[REPLAY] Chris Heller - Weird Alternatives at Cordillera Investment Partners (Manager Meetings, EP.28)

On today's Manager Meeting, Greg Dowling interviews Chris Heller. Greg is the Co-CIO and Head of Research for Fund Evaluation Group, an institutional OCIO and investment consultant with $83 billion in assets under advisement. Chris is Co-Founder and Co-Managing Partner at Cordillera Investment Partners, a $1.2 billion alternative investment fund that invests in niche, non-correlated assets, or what Chris calls weird stuff, like whiskey aging, boat marinas, spectrum, and water rights. Their conversation covers Chris's background and the founding of Cordillera, the evolution of alternative assets and alternative alternatives, sourcing new opportunities, conducting due diligence, measuring risk, portfolio construction, and exit strategy. Take Capital Allocators Audience Engagement Survey https://www.capitalallocators.com/annual-survey/ Learn More Follow Ted on Twitter at @tseides https://twitter.com/tseides?lang=en or LinkedIn https://www.linkedin.com/in/tedseides/ Subscribe to the mailing list https://capitalallocators.com/ Access Transcript with Premium Membership https://capitalallocators.com/signup

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• 4:22Ted Seides?

  On today's manager meeting, Greg Dowling interviews Chris Heller. Greg is the co-CIO and Head of Research for Fund Evaluation Group, an institutional OCIO and investment consultant with $83 billion in assets under advisement. Chris is co-founder and co-managing partner at Cordillera Investment Partners, a $1.2 billion alternative investment fund that invests in niche, non-correlated assets, or what Chris calls "weird stuff," like whiskey aging, boat marinas, spectrum, and water rights. Their conversation covers Chris's background in the founding of Cordillera, the evolution of alternative assets and alternative alternatives, sourcing new opportunities, conducting due

• 5:03Ted Seides?

  diligence, measuring risk, portfolio construction, and exit strategy. Please enjoy this manager meeting with Chris Heller from Cordillera Investment Partners.

• 5:14Speaker 02

  Chris, would you briefly introduce yourself in Cordillera?

• 5:20Speaker 03

  I will. Thanks, Greg, and thanks for having me. I'm excited to be here. I founded the firm with two other co-founders, my partner Gus Araya and Ashley Marks. We founded it in 2014 to focus exclusively on the topic du jour, which is niche, non-correlated, off-the-beaten-path assets, or alternative alternatives, or, for lack of a better word, just weird stuff. My background, so I graduated from Vanderbilt University, went to work in investment banking for a number of years, both in New York and Menlo Park, had a brief stint on Capitol Hill in DC, then went to the Stanford University Endowment, spent a number of years there.

• 6:00Speaker 03

  My co-founder, Ashley Marks, also worked at the Stanford University Endowment with me, and interestingly enough, she and I grew up together in Denver and have known each other since middle school, so a long history with my partner Ashley. My other co-partner and co-founder, Gus Araya, was down the street from us at the Hewitt Foundation on Sand Hill Road. And then all three of us were a part of a firm that itself was a spin out of the Stanford University endowment called McKenna Capital. We all worked together there for eight years in various roles and asset classes and investment types, hedge funds, private equity, natural

• 6:43Speaker 03

  resources, real estate. So really had a flavor for all of the quote unquote alternative asset classes. And then all three of us went out to found Cordillera in 2014.

• 6:52Speaker 02

  I did want to ask, and this is a little bit crass, but what is a Cordillera? It sounds a little bit like something I would order off a Taco Bell menu. Like I'll have two chalupas and a cordillera. So what is a cordillera?

• 7:08Speaker 03

  So, you know, I think another thing, lesson learned as we look back, you know, maybe we would have come up with a different name. It's not easy for people to pronounce. And we get cordillera 90% of the time. We get cordillia 5% of the time. And then the other piece we get is people just not saying our name, trying to avoid saying our name altogether. That being said, a cordillera, and I will not pronounce it in Spanish very well, is Spanish for mountain, mountain range. Guts, my partner, is from Santiago, Chile, and the mountain range just behind Santiago was called La Cordillera. Ashley and I grew up in Denver, very mountainous state, and there was a resort, which is no longer in business, called Cordillera. At the time, I got married there. Ashley has some very

• 7:52Speaker 03

  personal stories and has good memories there. And so it was something that brought us all together, and it wasn't taken. When we asked the lawyers if it was taken, it wasn't taken yet.

• 8:01Speaker 02

  Shocker. That's a shocker that it wasn't taken.

• 8:03Speaker 03

  Yeah, correct.

• 8:04Speaker 02

  When did you kind of come to the realization that you wanted to focus more on these uncorrelated, as you call them, weird investment ideas? Was that, did that start at Stanford, or was that later at McKenna?

• 8:16Speaker 03

  You know, we kick ourselves. We should have figured it out sooner, quite frankly. But it really started back, and I think it was an evolutionary process, from when we were at the Stanford Endowment, all the way through when we were at McKenna, which was it was becoming more and more apparent that, and I'm putting this term in air quotes, "alternative asset classes" or "assets," were becoming less and less alternative. Nearly every institutional investor had representation in the portfolio of private equity, hedge funds, real estate, natural resources. And as there became more and more adoption of those assets and asset classes, you know, what you would expect happened. Returns came down, whether you were trying to do individual deals or make investments in those spaces, or whether you

• 9:01Speaker 03

  were investing in managers. And so, we noticed that as a sort of slow degradation of returns. That isn't to say that there aren't periods that are good and periods that are bad, but as a whole, you know, there's a pretty slow degradation in returns. And at the same time, another thing was happening, which was that correlations amongst those asset classes were increasing, just as fundraising cycles increased and the amount of capital plowed into these asset classes. When we went through 2008, we got very little diversification from our quote-unquote "alternative asset classes." Again, should have been smarter, should have tried to figure it out sooner, but you know, the light bulb went on, that you know, if we are going to generate the returns for our investors that we would like to, at a

• 9:45Speaker 03

  level of acceptable risk with diversification in a portfolio, we're going to have to go back to the basics of investing in truly alternative assets. And that's really just what we think about our business. It's back to the basics of investing in alternative assets. And that has two prongs to it. One prong is being early to an asset class before competition and capital has competed away returns is useful and beneficial. And we came at this first and foremost from a return perspective. You can be early to a place where the world hasn't found yet, that's a benefit, and you can extract outsized returns.

• 10:25Speaker 03

  And then secondly, trying to find places that have really non-correlated risks. Without a doubt, the things that we invest in have risks. We haven't found some panacea of riskless arbitrage. It's just that there are different risks that run through our investments. And they're likely not correlated with the other risks that most institutional investors have in their portfolios, which is some sort of equity factor risk and some interest rate factor risk. And so, really, the answer is, as we were watching this in slow motion, we said, look, if we just went back to the basics and found truly alternative assets, that would be an exciting place to be.

• 11:02Speaker 02

  So why do you think then that people and institutions still plow billions and billions of dollars into traditional alternative investments?

• 11:12Speaker 03

  Well, look, they're still attractive, and there are still very attractive spots. And I don't want to poo-poo that at all. And certainly, we've seen a great run for venture and growth equity. But I also think, and I say this coming from them, there's just a lot of institutional momentum that's hard to stop, right? You set firms up in a way that are siloed. You hire people to invest in certain asset classes. That is their job. It's really hard to change course midstream and start doing very different things. And I would say, we love that. We love the fact that that exists. And to the extent that that ever broke down, or that wasn't the case, the opportunity for us would not be as attractive. So we are happy that that happens. It's not like those are terrible asset classes.

• 11:56Speaker 03

  We just thought, there's a more interesting way to do this. We can extract a lot of return per unit of risk, and we should focus on it full-time.

• 12:05Speaker 02

  We talked about this in the past, that what is alternative evolves over time, right? So if you went back to the 70s, investing in international stocks or real estate might be considered alternative or unique. And then we kind of got into this phase where, I would say, our traditional alternatives are really hedge funds, private equity. But who knows what traditional alternatives will be in the future? So things are always changing.

• 12:31Speaker 03

  It's a fantastic point. A hundred years ago... Just stocks and once you introduce bonds, it was like, wow, this is crazy. And you know, just in our moment of existence from 2014, there's been a massive amount of evolution. So when we were early on, we were investing in things like music publishing and litigation finance, which was in our minds, very cutting edge at the time in 2014. You know, fast forward to today and the whole world has found music and litigation finance and subsequently returns have come down and it's not something that we do anymore. And so our ethos and our mandate is to constantly be at the leading edge of what will be interesting and new and generate outsized returns.

• 13:17Speaker 03

  Hopefully prior to the world finding them and then when the world does find them, moving on and being in that next spot. And so it's what we strive to do and it's what I think we've gotten, you know, better at over the eight years that we've been doing this.

• 13:30Speaker 02

  How do you balance this all out? Yes, you want to find that undiscovered alpha, but to paraphrase Warren Buffett, he talks about investments not being the Olympics, that you get no points awarded for difficulty. So how do you avoid complexity for complexity's sake?

• 13:47Speaker 03

  Yeah. That is such a critical question to what we do. Whenever we tell our story to anybody, the most common response is, wow, that must be risky. And we love that. We love that comment. And I think the moment we don't hear that comment, the opportunity is gone because it is the perception of risk in our space that keeps people away. Our business is predicated on exploiting that gap between perceived risk and actual risk. And I think that response to something is weird, it must be risky.

• 14:26Speaker 03

  It's just a behavioral heuristic that we as humans have used for thousands of years. You know, you're loping along the meadow and something comes into view that doesn't look like it belongs there. You know, it elicits a fight or flight response, which I think has been a great, you know, a great thing for humankind for a long time. But it's also something that we can take advantage of, that this view that something is weird, so it must be risky and they stay away is really helpful to us. Now that being said, it's a heuristic that's been developed, you know, amongst humans for good reason. And in the investment community also, there Not everything that is weird is a good investment. And to your point, lots of things that are weird are really bad investments and are not invested in for good reason.

• 15:10Speaker 03

  You know, we are in the business, and I say this a lot, of kissing a lot of frogs. So we look at lots of things and lots of deals, say no to a lot of them because lots of things in our fishing pond are not attractive. But the ones that are, the things that we find that really have what we think is outsized return potential for undersized risk, and we think the things that we find in this pond are really attractive relative to the more competed ponds. And some of that is in the return perspective, which I talked about, being early and extracting outsized returns before the world finds them is attractive, but also from a risk perspective.

• 15:50Speaker 03

  Because we have time, we are not in a bake-off or a competitive process where we have to have a deposit down and an LOI down within two weeks, otherwise we're going to lose a deal. Most of our underwriting takes six to 12 months, and so we have time to structure deals, we have time to structure with our operating partners in a way that limits our downside. And so, you know, we think about when we find something that's got outsized return potential and then potentially mitigated risk. And so we really like this space, but not everything is perfect. And to your point, investing in weird stuff just for the sake of investing weird stuff is a very bad recipe.

• 16:24Speaker 02

  Yep, that makes perfect sense. So let's actually get to some specific examples. And one, that we talked about, that maybe it's a personal favorite of mine, whiskey aging. So tell us how you could invest in whiskey aging.

• 16:37Speaker 03

  We have been investing in the whiskey space for almost four years now. It is a space that has gone through a lot of structural change. We always look to invest in places that have gone through structural change. It is a space that was a slowly, pardon the euphemism here, up until the early 2000s, was a, brown goods were a slowly melting ice cube. It was a not a growth industry. Clear spirits had taken over pretty significantly, and so distilling capacity in the space had been taken out, and then comes what is now called the bourbon boom. Nobody knows exactly why it was. Some credited to Mad Men, the show. But demand for brown goods and whiskey and bourbon accelerated quite significantly in the U.S.

• 17:21Speaker 03

  And so you had sort of less distilling capacity, more demand, and that created all kinds of interesting dynamics in the space that for us made it investable. You had a space that used to be fully integrated, vertically integrated from the majors. They would distill, they would age, and they would distribute the product to an industry today that has become massively fragmented. There are folks who distill. There are folks like us who age in the middle, and then there are brands that distribute. And so this was a moment in time investment for us. We buy whiskey. It's a perfect space for us to, because we have patient capital, we age it. All we do is we sit on the whiskey and we age it.

• 18:02Speaker 03

  That aging curve today is as steep as has been seen in the industry in a long time. And the aging curve refers to the price of a barrel of whiskey at any age along the aging curve. And so as we age that whiskey, it becomes more valuable. And then we sell it to brands that want to buy already aged whiskey to put it in their bottles and take it to market. It's been a really simple business, and it's been lucrative for us. We're excited about that business, and it's one that is not institutionally invested in, and we like that.

• 18:33Speaker 02

  If you could take the experience from investing in commodities and apply it to something that's a little bit more bespoke, it seems like you could apply a lot of the same principles.

• 18:42Speaker 03

  I think that's right. As I think through whiskey, what is the strategy of whiskey? It is purely inventory finance. And we do have themes around how we source, and those themes often come down to very simple observations. But one is, you know, providing inventory finance in nichey, weird, off-the-beaten-path places is a really interesting space for us. And whiskey is purely inventory finance. We buy something, we have patient capital and have a balance sheet that can age it for someone else that wants to buy it because they didn't have the capital and they didn't have the time to buy it and age it themselves. And so, to your point, this is not... Novel, I think the how we're applying it is novel and where we're applying it,

• 19:26Speaker 03

  but inventory finance is not something that is novel. We also have expressions of this in wireless spectrum licenses that we invest in. There's some precious metal strategies that we invest in. And so, and then we're looking at a deal right now in cheese, in aging cheese. So inventory finance, while simple, can be applied in many different ways.

• 19:48Speaker 02

  Yeah, it's interesting too. It also kind of reminds me a little bit of timber, right? So you can look at timber and if you like the price of timber, you can harvest it and sell it, but if you don't, you can just wait. It actually appreciates over time and whiskey, bourbon appreciates over time. A 10-year aged whiskey is better than a four-year aged whiskey. So you sort of have the benefit of time in this investment.

• 20:11Speaker 03

  That's right. And, you know, I think what we like about it, maybe relative to a timber or other commodities, is the predictability of the pricing. You never know how steep or how flat that aging curve might be, but it is typically positively sloped. Whereas some other commodities can be up, can be down. You know, if you didn't sell your corn or your wheat or your timber this year, next year you might be kicking yourself because the price is down. And so one of the things that we really like about whiskey is it's, while you don't know exactly how much it will appreciate, it's fairly predictable that it will appreciate.

• 20:47Speaker 02

  Yeah. And you don't have to worry about trying to define things like contango or normal backwardization or any of those crazy commodity terms. I love that example. I wanted to ask you, what is the maybe weirdest, or what somebody else might consider, kind of weirdest idea that you've either invested in or have gotten close to investing in?

• 21:07Speaker 03

  So there are lots of things that we get shown and we have an open door policy. Like we will listen to weird stuff because that's what we do. But I think probably the weirdest thing that we looked at, got close to, but ended up not doing is alligator farming. Really fascinating business. Quite frankly, we spent a lot of time on the business, spent time visiting the alligator farm, which is quite fascinating. We actually really liked that investment from an economic perspective. We ended up saying no to that investment from an ESG perspective and we have a pretty heavy ESG overlay to our fund. We like investing in ESG assets. There are some quirky, niche ESG assets. And while there were some actual things about alligator farming, and the University of Florida has done a lot of studies about

• 21:52Speaker 03

  actually how good alligator farming is for the alligator population that was almost extinct. At the end of the day, you were using alligators to essentially make wallets and purses and boots. And from an ESG perspective, we ended up saying no. But we had a lot of fun doing diligence on that, as we have in whiskey. I think one of the things that we've looked at quite often, that we often say no to, are when we get shown a lot are things in the luxury goods space. So art, automobiles, diamonds, wine. Those investments for us are really tough because they are not non-correlated. They are tied to the economic cycle. Art, wine, diamonds become much more valuable as the economic cycle accelerates.

• 22:36Speaker 03

  And then as it turns, as so does the price of those things. And so we do not, we get shown those things quite often, and they're typically of very little interest to us.

• 22:47Speaker 02

  I wanted to ask about sourcing. Other than having an open door policy and maybe people bring you ideas, where do you find them on your own accord?

• 22:57Speaker 03

  There are a lot of different ways, and I would say we've gotten better at this over the eight years that we've been in business. First, and probably the most interesting is thematic. You know, so we tend to spend a lot of time taking a step back and thinking about certain themes that may or may not be interesting. And those develop over time. Some of them we run down and they end up not being interesting. And some of them run down and we end up with a lot of significant deal flow from them. You know, interesting themes, you know, I'll give you some past ones, maybe not some that we're working on right now to divulge too much. But you know, water in California has been a theme of ours for quite some time. Income share agreements is a theme of ours that we can talk through. And we have found some interesting deals. We've never done a deal in that space, but we

• 23:40Speaker 03

  watch it. You know, getting a share of some of a person's income over time. We've looked at a lot of things within the athlete income share agreement space, student income share agreement space. There are income share agreements for entrepreneurs.

• 23:58Speaker 03

  So you can obviously think of an income share agreement across lots of different sectors and lots of individuals. And it's kind of an interesting space for us to look at. We've looked at inventory finance, I mentioned before. And then, you know, another one for us has been, and I mentioned, you know, that we don't like collectibles, but we have looked at how do we apply AI and sort of big data to weird, nichey spaces to potentially unlock some interesting arbitrages in automobile auctions. We've looked at some things around sports and, and actually providing guarantees in art and all kinds of different places. And so that's been a theme of ours. We can, we're constantly evolving those themes and that's a good source for us.

• 24:40Speaker 03

  Also, we've just been in this business now over 20 years. So there's just a deep pool of our network that is bringing us deals. Now Cordillera has been in business for eight years, you know, not that we're a household name, but those who tend to traffic in the kind of weirder, nicheier spaces kind of know that we exist. And so that has become a much more fruitful channel over time, over the eight years that we've been in business. And so we have also evolved in a way that we are better at vetting and triaging these opportunities quickly and knowing what is or is not a Cordillera deal. You know, for fun, our first fund and early funds, our first one, we looked at three,

• 25:23Speaker 03

  over 360 deals and invested in 14. And I think we've become a lot more efficient and better at kind of tracking, you know, what is a Cordiero deal. So, you know, it's helpful for us to have been in business for eight years to help the sourcing.

• 25:38Ted Seides?

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• 26:15Speaker 04

  This is not an offer to sell or investment advice. Investing involves risk, including the loss of capital.

• 26:21Ted Seides?

  And now, back to the show.

• 26:25Speaker 02

  What about diligence? Does it take a different skill set than traditional manager due diligence or traditional investment due diligence?

• 26:32Speaker 03

  So there are some parts of the skill set that are almost identical. And that is what I would call in the people, where we are still in a people business. We are always partnering with operating partners to do what we do. And so that piece of it, sitting across from somebody, talking to somebody about their skill set, are they trustworthy? Do they have what it takes to execute on what you want them to execute on? You know, I would say that is nearly identical to what anyone in the investment business or picking managers does for a living. And I think that is a very transferable skill set. In terms of the sourcing, structuring, diligence, it is different.

• 27:13Speaker 03

  And we, as we recruit, we try to find people from, that don't come from a traditional background of private equity. We try to recruit from different backgrounds, more creative, who can think about the world differently. And I think one of the critical things we have on the diligence side here is time, right? We can take time. Oftentimes, something comes to us that, quite frankly, we don't know a lot about at the beginning. You know, we first started looking at music publishing almost 10 years ago. We didn't know a lot about music publishing, but we took a year and a half to understand the business. When we first started looking at alligator farming, we didn't know anything about alligator farming, but we had time. We first started looking at whiskey. We were not very familiar with drinking whiskey. Not familiar with underwriting, you know, whiskey as an asset.

• 27:58Speaker 03

  And in all those examples, we took 12 months. And so we have time in this space to both diligence the opportunity, how do you make money? How do you lose money? What are the risks? What are the opportunities? And then to diligence the operating partner. If we like this idea, who is the right person or team or people to execute on this idea? And I think that is the advantage to this space that we have vis a vis other investment spaces that are a bit more competitive.

• 28:26Speaker 02

  From a risk perspective, you named a few, but like, if you're doing things like inventory finance, whatever weird inventory it may be, you have sort of these carry risks, right? That you have a warehouse of bourbon that's being aged and it burns down. Are those a lot of the risks that you have to deal with is make sure that you are properly insured and that maybe you have... Potentially even the rights to the assets that you're financing in case there's a problem. So I'm sure there's a lot of risks out there and each one's going to have unique risks, but there's probably some common risks with some of these strategies, or am I off base?

• 29:07Speaker 03

  No, you're exactly right. What we hope and what the purpose of our portfolios are are that each of those, for every investment we make, are very idiosyncratic. They could be weird, they could be hard to understand, but as long as they are diligenceable and we can take our time and we can understand that idiosyncratic risk, we will do that. And I think that's the opportunity. A lot of folks who look at these opportunities are like, "Oh, my goodness. I just don't even know what I don't know and I don't know how to get at it." You know, after eight years, I think the idea of we don't know what we don't know, we're comfortable with that and we're comfortable going down a path and spending a lot of time to diligence these things. To your very specific point, you're exactly right on whiskey. So one of the big risks is a lot of where they distill and where we store whiskey,

• 29:51Speaker 03

  there's tornado risks, there's flood risks. And so that is solvable through insurance. We also have a boat marina roll-up company that, you know, boat marinas can be subject to hurricane and weather risk, but those are solvable through insurance. They just have to be part of your underwriting. For whiskey, we insure a year ahead from the aging curve. So whatever the value is today, we actually insure it for a higher value for what we predict the value of the whiskey will be a year ahead. So if we get wiped out for some reason, the collection through the insurance will be priced that is higher than where we hold it today. But that's just a very specific example for a very specific investment.

• 30:31Speaker 03

  What we hope for what we do is that we're putting together a lot of assets with their own idiosyncratic risks, some or most of which we can mitigate, not all we can mitigate, but having diversification helps mitigate all of those idiosyncratic risks. But that what we don't have running through the portfolio is some singular factor risk, some equity factor risk, or some interest rate, or inflation, obviously the topic du jour, inflation or interest rate risk. Those are things that as we think through portfolio construction and what assets do we own in a particular fund.

• 31:09Speaker 03

  Do we have today and so how would we want to augment that or you know what new investment might what might we want to make? We want to make sure that there's just diversification of those idiosyncratic risks and not some universal risk that is running through the portfolio. And that's where I would say portfolio construction is a really important piece to what we do. And a big piece of why we founded the firm, right? I think there are a lot of people and maybe people listening to this podcast who are like, yeah, yeah, we invest in some weird stuff and we have done that. And there are lots of people and who are really good at this and they do it as sort of a one-off rifle shot approach, right? They kind of have their day job, they invest in what they do and then every once in a while they will do invest in some interesting quirky stuff.

• 31:53Speaker 03

  And that can work really well. I think as we decided and thought about founding our firm, because that's really what we had done in this space prior to founding Cordillera, you know, we thought that the whole that focusing on it exclusively and how you put the pieces together, not just haphazardly, but in a portfolio construction that's thoughtful is one of the big important innovations, I think, a part of what we do where we can have an advantage and think through how to put these all together and how the pieces all fit together. So it's important to us.

• 32:23Speaker 02

  So it's a private capital structure. You've mentioned that earlier. The knock on some of these strategies and by the way, there's not many strategies that do exactly what you do, but anything that's sort of off the beaten path, sometimes they're easy to buy, they're hard to sell. And so you have this great embedded value, but what is the exit strategy? So how does one sell a alligator farm or a spectrum or a boat marina is you know, oftentimes in private equity, if you're a small buyout shop, you improve a company, you leave a little bit of fruit and tree and then you sell it to a larger PE company.

• 33:05Speaker 02

  I don't know if that's the same ecosystem with weird ideas. So who do you exit to?

• 33:10Speaker 03

  When we underwrite a deal, we have to know exactly that there's a viable market to exit that deal today. It can't be, hey, look, this is a great idea. Let's invest in it now and figure out if five years, six years down the road, something will develop to sell it to. We cannot invest in anything like that. This is not a venture fund. We have to know today and our base case has to be an exit that exists today and it is viable and probable. Our portfolio is diverse in terms of how it gets exited. We have a number of things that are what we call self liquidating. And if we had our druthers, everything would be in this self liquidating bucket,

• 33:50Speaker 03

  where you invest in something, you pay money upfront for the right to collect some cash flows over time. Those cash flows pay you back all of your return. And at the end of the period, the asset or whatever you bought has amortized down to nothing. You don't have to sell it. We have a number of things in the royalty space that look like that, which is why we really like royalties. Some things early on, again, we don't do it anymore, but in litigation look like that. You invest in a portfolio of cases. They get monetized along the way, depending on what a judge or a jury or a settlement happens. And at the end, they're all self liquidating. So one thing that we really like, although we can't find an entire portfolio, and there just aren't enough good ideas, is self liquidating. So that is one piece.

• 34:35Speaker 03

  And then on the side that, you know, where we do need exits, you know, I go back to what we said, which is we spend a lot of time underwriting it. It's probably in terms of key metrics on top of who is our operating partner? What are the risks of this? It's how do we exit? And it's probably where we spend the most amount of time and what is the most likely exit. And so each one is a bit idiosyncratic to that investment, so hard to generalize, but it has to exist today.

• 35:01Speaker 02

  So much in this world of private capital, we're always trying to put the best numbers forward so we can raise our next fund. And with some of these strategies, if you misjudge an exit, you still may make a lot of money, but your IRR is going to be lower. And is that just kind of part parcel with this? That there will be times where you have a longer holding period? And so maybe talk about that and maybe a time where you have misjudged the exit strategy?

• 35:32Speaker 03

  Without a doubt, and I think the biggest risk to what we do, you know, would be for those portion of things that we invest in that are non-correlated, but where we do need an exit. There can be this secondary correlation effect, which says, if we go through an 08 time period again, where there's just no liquidity for anything.

• 35:54Speaker 03

  Even we might have found the most non-correlated cash flow stream and most non-correlated asset, but there's just no one to buy anything. That will extend our hold period, for sure, on those things that need an exit. But luckily for us, what's good is that if we have found a truly non-correlated asset, the cash flows in a non-correlated way, it's fine. Meaning, we'll just keep clipping that coupon. It will march to the beat of its own drummer. It's not going to fall off a cliff like everything else will. And it's okay. We can take a little bit of that duration risk because of the non-correlation, which is helpful to us. But look, to your point, there is just math around if you hold something longer, maybe that's good for your multiple, you're clipping a coupon longer.

• 36:36Speaker 03

  But from an IRR math perspective, that is not good. We haven't had anything so far that has dramatically exceeded expectations, but one is certainly in the litigation world. Like, I think of the big takeaway, whenever somebody asks me, because we have done lots of things in litigation, what is your takeaway? It's that they take forever. And it takes way longer, no matter where you are in that space. It just generally takes longer to get liquidity out of cases. And one particular spot that has been long is we invest in international arbitration cases early on, which are sovereign governments against corporates. And, you know, there's just a lot of ways for, through legal tactics, to kick that can down the road.

• 37:21Speaker 03

  And, you know, I think that is one space where we have experienced an extension of expected liquidity and lessons learned from kind of early investments. And I would say ours is a space where we have to be very self-reflective. You know, what are the lessons we've learned when we've invested in these spaces? How do we get better? How do we continue to evolve? How do we structure things? I think one of the big... And areas of improvement for us has been around structuring. You know, we're investing in weird quirky things and I think we have a lot of really interesting innovative structures that help us to have more control over exits. So our recent investments are just much more evolved than some of the early structuring that we had in our

• 38:05Speaker 03

  early deals and so we continue to try to evolve that and get better at that and then learn lessons from things that haven't worked in the past.

• 38:11Speaker 02

  Without giving away state secrets, is there a, can you kind of explain a recent investment you made and maybe how the structure helped make it a good investment?

• 38:21Speaker 03

  Yeah, so I would say one evolution in our firm pretty significantly through structure has been when we find an investment that is really interesting, is new and there's a, one of our investments is called hardware royalties. It's a space that we don't think that anybody has really invested in. I don't think we have time to get into the details of it, but we really like it and has really outsized returns and we think that we're one of the first to do this through an operating partner. But that operating partner that we have partnered with, after they invest our capital that is captive to us, could likely have a really big business around this strategy and they could raise a lot of capital themselves and have a really interesting firm around this strategy.

• 39:06Speaker 03

  And in our early days, you know, we just really got the return of those assets and then kind of picked up and moved on. Today, the way that we structure is we will, the fund, our funds and our LPs will get a revenue share in that business. So we will get the return of the assets themselves and then if the operating partner can build a big business around that, our LPs will benefit from that, having been the early capital that unlocked value and a track record for them to get upside through a revenue share or some other upside warrant or equity participation in that business. And that has helped, you know, evolve returns through a way that is really, you know, helpful to us to what we think are already good investments to have a lot more upside in those investments.

• 39:50Speaker 03

  And we think we continue to get better at structuring those. I'll say there's an example, you know, early on in our life about when we were early to music publishing. Helping put people in business then that have turned out to have really big businesses. And early on, we did not have those revenue shares and we kick ourselves for not having those.

• 40:07Speaker 02

  So you mentioned music publishing and just the royalty space in that area. And I just kind of laughed a little bit like, hey, you know, that's played out. It's not niche anymore. And I thought in my mind, kind of self-deprecating way, if a consultant calls you and asks you about it, is it then over?

• 40:30Speaker 03

  Well, look, I will say there are some consultants that are very forward-looking and very innovative. And then, you know, some that aren't. And so, but I, it is a good question. I mean, one of the, one of the things we actually track and make note of is how often are we getting inbound questions from our LPs and from other people, consultants, about a space? There was a good stretch of 18 months, probably in 2019, 2020, where we were fielding at least a call a week, if not more, around litigation finance. You know, how does it work? Who's good out there? And those are really good signposts to us of it's time to move on. And that's not to say it's not a great asset class. I think they're really, really, those are great asset classes.

• 41:14Speaker 03

  But for our cost of capital in a private structure, you know, it just likely means that those returns are coming in lower than what we had, than what we were, we need to underwrite. But that isn't to say that if I'm running an endowment or a family office, that I don't have a pot or a pool of capital that has, you know, an expected return that works really well, even today for music publishing and for litigation finance. Just for us who are trying to be on the cutting edge, generate returns that we need. Once everyone's asking about it, probably time to think about moving on.

• 41:48Speaker 02

  That's so funny. You've always been such a great resource to us and to me. Whenever we get some peculiar request from a client, I had no idea I was being trapped.

• 42:01Speaker 02

  And I might be a contrarian indicator. So it's always good to know that you're a contrarian indicator. At least I'm fully aware now, so that is great. You mentioned Spectrum earlier and you, I don't want to spend too much time on it, but I do think Spectrum's interesting because we're kind of moving into this 5G area. Is that the play there? Is Spectrum Auctions a way to invest in 5G that's kind of non-tech related?

• 42:25Speaker 03

  That's exactly right. I would say, just taking a step back, you know, I think there's a more secular play, which is just, we like things where demand is increasing at here in, you know, for demand for wireless broadband at an exponential rate, and where the supply of whatever it is, is fixed. You cannot create more spectrum. Now, you can make it more efficient, use technology to, you can more efficiently use the spectrum for most intensive purposes. It is a fixed supply with demand against it going at sort of exponential rates, and we like that. Just taking a step back, now 5G happens to be one of the reasons why that demand is increasing. But even going back to 4G and 3G, we think, you know, there was

• 43:09Speaker 03

  just some secular reasons to believe that pricing of spectrum, if you can buy it right, and that typically happens through an auction. Sometimes it doesn't. Sometimes there are really expensive auctions. Sometimes there are inexpensive auctions, and there's some idiosyncratic reasons around why certain auctions are more attractive than others. But if we can buy the asset at a good basis with those supply-demand dynamics, that is really the core thesis around spectrum. And 5G is, you know, that is a big piece to the demand side, and we really like those assets. But it's hard, they're hard to, they're hard to acquire. You really need a specialized skill set to participate in an FDC auction. No pricing,

• 43:53Speaker 03

  no technicals around what band you want to be in, and no what, what are called PEA's or what geography or city you want to buy in. And so, we also like that aspect to it, you know, a place where good supply-demand dynamics, but also a lot of technical moats around how to buy.

• 44:09Speaker 02

  Yeah, there's definitely some barriers to entry there. So Chris, even though you invest in some crazy weird things, you seem pretty normal. Are any, any unusual hobbies or weird hobbies outside of, outside of work?

• 44:23Speaker 03

  I have twins that are six years old, all boys, twins that are six years old and a nine-year-old. So, my hobbies have been subordinated to the hobbies of my children at this point. This weekend I have Little League baseball, coaching football, there's lacrosse, there's soccer, and so that feels to me to be my, my, my, my full-time hobby. I do enjoy running, biking, and playing this silly game called paddle tennis, so I enjoy that. But, you know, for the most part, right now, I'm Barely keeping my head above water, keeping up with my kids and their endeavors at this point.

• 44:59Speaker 02

  Gotcha. So if listeners wanted to continue to learn more about different niche strategies, are there books or blogs, or how do they learn more?

• 45:09Speaker 03

  So, just like the conversation we had about when we get called about certain things, I think the moment there's a book or a blog about something we're doing is likely not for us. And so I think that the good thing about our space is, so far, no. The answer is, I don't have any really good examples. But, look, I do think the appeal of alternative alternatives, or trying to find non-correlated assets, particularly in market environments like today, is increasing. And I wouldn't be surprised if it doesn't start to happen. I just don't have anything right now that I can really recommend, or you can sink your teeth into. But my gut is, this space will start to become more covered in the Wall Street Journal,

• 45:54Speaker 03

  some mainstream press. And we get more and more inbound inquiries about, hey, I get it. I need to find more diversified, moderately to high-returning assets in my portfolio. Can you tell me about them? Because I'm kind of fearful of equity markets, fixed income markets. So, while I wish I had a better answer for you today, my gut is that it will evolve over time, and I'll have a better answer at some point in the future. There's just really nothing today that is kind of a one-stop shop for weird stuff.

• 46:24Speaker 02

  I have a hunch, if there was a really good insider's guide, you probably wouldn't tell us, anyway.

• 46:28Speaker 03

  I would. There's an open kimono today, but I haven't found anything yet.

• 46:32Speaker 02

  Chris, that was fascinating. So I really appreciate you being a part of the manager meeting. I learned a lot about weird investments, and maybe more importantly, I learned what a cordial error is.

• 46:45Speaker 03

  Thanks, Craig. I really appreciate it.

• 46:48Ted Seides?

  I hope you enjoyed this conversation and maybe even piqued your interest to explore further. See you next time.