YouSaid · the spoken record

Tony Davis

lines on the record: 70
first: 2020-06-29
most recent: 2020-06-29
sittings or episodes: 1
sources: podcast

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“I think I've basically lived a pretty selfish existence. I did sort of a mission for my church when I was 19, for the Mormon church. I don't practice anymore. It was a great period for me. I remember very fondly because you woke up every day thinking, you know, how can I be of service? And then I got back from that and immediately got very selfish. So focused on my education, my career, having fun. And I wish I'd probably pivoted earlier to sustainability. I was in that old school kind of learn, earn, return mindset, so much more impressed by the young people that I meet today that want to have an impact from day one of their careers. They want to make money, but they also want to figure out how they can improve the world around them as part of their daily life.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“I grew up in a family. We didn't have much money, but despite that, my parents gave a lot of their time and financial resources to the community and to our church.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Been working on better self awareness, I think, and trying to meditate and work with a coach and just be more self-aware and get out of my own head and be more empathic and closer to people and nature. So it's a lot. I got a lot of long ways to go.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“People sort of talking about big returns and not giving you the data over what period of time that was sustained and how much risk they were taking to get those returns”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“It's allowed us to have bigger positions and a larger voice. We thought about having impact both through our own direct investments in AUM, but also through trying to add to the conversation, be a thought leader, put out pieces like this one in the Journal of Applied Corporate Finance, and really be a demonstration case of what is possible. So I think we are contributing. I think Takesa Village. There are a lot of people that are working at this in different ways, which is great to see. I'm really excited to see how much new product is being developed. And I'd say”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“I want to turn to some closing questions. Before I do that, I'm curious to circle back and ask you how you've been feeling about the scaled impact that you've been able to have from taking an outside capital when that was part of the reason for doing it in the first place.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Getting away from people and repeatable processes and those things. On a mission driven side, I tell people really two things. One, Are they doing as a manager, as a management company to embrace ESG? To pull some investment committee memos at random and see how they talk about ESG. So on the manager side, we're trying to walk the walk. Half our investment team are women. We offset our carbon. We run a summer internship program for low-income minority kids. So we're trying to really live our principles. And then, you know, we've talked about how we integrate ESG into our investment process, which is manifest in our investment committee memos and how we talk about OESG underwriting and thematic relevance. So those would be the two things that I would say. You can very quickly figure out if it's for real or for not.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“You've been in front of a lot of investors over the years for sure, and I'm curious in this space in particular, what tips would you give to allocators who are interested in looking at ESG and sustainable investing managers to kind of differentiate the ones that are likely to call it succeed on the mission driven side of it alongside of the capitalist side of it and those that might be less likely to.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Is there is an opportunity in a restructuring to hit the reset button. You have this moment in time where you can completely rethink governance and put in place best practices in terms of governance and executive compensation. You have a chance to reset on culture and really say, look, this is what we stand for. And so I do think there is a real opportunity in distress to lead on these issues. Of course, companies are very focused on cash flows and on survival and 100-day plans as they should be. But it's also a real opportunity to reset the tone and to put yourself in a position to lead on ESG, starting with governance.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“I'd say two. One is the distress that we're going to be focused on are businesses that we think have a real role to play in society and can be long-term compounders and came into this either with overleveraged balance sheets, but are fundamentally good businesses or their eye of the storm companies that just happen to be in one of the industries that's being so affected by the shutdown. So trying to find those. I'll give you one example of a company that we really like right now, which is in the amulatory surgery center of business. It's a leveraged company. We've been buying bank debt and bonds. It's a company where it's one of the few times in healthcare that payers and physicians and patients all agree that they're good because they lower costs, they improve outcomes, and patients prefer to go in an ambulatory setting than into a full-service hospital, particularly today with COVID circulating. So that's an example of the kind of thematic company that we'd like to own and distress. The other thing I would point out.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Think there's going to continue to be a lot of volatility, and we think in the credit markets in particular, sadly, there's going to be an awful lot of distress. And so from an investment standpoint, we'll probably be spending a lot of time there. I would say putting on my ESG hat for a moment and what I'm hopeful for, maybe the silver lining and all this, is that this was the crisis that we didn't see coming. Climate is the crisis that we know is coming. And maybe this will galvanize action, show us what's possible. We all agree how forcefully and with what scale governments can move to tackle a real challenge, that'd be my optimistic outlook.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, I think share repurchase and dividends, I mean, if you eliminate those, you kind of take out one of the core tenets of capitalism, which is the ability for owners to redeploy their profits into more productive activities. So I don't see that going away anytime soon. That being said, the optics of it, I think, are significant. And I think, again, to the point of if you can't really articulate what the role of your business and society is and why you need to exist, and you can't really articulate how you've been taking care of your customers and your employees during this period of time. And if you've got CEO paid to median pay that is egregious, and if you've blocked back a lot of shares recently and now are benefiting from government largesse, I don't think you'd be able to buy back shares just as an optics matter for some period of time.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Given that you've played really across the capital markets, one of the questions that comes up with this period of time and this kind of sudden stop in the economy is how people will perceive share repurchases. And just curious what your thoughts are on that.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, we already have a head start thinking through cheap, reliable, renewable energy, or thinking about electrification of transport, thinking about remote medicine, remote learning and remote education areas where we've already spent a lot of time”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Think Sachya Nadella said it best where it's going to remote everything. So thinking about remote medicine, thinking about remote education, retail, of course, remote e-commerce, you're seeing acceleration of trends that I think were already in place. You know, I do think some of that will be here to stay. I am of the opinion, I remember from 9-11 thinking, would we live in New York City? Would we fly airplanes again? And as this passes, I think most of our behaviors will return, but some of these structural trends will have been accelerated. So we're trying to make sure we're on the right side of those. Frankly, many of those are aligned with these SDGs.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“So we have this unique moment in time, I guess you'd call it, with the pandemic. And I'm curious what your perspectives are of what we're going to see on some of the things that come out of this and the impact on companies and markets.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“And we've got a couple that are really performing really well right now because they're actually a cost effective way for remote medicine, for example, dealing with chronic care conditions. And conversely, companies that have been earning excess rents, I'd say some of the physician practice management businesses where they've benefited from surprise billing, that's now, looks like it's going to be legislated away. So those are a couple quick examples.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“They would be able to really trade in line with their closest comp, which has happened. So that's one example of really ESG integration. I think if you think about just ESG more thematically or SDGs, when you look at how energy has been performing, any company with long-dated reserves has been called into question, healthcare. My whole career, the trade in healthcare, was buy the company with the highest notes that's earning excess rents and just go along.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Maybe without mentioning specific names because that might cause a compliance issue for our people, but we did write a paper last year for the Journal of Applied Corporate Finance and talked about ESG as a tool in active management. We gave an example of a specialty chemical company that was all sides of the EPA on nitrous oxide, sulfur dioxide emissions. And it was our view that they should spend the money to comply with the EPA today and that that would put pressure on their smaller competitors to comply, further tightening supply demand, and that the price increase alone would cover their cost of capital investment. And they've moved down that path and have since released a sustainability report and become real leaders, I think, in how they're approaching sustainability. But the kicker in all that was that they were trading at a 20% PE multiple discount to their closest competitor. And we felt like by fixing these issues and some others.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“So shorts, one I would say we like to be able to short because we think being able to be market neutral or closer to market neutral at some periods of time is really valuable. So first I'd say we look for companies that are overvalued. Generally, we're looking for shorter term catalysts, so 18 months in N. We find a lot of these companies that are on the wrong side of these SGGs and we think are facing operational headwinds. And then we find also companies where we think their laggards on ESG. So I'll give you an example of one screen we run called the Cult Personality screen. So we look for companies where the CEO has been in the seat 15 years or longer and where in a CI or Sustain Analytics gives them a bottom cortile score on governance. And we've just seen over and over in our career that sometimes the CI is there because they're just like that good. But oftentimes it becomes a personal thiefdom and ends up badly.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Of these issues, and then we show up, and we're not lobbing bombs in from the outside. We're going to eat our own cooking or invest it, and we're thoughtful. And so actually what's happened is there's been a virtuous cycle or circle because now they're saying, oh, that's a great idea. You should talk to my head of HR. You should talk to my head of cyber. You should talk to my safety person. So we're actually getting access to a lot more people throughout the company, which helps us as we think about underwriting the risks. And it's been a range of topics. So it's been labor practices, it's been executive compensation, it's been, in one case, putting in scrubbers to deal with NOx and socks emissions. It's been a mortgage servicer improving loan modification and the customer experience. It's been diversity, but diversity really with a focus on how do we expand the talent pool that you can attract people from because you have a talent problem in your organization. So there's been a number of different issues where we've engaged with folks and we try to identify”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“We understand the unit economics of the business. We understand how they make money, and we show up really thoughtfully and say, like, here are some non-ESG things we think you ought to be thinking about. And here are the two or three material ESG issues that we think actually are going to add to your business success over the long term. Part that we don't get credit for, I think, is there's a moment in time where role of businesses and society is being questioned. Boards are putting pressure on their management teams to lead on these issues or to understand what they're doing. Some of that, I think, is just in response to social media and smartphones. You just can't get away anymore with being a bad actor. If you treat your people poorly, it's going to get out. You're polluting the local river. It's going to get out. PWC had a report out on maybe six months ago and said that a third of all the CEOs that had been laid off in the prior year was due to ethical lapses. That's a bad day for your stock price. So boards are pushing management teams to get ahead.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, engagement has been, I think, the biggest surprise of all this because when I started telling guys about our ideas, especially my private equity friends looked at me like I had two heads. They were like, we own these companies. We can't get them to focus on this stuff. Like, how are you going to come in and own two or three percent of a company and get them to focus on it? And that really bothered me at first. But what we've actually found is something very different. And I think the reason is just that the timeframes are so different. Private equity average hold is much shorter. So the incentives are different. And investing in sustainability is often synonymous with a long-term orientation. Some of these things of investing in good processes and investing in your people pay off over multiple years. We found that companies have been very open to conversations with us. And I think some of it we get credit for because we're professional investors. We show up.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Yes, we're always trying to maintain a shopping list companies that we really like in equity and credit and waiting for them to reach our target levels. March was a little bit different. I mean, things were moving so fast. And we decided that we wanted to own investment grade as an asset class spreads have gotten out into the 400s, 99th percentile, but keep in mind, they were still tighter than they were in 08. We didn't expect the Fed to step in. The Fed had made it clear in the past that they didn't intend to buy corporate paper. But we felt like you didn't have the leveraged unwind to leverage investor in an IG in particular that CDO unwind that was going to create continued foreselling. So we felt like it was really good risk return and started to step in. And we were buying, I mean, we were moving very fast. So to go back to an earlier question, in that case, we were using some of the external rating agencies in ESG just to help us quickly get a sense for is there a big issue we ought to be aware of because we at a high level we just really like”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“You talked about that sourcing into those areas. Is that how you're driving sort of where these, let's say, IG or later on stress to stress opportunities are going to come from, that you just kind of have a shopping list and you're monitoring certain companies and prices?”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Pretty rapidly, we really were mostly equity in that valuation bucket and taking it down in January and Feb as we reached price targets in some names, but then as we got worried about the pandemic, we had very little total return credit because we just weren't seeing value in total return credit. But we quickly went in March and April to that being by far our largest allocation, buying a lot of mostly investment grade that had reached kind of 99th percentile in terms of historical spreads and long duration. The curves really flattened and the long-duration stuff we thought had a lot of total return upside. And also you were starting to trade significantly below par in some instances where you had bond floors. So I think as the year kind of progresses, I imagine that we're going to see a lot more stress and distress. And so that IG, we've already started selling it, will become more stressed high yield bonds and leveraged loans. And the valuation bucket is going to be a lot more.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“So we target 15 longs. We want to be concentrated. We think that's a way to sort of generate alpha over time and also it allows us to really engage meaningfully with the companies. We think about risk on the long side in our portfolio in three buckets primarily. Valuation risk, which can be distressed or equity, but it's where you're taking fundamentally view on the valuation of a company. Total return credit, which is credit where there's both a carry component as well as a capital return component where we're expecting effectively to spread to tighten over time, and then low LTV credit. So those are the three buckets, but the portfolio has been moving.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“There's a lot of good data on governance, and there's increasingly good data from CDP, true cost, and others on the environmental side. And I think we talked about the challenges around scope three. That is an issue in the data today, but people are trying to figure out ways to address that. Social is much more difficult today. Let's start with the fact that the data is self-reported, unaudited, and stale by the time you get it from most corporates. So I think that's going to improve mandatory disclosures are going to improve. Different frameworks for taking that data then and figuring out how to use it in a useful way are going to improve. But for now, it's early days. I think you have to do your own work. And we're able to do that because we run a small concentrated portfolio. It's a much more challenging problem, frankly, for the very large allocators with hundreds of internal positions, hundreds of potentially of external positions or many managers externally. How do they roll it all up into a dashboard that's...”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“With frameworks and do that. I think that's part of the opportunity for driving alpha still. Even the ratings agencies themselves often don't agree on whether a company's a good ESG company or a bad ESG company. I mean, just to use the Tesla example, some really like them because they're electric vehicles. Some really don't because of governance and work labor practices and human rights abuse allegations in the cobalt supply chain. It's more of like how do you take all of these inputs for us and just be aware of them and think about them in terms of the risk reward framework and are we getting compensated for the risk that we're taking? It's rarely like a go no go decision. It's more are we getting compensated for the risk that we're taking?”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Well, just as a side, I mean, one of the organizations we support, the Center for Sustainable Business at Stern, is really tackling this issue of how do you quantify the benefits of sustainability? Because I would argue CEOs got the message because it was great for external relations and managing their people. COOs view it as an opportunity to really continue to push operational excellence and improve productivity, reduce costs. CFOs, maybe you're still getting the message. There are different ways, of course, that these things manifest themselves over time in your financial statements. Higher productivity, having an employee workforce that's engaged will result in better revenue productivity and better expense management over time. We often make the argument around cost of capital, and I guess the way that you would integrate that into your financial analysis is to lower your discount rate for a company that you think is leading on these issues. But it's hard to distill this into a single number people do try to come up with a lot of”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“How do you blend a traditional DCF or looking at cash flow? You're projecting out the model for three to five years or whatever it is. And then these factors where on the emissions, you could quantify it. If you say we're going to price carbon, on the S, maybe it's a little bit harder. How do you actually do that?”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Communicating transparently means furloughing them if possible with benefits. It means thinking about paid leave, paid parental leave, all of these things. And I think that creates and engenders real loyalty among the employees over time detract and retain higher quality talent. You get better productivity out of that talent. We have a series of culture questions that we ask senior management. We ask recently departed employees. Of course, we look at Glassdoor if it's a company that has public data sets in industrial, we'll look at health and safety data, but we're really trying to understand what's the DNA of the company. Do they take care of their people? Is it a culture of operational excellence and risk management? And that's what you're trying to get at in that kind of line of inquiry.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Efficient way, and does it change the cost curve? So there's a carbon kind of climate analysis. Third is us looking into culture. I'll say on that topic if you think about the history of ESG, it really started with G and people understanding that good governance led to better returns over time. More recently, I'd say there's an appreciation for E, like environmental risks and opportunities. I think in this current moment of COVID, S is going to get its day in the sun. How do you take care of your people? What have you done even more broadly, the role of business and society is being questioned? You see the polls around how many Americans believe in capitalism at this point, and those numbers are declining. So I think you want to be able to say, my business is good for society. And sometimes it's not as clear. So, for example, we have an investment in a especially chemical company. But in those instances, you want to make sure the way you're conducting yourself, you're taking care of your employees. And in this time, what does that mean? It means...”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“So scope one are emissions that are emitted as part of your process, your production process. Scope two are emissions that are emitted by the electricity that you consume in your process. Scope three is everything else. But you get these bizarre effects where on scope one and two, for example, Tesla has the same or even more emissions per unit volume than do GM and Fort. But obviously if you include scope three, they're a huge winner in a hundred dollar per ton carbon price environment. So we think through what the impacts of pricing carbon is and then the next level of analysis is how much elasticity is there in pricing, how much of that can you pass through to your customers? Are there substitutes? And then especially in some of these more highly emittive industries thinking about what does it do to cost curves? Because we're still going to need cement. We're still going to need aluminum. But who are the folks that are doing it in the most carbon efficient way?”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Look at both physical and transition risks tend to be more of an issue for industries that have a lot of fixed assets, think real estate or agriculture, but increasingly for companies that have supply chains in flood zones or high fire risk areas, it can be an issue that we need to focus on. But the main analysis there is really climate transition and thinking about the way that we approach that is one simple question. What would a $100 per ton price on carbon do to the unit economics of this business? So you first have to understand what their scope one and two emissions are, which is reasonably straightforward. Scope three is much harder to do, which is what the emissions are associated with their product once it's out into the universe.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“True independence on the board, not just in name independence, but are there directors that are acting as independent? Is there diversity on the board? Again, not because it's the right thing to do, because it's the right business thing to do. It leads to better risk management, it leads to better capital allocation. We spend a lot of time on executive compensation. What are the incentives of the executive team? How is the compensation design? I won't get into the details of TSR versus economic value add, but how much risk and over what term are they being compensated for their performance? And you might, for example, want a company taking more risk if you own the equity and less risk if you own the credit. It depends where you are in the capital structure. If it's credit, we'll spend time thinking about the sponsor and what that history of that sponsor is in terms of credit friendly or unfriendly actions. We'll look at related party transactions, which would be a big red flag, for example. So that's governance. On climate, which would be the next area that we focus on, we'll...”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“For forced selling, for situations where we can get involved and hopefully extract some excess return for the risk that we're taking. And in those instances, and in the SDG aligned businesses, we're really then relying on ESG as part of our underwriting framework. So you're moving now from sourcing and our investment universe into underwriting. So first thing I'll say is we do everything that we did before at Anchorage and at King Street and at Goldman, et cetera. So we're not shortchanging any of the fundamental work that we've done before, but we just add to it this ESG line of inquiry, which we think helps us identify other risks. And from time to time, opportunities that might not be apparent if we didn't focus on them. So just quickly to maybe take you through that framework where every company that we look at, we're assessing governance and you can look at a ton of different things in governance. But I'd say the big ones that we look for are, is there?”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“So, our investable universe is two primary areas. So one, I'd say each of our analysts is covering one or more or subsectors of the SDGs. And so we're constantly mining decarbonization, electrification, transport, value-based reimbursements in healthcare, water scarcity, healthy foods, financial inclusion, broadband access and sort of developing market. We're constantly mining these themes for longs and for shorts. I like this description of the Sustainable Development Goals as the strategic plan for the planet, which I believe, and if you believe that, there's just going to be over many, many years of tailwind to invest in these SDG-aligned areas. And conversely, if you're shorting a headwind. The other area where we source primarily is in what I say more traditionally, a special situations or stress to stress, credit opportunities, but this is looking for complexity.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Time arbitrage perhaps in the markets today. I think if you're trying to compete quarterly against the machines, that's a tough place to be. So you need to be able to take a longer term view. And so we structured it so that the majority of our capital is longer term capital. Exchange for that, what we offered was lower fees, a hurdle, and we pay ourselves at the end of three years. We really want to make sure in terms of core values, LP alignment is one, two, and three. And so we felt like that would better align us with our LPs. The other thing that we did was to set aside a majority of the economics for the team. We really wanted it to feel like the analysts to feel like they were owners and to think long term. And one way to do that is that the economics are there for them to benefit from.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“We led with a product that is across the capital structure long and short. We wanted to be able to go where we saw the best risk reward. I mean, I think another one of the lessons you talked about from Anchorage, we were, I think, very good at being able to invest across the credit spectrum from distress to IG, across the capital structure, from equity through bank debt, and across geographies. And we were always asking ourselves, where are we seeing the best risk reward today? And so we wanted to have that flexibility. The other thing that we designed it to be able to do is to be in moments like coming to this year, we had very little net exposure, but we want to be able to have communicated to our investors that when things are really for sale, we're going to get much longer. So that ability and flexibility to get long when we feel like risk is really on sale was a key design element. The other I'd say is really time.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“As you started to tackle each of those for inherent the business, why don't you start with the investment strategy piece in that you've trafficked in, obviously, in credit and equity, in privates, with your own stuff in some earlier, what product did you decide to put out and bring to market?”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Those cash flows are less risky, they're less volatile And if we can help companies to sort of internalize this message and believe it, then instead of folks like us and others begging them over the head to incorporate ESG, they'll just see it in their self-interest to go out and lead on these issues so they can lower their cost of capital. So those are the guiding lights, if you will, of everything we do. And then we had to think about all the things about how do you integrate ESG into our investment process, how do we staff appropriately, what is the world of alternative investments look like today. Where are going to be the investors for this kind of product, all those things that you would imagine. But it started with aligning on mission and goals.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“First, again, we wanted to make sure we were aligned with our mission, our values, what's our North Star here. So I'd say number one, it's very clear to us that as an investment organization, we have to put up great numbers because otherwise we're talking about these things, but we need to show great numbers. Our two big goals as an organization are to show that when you incorporate ESG into your investment process in a thoughtful way, at least a better investment outcomes. And as you probably know, there's still a lot of folks who the moment they hear ESG think concessionary. And we just don't think that. We think it makes us better investors. And we want to demonstrate that. And hopefully by demonstrating that encourage more capital into the space. And the second big goal is to show corporates that when they lead on ESG integration, they can lower their cost of capital. And the basic rationale of that is you have two companies doing exactly the same one, but one leads on ESG and one doesn't. You're willing to pay more for the cash flows of the one that leads on ESG because”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“An ESG integrated product. And for the first time taking outside capital and how we would integrate ESG into our investment process, sourcing, underwriting, and engagement. And we wanted to be part of that conversation. And the scale of problems, I mean, I like this one statistic, the IPCC, the Intergovernmental Panel on Climate Change tells us that we need $2 trillion a year at least invested in clean energy systems. Let's hope it's not government. Let's hope that we can get the capital markets we put a price on carbon and we get the capital markets helping us to allocate that capital. And so that's what gets me really excited. I think other externalities are going to be priced over time that we can get capital more efficiently allocated and we can start to really address at scale some of these issues.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“What happened then is we were really enjoying what we were doing, but I was feeling a little bit frustrated just at the scale of the impact that we were having. And when you look at just the magnitude of these issues, you really need the capital markets to encourage these behaviors. You really need large corporates to take up these challenges. working with the capital markets and working with large corporates is what I had done at Goldman and at Anchorage. And so we started thinking more about”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Impact stuff was really all over the map in the beginning in terms of sectors that we would focus on, in terms of size of deal from seed deals to late stage growth to small private equity, where it's kind of gotten to over time is that it's been much more focused primarily, I would say, on SDGs 347, so health education decarbonization and late stage growth, small private equity. That's been rewarding in a lot of ways. One, we've been able to get much smarter on these issue areas. Two, we've met some really wonderful entrepreneurs along the way and been able to help them scale their businesses and have both good financial outcomes as well as good impact outcomes. And it's actually been a portfolio that's performed very well too from a financial perspective. So that's what we've been doing on the impact side of things. And both of those activities, the foundation and the impact investing have all been with internal capital.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“So great that this makes sense for us. And often the case is yes. I mean, relative to a pure grant, even if you can just get the capital back and recycle it and use it again. And there's also something about those blended finance models that also I think there's a governor accountability effect that there is an expectation of return of capital, let's say. And so it does sometimes. Cause the receiving organization to have to be a little bit more aware perhaps of their expenses and efficiency and how they use that capital.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Most of the endowment is in what I would call MRI, mission related investments, where we expect they're aligned with our mission, but we expect commercial rates of return. And then there's the grant making, which is 100% concessionary. It's this in-between space that people get hung up on. Like I'm investing in something that I think has a great social impact, but for the risk I'm taking, I'm earning 300 basis points less than what market rate of return risk would be. And I think that some of those organizations are just more efficient in allocating capital and tackling social challenges than if Ask a purely nonprofit to do it, or you ask a government program to do it. And so we try to kind of do that calculation in our minds and just say, look, for the 300 basis points that we're giving up is the social return.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“You're investing the asset side of your balance sheet into these things that also serve the core of the foundation, others would make the case, oh, that's a narrow investable universe, so you're sacrificing return that you could then use to make more grants on the liability side. Have you thought about that holistic math?”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source
“Businesses in New York City because we just felt like the money wasn't getting to them, so we were able to be part of the grant money that helped that occur. So the foundation, I think, is we're really proud of how we've used our capital and thoughtful about it.”
2020-06-29 · Capital Allocators · Sustainable Investing 7: Tony Davis – Hedge Fund Perspective at Inherent Group (Capital Allocators, EP.145) · IDENTIFIED FROM THE TRANSCRIPT · source