E366: Keri Findley: The Credit Investor Peter Thiel Chose to Back

What if the best investments aren’t the riskiest—but the ones everyone else can’t own? In this episode, I sit down with Keri Findley, Founder and CEO of Tacora Capital, to discuss how she built one of the most differentiated credit strategies by focusing on illiquidity, not risk. Keri explains how dislocations are often driven by forced sellers and structural constraints, why the best credit opportunities come from creating assets rather than just finding them, and how she partners with startups to finance products banks won’t touch. We also explore portfolio construction, why scaling is the hardest problem in credit, and how incentives, ethics, and alignment ultimately determine outcomes.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00David Weisburd?

  Carrie, you were introduced to me as the trader that Dan Loeb called the best adjusted by age trader he's ever met. What does that even mean?

• 0:08Speaker 01

  So I think that it was 2009, 2008, and Dan Loeb was trying to find structured credit talent to run a structured credit business for him. And he met people between the ages of 25 and 40. And I think that I probably wasn't the best person he met for the job, but age-adjusted, I was. And I think from his perspective, his view at the time was that by the time I grew into their age, I would be better than them.

• 0:33David Weisburd?

  Obviously, as you age, you get better at trader. But there must be some advantages of being a younger trader. What are they?

• 0:38Speaker 01

  At that time, in that market of structured credit and mortgage-backed securities, the age was my... Being young was a huge advancement for me. I didn't have the scars of the financial crisis. I didn't have the scars of losing money and losing my job. I was able to think rationally and not emotionally. It was one of these things where if you think about, like, every hedge fund had taken huge losses related to mortgage-backed securities, or every hedge fund in the space, and every trader was scared. How bad can it get? How bad can it get? People at Bear Stearns created this group called the Mod Squad. The Mod Squad was there to modify every mortgage loan that was outstanding. And they did that to protect their position. And I didn't have any of those battle scars. And so, looking

• 1:19Speaker 01

  at mortgage-backed securities at that time, I was able to take a very rational, not emotional kind of look at, okay, how bad could it really be? How bad can losses be? How bad can housing be? In a way that wasn't colored by how bad it had been.

• 1:34David Weisburd?

  And you started at this pressure cooker that was Third Point with one of the top credit teams. You've now developed yourself, your own firm, as a top trader. When it comes to credit, where on the risk spectrum are the best credit investors?

• 1:48Speaker 01

  I don't think they're on the risk spectrum. And I look at it just differently. I think we're on the illiquidity spectrum. I always liked assets that were perceived to be risky, but I never thought they were as risky. I just thought they were very illiquid. And what that means is they don't fit nicely in a box. Usually, a mutual fund can't buy them. Sometimes, banks can't own them. They don't have ratings that would be associated with being able to be owned by an insurance company or someone like that. And so, there's just a smaller buyer base. And so, these assets are less liquid.

• 2:19David Weisburd?

  What's upstream of that? Is that being able to find these type of opportunities? Is it access? What is it that makes a great credit investor?

• 2:25Speaker 01

  Able to find, create, and analyze. You know, back in 2009, there were all these mortgage bonds that were out there. They had all been downgraded from AAA to D. And so I realized, and many other people realized, that you took these bonds and they were rated D because they were going to take at least $1 of loss. Well, $1 of loss isn't that bad. If the bond is trading at 60 cents on the dollar, it could take $40 of losses. And so I looked at it and I was like, okay, how do we create an asset that a mutual fund wants to buy at a really low rate? And then what else can I create from that? So we started taking these AAA, now downgraded to D or default, bonds, selling them into trusts, getting S and P or Moody's or Fitch to put a rating on a percentage of it.

• 3:10Speaker 01

  And so they'd come back to us and say, I'll rate 60% of this bond, single A. Well, now I have a bond that traded at 60. I have a mutual fund out there buying this new single A bond. And I was able to create these unrated, defaulted mezz bonds off of it, which was the bottom 40% they wouldn't rate, at the beginning at like two times the coupon. So I was able to buy them at about 10 cents. And they were very illiquid. Nobody wanted them, but they paid me interest every month. And the downside was they'd pay me interest every month for a really long time. The upside was maybe I'd get some principal back. And I looked at these as the best risk-adjusted return assets I had ever seen. And for the most part, these assets paid interest for five, six, seven years.

• 3:54Speaker 01

  And in many cases, we got 50 to 70% of our principal back. And so it really is finding, creating, and analyzing risk that other people probably just didn't want to take, maybe because they can't, or maybe because the buyer base is so small because of limitations they may have.

• 4:12David Weisburd?

  It reminds me of the story of the two economists walking on the side of the street and they see a $100 bill on the ground. Neither of them goes to pick it up and they keep on walking. And a passerby comes by and says, why didn't you pick it up? And they said, it shouldn't exist.

• 4:25Speaker 01

  That's correct. It shouldn't exist.

• 4:26David Weisburd?

  Maybe you could double click on why that trade did exist and how that relates to being a good credit investor.

• 4:32Speaker 01

  The trade existed because insurance companies had to have ratings, mutual funds had to have ratings, the hedge funds had just all lost a lot of money on mortgage-backed securities during the financial crisis. Banks had to have ratings or trade them quickly. And so the buyer bases just went away. And so the trade of, okay, there was a forced seller of the bond. And so if this bond previously lived in a bank portfolio, a mutual fund portfolio, it got downgraded to D or default, and they now had to sell it. And there just weren't a lot of buyers. And the kind of buy-sell lack of equilibrium created this opportunity where people like me could buy this bond at 60 cents on the dollar and then restructure it into this trust where I was able to get 60% of it rated single

• 5:16Speaker 01

  A, sell that at about 95 cents. And then my 40%, I was able to buy at about 10. And being able to do that, it just, it existed because of what I would call a ratings arbitrage.

• 5:28David Weisburd?

  Preparing for this interview, I read everything about Dan Loeb, obviously a multi-billionaire, extremely successful. What was his superpower?

• 5:35Speaker 01

  I think he is the best in the world at hearing three, five stories and understanding which one Mr. Market is going to receive well. I remember back in the day, he would hear a story, you know, it's public, what about Yahoo? And the story of like, okay, the sum of the parts of Yahoo was worth more than it was trading at. I mean, he just-

• 5:55David Weisburd?

  And that's because of Alibaba?

• 5:57Speaker 01

  In that case, it was Alibaba and I believe Yahoo Japan. And then you were creating the like core Yahoo business for free or something like that. But the high level was that he really understood some of the parts analysis. And again, if the market, when given the analysis, if the market would understand it in a way that it wasn't today, and then it would go up.

• 6:18David Weisburd?

  Tell me about the CXHE bond trade in 2005.

• 6:23Speaker 01

  CXHE was a mortgage originator pre-crisis called Sentex. And Sentex was originating actually very good performing, clean, subprime, but good performing, subprime mortgage bonds. And in 2010, a trader from a bank called Jefferies calls me up and says, "I have this bond you should look at. The name of it is CXHE 2005 DM4." And I'm looking at this bond and I said, "Well, so why do you like it?" And he said, "If you run 1.990, you still get a 9% yield." Well, what that meant was if you run 1% expected prepayments, which is people prepaying their mortgage loan, 9% expected defaults annually, that's 9% of the pool defaulting annually, and 90% severity, which means that every house that defaults

• 7:08Speaker 01

  sells for a 90% loss on the loan, so 10% of its money back. And I said to him, "Well, so you're thinking that 90% of these loans are going to default?" And he's like, "Well, I like knowing if they do, that I still get a 9% yield." And I'm like, "Okay, this doesn't make any sense." And then like looking at every chart, trying to get data. And I found some chart that showed at the time in 2010 that 97% of mortgage loans that actually end up defaulting, default by month 60. So I'm looking at this bond, we're at like month 59, and it's only like 20 or 25% delinquent. And so I'm like, "Okay, so if the data shows that 97% of defaults occur by month 60, and you're saying that this is 25% delinquent, and 90% are going to default,

• 7:51Speaker 01

  like, that's like saying that only like 25% of the defaults-ish have happened. That doesn't make any sense." So I started running like, "Okay, what if 85% of the loans default? Okay, what if it's 80? What if it's 70?" And all of a sudden, this bond went from a 9% yield to like a 25% yield. And so I started buying bonds that were about 60 months, you know, seasoned, that were what I would call the fulcrum security, where if losses weren't what the street was expecting, they had huge pops in value. And it just changed my way of thinking about it. It's like, yes, you have a base case, but like, let's look a little bit below that base case and see, "Okay, if 90% is a 9% yield, what if defaults are 85%? Well, what if they're 75%? Well, what if they're 65%?" And I think defaults on that pool, if I remember correctly,

• 8:35Speaker 01

  ended up being 40 something percent. And so this bond ended up getting 100 cents on the dollar back, and I believe I bought it at the time somewhere between 12 and 14 cents on the dollar.

• 8:46David Weisburd?

  This is another variation of this Warren Buffett, where in the short term, the market is a voting machine. In the long term, it's a weighing machine. At some point, no matter how contrarian the trade is, the market will catch up to the thesis.

• 8:57Speaker 01

  So, yes, but it didn't mean there was a lot of pain in the meantime. So I bought this bond in 2010. In 2011, this bond probably went down 30 or 40%. And you're thinking, oh, my God, am I going to get stopped out? Am I going to have to sell these things? And like down 30 or 40%? Like, I don't think there were any buyers down 30 or 40%. I think there were just sellers. And so it was a really bad time where there was no liquidity in the market. People had this perception that loans weren't going to be advanced against. And what that means is that if the borrower stopped paying his interest, that the servicer who's supposed to advance it won't. And they thought that was going to make these bonds a lot less valuable. I actually thought it was going to make them more valuable because if you're not making my interest payment for me, if you're the servicer,

• 9:42Speaker 01

  when I sell the house, there's going to be more value left. And so there's all these complications as to why I thought it was worth more and everyone else thought it was worth less. And then your calendar year of 2011 ended. Calendar year of 2012 opened. And at that point, this group called NAIC, which is the National Association of Insurance, maybe commissioner, started rating these bonds. And they started saying, OK, Moody's, Fitch, S&P, your typical rating agencies, you guys aren't rating these properly. We're going to put ratings on them. And so they actually started putting prices on them. And so if you're an insurance company, now this bond that you couldn't own at all, as long as you bought it, if the NAIC price was 70, as long as you bought it below 70, you got tier one capital treatment on it. And it changed the market. And then over time, it became a weighing machine.

• 10:25Speaker 01

  And these bonds went from trading at 10 to 15 cents to 20 to 30 cents, to 30 to 40 cents, to 40 to 50 cents. And then at some point, they started trading kind of north of 65, 70, which is where I started selling them. Because at that point, the market was perceiving that they were going to get 100 cents on the dollar back. It was just a long bond with a long duration. And it was just pulled apart at that point. And so I was like, OK, my credit trade on this is done. I'm not here to bet on the duration of this. I'm not here to bet on how many years it'll take to get your 100 cents back, just that you're going to get it back. I'll let the next buyer own them.

• 11:00David Weisburd?

  This is one of those things that almost every great investor, especially in a public market, struggles with, which is, yes, you might be right. But what is the catalyst that's going to change the perception of the market? And in many ways, a lot of these things are unknowable. What does that mean? Sometimes there's a famous activist investor that comes in and writes a letter to the board. Sometimes, say, there's somebody that makes an X post and does this whole dossier on the company, whether positively or negatively. It's very difficult, if not impossible, to predict the catalyst for something that's undervalued.

• 11:33Speaker 01

  In this case, I knew the catalyst was going to be time. And then I was wrong, and it was the NAIC pricing. So over time-

• 11:40David Weisburd?

  You didn't need there to be a catalyst for you to make money.

• 11:42Speaker 01

  I didn't, because bonds have fixed maturity, loans have fixed maturity. These were six- or seven-year duration bonds. Over six or seven years, I would have earned, if all I did was sit on those bonds, I would have earned a 20-plus percent yield as it pulled to par naturally. It just would have been a very long time. Instead, I was able to monetize these bonds in between two and four years as the market changed. But the catalyst would have been people making interest and principal payments, bonds paying down, the subprime mortgage structures, delevering. It would have happened, it just would have happened much slower.

• 12:15David Weisburd?

  You had implicit backstop there.

• 12:18Speaker 01

  Yes, of time.

• 12:20David Weisburd?

  And then you saw a similar opportunity in SoFi.

• 12:22Speaker 01

  In 2013, I met SoFi through Goldman Sachs. And it was just shocking to me that SoFi had this whole idea that every student in the United States is lent to, at the time, at a 7.5% rate by the federal government. In theory, 50% of the borrowers are better, 50% of the borrowers are worse. And SoFi's original idea was, we're going to lend to the borrowers who are much better at a slightly better rate. So we're going to take the students who came out of Harvard, Yale, Princeton, Stanford, and a bunch of other schools with top names, and we're going to give them loans at 6%. Even though, just in theory, the government lent to them at 7%, there were probably 2% to 3% losses. And seven and a half minus two to three is, you know, let's say about five. Well, these top students they were lending to,

• 13:07Speaker 01

  they lent to them at 6% and there was like 0.1% losses. But over time, they had to prove it out. And so when they originally went out to get debt, nobody would give it to them. They eventually were able to get debt from funds and then from, and then from banks. And once they did that, I helped them finance their consumer loan portfolio, which was the same thesis. We're going to lend to the best borrowers in the country and we're going to lend to them at a little bit of a better rate than Lending Club or a little bit of a better rate than they can get on their consumer unsecured loan at a bank. And so all of a sudden, you're looking at a pool that probably won't have many, if any, losses and banks won't finance it. And so we did. And then very quickly, banks move in. And so, once they can prove something out, again, this was a time exercise, right?

• 13:52Speaker 01

  If they're able to prove that losses are low in the student loan portfolio and the consumer portfolio for one year, for two years, all of a sudden, every bank in America wants to be part of that program. They just won't do it until it's proven out.

• 14:04David Weisburd?

  I want to get back to how you structured these products in a bit. But first, with Tacora Capital today, a friend of mine said that it's Peter Thiel's biggest investment in any fund outside of Founder Fund. A, is that true? And B, how did you accomplish that?

• 14:18Speaker 01

  I don't think Peter's ever said that to me directly, but I've heard that as well. It's, I mean, it was really incredibly cool and really humbling and amazing. You know, I got to know him over a long period of time. I think that, you know, over time, he grew to trust me. We'd talk about ideas, we'd talk about lending. It wasn't something he really knew or had interest in. And then one day, I was, you know, trying to figure out how to start a fund. It's really hard, even with a track record from Third Point, even with a track record like I had, it is just really hard to get yourself in business. Maybe some people are better at it than me. Maybe they know who to talk to, but I just didn't. And I was at his house and he said, I want to be the biggest investor in your fund. And I was like, look, raising money is really hard for this. And he said, well, if I'm the only investor, if it's just you and me, that's just fine. And that's how we started.

• 15:03David Weisburd?

  And why in the world would Peter Thiel want to invest in a lending fund?

• 15:07Speaker 01

  Peter cares more about like the person and trusting the person and knowing the person, being ambitious, but also like being a good steward of capital than he cared about whether it was a lending fund or an equity fund. We create relatively interesting risks and securities. I think he liked that. I think he knew that I had been around the venture ecosystem. One of the reasons and one of the ways I got to know him was actually through SoFi. He was an investor in SoFi. His, uh, his family office was in the same building as SoFi and the Presidio. And so that was, you know, that was very early on in, in getting to know him and getting to know, you know, kind of what he thinks about and his values. But I never pitched him. We just talked about ideas. And then one day at dinner, he offered to invest and I was shocked and it's been incredible.

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• 17:43Speaker 01

  Maybe. I don't even know how much advice I ask for, but he's always been very generous with it.

• 17:47David Weisburd?

  So I want to get back to, we talked about earlier about SoFi and the product creation that you did there. Is that one of your operating principles in that you're solving problems? Or are you looking for the most undervalued assets, existing assets in the market?

• 18:02Speaker 01

  I think we're looking for more illiquidity than we are looking for undervalued, but maybe those two things are more similar than I'm giving it credit for. But we are looking to solve problems. If you're a venture-backed business and you have a marketplace between ranchers and farmers and food distributors, you might get those ranchers and farmers a lot more money for their food. And this is a real deal that we looked at. And all of a sudden, the ranchers and farmers are so happy. They can sell their food for 30, 40% more than they were six weeks ago. That changes their life. Well, then they realize that the guy they were selling it to, 40% less, paid them within seven days. And this new national food distributor probably doesn't pay them for 90 to 180 days.

• 18:45Speaker 01

  Well, that's one to two seasons of their annual revenue. They can't put the money back into the next product, the next crop, the next herd. And all of a sudden, they can't sell their food at 40% more because they don't get the money quick enough. And so that company goes out there and they're like, okay, we just created a problem we didn't expect to create, but now we have to solve it. We have a customer that trusts us, the rancher or the farmer. Let's do an invoice purchasing product. A small cattle ranch in Montana, a national food, kind of buyer/market. Does a transaction and now the company is buying the invoice. We would lend the company the money to finance that purchase. It's anything from that to insurance products that we know have really low loss ratios because they're small and niche and proven out.

• 19:29Speaker 01

  And they need statutory or regulatory capital to get in business, to put money at the state insurance fund, and then also the surplus note in the actual insurance company itself. We'll do anything kind of that spans that gamut of anywhere from invoice finance, lending products, receivables, finance, statutory capital, loans, leases, kind of anything in the financial services world.

• 19:50David Weisburd?

  And how much of your book is adjacent to startups or around the startup ecosystem?

• 19:54Speaker 01

  Eighty-ish. The other 20, though, are, you know, just not venture-backed. They're still startup-y. You know, it's still a guy who started a business, who, you know, financed it himself, bootstrapped it, and has a financial service product. He just isn't in the VC startup ecosystem.

• 20:15David Weisburd?

  Is this essentially a strategy that does really well, but is very difficult to scale because as you scale, you're competing against those banks?

• 20:22Speaker 01

  You can't scale. Like, the scaling just doesn't work. You're not just competing against banks. You're competing against Ares and Apollo and Blue Owl and Blackstone. And it's really funny because people often ask about the competition in the market, and it's actually less now than it was two years ago. And people are like, that's why. Well, the reason is because, you know, Blue Owl used to have maybe a $2, $3 billion fund in asset-based lending. Now it's probably like 10 to 20. And they're obviously not 10 times the staff they were two to three years ago. And so they just have to make their deal size bigger. I mean, we can't process. It's going to be hard. We raised Fund II with a $700 million fund. It is going to be hard to put that all to work. And we stay disciplined and we don't want to do bad deals. And bad deals are fund killers, so you don't.

• 21:05Speaker 01

  And so you have to be pacing and just looking for all the same issues you look for. And you can't overlook them just because you have more money to put to work. It just doesn't work. And so, you know, we're kind of in a position where we might put the whole fund to work. We might, might be, 80% might be, we don't know yet. We're working on it. But we see less competition because the big guys deal with that same problem and they have to put now billions and billions to work. And so our average deal size stays around 30-something million and theirs is probably closer to 150.

• 21:33David Weisburd?

  I'm sure your LPs are totally fine with being in a capacity-constrained, good-returning fund, but you yourself, how do you look at? Not being able to grow, not constantly increasing your fund size and your fund strategy.

• 21:46Speaker 01

  I like what I do enough that like.

• 21:48David Weisburd?

  Why? Why do you like what you do?

• 21:49Speaker 01

  Oh, I find it fascinating. I mean, we get to deal with like some of the most interesting entrepreneurs, some of the most interesting problems. We meet people who are also really passionate about what they do, and we get to help them and work with them. We get to help them try to solve their problems. We get to help them work on, work through their problems. It's an unbelievably interesting and fascinating set of people we deal with. And the ones who are ethical are amazing and we love them. And then you, obviously, you get the other half, well, not half, the other 10% who, you know, who aren't. And that's like the part of the job that I dislike, I don't enjoy, but the 90% that work hard, whether it's a good outcome or a bad outcome, like they tried, you tried, and you gave it a go.

• 22:28David Weisburd?

  Recently, relearned something that I just believe dogmatically since I made my first startup investment in 2008, which is the size of a market, the size of a company is directly proportional to the problem that's solving. And in the startup ecosystem, this was kind of obvious. I've come to learn, lo and behold, shocking, the same is true in the capital markets. It's the funds that actually solve problems are the funds that have embedded alpha in it. And I don't know why it was so surprising to me, but I just see it now everywhere. And before I even ask somebody about their strategy or their investment manager or anything, I like to ask a fundamental question. What problem are you solving?

• 23:01Speaker 01

  And the problem we're solving is that a lot of these companies come to us with an idea. Hey, we have this customer and we want to finance their invoices. Hey, we have this purchase order and we want to finance it. Like, they haven't even done it yet. And so they ask us for a term sheet before they've financed their first invoice. Sometimes they've done 300 to 500 grand, and we give them a term sheet and we spend hundreds of thousands of dollars on legal documenting this. These are relatively complex legal documents. Hopefully, AI helps us with the costs some days, but not yet. And we're in a situation where we might have spent all this time, all this effort, and it might turn out that nobody wants to sell their invoices. Or the first 300 to 500,000 did, but the rest don't care, the rest are bankable. And you just don't know.

• 23:43Speaker 01

  And so we take this scaling risk, which is like, investors will often say, well, why'd you do a $1 million deal? And it's like, I never intended to do a $1 million deal. I did a $10 million deal and they couldn't find their customer. The weirdest one to me was we did this homeowner's insurance in California. It was a fire modeling company. And they had all these factors as to how fires started, how fires moved. And we did an $85 million deal between us and another fund. We did 13 of it and they did 72 or something like that. And they never drew more than 3 million. And we know there's need, but couldn't find their customer. And so that's the risk we take, that we reserve our capital, make this commitment. And all of a sudden, they never call the capital, they never find it.

• 24:24Speaker 01

  This company had zero fires in their portfolio through the Palisades and Altadena fires. Like, they really proved out their model incredibly well through incredibly trying times. Still couldn't find their customer. I don't understand why. It doesn't make a lot of sense to me. But like, we also can't help them find their customer. That's not something we have the skill set to do.

• 24:43David Weisburd?

  So although you're not investing in equity, you are in many ways betting on the founders and betting on startups quite heavily.

• 24:48Speaker 01

  We're betting on their ability to underwrite that asset. In this case, had the performance been average, the performance of their model, we would have done well. Had their performance been like AIG, we would have done well. Had the performance been what it was, we did very well. So we are betting, we're not betting on their ability to run a business. We're not betting on their ability to, you know, to build all the technological aspects they need. We're betting on insurance losses or we're betting on losses of a financial product. And that's something that we feel we are semi-decent.

• 25:19David Weisburd?

  But you're also betting on them scaling, getting more customers, acquiring more loans.

• 25:24Speaker 01

  We usually don't lose money if they don't, which is the, like, you know, why we're comfortable with it. So usually we, if we do 500,000, we just didn't put the rest of our money out. It's not ideal, it's not perfect, but we don't lose money. If they only create, in this case, 3 million, it was 3 million of the insurance policies, again, we didn't lose any money. We actually made 40-something percent on the money we put out and the company just wasn't able to make it.

• 25:49David Weisburd?

  You alluded to how difficult it was to raise that first fund. If you had not had Peter Thiel as an anchor, would you have been able to raise a fund?

• 25:56Speaker 01

  I actually don't think so. I would say I had this like huge sensitivity to running my own firm. I didn't want to do it. I wanted to kind of slot in somewhere. And I realized through a lot of like, you know, nicely kissing frogs, that everybody has their problems and like every firm has its issues. And slotting into another firm really wasn't going to work. But most people, when they leave a place like Third Point, they go out and they get a seed, a seed deal right away. I actually think, given the amount of time I spent trying to figure out how to do this without having to do the back office, without having to do accounting, I don't know that I would have. I did that longer than I should have. The window for like a seed from a place like Blackstone or any other GP seeding stage probably closed. And so I had never even looked for that. And I don't know if I would have been able to without Peter.

• 26:41Speaker 01

  I think it would have been really tough.

• 26:43David Weisburd?

  We have a lot of the same friends that are GPs and equity investors. What's different about raising a credit fund versus an equity fund?

• 26:50Speaker 01

  Equity funds, one, don't have a size component. Like, you know, I know people who raised their first venture fund and it was 5 million, 10 million. And they're like, great, 10 million? I can do, you know, 2,500,000 bets. You can't do that in credit. Credit deals to even just document and get them to work have to be between 10 and 20 million. And then you need to have 10 to 15 of them to get good diversity in case like they don't scale or things go wrong. And so you just have to raise a much larger quantum of capital to start than you would for a venture fund. I also think that like for small venture funds, if you get one right, you know, there's just this thing of like, okay, you only have to get one right, one out of 20, and it makes your whole fund. With this, you get one wrong and it like destroys your whole fund.

• 27:32David Weisburd?

  Talk to me about your portfolio construction.

• 27:34Speaker 01

  So we have a North Star. And the North Star is we want to be in about one-third real estate related, AKA prop tech, one-third insurance related, AKA insuretech, and then one-third financial services related, fintech. And then, but we don't get to choose our companies, right? The companies choose us, meaning that we can only lend money to companies that are out there. And we kind of see ideas come in batches. So you'll see a bunch of like California homeowners insurance. You'll see a bunch of Florida homeowners insurance. You see them all at the same time. And we don't have, really have companies that compete against each other. So then we can only choose one. And so we kind of start with the North Star, but then like go to reality of like what's out there? What are people doing? What types of businesses are people trying to start? And then we choose among those and try and kind of keep the North Star, you know, relatively in our frame.

• 28:18Speaker 01

  But like if it ends up being 40% one or only 10% the other, like that's just what we're seeing. And we only do it from a diversity perspective. We don't do that because we think that that's like some algorithmic, perfect mix to get the best returns.

• 28:32Speaker 01

  The big change between Fund One or Fund Two is we used to fund equipment and we will never do that again.

• 28:36David Weisburd?

  I understand.

• 28:37Speaker 01

  Because we had a deal and we funded equipment and when the company started having trouble, unlike financial services where the borrower still make payments, the invoice like Safeway is still going to pay for the food they bought, no matter what happens. The CEO said to us, if you put me in default, I'm just going to let all the employees steal the equipment. And the equipment were tractors, caterpillars, John Deere tractors, Ford F-150s. And he's like, good luck finding them in rural Kentucky and Virginia. And I often joke that I could work out the worst deal I've ever done with an honest, good person on the other side, but I would have trouble working out the best deal I've ever done with a, you know, less ethical character on the other side. This was just an example of that. But in financial services, you have a lot more control over your own destiny.

• 29:21Speaker 01

  The insurance surplus note will still be there. The invoices will still pay off. Where cars and trucks and trailers and tractors, if someone's going to just let their employees steal them in rural Pennsylvania, where they haven't been paying them their salary, you're going to spend a lot of time and a lot of money trying to track down those assets.

• 29:39David Weisburd?

  I want to double click more on the portfolio construction. So you said a third, a third, a third. But how many loans is that across? What are your assumptions in terms of how many of those loans are going to default or get repriced? How do you think about that?

• 29:51Speaker 01

  We think that about like a third of our portfolio is going to wind down. So Fund One was a $350 million fund. It had 21 deals. And that, that doesn't mean every deal was like $15 million. It means that some of them never scaled past three, four, $1 million and some of them got to kind of be 20% of the fund. We try to have, to start with like 15 equal sized loans was kind of the thesis to try to have that. And we would expect in that case, five to default or be wound down. So the one, a lot of them don't really default. It's not like, oh, hey, we can't make our interest payment. It's usually like, we're running out of money. We're not scaling. If it's their second product, like invoice finance to a marketplace, it might not matter. They might just say,

• 30:35Speaker 01

  hey, look, nobody wanted to, to sell us their invoices. Like, we're still going to run our marketplace. All good. We'll work with you to wind this down. If it's their only product and they only got to a million and they've spent two years and they've only borrowed a million dollars, they're probably in trouble. Like financially, because they've spent all this time and money trying to get a product off the ground, they have employees, they've paid them, they probably can't raise another round. And so it's trying to get the people to stick around long enough to help you wind down with them. We had a company that went into default, they hit a covenant, they didn't stop paying. And we called them and we're like, okay, guys, like, what's the plan? And they said, if you put us in default, we're going to make this company worth zero. It is wild, you know, what, what people will do when they are not in a great situation.

• 31:18Speaker 01

  But we expect to work with about a third of the entrepreneurs to find a way out of this.

• 31:23David Weisburd?

  Credit really brings out the worst in people.

• 31:25Speaker 01

  Especially when they default and they start to justify why what they're doing is okay to save, to save their company or save their employees or give people decent severances or whatever it is, they use that as justification instead of, I took out this loan, we have a contract, I need to abide by it.

• 31:41David Weisburd?

  What's the sweet spot in terms of the stage of the company?

• 31:44Speaker 01

  Our average company is probably has a hundred million dollar valuation. That used to be a series B, now it's probably closer to a series A. But they want to start a financial service product. They would have to raise 20 to 30 million of equity to do that. And that would be 20 to 30% dilution.

• 32:01Speaker 01

  And something they can't buy back. Instead, we'll lend them the money. They put up a couple million dollars of, you know, kind of haircut capital into this warehouse and they give us a couple percent of the company. And, you know, that's typically the sweet spot is instead of giving away 20 to 30% forever, they take that money from us and they can obviously always pay it back.

• 32:21David Weisburd?

  Taking a step back.

• 32:24David Weisburd?

  Private credit has been the hottest asset class in the world over the last three, four years, ballooning to trillions and trillions of dollars.

• 32:34David Weisburd?

  What's your view on the space? Are we in a bubble? If so, is it a bubble that's gonna pop? Or is it something that's gonna kind of slowly deflate?

• 32:43Speaker 01

  So I would say it's always a case of have and have nots. And like, I think there are gonna be industries that'll be just fine. And then there are gonna be industries that have trouble. I don't necessarily see that industry as like software in general. I think even within software, there will be software that's really disrupted and software that's not. And so, you know, with loans trading at discounts in the software space, the first thing I do when somebody talks about it is I pull up the ticker on Bloomberg and see what the equity value of the company is. And if it's like, you know, in the billions, you're like, this doesn't make any sense. But if it's down 90%, you'd be like, okay, this company's having serious issues. But if the equity market starts to drop and start to look like the company doesn't have equity value, then the debt's probably in trouble. And one of the reasons we don't really lend against software is we look at everything as, okay, if this company goes out of business, what is our asset?

• 33:28Speaker 01

  And how do we, you know, kind of, how do we monetize it? So loans, leases, they just, they're different. If you have software and all of a sudden the company's out of business, even if the software's still running, well, you don't have employees to deal with bugs. You don't have employees to deal with customers who aren't getting what they need. Customer servicing starts to go away, and so it starts to become a spiral. I do think there will be some problems in software. My guess is overall, it's overblown.

• 33:53David Weisburd?

  You mentioned you take equity in companies. Your first fund was $300 million. How important are these equity pieces? And how do they play out in terms of your fund and your fund returns?

• 34:03Speaker 01

  I think Fund One was an anomaly. But I think we're gonna end up with six or seven companies in Fund One where the equity portion returns nine figures to investors. I think we have one company where it's possible that the equity portion of the return returns 10 figures to investors. It is, you know, that type of hit ratio is not repeatable. And we know that, and we obviously wish it was. I think that the equity, having the equity component is one. Like, if this company becomes a multi-billion dollar company off of the loan we originally made them, we should get some sort of participation for that.

• 34:36David Weisburd?

  And it's less dilutive. We started talking about SoFi. SoFi, in the beginning, I think they were loaning off their equity.

• 34:41Speaker 01

  Yes.

• 34:42David Weisburd?

  It's like the most inefficient capital structure of all time.

• 34:44Speaker 01

  Yeah, they were loaning off their balance sheet, which is their equity.

• 34:47David Weisburd?

  And like For loans.

• 34:48Speaker 01

  Yeah.

• 34:48David Weisburd?

  It's insane.

• 34:49Speaker 01

  And they were buying, they were selling something that you can't buy back, right? You can't buy back equity unless the person wants to sell it to you. And, you know, the venture capitalists who invest in this think they're getting north of a 20 IRR. And they're putting it into student loans where SoFi is lending it at 6%. Like, it just wasn't good math for them. So that is the same problem we are solving today. Hopefully, it's not, you know, a 6% asset because we charge a lot more than that. But this is a very inefficient market. It used to be less efficient, you know, back in 2013, 2012. But it's still very kind of inefficient today.

• 35:21David Weisburd?

  How critical is this equity component to being aligned with the startups? Not only economically, but I guess, for lack of a better word, spiritually, like a partnership?

• 35:30Speaker 01

  Very. I mean, we've had companies where like, they want to be in a situation with us where it's like, tails the company wins, heads to Coral loses, and we just can't have that. I mean, you can always game what you're putting in the facility. We try to have them put everything, but, you know, there's very little way to police that. It is very important for us to be like, hey, guys, we're equity holders too. Like, you want to do the right thing for yourself, for us? We kind of all want to be on the same page here. Kind of what I said a few minutes ago, like, you know, I could work out the worst loan with a really ethical counterparty. And it is impossible to work out the best loan with somebody who is

• 36:02David Weisburd?

  The reverse is not true.

• 36:03Speaker 01

  Yeah.

• 36:05David Weisburd?

  Have you figured out ways to suss this out earlier?

• 36:08Speaker 01

  It's really hard because you don't get to spend enough time with people to see how they like handle difficult situations. The other thing is people don't handle decent situations the way they handle difficult situations many times. You know, we really try to, but the easiest way to deal with it is to have at least one member of the board of directors that we like and trust. And for most, you know, in most cases, they will stand up for you in the boardroom and help you work out of it. That has been kind of our golden ticket. When we've had problems, having a VC that we know, that we know has good ethics, that we know is trustworthy. They have solved a lot of our problems when the founders seem to veer off course.

• 36:44David Weisburd?

  So rational reason why networks and reputation

• 36:48David Weisburd?

  Are de-risking factors because as value, if somebody hurts their reputation, they can't do the next deal. So it's super rational.

• 36:54Speaker 01

  The way I say it is like, if you start a venture-backed business and you take money from Andreessen Horowitz, Marc Andreessen, I've heard him say that like, if he is a founder who had a failed business but learned a lot of lessons and like is really, you know, kind of thoughtful about not having the same mistakes in the next, like in the next company, he wants to give them more money because he doesn't want someone else to benefit from his loss or his lessons. But if you, you know, learn those lessons and you have ethics issues, he would never give you money again.

• 37:21David Weisburd?

  And he's another one of your LPs.

• 37:22Speaker 01

  He is.

• 37:23David Weisburd?

  What are you most excited about in the next five to 10 years?

• 37:27Speaker 01

  I would love to continue compounding capital at the rate we have. That is, would be an unbelievable goal, I think probably impossible, but you know, just the ability to try and the opportunity to try and the opportunity to work with like really great investors and do a good job for them would be my ultimate goal. I take it very seriously. And so if we can help endowments, send more kids to school, help foundations donate to causes, like that would make me incredibly proud and happy. Build a team that I like working with. I feel so lucky that I found my team. Sometimes in life, you like, you learn, you learn what you want because you see it. And sometimes you learn what you want because you saw the opposite. And I found that like, having a really great group and team around me, and you know, they all know that like, if they lie to me, they won't be working at Tocora tomorrow.

• 38:13Speaker 01

  If one of them didn't tell me the truth about one of our deals, about something that was going on, like they just wouldn't be there tomorrow. And they all know that. And it's made it like a really great place to work because people kind of know that nobody's gaming them, there's no politics. It just is, that's been a kind of a nice bright spot in building this business.

• 38:28David Weisburd?

  Minds me of my mentor and friend, Eric Anderson. He always talked about, build the business that you want to work in for the rest of your life. A lot of people know about this concept of founder product fit in startups. There's also founder product fit in fund managers. And does it just mean that you're good at something? It's like, what do you want to do? Because if the best way to compound money and to compound your advantage is to build a thing that you would want to do if you retired.

• 38:51Speaker 01

  Yeah.

• 38:51David Weisburd?

  Therefore, you never have to retire, you never have to switch careers.

• 38:54Speaker 01

  I mean, there was this one firm that I spent a lot of time with when I was, you know, in, in between Third Point and starting Tocora and trying to figure this out. And I- They had just an unbelievable amount of like mediocre talent. And it just means that like people get protective, that people are very like fiefdom prone. And like, I just don't want any of that. I want to do this in a way that like, isn't political, that isn't about like, oh, well, like, you can't do this deal because I might look at it like, you know, nobody gets paid on their individual deals, everyone gets paid on firm, firm performance. And it's so far worked really well. You know, the problem is as you scale, and we don't plan on scaling that much more from a fun size perspective, but we'll see how many people we end up needing to manage the positions we have and will have in the future.

• 39:37Speaker 01

  You know, the more people you have, like, the more risk you have of fiefdoms, of politics, of all that stuff. And I would do anything to kind of stay away from it.

• 39:46David Weisburd?

  Going full circle to how we started, Demo called you the best agent of talent when you were back when you were 25. If you could go back to right before you started at Third Point, or maybe the first day at Third Point, what is one piece of timeless career advice you would give yourself that would have either helped you accelerate your career, helped you avoid mistakes?

• 40:08Speaker 01

  Not caring about the promotions. And I cared so much. I like, they had this title called partner, I wanted to be a partner so badly. Like, it wouldn't have mattered.

• 40:17David Weisburd?

  Was that a matic? In other words, like, everybody else convinced you that was important?

• 40:24Speaker 01

  I don't know. You know, look, if I go back and look at myself as a child, like, I remember in like the third grade, I was put into fourth grade math and I had to walk with my little book to fourth grade, but then I found out somebody was in fifth grade math. And so I took my book and was like, I want to be in fifth grade math. There was no reason I needed to be in fifth grade math in the third grade. Why did it matter? But for some reason, when somebody dangles a carrot, I find this need to achieve it. And, you know, why did I need to go to an Ivy League school? I probably would have been just as happy at a great state school. Something about it, like, you know, I knew it was out there, I knew it was something that was achievable, and I had to do it. Like, now in my much older age, none of it matters. Like, just keep doing you, like, taking your own path, finding your own path, working

• 41:06Speaker 01

  hard, being ethical, and like, everything will eventually fall into place. There's just no need to focus on these like, things that like, you think are going to validate you, or you think are going to put you in the next echelon of.

• 41:20Speaker 01

  Of groups or whatever it is, it just, it doesn't matter. Like, you know, I wish that I understood that. And it's not, that's not a third point thing. It's a just, it's a me thing. And I think I learned that much later in life than, than I would, I would wish I had.

• 41:32David Weisburd?

  So you're chasing validation then? What are you chasing now?

• 41:35Speaker 01

  I actually love it. Like, I actually love waking up every day.

• 41:38David Weisburd?

  The love of the game.

• 41:38Speaker 01

  Yes, the love of the game. I don't think it was chasing validation as much as I believed it would give me more opportunities. I didn't care that, oh, other people are going to think it's cool that I went to Columbia or other people are thinking it's going to be cool that I have this title. It's, I thought it would lead to more opportunities for me. And like, I just was wrong on all of them.

• 41:55David Weisburd?

  You're trying to speed run life?

• 41:57Speaker 01

  Yes, and there's just no need. Like, the slow path, you still get to the end of the race, right? I mean, it's, you still get to where you want to go. You just might not get there in as, in as few years as you had hoped.

• 42:07David Weisburd?

  Well, Carrie, this has been an absolute masterclass. Thanks so much for jumping on and looking forward to continuing this conversation soon.

• 42:12Speaker 01

  Thank you for having me.