Chris Heller - Ten Years of Weird Alternatives (EP.420)

Chris Heller is the Co-Founder of Cordillera Investment Partners, a $1.6 billion manager of non-correlated, niche investments, or weird alternatives. Cordillera looks for investments ahead of the crowd that offer compelling returns and significant diversification. Chris came on the podcast two years ago in our Manager Meeting series interviewed by FEG's Greg Dowling, and that conversation is replayed in the feed. Our follow-up covers lessons learned over ten years of focusing on off-the-run investments. We reflect on Cordillera's strategy, sourcing funnel, research, operating partners, deal structures, and risk management. We then discuss the importance of people, humility, and struggle in investment success. Along the way, Chris colors his lessons with examples from specialty financing of whiskey, boat marinas, wireless spectrum, land for data centers, sports, and cheese. 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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• 0:01Ted Seides?

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• 3:32Ted Seides?

  Hello, I'm Ted Seides and this is Capital Allocators. This show is an open exploration of the people and process behind capital allocation. Through conversations with leaders in the money game, we learn how these holders of the keys to the kingdom allocate their time and their capital. You can join our mailing list and access premium content at capitalallocators.com.

• 3:59Speaker 01

  All opinions expressed by Ted and podcast guests are solely their own opinions and do not reflect the opinion of Capital Allocators or their firms. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions. Clients of Capital Allocators or podcast guests may maintain positions in securities discussed on this podcast.

• 4:18Ted Seides?

  My guest on today's show is Chris Heller, the co-founder of Cordillera Investment Partners, a $1.6 billion manager of non-correlated niche investments, or weird alternatives. Cordillera looks for investments ahead of the crowd that offer compelling returns and significant diversification. Chris came on the podcast two years ago in our manager meeting series interviewed by FEG's Greg Dowling, and that conversation is replayed in the feed. Our follow-up covers lessons learned over 10 years of focusing on off-the-run investments. We reflect on Cordillera's strategy, sourcing funnel, research, operating partners, deal structures, and risk management.

• 5:02Ted Seides?

  We then discuss the importance of people, humility, and struggle in investment success. Along the way, Chris colors his lessons with examples from specialty financing of whiskey, boat marinas, wireless spectrum, land for data centers, sports, and cheese. Before we get going, we've just received word that the U.S. Patent Office has registered the trademark Capital Allocators for use of downloadable podcasts, entertainment services, and education services in the fields of finance, entrepreneurship, and investing. It only took about two years to be officially trademarked, and now that we are, other than putting a little "R" next to our name,

• 5:46Ted Seides?

  I can't tell you I know what to do with it. But for the next 14 years, you can rest assured that the only legally official Capital Allocators podcast in the fields of finance, entrepreneurship, and investing will be ours. So in the words of Bill Murray's caretaking character, Carl Spackler, in the legendary film Caddyshack, "We've got that going for us, which is nice." Thanks for spreading the word about the registered trademark for Capital Allocators. Please enjoy my conversation with Chris Heller.

• 6:20Ted Seides?

  Chris, great to see you.

• 6:22Speaker 02

  Nice to see you, Ted. Thanks for having me again.

• 6:24Ted Seides?

  We'll do a replay of your last episode, but for now, why don't you give just a quick description of what you do at Cordier?

• 6:32Speaker 02

  For lack of a better word, we invest in weird, off the beaten path, what we call niche, non-correlated assets. So we are trying to find the nooks and crannies of the capital markets, trying to look for assets and fishing a pond that other people aren't.

• 6:48Ted Seides?

  So you've now just come across 10 years in business. And I'd love to do a reflection of what's different now versus then. And I guess, starting with the weird alternatives, how do you think about it similarly or differently now than you did a decade ago?

• 7:05Speaker 02

  The original premise of us starting the firm was really that, and I'm going to put this in air quotes, that alternative assets are not alternative anymore. This was 10 years ago. If you think about private equity, it's a $9 trillion industry, hedge funds, three to four trillion dollar industry. And so they got this moniker and called the late 80s, early 90s as being alternative, and they were. And you fast forward to 2014, when we started our business, and now 2024. And I think it remains the same, that those are not alternative. And in fact, they've grown significantly since we started the business. We think about what we do today as trying to go back to the basics of finding

• 7:49Speaker 02

  today's alternatives. It's the same as when we started. I think this has not changed. What was the original promise of alternatives? It's twofold. It is first, by being early to finding an asset, or an idea, or an investment, you can extract outsized returns before the world finds them. And secondly, finding assets that have non-correlated idiosyncratic risks, or diversify your portfolio, is a worthwhile enterprise. And so that's what we do today. And that fundamental essence of it hasn't changed in 10 years, trying to find today's alternatives.

• 8:30Ted Seides?

  So in terms of that core strategy, if you circle back before the 10 years, at the 20, 25 years when Dave Swenson wrote his book and described alternatives, there was at least a thought that some of the risk premium was from a give up in liquidity. How do you think about what you have to give up to get this desire of non-correlated assets with higher returns?

• 8:55Speaker 02

  That's a really good question. I mean, see, there's no free lunch out there in the world. We are pursuing these types of assets because there's less competition, which means we can structure around things and we can pay prices that we think are interesting. On the flip side, what do you give up? Time. I mean, we have to spend a lot of time to find these things. We have to spend a lot of time to structure these things. We have to spend a lot of time to understand these things. And I think it's something that a lot of other private equity firms, asset managers don't really have time to do.

• 9:30Speaker 02

  In some instances, what we do does have some liquidity aspect to it. Now, some of what we find is actually cash flowing and is fairly liquid. Other things that we find aren't as liquid. And we obviously have to take into account what are we being paid or what are the return for giving up that liquidity. But I don't view that as any different than in any other more traditional alternative space. There is a spectrum around how much liquidity something has and our assets, even though they are funky, also have the same thing. And we have to just think about what we're giving up.

• 10:07Speaker 02

  The other thing that I would touch on is risk. I think the thing that we typically get is, oh, you're investing in weird stuff. It must be riskier. And so that's sort of the trade off that you're making. And I think our original supposition and now bolstered by 10 years of being in this business is that that's not actually the case. Now, there are absolutely risky things in this niche space and there are lots of things that you don't want to invest in. But what we think about every day is when we're fishing in this pond, all we're trying to do is exploit this gap between perceived risk and actual risk.

• 10:47Speaker 02

  This pond has lots of things that people are like, oh, my goodness, that must be risky because I've never heard of it, that actually have a really compelling Reward per unit of risk metric to it. That's what we try to do every day is fish in this pond that people think is risky and I'm just going to stay away and find the things that have really attractive return per unit of risk and leave behind the things that don't. And because there's less competition in this pond, we love fishing in it.

• 11:14Ted Seides?

  I'd love to poke on that question of competition. There are some called alternative alternatives that have gotten popularized. So think about reinsurance, litigation finance, pharma royalties. They've been successful. Maybe those are still alternative alternatives, maybe they're not. And then there's the stuff that you do, which isn't that. Where have you seen competition come in and where does it not?

• 11:39Speaker 02

  Some of those things that you mentioned, we used to do and we did a long time ago. And certain things that we have done, let's call it starting 10 years ago, have been adopted very quickly, to your point. Other things that we've invested in, we've had to ourselves for five, six, seven, eight years. And trying to predict which of those are going to become well adopted and which are not, we've actually found not a lot of predictive qualities in anything that we do. The one thing that I will say that we have found to have been a key factor has been in the interest rate environment that we used to be in, anything that we found that was yielding or generating cash flow would get adopted the most quickly.

• 12:22Speaker 02

  So if you think about music publishing and music copyrights, which we started to do 10 years ago, which we don't do anymore, it cash flowed and it cash flowed really predictably. And so it got snatched up. You mentioned litigation finance. It's another great example because of the way you invest in portfolios and then they liquidate over time, it de facto creates a cash flow stream that got snatched up very quickly as well. We're seeing it change in today's interest rate environment. It's not as predictable that anything that generates yield is going to be the first thing that gets snatched up. But some human being evangelizing an idea and being very loud out on whatever it is and just the world saying, okay, that sounds interesting, I'll go do that. It's pretty hard to predict. And that's why we have to be pretty facile.

• 13:07Speaker 02

  We'll let things go as soon as. A big player has raised a big fund around it, or something has happened that is widely adopted and returns have been arbed down. We're moving on to the next thing, and that's a huge piece of our ethos.

• 13:21Ted Seides?

  So you mentioned this part of going through those challenges and finding things, understanding things and structuring things. I'd love to walk through each one and what you've learned over the last 10 years. So start with that finding and sourcing opportunities.

• 13:32Speaker 02

  When we started 10 years ago, obviously, no one knew who we were. Today, we're not a household name, but for those that traffic in weird, nichey, off the beaten path things, people know we're here. So I'll say 10 years of just being here and plugging away and having our names get out there has been helpful, which means the top of the funnel is just much wider today than it was 10 years ago when we started this, where we really had to be out there beating the bushes, telling people we're around. Today, we get deals coming across our desktop, tens a day, because people know we're out there. So that's helpful. I'd say the other thing is just 10 years of doing deals and investing in this space.

• 14:11Speaker 02

  Our best source of new deals and new opportunities today are the things that are tangentially related to deals that we have done in the past. I'll just throw out music and music publishing. By being invested in that space, we learned a lot about the music industry and lots of other media and content related to music. And so while we've moved on from music publishing and music royalties, there are other things in the live music space and other media royalties that we invest in and we learn from our previous deals. So there's just a lot of connecting the dots. The other thing I'll say is thematic. About half of our deal flow comes across our desk, and about half of our deal flow is thematic. So we're outwardly looking for something very specific.

• 14:56Speaker 02

  And I'd say over 10 years, we've gotten much better at identifying themes, and it's really just about pattern recognition. The ability to identify themes and pursue those themes and not pursue other themes and not run down dead end alleys, we've gotten a lot better at over time.

• 15:16Ted Seides?

  What are some of those things that you've learned to look for?

• 15:20Speaker 02

  So for us, very specifically, the things that we like fragmented industries. We like things that are owned by mom and pops. One of the first things we look for is who owns an asset? So boat marinas is a good example. We've been invested in boat marinas for a long time.

• 15:37Speaker 02

  If they ' re institutionally owned, it ' s probably not for us. If there is a big P E firm or a big hedge fund that owns these things, that ' s not where we like to play. The people that we see in our deals are family offices and high net worth individuals. That ' s a good place for us to start. The second thing that we ' ve gotten really good at identifying is non- correlation. Can we be convinced quickly that some asset is not correlated? And really, we think about equity markets. The main factor that most of our clients have running through risk factor that have running through their portfolios is equity. And so we try to look for things that are not correlated with the equity market. How much capital is in this space? We obviously like to look for things where there ' s not a lot of capital in this space. And then very quickly, we get to who ' s the right operating or management team.

• 16:22Speaker 02

  We ' ve gotten a lot better over ten years at figuring out, okay, if this is an interesting idea that is fragmented, there ' s not a lot of capital to it, it ' s not correlated, it can meet our return hurdle, who ' s going to operate and run this business for us?

• 16:37Ted Seides?

  How do you think about the second order correlation?

• 16:41Speaker 02

  Yeah, without a doubt. So the first second order correlation piece that we think about most often is exit. And we might find the most non- correlated business and its cash flows are not correlated with general GDP cycles. But if we own that asset or that company and we want to exit it to another private equity firm or take it public, even though we might have a non- correlated cash flowing asset, a general lack of liquidity like a two thousand eight, two thousand nine environment would bring on this secondary correlation effect that says, great, you have this non- correlated asset, but you can ' t do anything with it now and you can ' t sell it. And so we need to make sure, as we think about portfolio construction, we have lots of different ways to exit our assets.

• 17:27Speaker 02

  So a lot of things that we do are self liquidating. Most of what we do, we don ' t have to sell to other private equity firms or take public, but there are some things that we do. So we want to have a diverse set of these things. But secondly and most importantly is, if that is the case where we ' re in an environment where there ' s Not a lot of liquidity, but it doesn't really matter for us. We'll just run the business. It's a non-correlated asset. The fact that we're probably highly correlated are illiquid environments and also GDP or the economy is generally not doing as well. And that's okay. Actually, those environments can be fine with us. We just run those businesses through those environments and then find a better time on the other end to get out of it.

• 18:09Speaker 02

  Then the last thing I'll say is you can have assets that look very disparate, that sound like they have nothing to do with each other, but might have one layer underneath it, some correlation to them. And so we have the theme around specialty inventory finance. And the way that that manifests itself is in very different things like whiskey and wireless spectrum licenses and land for data centers. But underlying it might be some actual same thing liquidity metric that might keep them all a bit more correlated. So we do a lot of work around looking at our portfolio and say, okay, at the top level, they don't seem correlated, but one layer underneath it, they might be.

• 18:49Ted Seides?

  What goes into understanding something new in your process? It comes across the desk, it fits some of these heuristics that you've developed, and then you have to dive in.

• 19:01Speaker 02

  So I think the thing that we think about most is our single biggest advantage is time. If we're doing our job correctly, we are not looking at assets or looking at deals with a ton of competition, where you have to have an LOI or a term sheet in within two weeks and a deposit down within three weeks, otherwise you're going to lose the deal. By definition, that's the wrong space for us. And so when we think about finding these new spaces, it takes us a lot of time to underwrite them. Whiskey as something that when that came across our desk six years ago, we knew nothing about investing in whiskey, literally nothing.

• 19:44Speaker 02

  Three different groups pinged us and said, hey, you gotta look at what's happening in the aging curve. I didn't even know what the aging curve was. I didn't know anything about what it meant. So that took 18 months to underwrite that deal and which you're spending a full year and a half talking to everyone that you can in this industry. You're talking to cooperages, you're talking to brokers, you're talking to brands, you're talking to everyone that you can't. If we don't have time on our side, we can't understand a new industry and we can't get there. Oftentimes, we throw deals back because we say we're just not going to get there. There's more capital that's there to close a deal before we're going to get there, and that's good. We say that doesn't work for us. So I think the single most

• 20:26Speaker 02

  important factor for us when we're doing things that are brand new is time.

• 20:31Ted Seides?

  So if you're taking whiskey as an example, and you're taking 18 months, somewhere along the way, you're going to have that spark that tells you, oh, wait, this is why this aging works and how we understand to play it. How do you decide when you know it enough to start working on making an investment or moving towards the structuring and finding the management team?

• 20:55Speaker 02

  Yeah, we've spent a lot of time actually recently talking about our decision making and when we make decisions. We could spend instead of 18 months, we could spend three and a half years to be like, okay, is this really what we want to do? And by that time, the opportunity is gone. And so it's this mix of have we done enough work to understand the industry? And I always feel like I start in a place and I make this analogy of a dark room where I don't know anything that's in there and I'm just flashing a flashlight. And then do we feel like we're now standing in a light room where I understand what's in here and I know what I don't know and I know what I do know. But also that the opportunity hasn't moved. And so I think there's that confluence of you can take time, but most of what we do, there's a moment in time where the opportunity is here and then it will be gone. We have to get to a place where we feel comfortable enough, but then make a decision. And it typically has to do with us saying yes.

• 21:40Speaker 02

  Oftentimes, we have to get 80 to 85% of the way there and that extra 10 to 15 always, you could spend another year or two to try to understand it. But sometimes you have to move and you have to make a decision. And that's typically about then understanding the industry dynamics and supply demand. When we really have the supply, demand dynamics nailed to an opportunity, or

• 22:00Speaker 02

  Some sort of fundamental change to an industry. Whiskey had both. It had a fundamental change that it was undergoing because of the advent of craft brands, and then a big supply-demand imbalance because of the bourbon boom. And then the third piece that I'll say is you have to have the right operating team and the right operating partner. And so when all of those come together and we feel like we know what we know and we know what we don't know, but we understand the industry, that's when we really go all in.

• 22:27Ted Seides?

  So when you went from years ago, investing in funds, to now investing in operators in these niche opportunities, what are the similarities and differences in assessing an operator?

• 22:38Speaker 02

  In our previous lives, we used to be allocators. So it feels like many, many moons ago. And then very early on in Cordiera, we did a small handful of opportunities because we were writing smaller checks, investing in other funds. The thing that I would say is, and it's what has been true for all three, me and my two co-founders throughout our careers, is identification of people. When you're an allocator, the first thing you start with is a 30,000-foot view of where you want to allocate your capital and why. And we do the same thing, but it's just at a much more granular, nichey, weird spot. Like, do I want to be in whiskey? Do I want to be in wireless spectrum licenses? Do I want to be in sports, et cetera?

• 23:23Speaker 02

  And if I do, who am I going to partner with in that space? And that feels very similar to being an allocator. So you first top-down figure out where you want to be and why, and draw a lot of conviction around that. And then it's that sitting across the table from people. It is going to dinner with folks and getting a gut feel for, is this the right person? Whether you're interviewing a hedge fund that's going to manage your money as an allocator, or a private equity firm that's going to manage your money as an allocator, or is this the right group to run my boat marina company? Or is this the right group to run our whiskey assets? And that feels very similar. And I think that

• 24:05Speaker 02

  EQ around partnership is important. Identifying operators and the right people over 10 years proven to be the most important determinant of success in our investments. And I would have said the same thing 20 years ago when I was at the Stanford Endowment. So people matter. And there are some very specific lessons learned, which I'm happy to talk through.

• 24:29Ted Seides?

  Yeah, why don't you go through the lessons learned?

• 24:32Speaker 02

  I think a couple of things. So first and foremost, the best people in the world in any industry always leave behind a wake of super fans. People that just love them are shouting from the rooftops about them. And it's not hard to find them. When you have to really search to find someone to give a reference or you're only able to find good references from the references that they provide, it's probably not the right person. Another thing that we've learned pretty quickly is the quality of a work product that comes out of an individual or a group is highly correlated with their success executing whatever they're going to do.

• 25:15Speaker 02

  And I say this because oftentimes when we are pursuing a management team, for them to convince us that they're the right ones, they have to deliver work product to us. Some are really, really good. They are succinct. They are professionally put together. Others are just haphazard. They might speak and talk a really good game, but their materials, their actual work product is all over the place. I hearken back to the Mark Twain quote, which is, I didn't have enough time to write you a short letter, so I wrote you a long letter. And we see this all the time. People will get presentations from people that are 80 pages. They can't succinctly get to either why they are good at what they do or why the opportunity is there.

• 26:00Speaker 02

  And I think quickly saying, somebody who can't produce a good work product right off the bat, move on. We look for audacity versus arrogance. So we are trying to do bold, interesting things. But there's a fine line between the audacious and the arrogant.

• 26:19Speaker 02

  We try to figure that out. And so audacious partners and entrepreneurs and management teams, it really comes down to when things aren't going well. The audacious are willing to jump over or go around obstacles, figure out obstacles. They believe in it. A lot of the time, the arrogant feel at the beginning like they can do it, and then they run into an obstacle and they actually want to move to something else because they're used to being good at something or they think they're good at something. And so they won't jump over these walls or run through these walls or figure out the solution to those walls. It's a little bit of a nuance, but going in, you're trying to find bold people but aren't totally full of themselves. And that comes to this idea of listeners.

• 26:58Speaker 02

  We try to find people who will listen as much as they will tell you about the world. And another adage about religion, which is I've never found anybody who wanted to tell me about religion, who wanted to hear my views on religion. And so this idea that you're constantly finding people want to tell you about things, but our best partners are the ones that it's a two-way street that will listen to us as much as they will tell us. And we want to be that same way. And then the last thing I will say is one thing that we've really found about operating teams is sometimes these deep philosophical thinkers are not always the right people to run business. They can usually espouse a really interesting view, but they can't run businesses. There's something about the decisions and the process it takes to run an investment,

• 27:43Speaker 02

  the people management, how you hire people, how you motivate people. I think we have in the past, you can make mistakes. If somebody who's really smart and a deep intellectual thinker, who can talk through a thesis but can't really run an organization, trying to get to the bottom of who can actually run an organization is helpful as well.

• 28:01Ted Seides?

  So that whole set of assessments is pretty qualitative oriented. I'm curious if there are analytical tools that you also use when you're looking at a potential operator of one of these opportunities?

• 28:12Speaker 02

  It's not as easy as my old days, without a doubt. It's not sort of, hey, here's a track record. What do the numbers look like? What does the output look like? It does have to be a little bit more qualitative. That being said, our deals don't exist in a vacuum, meaning very rarely are we creating something that hasn't been done in the past. So while we are trying to be one of the earliest institutional investors in a space, that doesn't mean that the space hasn't existed. And so if you think about where we've invested, so boat marinas, boat marinas have existed since the dawn of time. Music and music publishing, back when we were early to that, there was NPS data, which is publisher's share data or cash flow data, going back to the early 70s there.

• 28:54Speaker 02

  Litigation finance, even though we don't do that anymore, there's data around outcomes that have happened in international arbitration since the advent of ICSI in the 1950s. And so a lot of things that we look at, there is history around them. But I will say, part of what we do is that there is a greater percentage of the evaluation that is more on the qualitative than it is on the quantitative if you were just going to old world as an allocator, which is like, what is your track record? And does that work?

• 29:27Ted Seides?

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• 30:04Speaker 03

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

• 30:10Ted Seides?

  And now, back to the show.

• 30:14Ted Seides?

  But once you found the space and the operator, what have you learned about how to put these vehicles together?

• 30:20Speaker 02

  The way that we structure our deals has certainly changed probably the most over the 10 years. I hearken back to what we think is our advantage, which is time and lack of competition. So we try to take advantage of that in our structuring. So first, there's two pieces of structuring. There's Minimizing downside and then there's maximizing your upside and you can potentially enhance each of those through structuring. On protecting the downside, because we're looking at deals where there's not other capital around, we can do a lot of things to our cash flows and make them more senior in the stack. We can think about things like waterfall.

• 31:05Speaker 02

  When do we get paid and how do we get paid in our seniority in the waterfall? We're not in competition with other private equity firms and trying to offer the best deal, we're the ones offering the only deal. And I think that has become helpful over time. On the maximizing the upside, we've learned a lot of lessons over time and typically we tend to be more asset based investors than we are operating company investors to begin with. And when we find assets that are really interesting, and let's just use as an example here, our boat marinas, those are really just assets. We think through, are these assets more valuable on their own? And whiskey, if it's fine, if you don't really need an operating team to do what you need

• 31:50Speaker 02

  for the value of the whiskey to accrete, we'll just put it into an LLC and we'll get the value of those barrels. But if the assets are much more valuable to someone else and someone that we might sell it to with an operating team layered on top of that, that's when we create an operating business that says, look, if I'm going to go out to the market, I could try to sell somebody a boat marina who doesn't know how to run a marina, they're not going to pay the price. But if we can deliver to them a portfolio of boat marinas with a world class operating team on top of it, there's a much bigger market around that. We didn't used to take warrants or equity or a revenue share in their business.

• 32:31Speaker 02

  We do today because oftentimes when we put an operating team in business, they could generate a track record and then they could go out and raise more capital. And we want our entrepreneurs to be successful and we will allow them to do that. So hopefully they'll get great returns from just whatever they're pursuing for us. But then if they can go create a great business out of that, our investors will get the benefit of that. There's a lot of ways that we think about enhancing that upside.

• 32:58Ted Seides?

  I'm curious how you risk manage these situations if something goes wrong. It's easy to see how it's self liquidating or it's a platform and it's growing. But you're investing in something that other people aren't for whatever reason. What do you do if it's not working?

• 33:14Speaker 02

  We have enhanced our asset management capabilities at the firm significantly over time. Sometimes they can be very familiar situations that anybody can jump into and run. But as you point out, we often find ourselves in different situations because nobody else is involved in these companies. And this is where us building up our own internal asset management capabilities and a little bit of pattern recognition and secret sauce around what are the typical problems that people in our space run into, which can often be around people? How do we jump in and augment the people part of it?

• 33:54Speaker 02

  And that's where 10 years of pattern recognition of being in, we've seen this, being humble around, man, we really screwed that one up last time and we didn't do that right. And we didn't motivate them in the right way. How do we learn from that? And I think the humility around the things that we've screwed up, even in our investments that go really well, nothing goes perfectly. So like, hey, that one looks like that old deal. When we did that, this went well, but this didn't go well. Let's do something different here. And the same thing works when we have something that's not going well. Be like, hey, it's got echoes of the other thing that wasn't going well. How do we manage that?

• 34:34Ted Seides?

  What are the most common, specific examples that come up of something that hasn't gone well in the past that when you're underwriting a new deal, you're referring to?

• 34:43Speaker 02

  Most of the time I would say we look back and we say, did we get the thesis wrong? Did we get the execution wrong? Or did something exogenous happen that we couldn't control? The vast majority falls into the middle bucket. We got the execution wrong. Either We weren't aligned perfectly with the operating team or the management team that we had somehow in the structure of the deal. Secondly, we just picked the wrong people. They had a really good idea, but they couldn't execute on it. Or sometimes we didn't bring the right resources to bear for that team. And I think we've worked really hard over the 10 years to develop internally the resources to bring to bear to those situations, but also externally.

• 35:27Speaker 02

  There's a lot of interesting things and people that we now are kind of specific to our weird spaces that we can reach out to, to bring those to bear as well. So I would say the vast majority of things that we think through that didn't go well. We were smaller at the time and didn't have the resources to bring to bear to go get the A-team in the space. Our firm has evolved quite significantly since then, and as we are writing larger checks into these opportunities, you can bring the A-team to bear, which is helpful.

• 35:58Ted Seides?

  I'd love to dive into some of the things that are common themes that might make sense that you've either looked at or invested in.

• 36:08Speaker 02

  Yeah. So data centers, obviously, if you think about it, the highlights have been well found and there's tons of capital in data centers. So data centers and building and leasing out data centers is not a cordial deal. But we have a theme for now five or six years around specialty inventory finance. This is the idea that we use our balance sheet to warehouse an asset that an end user does not want to warehouse on its balance sheet. And they want to just buy this asset and immediately do something with it to produce a profit or revenue. And so that has been whiskey for us.

• 36:50Speaker 02

  We buy and age barrels of whiskey and we sell them back to craft brands immediately when they want to put it into a bottle and sell it. They don't want to use their balance sheet to warehouse whiskey. Wireless spectrum licenses, we buy out of FCC auctions and own wireless spectrum licenses and sell it back to carriers when they need it for their networks. And Data centers is an interesting one for us. We have a theme around land related to data centers. As this is a confluence of two themes, specialty inventory finance and second and third order effects from AI. We are not also going to go invest in a venture AI firm or company.

• 37:33Speaker 02

  But we'd like to think about big secular trends and what are the second and third order effects from AI? And one of those is much larger footprints for data centers. If you're going to go from place where you used to be able to house a data center in a single building in Manhattan to now needing 300 acres to build a data center for AI. What does that mean? It means land. You're going to need much more land than you needed in the past. That land is going to need water. That land is going to need power. So how do we think about owning powered land?

• 38:13Speaker 02

  And the hyperscalers, the Googles, the AWSs of the world, need to build many more data centers. And they need pad ready land to build data centers very quickly. And that land is a very small piece of the overall cost of building that data center. We will warehouse that land and get it pad ready and then sell it to either the hyperscalers or the wholesalers who need to build a data center on top of that. And then either lease it out or use that data center for themselves. We've also think energy is a piece of that as well, which is how are we going to, as a country, come to grips with the fact that we can't put the genie back in the bottle that everybody wants to watch movies on their phone?

• 38:58Speaker 02

  And AI and all of this data consumption. We need to power those data centers that are generating all of that data.

• 39:08Speaker 02

  And we also want green energy. It's a conundrum that we are going to have to grapple with as a country and globally. So we tend to think about this. What are potential solutions to that? We got to think through nuclear and how we think about nuclear here in the US. Other places in Europe, particularly France, use a lot more nuclear than we do. All of the hyperscalers have made commitments around green energy. And so if they're going to build these large data centers, there's probably some solar and wind that they need, and you need land for that as well.

• 39:36Ted Seides?

  So when you have that thesis of land, energy, and how you're going to power these data centers, what's the investment that you made?

• 39:44Speaker 02

  It is in a company that is structured as a REIT. It's got an absolute world-class management team that has been in the telecom infrastructure space for 30 years, which we love to find and see. It's a fantastic company.

• 40:00Ted Seides?

  How about something like sports, which has become a very topical investment area? How do you attack something like that where there's capital coming in different parts, but you want to find a cordial-like investment?

• 40:14Speaker 02

  I think it's very similar to what I just described. So let's start with why do we like sports? What is the downside for us about sports is there's lots of big funds doing things and buying big leagues. So we got to find our place within that ecosystem. A couple of themes around sports is emerging leagues and emerging sports. So one of the deals that we are looking at right now and close to doing something in pro triathlons. Sports, so much hinges on media and distribution rights in sports. And so you either find opportunities where those distribution and media rights are in place and provide predictable cash flows over time, or you find interesting places

• 40:59Speaker 02

  where those don't matter as much and there's other ways to get predictable cash flows. And that's what we really like about triathlon. The triathlon is very specific to the league itself, but oftentimes you're assessing, do you want to own teams? Do you want to own leagues? Where does the value accrue? But this idea of emerging sports is interesting to us. We're also looking at some things in badminton. We're looking at some things in cricket. The other theme that we like within sports right now is new formats for today's consumer.

• 41:36Speaker 02

  I've got twins that are nine and an 11 year old. The way that they consume sports today is totally different than the way that I consume sports in the early 80s. My kids cannot watch the nine inning baseball game. They watch the highlights. They can't even watch a full football game. And so there's some really interesting things happening in the sports world today, creating formats for today's consumer. So one is in football or soccer. The Kings League, and this is just an example. These are not things we're actually pursuing. The Kings League, which is the Spanish league, it's a 40 minute soccer game instead of a 90 minute soccer game. It's seven on seven.

• 42:16Speaker 02

  It has a gamification aspect to it. Before the game starts, you pull a card and that's your secret weapon and you can play it at any time in the second half. The secret weapons are anything from a goal counts as two goals, or you can designate one player on your team. And if that player scores, it counts as two goals. At some point, they roll this gigantic dice out of the top of the arena and whatever it lands on, if it's two, you play two on two for four minutes. And the fans vote on changes to the rules in this league. There's lots of influencers that are involved, which was really interesting. I think this is a league where they embrace

• 42:55Speaker 02

  the gamification of it. And so the president of La Liga called it before it started, a circus. And so in the first game, they completely embraced it. They had someone dress up as a clown and play the entire game dressed as a clown. The finals, what they call their World Cup, 215 million views of the content. And 80% of the viewership is under 34 years old. There's another, the golf league called TGL, which is Rory and Tiger. This is a taking golf and putting it in a purpose mill stadium. And hitting balls into a gigantic simulator. And then, once you're 50 yards and in, they're actually start playing. There's a shot clock, there are timeouts.

• 43:38Speaker 02

  It's a two hour limit, it's three on three. And so it's this idea of new formats for sports that caters to the way that a new generation consumes the product.

• 43:50Ted Seides?

  How about any other weird alternatives that you're looking at?

• 43:55Speaker 02

  We're looking at a deal right now in cheese. We like to look at things that need aging. This fits into that inventory finance theme. We've learned a lot of lessons about things that age and people that need things to age. And cheese and pork bellies is an interesting one today that we're looking at. It has the same dynamics. It has an end user that wants the product, but it needs to go through a process before that product is ready to be sold.

• 44:23Ted Seides?

  As you reflect over these last 10 years, what do you think is true today that you didn't back then?

• 44:34Speaker 02

  That this was going to be easy. So when we first started this business, we had a list of, I think it was 300 LPs. And we're like, yep, they're all going to love this idea and we're going to go out to talk to them and they're all going to invest. And we stepped off the cliff and we started this business. And we still have that list of that list. I think it was close to 301, one of those people actually invested in our business. Actually, we've always used a corporate coach since the beginning. She talks about this a lot and entrepreneurs go through this phase. We were in this uninformed optimism phase and everybody has it because you don't start a business. You don't do anything new if you don't have the uninformed optimism.

• 45:16Speaker 02

  And very quickly, you get hit in the face with the informed pessimism. And then the question is just, can you get through it on the other end to the informed optimism? And obviously we were able to get through that, but still we love what we do, but it's not easy. We have a very specific piece of what we do, which is like in this niche weird space, there's a lot of things that are harder, like finding deals. There's no brokers in this space, so that's hard. Structuring deals, we're not a buyout firm that just uses the same structure or similar structure. Every single structure has to be bespoke and unique. How you exit our deal, everything is difficult and hard and it's great. Our business is not super scalable. By definition, if we've got $20 billion in a fund, we're not doing niche things anymore.

• 46:01Speaker 02

  And so there are lots of things and struggles that keep people away. But in that struggle and in the fact that it's hard and every day we come in is the moat. But I think we first started this business thinking like, yeah, it's great. It'll be easy. The three of us will get a bunch of LPs. They'll love what we're doing. It's hard every day.

• 46:21Ted Seides?

  Any other major changes in beliefs?

• 46:23Speaker 02

  As I look back at starting this firm, I think there's three major takeaways, which is the people matter the most. The people you start this business with, I would say, start a business with other people because your emotions and their emotions, when you're up, they might be down. And when they're down, you might be up and you need that. You need someone to pick you up and you need to sometimes pick your partners up. But more importantly, start a business with people you like and you enjoy spending time with. So often, we see people coming together that maybe worked on a deal together or worked on two deals together and they found that they were aligned and so they're going to start a firm together. I think you need a lot of shared experiences and a lot of shared scars and battle tissue

• 47:06Speaker 02

  before you start something. I'm very fortunate that one of my partners that I started with, I've known since middle school. We've literally known each other since eighth grade. And then Gus, the third partner, we've all worked together now for 18 years. We stumbled into that good fortune. I don't know that was a core belief back when we started the business, but it is absolutely a core belief today.

• 47:30Ted Seides?

  How about the other two?

• 47:31Speaker 02

  Humility. I think having the humility, Ashley, Gus and I all have totally different strengths and weaknesses. We have to be okay being like, I'm not the best one to do that, whatever particular task it is. You do that. You're better at that. When we first started, I'm not sure we'd all been introspective enough about what our strengths and weaknesses were. And we've worked a lot on that over the 10 years. I think we all now have a very good sense for what we're good at, what we're not good at, and being able to be open with your partners about that. There's a personal humility that comes from this.

• 48:10Speaker 02

  Also, you've got to be able to learn from your mistakes and you have to be able to surface those mistakes and talk about them a lot. Because you won't learn from them if you don't. If you bury them under the rug and it's painful. We do it all the time. Whenever we're underwriting, looking for deals, sourcing deals, or deciding are we going to do a deal? We're always saying, well, we screwed something. We probably made a mistake in the past. Let's learn from it and do it now. And you have to constantly be doing that and it's not easy. And then it's The struggle. If you start something that's easy, other people will come quickly and orbit away. The struggle is the moat. It is what keeps the value in whatever you've started. What is easy and what is hard can ebb and flow over time.

• 48:55Speaker 02

  Meaning what was hard at the beginning might not be hard anymore. But other things become really hard. You have to enjoy the struggle. What we do every day coming into work and trying to find these nichey off the beaten path things. It's not easy, but it's enjoyable and it's rewarding when you do. And seeing things that we found eight, nine years ago being successful and actually other people finding them and coming into those spaces. It's great. We're happy to do that and move on to the next thing. But I just think you got to go into it knowing that it's going to be hard and you hope it's hard and you hope it stays hard. But you got to enjoy that struggle as well.

• 49:32Ted Seides?

  So as you look out over the next 10 years, structurally, how do you think about why what you do works? So that there will continue to be new things to look at.

• 49:45Speaker 02

  This is about learning over the past 10 years and pattern recognition over the next 10 years over. How do we find things? How do we hire the right team? And we've learned a lot of lessons about our own people and the culture that we hire at Cordiera to Go find these things. So we have to find the right people. We have a little bit of a heuristic that we use to hire folks about capabilities, collaboration and creativity. Well, so obviously capabilities and competence speaks for itself. We need people who have some basic fundamental finance abilities. But the collaboration piece of it is really important for us because we invest in lots

• 50:28Speaker 02

  of weird stuff. And so you have to have a team that can sit around a table and talk about, hey, if we're making this whiskey investment, or this sports investment, or this spectrum investment, how do we compare and contrast these things? It's not like we can send people off in their own little silos to go find deals and come back and put them in the portfolio because they're so disparate and so different. And so collaboration for what we do, and not everybody wants to do that in the finance space. And then creativity, we look for people in different spaces. The person who we just promoted as a partner came from medical device field. And so we're looking for creative people who are willing to go out and look for deals in interesting new spaces. The last thing I'll say is, we do feel like we have a 10-year head start

• 51:13Speaker 02

  on people trying to do this. And we've learned a lot of lessons and have a lot of scar tissue around how to find them, where to find them, how to find an operating team, how to structure these things, and how to not run down dead-end alleys around things that sound interesting that aren't. We just keep building on that. Over the next 10 years, we become more efficient, and we hire the right people to continue to execute on it. I feel pretty excited about it.

• 51:40Ted Seides?

  Chris, I get a chance to ask you the closing questions that, for whatever reason, Greg Dowling didn't the first time around. What's your favorite hobby or activity outside of work and family?

• 51:50Speaker 02

  I'm a big music fan. I have absolutely zero talent for it, but I love it. I love listening to music. I love going to live music venues and concerts, and I can't consume enough music.

• 52:04Ted Seides?

  What's one fact that most people don't know about you?

• 52:07Speaker 02

  Probably related to that, my memory is like a C plus, B minus, maybe, pretty average. But there's a piece of my brain that just remembers lyrics. I wish that part of my brain could be used for a lot of other things, but I tend to just have a lot of lyrics in my brain.

• 52:25Ted Seides?

  What's your biggest pet peeve?

• 52:27Speaker 02

  Hmm. Rental car pickup without a doubt. I don ' t understand why we can ' t figure that out. I can fly from here to any place in the country or in the world with just my phone and I just get through and somehow you show up to rent a car. There ' s a line that ' s a half hour long. They don ' t have your car. You can wait for two hours. I don ' t understand why we can ' t figure out the rental. It ' s probably an area we should start looking at, but going to pick up a rental car is a huge pet peeve of mine.

• 52:57Ted Seides?

  How about on the investment side?

• 52:59Speaker 02

  Poor work product. When I ' m like, hey, I need to understand what ' s happening in one of our companies or internally and you get this haphazard, here ' s 70 pages, disorganized work product drives me crazy.

• 53:18Ted Seides?

  Which two people have had the biggest impact on your professional life?

• 53:22Speaker 02

  Without a doubt, my two partners, Ashley and Gus. So for different reasons, and as I mentioned already, Ashley and I have known each other for a very long time, but she is responsible for most of my career. She ' s had a very similar path to me. We both started our careers in investment banking, but she got me a job at Stanford Management Company at the Stanford University Endowment. I had left finance to go to Capitol Hill for a while and she called me. She ' s like, you need to come to. I was like, what ' s an endowment? I don ' t even understand what they do. She ' s like, no, come here. She had been a soccer coach. She played soccer at Michigan and had been a soccer coach at Stanford. She had also been in investment banking. And so she just helped get me on the track. But she ' s also just been an incredible friend for my whole life and. So Ashley and I have worked together since two thousand and one.

• 54:10Speaker 02

  So for 23 years, I ' ve known each other since eighth grade. And Gus, I mean, just an absolutely incredible business partner. I ' ve worked with him for 18 years and his skill set around process and process improvement and essentially has been For a long time, our de facto CFO and COO. He's incredible investor as well, but he's also just really good at making sure that the trains show up on time and run efficiently. And he's amazing at it. He does it with a smile every day. He's just been an incredible partner.

• 54:42Ted Seides?

  What's the best advice you've ever received?

• 54:45Speaker 02

  This is a theme that we've had through these questions. I tend to get my advice through music and through lyrics. And so the most distinctive thing I can remember is when we had to make a decision to are we going to start Cordiera as a firm or not? And I was driving in the car and Tom Petty's It's Time to Move On came on the airwaves. You know, it's time to move on. It's time to get going. What lies ahead? I have no way of knowing. And I was just like, it's exactly right. You need these moments in your life to try the next thing. There's kind of a lightning bolt moment when I was listening to that Tom Petty song. It was like, it's time to move on. I was like, all right, let's do it.

• 55:20Ted Seides?

  All right, Chris, last one. What life lesson have you learned that you wish you knew a lot earlier in life?

• 55:24Speaker 02

  That things will generally work out. I say this a little bit of follow on to that answer in that I've got an 11 year old middle schooler. I think about this when I was that age of you think whatever's going on with your friends, you can't ever get through it. And it's the worst thing ever. And you wish you could give

• 55:42Speaker 02

  my son that perspective. And even it happens a lot in our professional lives as well. It's like, oh my goodness. This is dire. And you're like, you know what? If you've got a good work ethic and you try, you just keep plugging away at it. Things change, things move on, things will generally work out. And I wish I had known that earlier in my life. I wish I could impart that on my children now who believe the littlest things are the biggest things in their lives. And when me and my partners are going through things, we're like, you know what? Seems big right now, but it'll generally work out.

• 56:14Ted Seides?

  Chris, thanks so much for doing this again. Always interesting to hear what's going on in the weird worlds of alternatives.

• 56:20Speaker 02

  Thanks, Ted. I really appreciate it. Thanks for having me on again.

• 56:24Ted Seides?

  Thanks for listening to the show. To learn more, hop on our website at capitalallocators.com where you can join our mailing list, access past shows, learn about our gatherings, and sign up for premium content, including podcast transcripts, my investment portfolio, and a lot more. Have a good one and see you next time.