. So the worry is the shadow banking system somehow full of mismatch and leverage. I don't think so. I think that most of the private lending entities out there, if they have bad assets, that's life. But A, they're not systematically important, and B, they're not that leveraged.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“The entire history of the financial world is one of crises that are born of exactly what you say, where you have a combination of illiquid assets held by a firm that has liquid liabilities like a bank and is leveraged. So leveraged and a mismatch is always the disaster. Always. That was what happened in the thrift crisis the first time around. Very illiquid real estate loans funded by daily deposits from depositors could take them out. Commercial banks that had a combination of commercial paper and deposits and all sorts of very short term liabilities buying all sorts of securities as principal that were not really marketable, plus not keeping track of what their real liabilities were because the derivatives market had gotten so overblown without careful compliance and regulation. There are so many stories out there of institutions that have failed that are highly leveraged and have a mismatch. And if it pervades the bank,”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“The other thing that seems to come and go a lot is every couple years someone throws a warning shot about the potential mismatch in liquidity with credit instruments and say the ETF world most recently or the mutual fund world before that. As we go through these pockets of downdraft like we have earlier this year, have you seen any of these potential mismatch issues cause real problems in the markets?”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“They've left a hole in some of that liquidity, which means when a mutual fund wants to sell, at least at this particular moment in time, the bids can be pretty disappointing. And that's a good thing if you're a buyer, but it's not necessarily a great thing if you're a seller because liquidity is challenging. And it's not always great as a buyer either because you might see something quoted at a certain level, but you might not really be able to buy what you want to buy or buy enough to make a difference. It's also tough if you're a very large player because you can't necessarily buy enough to impact your portfolio. Liquidity has always come and gone. At this particular moment, it's been driven out of some of the middle of the market just because some of the players have moved upmarket to mostly large lending.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Liquidity has always been fleeting in some of the things that we invest in, even when we started the business. Drexel had a disproportionate share of the trading in the secondary market of high yield. So when Drexel went away, liquidity went away in many respects. And then other firms all showed up because if there's no liquidity, there's usually a lot of profit in making liquidity. So market makers showed up. Often competitors firms that refuse to go into the industry but then hired someone from Drexel to run their department the next minute. So that's what happens. Banks used to hold a disproportionate percentage of the high yield universe, like pre-08, I want to say 20% plus. So that helps for market making. That's not the case at all anymore. So liquidity can be very challenged. Also, a lot of the players who were playing in the secondary market for high yield, the more active people who would pounce in and then step out depending on what the mutual funds were doing, have migrated toward other parts of the market, particularly direct lending.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“One of the benefits of the old system you hear about is the market making that went alongside of the bank's ability to hold assets on their balance sheet. What are you seeing in the liquidity of the instruments that you trade?”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Liquidity of the whole financial system. As long as the banks are forced into a more conservative mode, where they're not using their balance sheets as aggressively and their leverage is so much less than it was fifteen years ago, you have a capital allocation system that's generally pretty safe and is able to work in a pretty free enterprisey way and competitive way, and where one failure doesn't cause a daisy chain of failures across the system. And that's a healthier system than what we had prior to 2008.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“That pre 2008, the banks were in such a precarious state because they had really become gigantic merchant banks and with big principal positions and hugely levered balance sheets, and basically the whole industry almost blew up in the global financial crisis. So then you had Volcker Rule and Dodd Frank and all these other regulations, all the European regulations. It basically caused the banks to pull their horns in massively. Now you see private lending. Many, many firms doing direct lending. And you'll see some of those firms appear in the league tables as direct competitors of JPMorgan and Citibank and Goldman Sachs and everyone else. The private markets tend to drive a lot of progress and a lot of change. I don't think that's going to change anytime soon. It has a pretty dramatic effect on the role of institutions. The nice thing in the private markets right now is you don't have as many critical players in terms of being in a position to take down the economy or threat.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“There's been a massive growth in the private markets. And again, I think that origin can be traced in large part to where we were before we started Canyon, which was Drexel. The number of private equity firms exploded, the velocity of transactions exploded, the technology for allowing private equity firms both to be competitive with other corporate buyers in terms of speed and in terms of price was critical to that. A lot fewer headaches running a private company than there are running a public company. Every year the private markets grow at the expense of the public markets, the number of public markets has shrunk dramatically to less than half of what it was a couple of decades ago. Two or three years ago was the first year that the high yield market privately issued high yield exceeded publicly issued high yield. It's quicker. There are certainly situations that cause unusual arbitrages because of the differences. The private markets have really taken over in a very major way. The role of banks has changed.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“I'd love to turn a little bit to the markets, and there's been a lot that's changed over time in the structure of the credit markets. Love to get your sense what you're seeing of to the banks and the private markets, both credit and equity.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Sometimes people think that I'm the risk on guy and he's the risk off guy. And I guess there's probably a little bit of truth to that because he likes to be really, really sure before he takes a risk, although once in a while it'll surprise you on something. And I think the fact that we debate about things or argue about things makes it okay to debate and argue about things, which is also a characteristic of the organization.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“We both have a certain amount of respect for each other, and I think we also both serve different functions. I'm not sure that I would recommend this business model for other businesses. Goldman Sachs, for years, did this very well. They had Whitehead and Weinberg. They had Reuben and Friedman. They've had pairs of leaders, and it's worked very well. Usually when the leaders are very different from each other, have different interests and different responsibilities that evolve. Mitch and I are probably a little bit like that in some ways, and I think that may be one of the reasons why it works. But I think there are certain things that Mitch imparts to the organization in a very powerful way that maybe I don't impart the same way and certain things that I do that he doesn't. Mitch is obsessed with the research side. He's profoundly decent and ethical person. People trust Mitch. He's sort of set the standard for what deep research looks like at Canyon. I don't get in the way of that process, although I parachute in and parachute out.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“You and Mitch have worked together for a long time, and you don't see that many partnerships in this business work for so long. What's been the special sauce that's worked so well for the two of you as partners of the organization”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“I think people have to love what they do first and foremost, and they have to trust the people they work with. If they love what they do and they trust the people that they work with, and when things work out well, they get compensated in a way that they believe is fair and mostly transparent. That's the best thing you can do. It's never going to be perfect. You can pay people an awful lot of money, and then they can say, there's nothing to do. I think I'll just leave. They can decide they want to be the... Most important is they love what they do, they feel very well respected for their expertise, and they get compensated fairly for what they do.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“How do you create your internal compensation structure so that these people are comfortable and happy to stay around for 13, 14, 15 years when if you look at this last period up until a couple months ago, there was probably a lot more waiting than there was exciting activity in this world.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“Bond, but if the market gets smoked, they're all going to trade badly. And of course, that's what's happened this year. Thank God we kept the people on the team because most of our senior people have been with us for between 10 and 20 years, a lot of them 14, 15, and 16. When the market just exploded and the Fed started raising rates, now the high yield market's down 14% year to date, the investment grade's down massively. The equity industries are down massively. And all of a sudden, the opportunity set is dramatically different from what it was 12 weeks ago. You have to be patient and wait for those moments.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source
“So prior to the first quarter of this year, we were in a market where what you're describing with distress was not just with distress. There were some ninth inning distress things to play, like the last chapter of Puerto Rico, the distressed oil rig companies that had all been restructured that now are starting to all sign up long-term contracts at very high prices because of what's going on in the energy business. But most of the traditional distress was gone. Traditional high yield had a very low yield. Treasuries had very, very, very low yields. So you had low yields, low spreads, and not getting paid for taking more risk. You could go down to CCC and you barely got paid additional. Well, that's a very hazardous environment. So you have to pull your horns in and generate more cash and sit more senior in the capitalization, be more floating rate, do things that are defensive, and just tell everybody we're going to have to wait a while before we get more aggressive. That's a bit more macro observation because the tendency is to say, oh, I like this bond because it's cheaper than that.”
2022-07-25 · Capital Allocators · Josh Friedman – Master Class in Credit Investing at Canyon (Capital Allocators, EP.263) · IDENTIFIED FROM THE TRANSCRIPT · source