Common Sense from Uncommon Investors

well we have a very special panel today commonsense from uncommon investors and you have a full description of everyone on the panel here so I'm not going to go into detail but I think it's fair to say their response they have an enormous responsibility and that is they all manage a great deal of money anywhere from 20 billion to 400 billion today and their enormous responsibility for LPS pension funds endowments sovereign wealth funds etc is to create stability in the world by generating high rates of return so I thought I'd start today with Jonathon Sokoloff and Jonathan when I think about the firm that you really built here over the last period of time you specialized in the consumer now the consumers tastes are changing how is your firm change well you know there's some basic tenants that haven't changed we're fundamentally a consumer focused business we follow a few basic ideas including such things as the old Peter Lynch buy what you know and understand and what you like Jack Welch buy number one or two in the space or don't buy anybody and a little bit of warren buffett buy good companies and work with them and kind of leave them alone a little bit and hopefully help make them better but over the last 25 years or so we've had to evolve and focus in different areas to follow the consumer so just to give you a little timeline there's three or four deals that this kind of have brought our firm to where we are today and 25 years ago we bought a drugstore chain in Los Angeles called thrifty drugstores and we bought it during the LA riots which are 25 years ago this week and we had to flee downtown LA from we're negotiating with the seller which was of course the local gas company that owns a drug store and had totally messed it up because the riots were coming when we feared for our safety the only time in my life in LA that I really feared for my safety and then all the stores were looted and out of all that drama we bought a drugstore chain was losing a couple million dollars a week we turned it around we merged it with another chain called Payless we sold it for a lot of money we made a double-digit return on our equity fast forward from that was 1992 25 years ago fast forward to 2000 the Internet boom the dot-com boom came and the stock market kind of lost its mind and traditional investors vestments were worth nothing and you know dot-com was worth everything so he bought Petco in 2000 we had a strong view on the pet space pets.com which that negative gross margin was trading at eight hundred million dollars Petco was made a hundred million dollars we bought it for six times we were in and out of the Petco investment for 16 years exiting finally in last year and each time we made over five times on our money but now even last week a company called chewy which finally figured out the online pet business 17 years later was sold for three billion dollars to pet smart so the world evolves dramatically our next probably seminal event was during the financial crisis where the world ended in the fall of 2008 and we made a very large investment in Whole Foods and whole food stock was down about 80% we felt the consumer move as he did with pets the consumer moved to healthy eating and healthy food was unstoppable that the stock market had overreacted so we invested in a large pipe in Whole Foods when the world thought they were going away because no one could afford to buy anything at Whole Foods so the stock was about 10 then the stock went to 100 and we made a great deal of money and we exited Whole Foods about four years ago and now Whole Foods is having all kinds of drama so you can see our first few deals were retail oriented where today we've made a dramatic pivot and where while the majority of our consumer related investments were retail today the majority are consumer services and services related so today we're 75% services and that could be a gym that could be a chain of car washes that could be a variety of healthcare services companies because there's been a dramatic shift of consumer buying things too buying experiences as this chart shows so as an investor you can never stand still you can never take a nap what worked a few years ago is not going to work tomorrow so we're always having to evolve we're having to look around the corners and see where we think the consumer will be spending their money going forward and evolve our investments accordingly so that's what we've done thank God and and it's worked pretty well so you can just see consumer services have gone from you know twenty percent of the economy to thirty five percent well grocery apparel and footwear have gone from twenty three percent to 10 percent over thirty forty years so a pretty dramatic shift in consumer buying patterns we have to study consumer buying patterns at the length to figure out where to invest our capital so Steve happy to have you with us happy that you can allocate some of your time to investing while you're advising the administration on so many things today but I thought it might be interesting to just read a couple facts from your April twentieth Blackstone earnings call our private equity funds have regularly outperformed the S&P by 700 basis points net after fees in real estate that our performance is 900 basis points in the past three years Blackstone has raised two hundred and twenty five billion from LPS were basically in the intellectual capital production business sustaining this advantage has become mandatory to deal with geopolitical events and decisions by governments which are impacting the business environment to a greater degree than ever before tell us how managing Blackstone has changed and how you've built the culture of the largest firm in your area well fortunately the firm hasn't changed enormous Lee in terms of the general approach that we take and you know I'm a great believer that you know sort of almost all investing is cyclical you know and you have to know where you are in the cycle and that that means not just you know in an industry or country it means all over the world where is everything happening words are going to change when's each industry going to start changing within that and so we tried to build a business actually sit since the beginning where we started in the advisory business and then moved into private equity and then real estate and and hedge funds and and then into it into credit where what we do is is every Monday each of those big business lines meets for like an hour and a half to two hours and and you know everyone in the group is there I'm a great believer that if you're younger you're just as good as anybody who's older you just don't have as much experience but you're just as smart and you want to be treated as if you are you know like as good as anybody in the organization which which which they are and and so what we do is we go over every transaction everywhere in the world we have a economist that you know it's in the room we have our you know sort of political advisors I and what you learn up by going around through each geographic area with each deal is a relative risk reward and it's like an education lifetime education as all young people and the rest of us learn what's going on and you can start seeing trends that start going around the world and and when you do it in multiple asset classes there's an enormous advantage because you know the cycles for real estate aren't necessarily correlated one to one with the with the cycles for sort of private equity and and different countries touch each other without a a one-to-one correlation but sometimes you can you can see things and we openly discuss where we are everywhere in the world all the time and what you can do is you can start to see patterns and and so you could see there was going to be a huge real-estate blow off in O six because we were looking at buying some properties in Spain and Spain was so over built but you could have moved most of Germany into it and there's still be unto units and so Spain was going to go bust it so what happened normal private equity people continue to invest in good companies in Spain but if you thought Spain was going down you don't want to be anywhere near it and so we were able to take every one of our businesses whether it was real estate or credit and sell out housing and and you could do things like this and you actually don't have to be too smart which is a great benefit for me because I'm not that smart but if you set up the system that compensates for that then then you win a lot the other thing I don't want to dominate this at all you had so many great people so Steve let me if I could hear a phrase basically you're very focused on looking things from the macro standpoint what's going on the government etc as well as the micro what's going on individual I sort of as squash you've got oh it's Mitch as one of the leading alternative managers with more than twenty billion in assets and you and I have spent a lot of time intellectualizing investment research etc together over the decades what is common sense name for uncommon investors kind of like the name of the panel was made for you Mitch thank you appreciate that it always helps to play to your strengths look I don't know if my mom would say I have a lot of common sense but certainly over the years either you develop common sense because the market gives you a lot of feedback or you have to get out of the business and one of the things that I think Josh and I my partner Josh Freeman and I have learned is that the world is complex I think we all particularly understand that since 2008 and unless you embrace that complexity and understand that complexity creates opportunity I think that's common to the theme that John was talking about all those different points in time whether it was a tipping point in whether it's social or economic financial and they represented an opportunity but as Steve was saying unless you bring multiple perspectives to the situation you embrace that complexity you recognize as you pointed out that you have to have a certain sense of humility your own limits and that through collective learning in the right corporate culture you can embrace that complexity and then create either opportunities by designing securities that solve a problem for a company is as you did in the 80s we all did working together or you will find uh you know opportunities in the secondary market because and if you could put up slide 11 I think if there was one slide I like to show you is is this it's that maybe it's not common sense to think of our financial system is having more holes more gaps and cracks now then before 2008 but I believe that is the case and in addition if you look at the other part of that matrix corporate balance sheets the balance sheets of securitizations other types of structured products they are going through more change and that's probably a reflection of increasing there's a lot of themes with this conference disruption technology etc etc grocery businesses going through major change retailing is going through a major change online share a wallet experiences versus buying stuff so corporations can't just rely on the traditional means of creating value the old-fashioned way you know good return on invested capital growth because they don't know what they're sometimes they don't know their cost of capital the right side of the balance sheet sometimes they don't know whether the incremental investment that they make is going to yield a great return I'll give you one really visible example it's right next door Westfield the new mall you should go over there before you leave this conference to get an idea of what retailing if you're going to get if you're going to leave your computer and you're actually going to go someplace and buy something physically go there you have to have like a Disney experience because otherwise there's almost no reason to try to you know take away the convenience of online so there are companies out there that and particularly mall companies that understand that to survive they have to change their balance sheet they have to create this major experience so what does that mean for us as an alternative investment manager it means that companies are either going to try to reinvent themselves through traditional methods of deploying capital and making their cost of capital is flexible as cheap as possible or they're going to do other things like they'll split up their OpCo from their prop code they'll go public or they'll go private they'll take on debt to go they'll take on equity that issue converts all those major balance sheet changes are occurring at a greater pace but yet the gaps and cracks in the financial system are more and deeper so that means there's a structural basis for alternative asset managers like us to play and then one last thing I'll say on that issue you can see that in when it particularly a very very clear example of that is in the case of companies that over leveraged such as Caesar's right so here's the company that the left side of the balance sheet it's in the sweet spot right it's got a control relatively controlled market because of regulation that's the left side it is an experiential kind of thing it sits right in the you know in the strong suit of what consumers want consumers are benefitting from the macro because more w2 they're employed their houses of prices have stabilized their 401ks have gone up in value so their balance sheet is better so they want the experiences they'll go to Vegas Vegas visitation I think is off the charts right now so these key companies including Caesars their business is perfect perfectly attuned to the times the right side of the balance sheet had to go through major major change and going through that three plus year process as a creditor as actually I think either the first or second largest creditor was a very complex thing to do it involved not only knowing the law but you had to understand the old expression where you stand depends on where you sit you had to put yourself in the position of the other people on the other side of the table sounds like you study game theory here mention well I think it's common sense right you know Rufus Miles the old academic about bureaucracy said it about politics where you stand depends on what you said I don't think that's game theory I think that's simply common sense well we got to the title of this panel now and I wondering where at paint so just an example I think to reinforce Mitch if I look at numerous companies let's just take singer sewing machine it's January 74 they know more about the sewing machine business anyone in the world they've been paying dividends since 1860 or something and they decide to dramatically expand in the malls and self fabric vertically-integrated interesting idea what they didn't understand was gosh women are going to be working the 1970s brought the emancipation of women so he just didn't have to be a school teacher or a nurse and all of a sudden singer within a year was on the verge of bankruptcy so here's the person knew a lot about sewing machines and supposedly customers but didn't understand dramatic changes and his Steven as Steve has pointed out what was going on in Spain and the overbuilding in Spain and what and the changes that were about to befall Spain from that standpoint John one of the things I thought might be interesting to ask you is what's your most memorable investment and how did it change your strategy on building a firm running a firm and how you spent your time well kind of looking back in history here I got really interested in the convertible market of 1970s and it was really not just about convertibles it was really how do you manage risk that was the whole point of gee how do I manage risk when the markets are as volatile as they were in the 1970s so it was really about adapting to an environment in managing risk and so one of the things I really studied convertibles a lot then the option market opened 74 so I was selling options managing risks with that so that proved to be a very good performance throughout that very volatile market environment in 1970s interest rates doubled market went actually sideways for 10 years so that was that really got me started in the in the convertible area and I used that in the 80s using the options we bought puts right before the 87 market crash that was that was good in in 1999 we're looking at the market and growth was really going well and we we always had a kind of a combination of using technical as well as fundamentals and the fundamentals were saying hey these stocks are overpriced they're going up so we bought some puts didn't work the first year but in 2000 worked really well so the one things that we learned over the years market timing short term market timing is very varied chuckles so kind of manage risk over a longer term so John it's interesting I'm often spoken to the group over the last two decades that 1974 that you mentioned in my opinion is the most important period to study if you want to study financial history post-world War two and with the stock market going down 50% interest rates doubling the convertibles that you spoke about and not a lot of knowledge of mathematical structure of a convert back in the 70s as we launched those markets a convert can be equity it can be a debt instrument etc you have a chance to move and you've obviously been a leader you know ever since in that area but understanding somewhat underlining what Mitchard says the complexity of a security and understanding what what is the implications what is the value of the data event security versus the equity and the options so Tom navigating around scarcity of information you and Steven have also taken on responsibility to interact with our federal government you know I we've you played a big role and the election of this president the United States and maybe you're the most international of all of us living abroad relationships in Asia though Steve has launched significant programs for the Schwartzman Scholars and China but a strong view in the Middle East Europe Asia etc how has your view of the world created you as the an uncommon investor here and stood you in good state all these years look I think I think the bottom line is and I think we probably all feel the same is that I'm more humbled the further away from home that I go and and more blessed to be within a to 1 2 or 3 100 area code so no matter what we think about arbitrage when you come back to the innate system of America a transparent legal system a community of interest an American dream that can still take place that you could have in a real estate developer or a reality TV host to become president of the United States it doesn't happen elsewhere it really does so the extent that we get hubris in thinking you know something like real estate which is it you know it's a slow-moving train and when you when you think about real estate investment you say okay well I'm gonna I'm going to have an operating business if somebody who actually knows how to do something that hotel and a manor woman comes up with an idea and they go find a piece of land and that takes a couple of years and they get an architect to design something that's unbuildable and that takes another couple of years and then they find a builder who's going to build it at three times the cause of what you can afford that takes another couple of years and you build in it three times over budget and three times longer than it takes three times longer to fill up and you're supposed to be right on the financial market by the time you get there it's a macro bit but it's just it's just a macro bit so I think to me the simplicity of having great investors such as those are sitting in the room it's really on this panel creating value on things that they know and just taking arrows in those Quivers and a transparent unified community of interest like America where you have a system that's reliable is a gift when we talk about the Americas which we've talked in place and Steve is spending a lot of his time that provides in the president administration on on some of these issues that you know the global issues all start with entrepreneurs and people are willing to take risk and hire people and work for a living it's not about investing your 401k and thinking make more money in your 401k than you do in the job that you work at so that has to offer a platform in which people can prosper and I think what I've learned in traveling around the world and really seeing the cultural nuances of other systems that have tremendous value is we are blessed to be able to live work and invest in America and it's still the senior lis best place to make money you know I know I heard you saying that disintermediation in real estate is one of the most drastic changes you have been one of the world's leading and best real estate investor for decades now Steve runs a very very large probably the largest real estate investment operation under Jonathan gray and Blackstone how has investing in real estate changed that you talked about disintermediation well I mean I'm tremendously right it used to be a good with you if you think about everything about the old families before any of us got in and into the business you build a building you borrow as much as you can for as long as you can from an insurance company you reset all to Xerox or IBM and you refinance every seven years and pull it out tax-free what happens is IBM is your article bust then you're left with an empty office building and you don't know what life is like until you're trying to fill up an empty office building right because it's all about cash flow capex so for almost 15 years I think we we all got a little bit lost in that we became financial arbiters rather than real estate professionals so we didn't really understand the businesses that were paying the rent as we were securitizing them and dividing them up and synchronizing them so today if you look at businesses that are not reliant on sticks and bricks I mean Jonathan does such a great job at such a complex in tree and the value in the utilization of sticks and bricks in those businesses we we talked about forever but if you look at the marketplace you look at a company like weworks which owns nothing and the enterprise value is equivalent to Boston properties which is probably the best or largest office Reid in the world so how how do you justify that who's right who's wrong who are the occupants in the high-rise buildings in downtown Los Angeles right are those occupants that you want or do you want to be in Nevada next to Elon Musk where you're investing sidelight that's where I've chosen to go so I think this issue here I want to move in a different direction and maybe start with Jonathan you Steve and Tom on this the second to ninth largest employer in America are now private equity firms and there's been a dramatic change in a sense of who people are working for obviously number one is Walmart but after that their private equity firms and I would guess Steve you probably have maybe more employees working for your companies than any private equity firm how do you think about those things you're an investor from that standpoint but you're also one of the largest employers in the country that's part one and the second thing I want to put on the table and we can all talk about it because it relates both to mention John when I went to Wall Street in 69 I have this idea I said okay if I have better ideas know how to finance companies better no one understood where the world's going more I want to find an owner I need to find an owner because I could motivate an owner to be my partner or financial partner in a sense that that owner wants to maximize the value of his company and when I discovered in 69 through and even up to the early 80s is that is necessarily true Steve probably remembers the best maybe Tom also but many of the owners in the late 60s 70s their pay was based on the size of their company the amount of revenue not their profitability so trying to explain them what they were doing didn't make any sense it wasn't a strategy because for them it made sense increase pay airplanes country clubs etc so today you sit at the conference with more than 60 private equity firms here who control thousands of companies today and we're quite possibly the owner and the management is aligned or the management wouldn't be working for that company Steve or John or Tom what do you want to start with that governance well look at I mean our industry has really matured it grown up it's an integral part of the US economy the varying statistics how big it is but it's a giant employer and we've done two things I think over the past 30 years one is I think we just have a better governance model than for example the public markets and it's a combination of a owner/operator model where you really want to make your management teams in yourself act like an owner and a pretty rigorous focused on return on investment and where should you deploy your capital and how do you grow your money best so we've been able to deliver returns for 30 years dramatically in excess of stock market notwithstanding that our industry still kind of has a lousy reputation we're generally viewed negatively by most people who don't understand us and and what's what's really interesting is is in our business you know we we often meet management teams whether they're public companies or family business this is and they're a little skeptical on us and what we do they're little scared and then they're a little scared of leverage and debt they've been just trained naturally do not like leverage and so what we have to do is is educate them and we walk them through presentations and how our governance model can be better how it can be more value creating for them and their families and and the best way we have to do that is by giving them the names of the CEO is their CFO's of our portfolio and say just call them up don't ask us we obviously are good salesmen and we have an axe to grind call up these companies and see what they say about what it's like working for a private equity firm what perhaps what it's like working for for the public and it's it's that's our best commercial and best endorsement and I wish we could find a way to to to you know mirror that in a more greater population or in government because we do take our responsibilities very seriously as both stewards of capital and owners of business we have hundreds of thousands of people that are working for us who depend on us for their livelihood as you look at over time even in financial crisis you know very few private equity owned firms in the end really got into big trouble there was no big scandals in private equity owned firms and we've done a good job and I think it's only going to get bigger in the meantime we've delivered wonderful returns to the pension ears of America the insurance companies of America now a lot of the international players so it's been wonderful to be part of this business for 30 years but as much good as we've said we do sometimes it's still very frustrating because our reputation still kind of lousy now in business sometimes you have to make difficult decisions you have to reduce workforces sometimes you have to close facilities all in the hope of making a more profitable business we've generally built our businesses through growth through organic growth through hiring people through opening new units of whatever business that is and creating you know value the old-fashioned way grow the business and it's been very rewarding and very lucrative but notwithstanding that our industry we need some better PR and some help in how we market ourselves Dave yeah we have fun with at Blackstone we're the fourth largest employers in the United State we have currently approximately 600,000 people who work at our portfolio companies that that's just one of the four or five areas that we're in that's that's not including our real estate business and so forth which is quite large and our other activities so people people mistake us for financial people I I don't know exactly why if you had six hundred thousand employees you might be a company right like a a responsible company and and and that's what we are and and so the way we make money besides trying to buy at a reasonable price is we actually have to build our companies and grow them as as John was saying you have to grow them faster or as fast as they are capable of being grown you don't sort of slice them because you can't get a multiple on that and so our company's on average and we were quite substantial obviously we have somewhere depends on the cycle around 125 120 hundred and 25 billion of revenues you know we grow 50 percent faster than the S&P and so so you know that's not double but it's at least 50% more and we do that you know through you know good strategies putting capital up and we have a whole separate staff of people one of led by one of my partner's Dave Calhoun who is vice chairman of General Electric if you ever need an operator you should hire the top people at General Electric they're really amazing and we have all kinds of things we have group purchasing if you imagine the scale that we're operating on and kind of discounts that we can get we we do stuff in terms of buying up parts with computer auctions and whatever the latest technologies are sometimes we save huge amounts of money doing that with suppliers we do healthcare across you know sort of this type of scale and things when you do all of these things and and you know you use best practices whether it's for the environment or whatever as John says the idea that you could do all that have a great success and be perceived like sort of at best a marginal way in terms of contributions for society you know you got a really wonder who's doing the PR and you know in this group of because it really works like that and it's a big responsibility and and we take that as sort of serious business it's not just being a genius and buying a company and playing with it it's not more Tom maybe even just you know what I frequently get asked the question will meet people you're in private equity oh don't you just go in and buy companies and cut costs and then pretty them up and then flip them that's what people ask today 2017 and I say no we've never done that we don't do that at all we grow businesses we create value but but most people think we do the former I think John that might be still carry over from 30 years ago in terms of defense when people wanted to buy the company all you're letting everyone know you're just going to let go of all the employees in Center Tom you've been on both sides in private equity owning businesses etc how would you respond to some of the things you do I think it's all about curation right I mean the reason that this group has been so successful is they're professionals that have wandered through these jungles a thousand times and they know how to curate people talent and and financial platforms if anybody who's run a public company doesn't want to do it again right I mean it's really that simple is it's built from yet I notice you know that you've now combined a lot of your entities under one public company here today but it's a slow moving train right to go to go to that frame you're solving for mediocrity and and the market is dying for mediocrity right today the market and our business is dying for you now everybody's sitting here would say if the market are dying for yield I don't want to be there I want to be on residual pop so I like I'd like to be involved in things they're gonna give me total return and I'll sacrifice what appears to be current yield for residual value and in the private equity sponsors today allow other wise firms that are investing under the cracks that are never going to read their reach their actuarial hurdle to be able to avail themselves or six seven terms of debt on a really competent basis without worrying about quarterly earnings and higher unbelievable teams of Stamper and they do the same to do the job you've just opened a whole line of discussion here that I'd like to go to Mitch first and your cell phone John okay so we could suggest this is a great time for private equity one you're able to borrow six to seven times and you're able to borrow at rates that you know if Stephen and I think back to the 70s when we were both a little younger as you say to yourself it's unbelievable on borrowed of six to seven times I have no covenants no maintenance covenants am i all in borrowing cost is five and a half percent pre-tax Fernando we don't know if that's free or after Steve's going to let us know by the end of the panel yeah now Mitch you and John are on the other side of the coin okay so they want to buy a company they might pay nine times they only want to borrow seven against it they're willing to put up a little bit of equity but of course they want to have room in a dividend basket and a builder so they can take all their money out soon they want to pay you a very low rate of return and they don't want any covenants and no maintenance how do you generate a return as an alternative manager with that acid saying I would I would give them the following advice try to make your company look and the securities are going to issue in your transaction as much in conformity with what the ETF's that house high-yield securities would want otherwise if you can't fit into that box which is a very popular box that has those tight spreads and provides what tom was saying about you know the need for yield and liquidity if you can't fit your transaction and the securities you want to issue to finance then transit transaction into that box then you come to companies like ourselves then we have to come to you mention that's right and in that the gaps and cracks in the the system that I was referring to and so what we have found is this bifurcation of the market right you know the popularity of ETFs and other index oriented structures smart beta etc means there's a crowding effect with a reinforcing kind of dynamic that overshoots some price etc etc because people are not buying the fundamentals they're buying the mosaic of that kind of product so that means there's a there's a limited amount of the high yield and leveraged loan market that fits for that kind of product and the rest is left open for alternative guys so if you need to get a transaction done quickly for example if you're you see a software company that where the price and the public market has collapsed by 40 50 percent why because people in the marketplace can make the complex calculation as to how long their business will last as a legacy business embedded in the infrastructure of the company versus the disintermediation of the cloud so a private equity fund that specializes in tech will say ok I it's not so important what my cost of borrowing and I'll agree to tight covenants hold the opposite of what you know that would be wanted but they basically understand that it's a pragmatic right I want to get this company the most important thing is to buy it at a slight premium to where the prices collapsed to offer that to shareholders who want out so I'll go to let's say three firms that I know have executed in the past for us or have a good reputation so we will be in that on that short list and they will say to us okay can you speak for a hundred million 150 million of this whether it's a loan or mezzanine financing and we will say yes we can but it can't be that long term the rate has to be close to ten percent or more it has to have non call features it has to give us a maintenance yield you know in case you want to take us out you know prematurely and the covenants have to be pretty tight and you have to take your cash flow and pay us down because in our firm our philosophy is return of money is just as important as a return on money especially in these complex times so we'll be able to design or find in a secondary market that kind of not on the rack off the rack merchandise so to speak that will provide you the risk return elements that would you you would think do not exist in this market when you look at the leveraged loan indices in the high-yield indices and by the way just to close the loop on the real estate point because it relates to what we're talking about here off market type of pricing as you pointed out Tom and I think Steve the cycles in the marketplace ago at different levels different rates of change real estate for example on the state at the local level goes through this long process where the developer is trying to get entitlements works with the city the city knows that it can't wait for the federal government to solve its problems so it has to have a competitive model the developer will basically get finally all of its ducks in a row and then it goes to the local banks and what does it find the local bank is subject to to dodd-frank and Volcker and Basel and add risk rules and the developer says wait a minute you've been able to lend me a 3/4 percent all these years and the city has this amazing strategic plan and you can already see the fruits of that plan people are coming back into the city we have this great business cluster effect between universities businesses and government so it's all working and this project is terrific it plays to the infrastructure leverage and the developers and the bank says you know I'm subject to you know all these regs I can't do it so what will they do well they will come to Canyon and they will say can you it wondered what that line was outside there mentioned we came in I I didn't know was real-estate developers in this area hey we try to we try to develop a you know a spectrum of products Mike because we're getting needs that are out there and if it makes sense for our investors will design the right security so in real estate the developer has bad timing in that respect he's got it all there and the banks are not there but they will be there once the project gets developed so look at this you the developer will borrow and a senior basis a mezzanine basis 10 13 whatever it is and and then in four years when it's when it's built and it's proved out you'll be able to go back to this local bank and borrow a three four percent that's a major gap in the capital market so what we have is a fun that's designed to fit that need I don't think I'm saying anything different than what you have developed at Blackstone and what you have done along you know in the real estate market but you know I think it speaks to the fact that cities are not waiting for the federal government to solve their problems now what's the effect the federal government is increasingly affecting the risk and return of securities so they're doing it but they're finding that the banks are tied up this is what I guess you're working on in this new administration trying to be rhoda rooder of the financial system because with dodd-frank there's been an overshoot and too much regulation so let's go to John and John if they come with a difficult deal you'll let them know you'd love to buy in the form of convert or a bond with Warren's or preferred with warrants at this time yeah I think you know as you pointed out many many years Michael convertible is all about access to capital and the convertible structure really is you know a dual benefit in fact as I look at private equity many private equity investors use the convertible structure as a way to buy companies and loan money to business so it in now with the world be much more global I think we'll see more and more convertibles in a global market as well so that's I think it's an important axis of capital the problem is that it's not helping the small business and the small business is really what creates jobs in this country in small business relies on bank loans and banks don't loan money out anymore so that that's why we have this explosion of non-bank banks right that's right that is it's really the money managers that are forming these institutions to loan money and I think you can imagine how exciting it was for me in 69 there's 500 investment great companies you know umpteen million non and the competitors didn't even want to do business with a non investment so it's pretty good they've got all the companies that collectively don't create any jobs we have all the companies to create jobs but as you know John I have told the group whether it was Tesla or others many of these companies convertibles were a big part of their capital structure as they were built and continued to be built at that point in time I'd like to shift the conversation a little bit if I could here and discuss what do you see if you were talking to the dog and giving them common sense now we have we have secretaries of the cabinet that maybe more than every time in history and I can't measure that Steven or tone that they were successful in the private industry that today have cabinet and post they might not have had common sense in a sense of politics so there are neophytes and politics but they have a great deal of common sense and what works in their business and what doesn't work in their business how does your interaction when you go to the meetings with the administration and group and not going any details in how does that compare to your interaction when you have those meetings with your partners worldwide and discuss the businesses you own how does that compare I'd say it's really similar I mean you've got people with similar experiences sitting around the table they're really forget what their titles are you know they're anxious to just get the economy going again and they look at all the inhibitors from doing that and and if if you can help them you know think through which one to attack first and what you would do you know sort of breaks into different piles you've got the stuff that they can do themselves as the administration from you know a regulatory perspective and getting rid of you know those types of restraints to the extent it's safe to do that and it's happening all over the government and and you know it so so I think it's it's it's very hospitable and it's quite non-ideological it's very pragmatic and practical and if you put something on the table that you know is going to work everybody gets excited about it and says let's let's go and do it so it's um it's different I've been of you know tangentially with with other administrations and so of many people in the room and sometimes there's a lot of talking or well-meaning something-or-another but you know it's it's not a group of people who wants to go through and lexically make it happen and this group does it's very similar to a lot of the people sitting here right I think that's a very interesting analogy that the team that you have in the group under you that's interacting they're busy they're really busy they have a lot of responsibilities and they've allocated that time as you have and they want to make something happen which is similar here I think most people want to see what can they do when no matter it's whether it's improving the economy whether it's improving other factors what we do with arts when we have a meeting of you know I'm not anxious for anybody to like lay out what the problems are that the problems are so well known by everybody here that's a waste of time so if you have you know sort of five to seven minutes for that person to talk you know with one of those senior people in the administration of the president you know what I said is I said you better have like five tangible ideas of what ought to be done in the area that you're talking about just like don't describe the problem don't hear yourself talk like let's do this like it was at our business and and just like how fast can you put things on the table and those kind of meetings are always a lot of fun whether they're in any of our organizations or you know in that kind of setting and there's a whole bunch of to dues after that and then those get done after the meeting would follow up and it's actually very exciting so Tom a family when Middle East background has a representative speaking in the National Convention puts on an inaugural did you ever think you'd be in that position and why did you take on those responsibilities and no I mean I never dreamed it I thought it was selling oranges in a grocery store if I did a good job I swear it would be but you know the responsibilities it's I think the whole the whole revolution that took place is is really about what we all dream of his disability to push through our own comfort barriers wherever they are and go to the next place and this president represented that opportunity I was I was gifted to take you know the the beginning part of the job of organizing inauguration with it with a fabulous team which is really a tribute to the to the system more to the to the man when you when you think about our country in this Hardison transfer of power that happens seamlessly it doesn't happen that way anywhere else and I think that with what what Steve is suggestion as to how things going if people understood that the system the bureaucracy is better than we think and thank God it's there right because presidents and administration's can change every four years and so the the bureaucracy is anticipating saying we're not going to be so abrupt to do something that we just have to change again in four years but having a president who can surround himself with people like Steve and Oberon and secretary child of the other people are here in the generals when we talk about generals are pushing the aircraft carrier they're just they're just nudging it a bit and sometimes unpredictability is the key of what you need because the system devours predictability and it will outweigh you and it will outsmart you and for all of us who are sitting here looking for immediate benefits it doesn't happen right I mean entitlements or 90% of the budget so when you really when you cut through all this and what we're feeling now with Congress is no one man one man team can make that happen but having somebody who's unpredictable is working so if you look at what happened really in foreign policies right and I think secretary Ross was here yesterday talking about Syria talking can you imagine between an entree and chocolate cake that president she's sitting next to him sang excuse me because before you take that childhood cake I like to tell you I just launched 59 missiles it's serious I mean he just must have lost his mind right that's never happened ever before but that that lack of predictability is gained respect every foreign leader has come to the table for him and when you look at and it's not President Obama's fault is to where we we've ended up it's very complicated morass I just think the system for all of us is great what no matter what you think of this man or the administration we're all now participating News is 24/7 the beneficiary of the dismay between CNN and the president is Jeff Zucker right CNN ratings have never been better we're all talking about freedom of speech everybody's involved in tax policy and health care policy and education policy so out of this constant throwing arrows in the middle of of serenity and calmness and bureaucracy something great will happen but it it won't be as good as we think and it won't be as bad as some people think it's my thank you Tom so I want to wrap up if I could here with yourself Jonathan Mitch and John the title of this session is common sense for uncommon investors and Mitch in your last comments implicitly you were talking about that we should all understand the potential risk and ETFs and what's occurred today so in a very one or two sentences tell us what common sense do you want people to walk out of here what is your wisdom that you want to share with them there's two elements one relates to this conversation about the current government real estate at least does epitomized by truant Donald Trump has always been thought of in simplistic terms as in a location Location Location and I think what this is what he has done with that is transformed into another three words which is jobs jobs jobs so from my standpoint common sense as an alternative asset manager means keeping track of in the macro-environment as to whether this administration is able to find the points of leverage in the system and create those jobs and I think it's all incumbent upon us as stewards of capital that we try to come up with the right balance between understanding our responsibilities to fit into that mantra because there's a lot of hurting people out there and you know you know the study about single middle-aged white men either implicitly or explicitly offing themselves sort of a Russian type of phenomenon because of despair and despair and anger are very related so the jobs jobs jobs mantra is not just at the government level as I say cities are pursuing this in their different strategies not waiting for the federal government so you know from the standpoint of alternative asset management I think there's lots of opportunities to design capital structures the leveraging opportunities giving companies more flexibility you can create that security for your investor that also gives companies the breathing room so they can also keep jobs or grow their company responsible and I think that's in keeping what's been said before meant just one common on that I think for the general Elte foundation etc to understand these complexities etc it's pretty hard for them to do without a full-time staff and that's why you want to give you a call right yes thank you the secatur pack Jonathan what wisdom I mean I think maybe more than any other private equity firm your ability to transition from essentially retail to services has been an amazing thing very few people are able to really transform their strategy what going away wisdom do you want people to take with them here today well I mean we're investors we're not economists politicians our job is to take our limited partners money and take a dollar and hopefully turn it into two to three dollars our core investment philosophies have remained the same for thirty years was I sketched out earlier but we live in a time of such rapid and dramatic change more so than ever in our investing career so you have to look you have to look behind you you have to look around the corners you can't take a nap there's just everyone is being disrupted so it's it's probably the most exciting but the most treacherous time to be an investor in in my view in the past thirty years and it also means along the way if you have an investment and the thesis was great when you made it and you're worried about change don't forget to sell because we are investors and we're paid to sell and realize gains so we try to figure out what's coming on around the corner and overall we're in a pretty ok economy the consumer is spending the GDP is growing we've all been a huge beneficiary of unbelievably user-friendly capital markets the the the cost of the debt and the debt technology has probably made us look a little better than we are and we'll continue use that aggressively as long as that continues when we started with Mike thirty years ago debt was twelve fourteen percent covenants you couldn't go to the you couldn't move without talking to your lenders today you don't really have to talk your lenders because there's nothing in your contract except pay interest when do and pay principle when do so it's a fantasy for it's a wonderful environment probably won't endure forever so we continue to benefit from the capital markets opportunities and continue to be really you know neurotic and worried and and figure out how to deploy our investors capital in this in this exciting world we live in you're the cleanup hitter yeah just one one comment I think the environment here has changed quite a bit I think from an investor point of view the bond surrogate rate is over interest rates been the lows in history that's over and I think what we'll see in the equity markets we're no longer in this low very low deflationary environment we'll see active management in the equity space come back because of that because it's it's a very different environment that we're going to find ourselves going forward hopefully fiscal policy is going to work here because we've had no good fiscal policy for 10 years here and everybody so focused on monetary policy that now with the proper fiscal policy will see active management come back will see growth come back and obviously a little inflation so I think that's positive well thank you very much and we are honored to have heard common sense today from uncommon investors thank you

Channel: Milken Institute

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Id: nU945OY36DE

Length: 62min 48sec (3768 seconds)

Published: Mon Jun 26 2017