Influencers with Andy Serwer: Josh Friedman
In this episode of Influencers, Andy travels to the Milken Conference in Los Angeles, CA to sit down with Josh Friedman, co-CEO and co-Founder of Canyon Partners, as they discuss the debt market, inflation worries, and the reason Josh moved his firm from California to Texas.
- In this episode of "Influencers," Canyon Partners co-Founder and co-CEO, Josh Friedman.
- Inflation is clearly here in the labor markets, is here in the commodity markets, is here in the supply disruption for all sorts of goods and services.
They can raise interest rates all they want. It doesn't necessarily curtail the gap between the number of people who are on the bench looking for jobs and the number of jobs that are available.
There is a lot of liquidity. But I guess what I would say is, whether that liquidity gets put to work or not, depends on people's optimism or pessimism. And optimism and pessimism always overshoot.
ANDY SERWER: Hello, everyone and welcome to Influencers. I'm Andy Serwer and I'm here with Josh Friedman, Canyon Partners Co-Founder and Co-CEO. Josh, so great to see you.
JOSH FRIEDMAN: Thank you very much, Andy. Nice to be here.
ANDY SERWER: So why don't you start off by telling us a little bit about what Canyon does?
JOSH FRIEDMAN: So Canyon is a firm that has its roots in the hedge fund business, primarily in things like distressed debt. And over time, that format has evolved to different types of securities, as well as different types of structures.
So we have a variety of different platforms, from real estate, to debt, to more equity-oriented platforms, to direct lending platforms, to distressed platforms, to the original multi-strategy hedge fund. All of which comprise, broadly speaking, alternative investments. And that total is about $25 billion in assets.
And our headquarters is in Dallas, Texas now. We have a large presence here in Los Angeles, as well as a presence in London and New York and Hong Kong and Tokyo and Seoul and Shanghai.
ANDY SERWER: There are other people, other companies, obviously, that do what you do, Josh. So what makes Canyon different? How do you differentiate yourself in the marketplace?
JOSH FRIEDMAN: There's nothing that we do that's a hundred percent proprietary. And that's true with everyone in the investment business, I'm afraid. We always tried, from the very beginning, to be a high value-added boutique investor. So not necessarily the largest investor, but to have the types of scale and resources internally, to be able to participate in very complicated situations.
And almost everything we do involves buying something in a way-- in a situation that's very complex and selling it when it becomes simple. Because when things are complex, companies going through a restructuring or they need capital urgently for some reason or they're trying to finance a project immediately.
And usually, you get well paid for taking those types of risks and undertaking those types of situations. And by the time things are simple and readily accessible, then you can usually sell them at a higher price.
So that's really what we do across all of the themes that we exploit. But there are certain areas where we've traditionally had a large and significant, sort of competitive, position.
One is clearly in distressed debt, which is where the roots of our firm go. But also in originating loans in situations that are complicated, as well as in real estate.
And over time, because of our size and because of the number of years we've been in business, the number of specific areas within the markets where we have expertise has broadly expanded to go to structured products, to financial institutions, to retail. To a lot of other verticals, gaming, energy, et cetera, because we have professionals have been at the firm for a very long time.
But within all of them, we've tried to occupy that top quartile of trying to focus, not necessarily on being the largest financial institution, but to try to focus on kind of the high value-added, not quite as scalable, types of markets.
ANDY SERWER: And I saw on your website, you had this quote from Einstein, front and center, something to the effect of, I'm not necessarily the smartest person, arguable. But it's just that I think harder or longer than other people. Does that speak to your process?
JOSH FRIEDMAN: I think it does. I think we try to be a firm that has a level of humility. We were always-- I used to call us-- when we were strictly a hedge fund firm. And today hedge funds are less than half of the aggregate assets of [INAUDIBLE] and all those other vehicles are over half.
But we always tried to be kind of humble and hardworking, if you want to think of it that way, as a firm. And we tried to have a culture where deep academic type of research and really, really knowing your credits was highly, highly valued. And I think we still have that. I think we still have that reputation today, as being a quality firm and that we don't take a lot of shortcuts.
ANDY SERWER: Right. So you're from Boston. And you went to Harvard College, Harvard Law School, Harvard Business School. And I saw this funny interview you did or a funny point in the interview where you were saying that you took your student loan which was due at 7% and invested in a fidelity fund that was paying 13% as an arbitrage.
JOSH FRIEDMAN: Yeah. That was the first days of the Volcker period when rates were pushed up through the moon. And my roommate at the time was Mitch Julis, who's my business partner, co-founding partner.
We sort of reunited, prior to Canyon, at careers at Drexel. But when we were roommates back then, I think Mitch was the one who came up with the idea of these money market funds that fidelity had. And all of a sudden, you didn't have to keep your money in the bank earning zero.
You could put it in this very reputable manager who wasn't exposing you to duration, but was just buying things that had a hell of a lot more yield, so for very, very modest risk. So that was one of our first active investment thesis.
ANDY SERWER: A couple of places to jump off of from there. Number one, we talked about inflation and Volcker. And here we are again perhaps. Want to get to that.
And then also we're here at the Milken Conference. And you worked with Mike Milken back at Drexel Burnham Lambert in LA at the famous x-shaped decks, I suppose, all those decades ago. Maybe we'll start with that first. What's it like to be here, and Mike is still wandering the halls after all this time
JOSH FRIEDMAN: It's great. I mean, Mike was an extraordinary boss. Or in my case, actually boss's boss, but I interacted with Mike on a daily basis. And the level of energy and creativity back then was unbelievable.
I don't think that it's quite as broadly known as it should be, the type of innovation that Mike pioneered in that period in the 1980s. Prior to Mike's arrival, the only non-investment grade bonds that existed really were fallen angels, investment grade bonds that had been downgraded.
But the idea of doing a new issue bond for somebody, like say, a private equity firm-- like at the time, there weren't that many of them. But for say, KKR, Clayton Duvalier, Westray, other firms that were Gibbons, Green, Van Amerongen, and the predecessor to Leonard Green and company, the idea of giving them this weapon of doing a new issue high yield bond that could save them months of negotiation with a private placement insurance company or whatever the alternative was, and enabled them to complete financings very rapidly, really turbocharged the whole private equity business. And of course, that business today has just become an enormous business at every firm on Wall Street.
ANDY SERWER: So many people came out of Drexel as well. But I should point out, of course, the firm imploded. And Mike got into some troubles himself. Does that tarnish the legacy of what happened there, do you think?
JOSH FRIEDMAN: No, I think it's easy to get lost in that detour. I don't think there's anyone in the history of the financial industry that I can think of who's had as much positive impact on the world as Mike, both before and after that period.
And the impact today is so far beyond the financial world. That it's really in health care, in just promoting the values of a largely free enterprise economic system and what that does to create wealth for the average person in society, and so forth.
Mike has been a leading thinker in so many ways. And I think that being part of that group, it was the most innovative, creative and empowering organization. I think at every level, we were very young, we were very inexperienced.
But these were new markets. There was no one who knew any more than we did anyway. So we were encouraged to be creative and figure it out. And that's what we did.
And I look at so many people who are walking around this conference today, from senior executives at Goldman Sachs, to senior executives at buyout firms, to people who have long since retired, who came out of that common background. It was both a place to learn and to learn that you can be confident in doing something innovative.
ANDY SERWER: Let's switch back to the interest rate environment piece that we were talking about a little bit. We haven't seen inflation potentially rearing its head like this since the Volcker era. How serious are you taking inflation, Josh? And how is it informing how you're doing your business?
JOSH FRIEDMAN: Well, it has been really tough. The last couple of years with rates low and having the sense that, generally speaking, most financial markets, the pricing was at such a level that it reflected nothing but what we call negative optionality.
So essentially, if you bought a debt security, the yield was so low that you had exposure to rates going up. You had exposure to spreads going up, and you had exposure to credit risk. So you had three different ways you could lose.
And in terms of winning in the generally accessible parts of the high yield market, from BB down to CCC, there wasn't that much upside. So you had to find much more creative and unusual ways to create enough yield to compensate you for whatever risks you were taking.
And that was the story of the last few years, whether that involved doing creative new financings, whether it involved finding the restructurings that existed like the Caesars, and the Puerto Rico's, and some of the retailers, and the oil rig companies, and the list goes on a bit. But those were from the last cycle.
As those were going away and rates stayed really, really, really low, it was pretty challenging to find what to do within the credit markets. But it was equally challenging in the equity markets because the levels were getting to nosebleed levels, particularly for companies that many of which had no particular earnings model or maybe even revenue model.
So now all of a sudden, the Fed has decided that they've overshot. Inflation is clearly here in the labor markets, is here in the commodity markets, is here in the supply disruption for all sorts of goods and services. So to get that psychology of inflation wrung out of the system really requires some pretty extreme action.
I'm not necessarily of the view that the inflation will be here forever. But I think parts of that inflation are very hard for the Fed alone to address. They can raise interest rates all they want. It doesn't necessarily curtail the gap between the number of people who are on the bench looking for jobs and the number of jobs that are available. Particularly as we go through a deglobalization period and more jobs are actually created onshore and make that gap even wider.
I don't think the Fed can necessarily take all the commodity inflation out of the picture, particularly when there's a great reluctance to restart a lot of oil drilling particularly in this country, as people think prudently about environmental considerations.
Yet at the same time, demand has been roaring back. So I think the Fed can try. I don't think they're going to want to induce a complete massive recession. So I think we'll have fits and starts. And I think parts of that inflation will be here for a while. And I think we're done for the moment with zero interest rates.
ANDY SERWER: And so how are you changing your business model? So if you're anticipating, it sounds like quasi-sustained inflation or certainly somewhat stubborn inflation, then what does that mean for how you're doing your work?
JOSH FRIEDMAN: We're not trying to make macroeconomic bets. So we're trying to prepare for a range of outcomes, but we're also trying to look at what that range could be. And certainly, in the last period, the range included widening spreads, widening interest rates and credit defaults at some point.
So we had a lot of downside, not much upside. So the range of strategies that we pursued in that, what I call negative optionality environment, is quite different from the range of strategies that we look toward in a situation where the markets are more disrupted.
And clearly, with the equity markets down 13% to 20%, much of which was in the last two weeks, with the high yield market down 8% off of where it started the year and with much, much higher rates prevailing in the world, the range of opportunities is different.
Some of those are really just simple secondary market purchases. Deals that got hung up because the underwriter was a little too greedy and who might not have been interested in playing when they were selling the bonds at par.
You get one set of loose hands out there and all of a sudden they drop to 88. And it might be just as good a credit, and the economy may be just fine in terms of the variables facing that specific issuer. But 88 is a very different set of upside versus downside when you're getting a decent coupon as well, than par.
So we're looking at things like that. We're looking at companies that have bank debt that is a significant part of their balance sheet, where rising rate environments really taxed them quite significantly. And we will see some stress. And we will see some distress that we haven't seen in the last few years.
And again, the new issue, call it direct private lending market, also has implications because some of people's ardor to make loans will be tempered a little bit by the environment that we're in.
ANDY SERWER: When we were talking about that bond example, you reminded me of what Howard Marks said to me one time. No bad assets, only bad prices.
JOSH FRIEDMAN: That's right.
ANDY SERWER: I love that one. So someone was telling me recently that they thought there was just so much liquidity in the capital markets that pricing had gone to you know where. And do you think we're going to see a washing out now in terms of the amount of money being put to work here and maybe that's not such a bad thing?
JOSH FRIEDMAN: I think that there is a lot of liquidity. But I guess what I would say is whether that liquidity gets put to work or not depends on people's optimism or pessimism. And optimism and pessimism always overshoot.
And when people are invested in the NASDAQ and it's down 20%, they become, in an ironic way, generally more pessimistic. Most people are not natural contrarians.
And by the way 20% may not be enough anyway. As we were talking earlier today about how one of the great venture capital investors out there was quoted yesterday saying, just because the stock's down 70%, doesn't mean it's cheap.
ANDY SERWER: Right. And I'm wondering what your take on Jay Powell is during his whole tenure and especially now.
JOSH FRIEDMAN: Well, I think Jay Powell is trying to correct for some overshoot. And I think as soon as he was reappointed, he definitely stopped referring to transitory inflation at all. We haven't heard the word "one time" since then because it's stickier than he thought it was going to be.
Or maybe because he was looking at a different set of variables when he was determining whether or not he'd be reappointed. Once reappointed, he has a little bit more liberty in how he acts and could be subject to more criticism and maybe be able to take it better.
So right now, I think he's doing a good job at trying to wring out some of that inflation. I do think they overshot dramatically. And I know Larry Summers was a huge critic there. And I tend to think that Larry was on the nose there.
As I mentioned earlier, I think if you go back in the history of the Fed, William McChesney Smith used to say, there are-- Martin rather, used to say that the role of the Fed is taking away the punchbowl just when the party is starting. We didn't do that. We did the opposite of what Jesse Martin said we should do.
ANDY SERWER: There are some people, Josh, who said, well, yes, but the reason why is in 2008, 2009 we didn't do enough. So this time, we're damned if we're not going to not do enough.
JOSH FRIEDMAN: The Fed sure came in with both guns blazing the second COVID hit. But that was a true exogenous shock of major proportion, and the Fed came in as well. But the second phase, once the market started to recover, of continuing that stimulus was where it was violating that principle of starting to take the punch bowl away.
I look at the Fed and the Treasury to some extent as if they're steering rudders on a very large and very heavy ship. And when the ship starts to recover, you have to be looking way down the canal to figure out how you're going to prevent it from hitting the wall.
And if you don't get off the accelerator early, it oversteers. And you compound that institutional oversteering with human nature tendency to oversteer in terms of greed and fear. And I think it can be a volatile combination. And that's a little bit of what we're seeing now.
ANDY SERWER: Shifting gears a little bit, you grew your business here in Los Angeles for many, many years. But you recently moved to Texas. Explain to us why you did that and tell us how it's going.
JOSH FRIEDMAN: Sure. Texas is a very friendly place for businesses. If you look at firms like Goldman Sachs and others, Goldman is moving literally thousands of employees there. I think sometimes a change of venue or an additional venue injects an element of excitement and growth into a firm.
I certainly felt that way when I moved from New York to Los Angeles 37 years ago or 38 years ago now. And I think we've continued to maintain an office here in Los Angeles.
It's a very active and productive office. It's actually larger than our office in Texas. And we didn't force anyone to move to Texas. However, we have a large office there now.
And I think for our younger employees, they are enjoying a much lower cost of living. Almost everyone has bought a home. And those homes have all appreciated because of the type of environment is toward business.
Their commute to work is short. The cost of gas is relatively lower. They have a variety of educational alternatives from public schools to private schools, all of them at or lower in cost substantially than California.
California, in many respects, even like Miami, Florida, while Miami has a lower tax regime than California, it does have a lot of the complexities of a high cost of living and a high cost of housing and a lot of those urbanization issues that aren't quite so prevalent in Dallas.
We've also, I think, gotten pretty good at operating remote workforces. We've always had cores of research people in London, New York, Los Angeles, and Hong Kong. So adding a Dallas hub as well, wasn't particularly difficult. We also have offices in Korea, in Japan, and in Hong Kong.
ANDY SERWER: And you, yourself, have moved to Dallas.
JOSH FRIEDMAN: Yes, I have.
ANDY SERWER: And how's it going?
JOSH FRIEDMAN: It's great. I mean, I have to say it's an adjustment after so many years in one place. I travel a lot and I visit all the offices frequently. But I can't imagine a more hospitable and genuinely welcoming environment that I've found for myself and my wife.
And I think everyone in our office has found that. People have been incredibly gracious and have gone way beyond my expectations in making us feel comfortable in our new home.
ANDY SERWER: And shifting back to Harvard, you're on the board of Harvard management?
JOSH FRIEDMAN: Yes.
ANDY SERWER: So that's essentially the board of trustees. There's two boards. And how's that going? The conversations there over the past couple of years must be fascinating in terms of all the social issues, and COVID, and the Supreme Court cases, and all sorts of things.
JOSH FRIEDMAN: It's interesting. We get a lot of updating and information on those issues from the president who's on the board of Harvard management also. But our mandate is much more limited.
We are basically the board of directors for a 50 plus billion investment entity. That's what we care about. We take our instructions from our shareholder, which is the corporation. And so the members of the corporation and the president and Fellows really are the shareholders, of which we are the board of directors, essentially, for this corporate entity.
And our job is to make sure that the money is managed in a way that takes into account the needs and desires of the corporation, which involve having payouts every year, et cetera. But also involve that whole competitive world of trying to make sure we have enough performance so that the university can maintain its excellence in everything that it does in its daily mission.
So we aren't really involved in those other aspects of admission, except of its mission, except to make sure that we're running that operation in a way that it can fulfill those obligations, and then some.
ANDY SERWER: Well, maybe you can tell them about that arbitrage strategy you had all those years ago, right?
JOSH FRIEDMAN: Exactly.
ANDY SERWER: Josh Friedman, Co-CEO of Canyon Partners, thank you so much for your time.
JOSH FRIEDMAN: Thank you very much, Andy.
ANDY SERWER: You've been watching "Influencers." I'm Andy Serwer. We'll see you next time.