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Please welcome your panelists for common sense from uncommon investors moderated by Michael Milken well good afternoon it's May 1st 2018 and we have five of the world's greatest investors joining us today and our theories for this panel were what are the insights their professional lives some of the. Ideas how do they approach making decisions at their institutions and I thought we'd give you a quick little pass down the panel here on why they went into the. Investment business Mitch Mitch Jewess Canyon was a lawyer and it wasn't challenging. Enough so I wrote a few articles in LA magazine I interviewed somebody at Drexel by the name of Henry wolf and Henry said we should be interviewing you for a job and they introduced me to Lowe Mike and I got to do what I always wanted to do which was to apply the law. And finance to restructurings of all kinds and in addition was able because. Drexel was that kind of place bring out some of my closest colleagues Josh Friedman who eventually became. My partner at Canyon all right George Hicks Barney partners well I was a lawyer as well and so we see a little training here I think you're setting it up there but what I noticed was that when when there was a deal closing or you negotiated all day the. Business guys and gals they got to go home and the lawyers had to stay up all night drafting so I said I got to get on the other side of this business somehow so I had a chance. To build a portfolio at that time for Cargill and it was right about the point time that we had the big default. Cycle in about 1990 and the Resolution Trust Corporation came into being selling off a lot of assets so I guess it was a bit the right place at the right time and that's how I got into the business well one of reasons George's you know lawyers work all night as they get paid by the. Hour so whether their word or sleeping they're working all night man I was 15 years old my father let me take $500 to buy a TNT shares I looked at the newspaper on the way down the broker dealer in Wilmington North Carolina I saw a little blurb about Kent cigarettes and Pilar lard and I decided to buy. 10 shares of Pilar lard the next day I got on a bus and got off in the two o'clock at night in Norfolk Virginia I got the newspaper I wanted to see how I was doing and the stock was up two and five-eighths and I could feel my heart beating inside of my chest and I knew from. That time on the only thing I ever wanted to do was to be in the market that's interesting Manny my uncle who was the chairman of the board of Hart Schaffner and Marx in Chicago when I was 13 gave me a few shares of Hart Schaffner and Marx I think he never regretted it because I constantly called him and. Discussed how the company. Was doing didn't like what management decisions were etc so a John what about yourself yeah so I. Have a little different story I was actually pre-med at Cal and I had an accident and ended up in the in the emergency room I broke my leg in the soccer game and I was there for three hours before they could x-ray me at the end of which it was why would anybody. Want to be a doctor so at that point I came back on major and the rest is history all right mark well I too was a lawyer and the. Short the short answer is I found it too boring although apologies to the many talented attorneys in the room the better answer is I wanted to get closer to the heart of what was happening whether. It was a financing or a. Merger transaction and a very good fortune to interview and get a job offer at Salomon Brothers in New York some of. You may was actually became somewhat prominent among other things for being the subject of a book liars poker and in those days Mike was a little bit competitive with the guys at Sally's and. I would did very difficult time getting attention from Drexel in. The second I get that Salomon Brothers offer an offer from Drexel a week later they would not let me leave the Beverly Hills office till I committed and here we are it must have been the corporate finance department not the gentleman's great so you know we have three of our panel members particularly that have expertise. And non investment. Grade debt and we have. A short video some of the requirements so we're going to talk about their activities some of what you need to do if you're going to handle an on investment grade for foil. So let's take a look at this video electronics for tracking changes in the marketplace the kind of things that don't come off the rack professionals when it comes to trading junk bar our services aren't tailor-made so Mitch if we walked into Canyon how are the people on your trading desk dressed these things huh yes. Well look I wouldn't say that debt is toxic or you know the kind of debt that we talked about and raised money during the 80s for and then transition into 90s and now in the next century it's it's challenging because it's complex and and that's like one of the common-sense themes that I think we're. Going to be talking about which is there are opportunities in any situation which is complex and when. You're looking at securities you're designing. Securities that are complex you can find a lot of beauty as opposed to toxicity in the situation right and so I would say that when you walked on the flora Canyon you'd find 50 professionals that are going over indentures really trying to understand the process the fundamentals of companies either buying securities that people and institutions don't want or designing. Securities as we did when we were at Rexel that solves a problem for the company and also provides an opportunity for our investors so it's this by complexity and self simplicity idea that's been around for a while that really is the basic common sense theme that we embrace. Now look to some people complexity is threatening and they. Like to envelop themselves in the false comfort of simplicity we see that smooth. Up you guys Wow well I mean we have charts on the flow of money into ETFs et cetera et cetera index funds and I'm not knocking that approach to investing but alternatives by. Their very nature are come complex and why don't we take a look at slide 16 and maybe took a take a look at your decision process there if we could pull that up mention yeah so if you look at what we try to do a Canyon and I think this is common to most other firms. That are in the alternative space is you have to have a worldview and a. Research process that's congruent in a corporate culture and one of the best ways to bring them all together is what I think is a systems approach which is you it's it's no magic to it it's basically saying you know. The world is complex getting more complex you should embrace that complexity by looking at how things are interconnected and. Always understand and have the humility. To understand that there's always unintended consequences unknown unknowns so you always try to balance. Preparation prediction and build staying power in your portfolio not just earnings power and that allows you to stay in the game when others are taken out so you can buy things when others have to sell and I think George would tell you and Mark and Manny and John that that's pretty common to what we do because when. You buy complex situations you have to most importantly always be around when things get tough and going back to your toxic you know little film from our days are excellent we did those kind of things look when things get really tough in the marketplace when there's this kind of fear that is that's what's really toxic it's not the. Investments themselves it's the fear that envelops them that you have to be able to withstand by having the staying power so I think three. Of our panelists particularly have the flexibility and maybe. In some sense all of them to participate anywhere in the capital structure if they choose to George talked to us a little bit about the process and Varni so I think a big thing is. I think about our team we don't happen to be dressed up in those nice suits. Go to work but I think the big difference is is that we have a team spread around the world that's interconnected we have 90 investment professionals spread almost equally between the US London and Singapore we connect regularly and and I. Think an important piece of that is that it brings a diverse set of views to bear as we both determine relative value and and find opportunities and so it it takes a lot of work because those time zones don't match up perfectly and we try to set up. Some rules of the road so everybody gets punished by by the late-night sessions but process is so important in diverse viewpoints are so important because all of those perspectives come together to ensure better decision-making and that you've thought about all. The risks so 10 let's take a look at then slide 2 for a moment see if. Maybe you could. Comment on that a little bit George. As we reflect on what those different cycles are as you step back well the point we're making here is actually to disagree and put in a little different perspective because we don't think. There is a single cycle and and there might be a bit of a unified cycle but our thought is is that as you look around the world there's always. A different set of opportunities and cycles playing out at different points in time I mean you have economies in different stages and then importantly you have holders of cuspid debt in different states of mind as to when they're. Going to sell those assets and one of the things that we found is is that sellers of the assets that create the opportunities often go through kind of like the stages of grief. You know its first its its denial then. Its acceptance and then it's finally selling those assets so I think a central tenet for us in having built a global platform uniform is that there isn't a single credit cycle and and frankly sometimes there's there's too much of a preoccupation of with what's going on in the US and in our credit. Cycle let's pull up that slide to just for a moment George and one of the points I would make to you and the other panelists is looking at these leverage ratios independent from the level of interest rates you know Israel is really. Impossible to do yep when they want to. Loan you money for one basis point or ten basis points in Germany it's pretty hard not to want to borrow and so we don't know if that's a liability or an. Asset long term from that standpoint so I think that's the point you were making there's so many factors George one of the other areas that somewhat unique to your firm is that you operate investment significantly in so many different countries so many different potential rule-of-law situations jurisdiction how do you handle that. Well it is a critical underpinning when you're a credit related investor. Because if you don't have a good. Rule of law in a way that it's. Enforced what appears to be a credit instrument with good downside protection is not even close to that and the big thing for us we talk about local presence local language speakers and as well as either partners or presence on the ground so a case in point we've been fairly active. In Italy lots of times you can talk about Italy as maybe not having the rule of law a process that that you might like to see it can be a bit slow and there's some truth to that which you can factor in. But importantly for us. As as in any country we go into we have local. Italian speakers we make sure we understand the law. We read all those indentures that that Mitch was talking about even though they're in Italian and then we have a local presence so that when when you have to work out a deal we can do it with. A local cultural presence and the fact of the matter is is that as you go to different countries some of them don't have that predictability and the rule of law. You need to invest for our type of investing and we'll just simply have to avoid those jurisdictions so Marc you have look. Heavily in your firm and mezzanine. Structured debt with equity etc is a combination and I think with so many different opportunities you've had to be pretty selective on which things you choose. To invest in and what you don't talk to us a little bit about the process at Crescent so you know Creston out for 27 years with my partner jean-marc Chapas who really pioneered. I feel sponsored mezzanine investing in the United States we've really focused on people process and selectivity leading to performance it's important and Mike we talked about this at. Crescents not just me and Sean mark we've got a team of 80 investors we have a slide here that indicates you know we've over the last few years we've looked at over 9,000 transactions we cover over 800 private equity firms and for the panel preceding this including with. John Donne uncle's partner John sokoloff it seems like it's still a robust time for private equity and and yet. With that and the number of multiple transactions with sponsors you can see we have over 60 sponsors we've done transactions with it's still extremely important to be selective if you're if you're selective and disciplined you that can lead to a good result typically we will look at. 1,300 1,500 transactions a year to make 30 investments and hope to get performance from those investments and Mike as you know I I also in the principal owner of the Milwaukee Brewers baseball team and I've tried to take things I've learned from business and investing to baseball and vice versa and we find selectivity is important in. Baseball also and it's a quick video that ok let's take a look at how you run their baseball team and we don't have quite as spirited a celebration we have a successful investment exited Crescent but you know that one of our players is this Aguilar swore 13 pitches there is single at-bat that's what John definitely ask. Them for a covenant in one of his but you know selectivity is so important in in and discipline in. Everything we do and you know that carries I think that carries through Marco I. Think one of the you. Started with management and I think it's something we've really focused on whether. It was in government in a country and whether it was person in the Senate the. House prime minister anywhere in the world or whether it's individuals managing a business what are. You looking for when you're looking at management how are you attempting to judge management well one of the key things to look at is is previous track record it's not as we know from an investment manager. Standpoint it's not always indicative of future performance but I think with folks who have demonstrated aptitude and running companies especially companies with debt they can do it time and again and and in particular not only the management team. But the transit the private equity sponsors we evaluate not only the PE sponsors and and their well their performance now. As a matter of record but the partner at the particular phone. And how how their transactions perform and we have a lot of investments not only with repeat PE sponsors but with repeat management teams so many in many ways you develop you finance and a firm you built financial institutions that have provided capital people particularly throughout this country today. You're probably the most knowledgeable money manager investing in financial institutions particularly banks how did you choose this area to focus on first I was a inset 1972 I started with oil and gas I had this thirst for knowledge in the market and was successful over very brief time and then. When gas broke after the Yom Kippur War three or four years later and then I tried to do casino stocks as an analyst and there was only eight or nine companies so I apologize it took me a while to get going I didn't give. You enough of them to invest yes I couldn't break through because there were so few companies. So finally I found savings loans and banks at that time there were 10,000 of them so it didn't matter if eight mr. Jones followed you know first fed of charter then I had 12 other pieces of to follow so I needed I had finally found a break in the market where there was tremendous in efficiencies because there wasn't coverage. And that's what I was looking for and you know that gave me the break to go into financials simply because they were thousands and thousands and thousands of them so I could be an expert in some group of them okay let's talk about evolution from analyst evolution from financing building. To evolution of. One of the leading managers of financial institutions in the world as an investor you know this group is you. Know is somewhat doe group but it has tremendous volatility in spurts tremendous changes it's tied very very much to the regulatory environment and in a sense to get really good returns in this group you need either chaos like you had an OE oh nine or what you had and other breaks. Earlier or you need massive regulatory change which for the way you're having it right now and because there's so many thousands of institutions and also because there's different waves operating against each other a meaning shadow banging against banking and you have banking in. Different areas of the world you just have to simply adjust to the waves which move one way and then the other way and also adjust to the unbelievably complex regulatory governmental change because it's a regulated business so to some extent the government sometimes. Is picking the winners in the loser's period so many probably more than anyone in the world you had identified the small or medium sized Bank as an opportunity probably knew more about them at your firm than people running the bank themselves and my view is a call from you to that CEO was probably. The best thing the banker running that business has with your insight across it what led you to this sector of the market we're agnostic as. A firm and so we don't care whether we're in Europe we don't care whether we're long or short we don't care whether we're in the shadow bank space or in the big banks space or in the small bank space we don't care whether we're in the debt. Or in the equity period we're just looking for the highest return and a rapidly changing group and we're we're here because this is the highest return anyone has seen in a long long time especially risk adjusted so what's happened today is there are five thousand bang the United States the Federal Reserve Board because of cybersecurity fears and. Also for political reason as starting two years ago has made a decision to make the playing field completely on level it's like owning a 7-eleven. Where the 7-eleven can be open all the time and the supermarket has to close at six o'clock every night and is closed on the weekends and can't sell liquor well you're gonna make money in the. 7-eleven so a small bank has an unbelievable advantage over for the very very large banks keep in mind the ten large banks have 75% of the market and once they made this decision we saw this as a very very powerful. Opportunity and that simply. Has accelerated because of the misconception in banking in terms of the yield curve being a major factor mike tells me they all have 30-year mortgages and that's a risk that means he simply doesn't understand banking today i invest. With you many and you know and they're actually basically have deposits at 30 40 basis points zero and they're lending out at LIBOR and they're growing at 8 percent and they're consolidating and so and the capital market window has opened up to all the private banks all the banks across the board the Federal Reserve boards made rules that are. Quite when a favorable of us one or. Two examples of those rules that favor the small and medium fine sub debt counts as equity that's like you going out and getting a mortgage at a house and. Your equity just went up by a hundred thousand dollars or a million dollars or ten million dollars if it's Mike's house so 20 40 million so so so that is an unbelievable rule and that's just a rule to allow me. Or have George buy me up because they. Say if George can borrow. Money at 6% counts his equity then he's first. Fed of Pulaski Missouri and I'm second fed of Pulaski Missouri I finally can sell out to him and he closes the branches consolidate it's a tremendous return so the consolidation is mind-boggling what's taking place and we now have gasoline. Being thrown on the fire we finally have a consolidation. We have a bill. In Congress which is should pass by Memorial Day which makes these rules even more favorable thank you so on I. Don't think you had a chance to come to lunch yesterday this fantastic lunch we had with a great moderator yesterday at lunch I. Know I was put on the standby list I couldn't believe it but I want to show you a short clip from that lunch. If I could General Petraeus now remember he had hit led the CIA led much of the world and protection and military. And the kind of in Middle East Africa parts of Europe etc had a stellar career in these areas and yesterday on the panel John he pointed out let's take a look as a partner now in the global financial investment firm KKR I have come to realize that beyond government service the highest calling of mankind is the private equity. Industry well for a person that graduated first in his class led our efforts around the world and we appreciate that insight and I want to emphasize that with that comes enormous responsibility day for private equity they control more than eight thousand firms in the United States today there are seven of the ten largest employers and with that. Economic power comes enormous responsibility for the jobs of the citizens of not only our country but the countries of the world so you've taken on a lot more responsibilities there too well and in a serious note. We no kid seriously tried to do well while doing good both because of if you will. The moral nature of that but also frankly the practical nature and for what it's worth we are actually raising our first impact investment fund where we're going to turn it around and. Do good while still hopefully doing well so John among the members of the panel you look like you follow the coordinate General Petraeus the highest calling going into private equity did you look at it that way and when. You made that decision well I would say two things first off one is I think he understates the case I think very cool socks I really like this and look. At it it is it is a important thing we do it's certainly not the most important thing but our job is to guarantee or provide for the retirements for our clients meaning most of them would be our retirement accounts so it's. Our job to make sure that the firemen the policemen the teachers the promises that have. Been made to them during the career are are. Honored and you know I tell you an interesting story I was I had had a benefit of going down to Houston to visit the Houston firefighters one of our clients and I I was there early and I walked around the lobby and they had this wonderful display an old. Fire engine which was kind of cool and. They had these cubbies and the cubbies had the helmets for Houston firemen who lost their their lives in the line of duty and it was an interesting you sort of looked at it and it started in 1898 and then as it kind of got it was you know Irish guides actually and is. It sort of the years went on you sort of saw bad days where they lost three or four firemen you saw Hispanic named you saw a female names it's sort of an interesting sort of commentary so. I went into the meeting and I and I said well you know in a hurry could you just and so I said yes and I said thank you and I sort of went through the story I went with you and one of the trustees he turned to me put his hand. On me and he had shed tears eyes and says that's why he can't blow it for us and it was it was a very moving moment for me a very meaningful moment for me and very special moments so you know look at the the folks. That are getting it done are the people who run the businesses we're allocating capital we're making bets we're hopefully adding value hopefully not over adding value but you know I would say maybe to use. We're more the coaches and they're the. Players and both are important so John there's. We've gone through an interesting cycle in private equity mm-hmm more. Money being raised than ever before your ability due to lack of covenants to dividend money out yeah higher levels of leverage today that's occurred in the industry how have you approached investing in this period of time okay well it's a broad question and I think it was an hour on this before at the at the presentation before but. You know Warren Buffett said and investing is simple it's not easy but it's simple and it I think it's a very apt statement there's sort of three ways to make money in in in. Private equity one is you buy things and later multiples expand the second is you buy things and you add value or the third is you buy things with momentum and you ride momentum for long enough and you make money those are sort of the three ways to do it and the. Point you probably add is financial engineering which which certainly is a part of a part of it but you know one of the one of the joys of working with Mike and you. Know we talk about uncommon investors there is a common thread four of us worked with my affordable sort the drexel burnham mike and was great was it was this opportunity to look at a lot of different buyout firms that was our client base and see who was good who was not good. Who would work for you and then as you get in the business there's pattern recognition so what works for us is is we first of all take the mandate seriously which is to put a dollar to work and return two dollars net or more five years. Later and then and the tactic or the strategy that we use to do that is essentially to buy growth and you know you have a slide up there that talks about dry powder I would say that I doesn't concern me at all and one reason is look at what we're competing. Against okay so what do people like investing in today they like investing in exchange-traded funds okay. The S&P 500. Today is trading at about 14 times Eva da okay our industry is buying last count eleven twelve times Eva da so we are buying the spread is the highest it's been versus the public market. In the last decade so that's an area of opportunity a second area of opportunity is growth so the average growth over the last four years compounded annual growth for is shockingly three point four percent 3.4%. Now that's way down there's some oil and gas it's gone the wrong way there's some large companies that are disproportionate but relative to the size of the EBIT da they contribute but as I think my partner said in the earlier the companies that we bought. In fund seven for the last four years have grown 19 percent compound annual growth so we're. Buying them basically today at about the multiple that the SP trades that we are growing for they're better companies we're growing faster we employ leverage that they. Can't employ and so relative to alternatives I would say that our asset class and certainly. In the exercise of assets that the that we're looking for there isn't a doubt in my mind that we will have perform that index not one so. Mitch I want to take you back here just thinking about maybe a specific situation where the flexibility that you built in to operate anywhere in the capital structure so we have. Looked recently to try. To test the thesis which leaves does the bond market lead does the equity market lead and as the first indicator and some of the interesting things we've seen is that stock of a company could be going down and the bonds going. Up where the. Bonds are moving into higher probability that they'll get to own the company you've had. A few situations over time where you started out as a creditor or you even invested as a creditor where you were investing looking at is if you're gonna buy. The company could you pick an example maybe to relate that to so I'll give you two examples. Of situations that were we've been involved with but first I will make a more general point that I think speaks to some of the things that the group has touched upon different ways so if you can put up slide. 18 this is a very simple depiction of the structural opportunity I think we all face today in the alternative so what this simply says that in a complex world were you dealing with a lot of the themes from this conference the disruption the. Disintermediation that is going on that arguably represents the way the world progresses right we think that social and physical technology for the most part will eventually get us to the right place and this conference is about coming up with solutions to make that the case so. Corporations think about it corporations are beset by these kinds of challenges and as a result they're. Trying to figure out what to do that with their balance sheet should. We be public should we be private should we raise debt should we issue equity should we consider hybrids like converts should we transform our company in a very step function like way like a Content company AT&T buying excuse me a distribute distribution company like 18t buying the comp a Content company like Time Warner. To be able to compete with the Facebook's Google's Netflix of the world so on the other side of this you're basically saying you see an increasing amount of balance sheet change and usually you yeah capital is necessary in one. Form or another. To deal with that and certainly secondary market securities are usually beset by these kinds of changes because the market doesn't always understand them the regulatory overhang and you see this bouncing around now the capital to facilitate that change is less because the amount of balance sheet capacity that was usually provided. By the money center banks has been compressed because of regulation litigation so as a result people in the alternative states whether any one of us on this. Panel have an opportunity to fill in those holes in the system and facilitate all the balance sheet change their corporations and other types of structured vehicles are going through that's a structural opportunity that will last for the next 5-10 years if not long now apply that to two situations slide 37 first this is what was. The Caesar situation on your left in the in the more complex boxes and what it became as a result of deleveraging here was a company that was. Bought bought you know in a private equity transaction excellent gaming company excellent franchise it. Was highly levered going into 2008 boom we hit a recession and they can't grow into their balance sheet what to. Do which I think we should point out due to lack of covenants this was a company that was Harrah's rated investment grace so the creditors that were investing in this company were investment grade that at that time and then there was a whole bunch of securities that were issued to and debt securities that were issued whole co-op. Co level to be able to finance this this situation and with the recession from the great financial recession it couldn't grow into that leverage so as a result Canyon and others bought securities up and down the capital structure to be able to have a seat at the table and figure out with the sponsor what should. That capital structure look. Like and through a long very challenging process we finally figured out that the best way to do it would be to create an op Co the operating company and a prop. Co they the entity which would hold the properties of the gaming properties and then lease them back to the OpCo so that's called Caesars that's the OP go and bici is the prop Co and what we received by holding you know close to two. Billion dollars market value a debt was a combination of cash new debt that. Was worth par if not higher and equity so we're one of the largest holders right now previously being a creditor in the bankruptcy process we're one of the largest holders of si users and. One of the largest soldiers of vici the prop Co now if you look at throught flight 38 here's another example I mention I want to come back there just I want to comment here that the second lien debt you bought how low did a trade said hit. I think it bottomed out at 1415 and at the. End of the day was worth well over par okay so when we talk about debt once again I think the point Mitch is making and before we go to another example in which I want to just. Move on for a sec is that here you had a debt trading at fourteen fifteen cents on the dollar you had analyzed what. Was an unbelievably common complicated structure figured out where value was and at the end of the day you ended up getting seven times your money on a debt security and getting ownership in the company how many people at your firm worked on that situation all told about I would say ten okay so you're. Moving through the capital structure and create an opportunity I'm gonna come back to the second example judge think about some situations you know people thought Italy was going bankrupt Greece was going back from Spain was gonna. Bite the dust give us the feeling of what's going on inside your firm as these things are occurring. How are you moving. Where you're with the people in your firm are really on three different continents at the time to try to crystallize the strategy that you deployed well an area I can talk about would be Spain and Spain we've been active in for a few years it's interesting that in 2017 we invested more money in Spain related to cusp e assets. Distressed assets than we did anywhere else in the world and I know for a lot of folks there was a lot of talk about distress in a place like Spain and they would have thought well that opportunity must be over but what we did to take advantage of that opportunity. Was was really built a patient approach to Spain where we hired the the requisite language speakers and the presence on the ground and and then. There was a lot of discussion over time in our evolution in the country occurred over those several years. And we started out in the more liquid situations we ended up buying an asset management firm and eventually we ended up owning a couple platforms that that could be used to purchase the assets and really had a barrier to others being able to buy those assets and so within the firm the. Discussion really spread across all three offices we did a lot of relative value comparing we thought a lot about the values that we could achieve in Spain versus anywhere else and we spent. A lot of time looking at the state of home building and the lack of development over the last few years particularly compared to say the US or other markets Thank. You Manny I don't believe I've ever met a person over the years that has more passion when you get an idea and probably one of the things that really defines you to me is I was in New. York we were had an event and you flew from came up the train from Washington to talk to me about the article and CRISPR technology which will be the focus of tomorrow's. Lunch panel and the ability to cure disease from that standpoint well and destroy the. World or to destroy the world which is really the issue we're going to address what is the future of humanity as you listen to some of these sessions you usually have a contour opinion so let's take Mitch's little chart there that he threw up on those four boxes what what is your how would you view those things that Mitch. Threw up there before for us to look at so cuz you see the box now we'll get we'll get the right ones up in a. Minute like that great slide though 18 so you know this is a complete fallacy what you're looking at this is what I love about Manny after it's after I give him a half hour presentation on how the world was formed he lets me. Know that I was wrong and admits he was a brilliant investor is notice it says post Oh 8 financial crises this is true 9 10 11 and but today it's actually just the opposite today there's 250 billion dollars of excess capital the. Banks they're taking the chains off the bank so they are beginning to affect the middle market dramatically you can see every BTC every small BTC you start to trade it 60 70 percent a book yields are being squeezed. Across the board so we're not in a second Mandy I just have to wait one second I have to tell you though that in the debt it may be that you see capital in your. Neck of the woods but as far as our neck of the woods are concerned we're constantly being asked to underwrite debt deals that don't fit into ETF structures and I understand that Donald Trump and his team are trying to unleash. These bank balance sheets. But you know that administration is only going to last so long and they're looking beyond that administration to Elizabeth Warren and all the regulation so we're still seeing at least in our markets a tremendous amount. Of opportunities so what I'm saying though is not that it's already over with I'm saying that it's just beginning oh that you're just beginning to see across the. Board you know the opposite of o8 the pendulum that was the Oh 8 disaster is now beginning to swing the other way across the board and you might not see that for another six months than a year or another two years but it is happening everywhere at this. Point and you will see that continue which is really one of the major challenges one of the. Dangerous areas in in the. United States where the direct lending business is now 16 18 trillion dollars compared which is double 32 trillion which is double the size of the bank lending business but I mean many I mean I look at Deutsche Bank which has been totally. Neutered as the Bank non-player United buddies I understand that but as a big balance sheet that has been totally downsized and if you look at Europe also other banks have just gotten out of the underwriting business and gotten into the wealth management business so all I'm trying to say is me you know you're its timeframe. No no no what I'm saying is that the pendulum is swinging the other way it doesn't mean there's not opportunities in your example of Caesars it has very very little to do. With the banking industry has to. Do with your brilliance of seeing an opportunity within the Caesars period I mean look at that nobody understands that charge that's the whole purpose that's why you can make money not because banks can't get involved because of the unbelievable lactate once they give you the. Advance Danny let me just tell you that in our experience even after Caesars emerged from chapter 11 that banks were wanting in terms of financing that simplified capital structure it takes a while for a institution a company to. Go from bankruptcy and then become like investment grade so in but did they is not Oh a today is not oh nine today well I know as we went. On a senior secured basis in that period where they. Just emerged cuz no bank wanted to do it so I look I don't want. To monopolize let's really show I think the point Manny is making her and we're not going to decide today is where where are we headed what is the direction or isn't that the point. You're making many. Yes I mean I look there. Was good the you know exceptions for the rule there's gonna be openings but the wide openings you saw that gigantic openings of oh nine are slowly disappearing are going to disappear over the next four or five years so I am in 1974 we. Were able to buy bonds for their coupon never thought of my lifetime it would ever happen but once again in late Oh eight nine we had bonds pain interest trading for their coupon from that standpoint mark what is the volatility and what competition are you seen in the mezzanine business today I think all the. Businesses are competitive as. Financing sources you're talking on the other side of the dais here about direct lending and you know one of the points I think you know I think we would take the point of view that we're all lending money. A lot more responsibly than the bank's used to we've got a couple of slides by the way relative to growth on in the economy and the high-yield credit and slides nine and ten that showed that actually corporate debt in or below investment-grade universe is coming down as. A multiple now seven quarters of declining leverage well everybody's waiting for the credit cycle to end it doesn't seem to be ending and so there are a number of folks who are trotting trying to crowd into a space where we saw a trillion dollars of dry powder. In private equity firms that the key is how to make it simple you know used to be several tranches of transactions now we have this new concept of unit tranche financing we have just you know one dead player and maybe one equity player we did those deals back. To when we worked with Mike and we. Used to call a senior now it's called unit ranch but it actually makes things simpler you could invest in growth companies like John Donne apples talking about twelve times plus cash flow you can lend to six six and a. Half times cash flow at often with fees eight plus percent provide very meaningful returns to investors and I think that's all very positive insofar. As things are still growing regular regulations there's something we all have taken advantage of in this panel in both directions I think we will continue to take advantage of regulatory environment and you know. John I don't know if your you know how you John I'd love you to talk about you know how you transition into the type of companies in a portfolio so there was a day where. A high percentage of the companies who bought were a. Retail and today there's not a lot that you would be first focusing how have you transitioned you know that's sort of the magic again if you're if you're in it you know it's interesting if I were gonna invest in savings and I give the money to Manny because he's look he's done more he understands it more we've done. Enough retail we could sort of see the writing on the wall so we managed to exit that those investments that would ultimately be impacted by some of the trends we've talked about we did that two three. Four years ago it's it's just sort of it's a pattern recognition are you suggesting you don't want to buy Neiman Marcus back you. Know that's probably more Mitch's game right now if you look at it I I would like to say actually make one point that I thought was interesting listening to the sort of the discussion argument whatever whatever that was but one. Thing that's that it always strikes me is fascinating is the disconnect between different markets so you know I talked earlier about twenty five trillion market and how its valued and. How it grows and then and yet before this we had a panel where everybody's complaining about 11 times EBIT died is too much to pay for companies in our world so disconnect Mike you mentioned a phenomenon that I find fascinating where a bond is trading. Poorly and then as the risk of default becomes clearer it moves up it doesn't make any sense right it did obviously those two markets weren't we're talking to each other when that came about it so you know let me just let me just mention briefly why. It makes sense you're a creditor if there's a long-running room yeah okay you might be paying interest to the buys that. Are junior and you're going out the door yeah I mean okay once it looks like you're not going to do it anymore if I'm first I now have to now analyze okay you're gonna pay me par or you're gonna hand. Me the keys mm-hmm so there's a potential rationale in that potential for sure let me let me go back to this sort of the un-- and this is a way we would look at it I look at caesars before and the thinking that went into the biotic without casting aspersions on the thinking that went into it. But what's fascinating to me is you know we talk a lot about EBIT dial when when we work for Mike there was no such thing as EBIT Dada there was a bit earnings before interest in taxes EBIT dies a made-up number and it's not in right now we have an E bit da and it's pro forma projected. You know we're talking about those sorts of we're using those sorts of concepts to rationally but also in your analysis John subtract capital expenditures so you're really looking at camp which. Was exactly the point I was making what. I wanted to make because if. You look at at the notion of gaming it is not an E bit dot business you have to spend money to refresh so that company started life crippled it hit it hit a downturn and of course the wheels came off and because of that because of a poor decision that was made or Leon Mitch was able. To feast and make seven times as money because he took the time to go and study and study it's just the the dynamism of these sorts of things. Is is you know to me just sort of fascinating as you sort of get different people in different markets talking about different things different valuation parameters well part of the reason John is because people populate different kinds of investment entities and they have different incentives and decision rules so they look at it from the you know as the old. Expression where you stand depends on where you sit yeah so. You know a guy who has you know if you're for example Vanguard that's the product that you promote right notwithstanding the fact that you have this reinforcing dysfunctional cycle of income having an index that's market cap weighted when every time one of those. 5 stocks bank stocks goes up you got to buy more of it right so you know it's dysfunctional in some sense when it unwinds but that's what you sell if you're in private equity you know you. Look at it from that standpoint if you do what we do and you know you're in the. Secondary market or you're designing securities you look at it from our standpoint George's standpoint so the the key to good governance though is checks and balances so that you don't take an institution's money and basically put it to work based. On the sole mandate that you have without regard to what's happening in the environment I mean. That's what the staying power element is George so could you just. Pull up slide 69 I think this just kind of follows on with what Mitch was talking about and this just shows the the growth and ETFs and in one way and of. Course a lot of that holds bonds debt instruments and these ETFs actually own our inventory okay or a raw material for our business they don't know it but at some point in time they're gonna face a non-economic. Decision because there's the flows will reverse they're gonna flow out and then when they sell those I mean they're smart people running them but they're facing a whole different set of perspectives and as that paper flows out of course. It creates an opportunity to buy this debt it's critical to our business is is buying it right and it's the ETF's you know I certainly would like to you know use them as a benchmark for my investment because I think they are gonna face those. Outfits but the higher those ETFs go the more at some point active investing becomes unbelievably profitable we already see it in the REIT area. Starting where ETFs now are sixty sixty-five percent of every single transaction so when you we just saw this with a company we brought in to Alexandra Baldwin once we. Got it into the REIT index 65 percent of had to be bought on the entire market cap so what happens when it hits ninety percent when happens when it's 99 percent there is a point where it no is is such an aberration it doesn't work it's like if. Everyone knows what the future is going to happen in the market tomorrow morning all all of us on this in this room it's impossible that what is supposed to happen is going to happen because we're going to anticipate the same thing with ETF I'm I just want to. Last out until they hit 90 percent 95 and we'll make it work all right so we can agree on that I think one of the things you see here is we have uncommon investors but they have tested time if we pull up slide 77 for example in closing here we've span wide ranges here of financial. Markets and so when we look at and say interest rates are going up relative to what period of time are we talking about from that standpoint and I think you can see whether it's the passion and Mitch and Manny or George or John or. Mark today that it's both the passion but in appreciation for experience gleamed in markets over a long. Period of time I'd like to thank you all for. Joining me today .

 


Leonard Green Partners Company News

Thu, 02 May 2019 12:20:00 GMT
Signet Nominates 2nd Leonard Green Partner for Board - JCK
Signet Nominates 2nd Leonard Green Partner for Board JCK Signet Jewelers has nominated Jonathan Seiffer, a senior partner at private equity firm Leonard Green & Partners, to be a member of its board of directors.
Thu, 02 May 2019 19:47:00 GMT
Leonard Green gets its money back with Mister Car Wash's second dividend - PE Hub
Leonard Green gets its money back with Mister Car Wash's second dividend PE Hub After nearly five years, Leonard Green & Partners appears to have recouped all of its equity investment in Mister Car Wash. The Tucson, Arizona, company is ...
Sat, 04 May 2019 18:47:41 GMT
Berry Global Group (BERY) Holder Leonard Green Partners LP Decreased Its Stake; Viking Fund Management Increased Target (TGT) Holding by $462,000 - CryptoCoinsTribune
Berry Global Group (BERY) Holder Leonard Green Partners LP Decreased Its Stake; Viking Fund Management Increased Target (TGT) Holding by $462,000 CryptoCoinsTribune Leonard Green Partners Lp decreased its stake in Berry Global Group Inc (BERY) by 33.33% based on its latest 2018Q4 regulatory filing with the SEC. Leonard ...
Wed, 10 Apr 2019 07:00:00 GMT
Sir Philip Green's biggest backer backs out. - BBC News
Sir Philip Green's biggest backer backs out. BBC News Sir Philip Green's biggest investor has sold its 25% stake in Topshop and Topman back to Arcadia - the company that owns and operates Sir Philip's wider retail ...
Fri, 26 Apr 2019 07:00:00 GMT
Next Generation Films and Charter NEX Films to Combine Forces - Associated Press
Next Generation Films and Charter NEX Films to Combine Forces Associated Press Press release *content* from Business Wire. The AP news staff was not involved in its creation.
Wed, 01 May 2019 20:51:00 GMT
Blackstone Is in Talks to Buy a Stake in BC Partners - Bloomberg
Blackstone Is in Talks to Buy a Stake in BC Partners Bloomberg A Blackstone Group LP unit that buys stakes in alternative asset managers is considering a minority investment in BC Partners, according to people familiar with ...
Mon, 22 Apr 2019 17:55:55 GMT
Berry Global Group (BERY) Market Valuation Rose While Leonard Green Partners LP Lowered Its Holding; Piedmont Investment Advisors Has Lifted Stake in Verizon Communications Com (VZ) - CryptoCoinsTribune
Berry Global Group (BERY) Market Valuation Rose While Leonard Green Partners LP Lowered Its Holding; Piedmont Investment Advisors Has Lifted Stake in Verizon Communications Com (VZ) CryptoCoinsTribune Leonard Green Partners Lp decreased its stake in Berry Global Group Inc (BERY) by 33.33% based on its latest 2018Q4 regulatory filing with the SEC. Leonard ...
Mon, 15 Apr 2019 07:00:00 GMT
Leonard Green sold £350m stake in Topshop for 76p - Retail Gazette
Leonard Green sold £350m stake in Topshop for 76p Retail Gazette Leonard Green & Partners has sold its quarter share in Topshop and Topman back to Arcadia for $1 or 76p.
Wed, 10 Apr 2019 23:01:00 GMT
Green buys back Topshop stake as Arcadia cuts loom - The Times
Green buys back Topshop stake as Arcadia cuts loom The Times The American private equity firm that went into partnership with Sir Philip Green to help expand Topshop in the US has sold its stake in the fashion retailer back ...
Mon, 22 Apr 2019 07:00:00 GMT
As Verizon Communications (VZ) Stock Declined, Holder Apriem Advisors Has Cut Its Position; Leonard Green Partners LP Has Decreased Berry Global Group (BERY) Holding by $1.41 Million - CryptoCoinsTribune
As Verizon Communications (VZ) Stock Declined, Holder Apriem Advisors Has Cut Its Position; Leonard Green Partners LP Has Decreased Berry Global Group (BERY) Holding by $1.41 Million CryptoCoinsTribune Apriem Advisors decreased its stake in Verizon Communications Inc (VZ) by 63.21% based on its latest 2018Q4 regulatory filing with the SEC. Apriem Advisors ...