“Leaders define cultures, cultures define organizations and culture is the best predictor of a company’s future.“
Jerry Pascucci is a Managing Director of UBS Financial Services. He also serves as Head of Global Alternative Investment Solutions, where he is responsible for research, sourcing, underwriting, strustructuringting, risk management, administration and distribution of all alternative investment products, as well as private equity, credit, real estate, infrastructure and impact offerings.
The hedge fund industry is doing well in the wake of the COVID-19 pandemic. As opposed to the 2008 financial crisis, there is more capital to work with. With time and operational capability, companies will persevere. Otherwise, there is ambiguity in what will happen when capital investors get into some friction.
On manager selection, “the first thing you have to do is have the license to get involved with that small manager.” A successful investment team has to be able to source and test their hypothesis. This has been made even more challenging without face-to-face meetings, meaning fewer managers are crossing the proverbial finish line with allocators.
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SPEAKER
Jerry Pascucci
Head, Global Alternative Investment Solutions
UBS
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
EPISODE TRANSCRIPT
John Darsie: (00:08)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology, and geopolitics. We've been doing these SALT Talks, which is our series of digital interviews with leading investors, creators, and thinkers during the work from home period in lieu of our global conference series. Just like we like to do at our SALT conferences, the goal with these SALT Talks is to provide our audience a window into the minds of subject matter experts and provide a platform for big, important ideas that we think are shaping the future of the world.
John Darsie: (00:43)
Today, we're very excited to welcome Jerry Pascucci to SALT Talks. Jerry is the managing director of UBS Financial Services, and he serves as the head of alternative investments for UBS Wealth Management Americas, where he is responsible for research development, approval, and distribution of all alternative investment products, including hedge funds, managed futures, real estate, and private equity offerings. He's the president and a director of the firm's commodity pool operator, as well as other registered investment advisor entities. His responsibilities include the oversight of product origination, manager selection, investment and operational due diligence, portfolio construction, and distribution of all alternative offerings in the United States region.
John Darsie: (01:28)
Prior to joining UBS in 2010, Jerry served in various capacities at Citigroup Global Markets and related entities in various capacities since 1996. He began at Citigroup Global Markets as a senior credit risk officer focused primarily on marketing counterparty risks associated with hedge fund and commodity pool and clients. He rose to managing director of Citigroup Alternative Investments prior to joining UBS. Citigroup Alternative Investments is a division of Citigroup that administered its hedge fund, fund of hedge fund, and commodity pool businesses, of which the SkyBridge investment team was formerly a part. I know Jerry and Anthony are likely to get into that during the interview.
John Darsie: (02:09)
Just a reminder, if you have any interviews, any questions, excuse me, for Jerry during the conversation, you can enter them in the Q&A box at the bottom of your video screen, and I'm going to turn it over to Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital as well as the chairman of SALT, to conduct the interview with Jerry.
Anthony Scaramucci: (02:27)
John, thanks very much, and before I get over to Jerry, I just want to thank you for putting my grandfather up on the wall behind you. It was very appropriate for this because Jerry's grandfather, as he knows, looks very similar to my grandfather, so we both-
Jerry Pascucci: (02:40)
Almost the same.
Anthony Scaramucci: (02:41)
Yeah, yeah, we're both very happy that you put us up there.
John Darsie: (02:43)
For all of our recurring SALT Talk listeners, the constant ridicule has led me to continue to change up my background. Hopefully, one day I'll find a background that is suitable for Anthony.
Anthony Scaramucci: (02:53)
Well, I appreciate the lineage. Jerry and I certainly do. But, Jer, go back further than John's introduction. Where'd you grow up? I know you live out on Long Island here with me, so tell us a little bit about your upbringing if you don't mind.
Jerry Pascucci: (03:08)
Yeah, okay. And before I do, thanks for having me, Anthony. Great to be with everyone. I'm happy to be part of such a distinguished group of guests in terms of the folks that you've had here. The next five minutes probably won't suggest I'm in that category, but I'll try anyway.
Jerry Pascucci: (03:24)
I live pretty close to where I grew up. My parents were from the outer boroughs. I grew up in Long Island. My dad was a civil servant. My mom was a homemaker. I actually got picked up from an adoption agency stairs about a week before ... I think, in 1969, when I was born, if you got to 10 months, you went into the foster care program, and I got adopted by a middle class family at nine and a half. So when you think about life and how a couple of days or minutes could take a drastic turn, I doubt I'd be sitting here talking to you if that stint in the orphanage lasted an extra two weeks. You can always come back to that, right?
Anthony Scaramucci: (04:09)
Hey, well, amen. So how many brothers and sisters did you grow up with, Jer?
Jerry Pascucci: (04:14)
I have one younger brother.
Anthony Scaramucci: (04:18)
So your parents ended up adopting him as well, or they had him?
Jerry Pascucci: (04:21)
Yeah, actually, they did. I was a public method, and by the time my brother came along five years later, they were able to do it privately, so it was a different experience with my brother. He's blond-haired, blue-eyed, fair-skinned, and my dad used to like to say he was from the north.
Anthony Scaramucci: (04:39)
Hey, Darsie, stop smiling, okay? Look at Darsie over there. You see him in the Zoom smiling away? Look at him.
Jerry Pascucci: (04:44)
I do, I do.
Anthony Scaramucci: (04:45)
Yeah, you never-
John Darsie: (04:45)
I got hazel eyes.
Anthony Scaramucci: (04:47)
You never met people like Darsie, you and me growing up. We never met people like him. It took us to these investment banks, Jerry, okay? But let's talk about ... I want to go back to the first day I met you. Remember when I brought the Italian food into 59th Street?
Jerry Pascucci: (05:02)
I do, I remember. Yep.
Anthony Scaramucci: (05:02)
We were buying the Citibank Alternative Investment Management thing. You were staying at Citi temporarily. Take us through the decision to get over to UBS and how far you go back with Ray and Troy.
Jerry Pascucci: (05:15)
Yeah. The decision about going to UBS ... Well, let me back up. We shared a floor. It was an interesting time because after the Smith Barney merger with Morgan Stanley, we had people working at different firms sitting on the same floor, which was a weird thing. I was in the JV for nine months. I thought I'd be in the JV for nine minutes. But, at the time, Ray and I were partners. Ray was running the business. I was running the portfolios for both the macro and commodity pools that were legacy businesses and the fund of hedge funds that was a legacy business, which back in I guess it was '95 when you were starting to reboot ... I don't even know what decade it is anymore. But it was a long time ago. So we were running our businesses together. The fund of funds was going into the JV. I'm sorry. The commodity pool businesses and some of the other ancillary businesses were going into the JV. The fund of funds was not. So there was a period of time where everyone sat on the floor but had different business cards.
Jerry Pascucci: (06:22)
Leading up to that, the investment team had reported to me, and so I was very involved in what that book looked like on a day-to-day basis. Troy, at the time, was a new hire who I had interviewed. That's another story unto itself, but we've only got 45 minutes. That was interesting. But, clearly, I knew then that he had opinions and he had viewpoints and that he did his homework. His very large binder of very neatly-wrapped pages of analysis told me that right away. So he joined the team early on that I was managing, and off we went.
Jerry Pascucci: (07:03)
By design, I think, even back then ... And this was a long time ago. We were looking for concentrated portfolio. We were looking to have forward-looking views all the time. That was going to be the hallmark of what we did. We weren't trying to compete for what was at the time a business that tended to have 40, 50, 60 names in a portfolio. We just thought that kind of product was already commoditized in in some respects, and inside the type of distribution system we were in, it wasn't all that relevant or valuable. So we really set out to do something different. And Troy, his viewpoints obviously became one of the largest and ultimately the largest influencer into the shape that that would take. It was a differentiated business from go. It lived in between the single manager business and the multi-manager business, and that's exactly where we intended to situate it. I think it proved to be a very useful tool for families, way back then even.
Anthony Scaramucci: (08:07)
Well, and I appreciate that. I think it's a really good narrative for where we are right now because I think that was one of your remarks after March. You were like, okay, well, in the context of its performance, designed the way it was, it acted exactly the way you thought. I think that's a pretty good tie-in back to that narrative. So now you're over at UBS, you're meeting my good friend Brian Hull over there, you're working over there with him, and you're building this asset, this alternative asset management platform. So tell us a little bit about that. Tell us a little bit about the things you're looking for over there.
Jerry Pascucci: (08:48)
Look, we started from scratch there. When I got there, it was just after the crisis. We wanted to invest. It was past the point where people started to become a little bit braver. I didn't get there until 2010. That was good because they hadn't done a product in about 18 months and I didn't really have a lot of demo to do. So there was nothing to tear down, and you could start to build right away. That put you in a position to get going. My thought there, when I left the Morgan Stanley JV, I swore I would never even have a checking account again, nonetheless work for another bank. But I did have a tremendous opportunity going to work for some of the people you mentioned, Bon McCann, John Brown, who I was his first hire there, Brian Hull. That gave me a tremendous amount of optionality and distribution at a time when distribution was really, really important.
Jerry Pascucci: (09:38)
The other thing that that management team gave me, which is a license that I have to this day and which is probably the most valuable license anyone in my seat will ever have, is a no adverse selection license. What that means was there was no arbitrary constraints on what we were going to build, right? It would be just as easy for me to engage with a first-time fund who nobody in the world ever heard of in a nation strategy or something that was out of favor as it was for me to do the next Blackstone fund or the next Millennium product. Not that those things aren't extremely valuable on both sides of that ledger, but I had the ability to run the barbell, which meant things we knew about controlling classes of CMBS and related types of things, which wealth management channels, quite frankly, never saw in a discrete way, we were able to offer. It wasn't like, "Hey, 37 months is a long enough track record but 35 isn't," or, "You can be 29% of that fund but not 31%," or, "You can be in fund two but not in fund one."
Jerry Pascucci: (10:37)
We took that all out of the equation, and that was the contingency for me to sign up. You had to run an investment-driven process that was 100% outcomes oriented. There were other ways to do it, and Bob and Brian and I talked a lot about that and said, "Look, you can go another way. You can build. I'm just not in the business of giving away 7 to 10 years of hard work every five years, so I'm just not your guy if that's the way you want to go." We came to an agreement on what my latitude was going to be, and these people have been steadfast in their support of that.
Jerry Pascucci: (11:09)
So, when I got there, I had a regional remit in the Americas. There was seven or eight billion dollars laying around. There probably wasn't a product launched in 12 or 18 months. Today, my remit's global, and we're approaching a hundred billion in our office.
Anthony Scaramucci: (11:23)
Congratulations.
Jerry Pascucci: (11:24)
So we made some strides. Thank you. We made some strides.
Anthony Scaramucci: (11:27)
So, Jerry, I got to ask you this because you've been around a long time. This is my 32nd year now starting in the business. I grew up at Goldman Sachs, very client-driven at that time. The boss said, "We're long-term greedy. Build the relationships forever."
Jerry Pascucci: (11:45)
That's right.
Anthony Scaramucci: (11:45)
One of the things that's happened in COVID-19 for me is the awareness of how dramatically Wall Street has changed. It has become very transactional. So people you think you have 10, 20, 30-year relationships with, it turns out you actually don't. They start ghosting you if you don't do well. My question is how have you maintained that long-term? How has Brian Hull maintained that? How have other people at UBS maintained that hallmark of it still being a relationship business?
Jerry Pascucci: (12:15)
Yeah. Well, because that's all you got in the end, Anthony. You're going to have your reputation and your relationships, and that's all you're going to have when it's all done. I live every day like tomorrow's my last day, quite frankly, but-
Anthony Scaramucci: (12:27)
Right, well, me too. That's how I grew up. I get that.
Jerry Pascucci: (12:30)
The reality is those are the two things you're going to have. Brian always says, "Leaders define cultures, cultures define organizations, and culture's the best predictor of a company's future." That's a direct quote of Mr. Hull who you know I hold in the highest-
Anthony Scaramucci: (12:46)
Say it again slowly, Jer, because I think it's an awesome quote. I've heard him say it all the time.
Jerry Pascucci: (12:49)
Yeah, he says, "Leaders define cultures, cultures define organizations, and culture is the best predictor of a company's future." And he's right.
Anthony Scaramucci: (12:57)
No question.
Jerry Pascucci: (12:58)
I think if the world knows that you're playing the long game all the time, then they know, and that has to happen in actions, not in words. There's times when it matters, so if you can point to the times when a relationship mattered and you scored high there for the right reasons, then that becomes your legacy. That's what we want ours to be. Not ever-
Anthony Scaramucci: (13:23)
Well, amen.
Jerry Pascucci: (13:24)
Not ever to compromise a client, not ever to compromise a standard, not ever to compromise your reputation, your franchise, your firm. But there are just times when you got to make intelligent decisions at critical moments, and that's what's going to separate you, I think, when the last tally gets taken.
Anthony Scaramucci: (13:45)
Oh, listen, you've definitely demonstrated that over the course of your career, but particularly now. Frankly, SkyBridge has been the beneficiary of that long-term relationship, so I want to say thank you to that. Specific to the hedge fund industry, the industry did reasonably well after 2008. Then passive money took over as the fed started really washing the universe with capital. What do you think about today, the hedge fund industry post COVID-19? Is it going to do well, and what sectors will do better than others, in your opinion?
Jerry Pascucci: (14:23)
Well, look, I think we are by large as an industry doing well. I think when you're running a book, whether you're an allocator or you're a direct risk-taker, you want your big positions to be the ones working and your small positions to be the ones that aren't. Fortunately, on most of the platforms, not only our own here but on most, you tend to have bigger positions in things that have stayed the course and navigated this a little better, like MultiStrat. The places where we're challenged, obviously, in those external leverage dependent areas of the market where we had some problems, you tend to have smaller positions because the capacity for those things is oftentimes lower. So you come in okay.
Jerry Pascucci: (15:08)
I think there are areas where we're going to do very well, be they in downside protection or in dislocation. I think we're going to get into the strategies and the markets we think are favorable or unfavorable as this whole discussion goes on. But by and large, in those areas, I think we look promising. More importantly, I think I'm starting to hear a little bit less of the types of narratives that we heard over the last 10 years, like, "I can't make enough money after tax. What am I paying the fees for? Fees are X percentage of total expectancy. I don't understand the value proposition anymore." We were getting quite a bit of that out of the wealth community, and I would make a big distinction here. It wasn't necessarily clients. It was equally and as much their advice providers that had that position. Once you start to lose them, when you sit in an intermediary business like ours, that becomes problematic. You really have to be articulate through that.
Jerry Pascucci: (16:12)
I would say now the narrative's a little bit more constructive. March and April were quiet. May, June, and July are not. People are actionable and investing. People are revisiting things that they were looking to leave a long time ago, and performance has been okay, right? It's been okay in multiple disciplines and strategies. So it feels okay to me in places. Whether or not hedged equity is going to generate enough alpha, particularly on the short side, looks promising yet TBD. Same thing on macro, which the amount of the imbalance we've had in the world and all the things that we're dealing with that are hard to underwrite, macro should be doing a lot better than it generally tends to do. That's been something that's been prevalent for quite some time.
Jerry Pascucci: (17:04)
But it's a different world. I think it's a different world than it was 10 years ago. I know we're going to talk about that too, but I think it puts us in fairly good stead. I would expect to see some dispersion in those results, though.
Anthony Scaramucci: (17:18)
So let's talk about that. It is a different world. So what makes it different? It's interesting. I was just on with one of our investors, people we're invested in, Dan Loeb at Third Point. We were talking about the differences. He's going to be speaking next week on SALT Talk. We were talking about the differences between 2008 and March of 2020, where basically the entire global financial crisis happened in about seven to 15 trade days.
Jerry Pascucci: (17:45)
Right. It's obviously time that we condensed this whole thing in. I think last time you had far less capital, far more time, and therefore you had a tide that would raise all boats. If you were brave enough when the tide rose, it was hard to get it wrong or harder to get it wrong. I think this time it's very different because you're dealing with things you just can't underwrite from a financial perspective. You can't underwrite the healthcare problem. You can't really underwrite the election because no matter where you go there, there's a whole set of issues you got to contend with and you may be looking at a hard pivot from one posture to another. You've got the civil issues that we're all grappling with and reconciling. So you can't throw the financial modeling at that, right? You can't make a reasonable forecast, which means that it's just the tails are fatter and it's hard to be brave.
Jerry Pascucci: (18:37)
It was also less crowded last time. To me, it's an interesting juxtaposition because some of these opportunity sets have velocity associated with them. But at the same time, I think, and you might hear Dan talk about this a little bit, it's going to require some patience and picking through. So, on the one hand, you're saying, "Hey, hurry up, okay? There's been a lot of mean reversion in certain areas of the market already. What's really left, right?" On the other hand, you're saying, "Be patient. Be careful. It's crowded. It's going to be complex." Whether you're talking about mortgages or corporates, whole loan corporates versus structured, commercial versus resi and property, agency versus non, this onion just has a lot of layers, and there's a lot of capital chasing it. You got a lot of work to do to sift through where the real value's going to be. I think it's very different because there are factors there that we haven't had to contend with in the past, where it's been a financial problem.
Anthony Scaramucci: (19:41)
So go over the structured credit for a second. That was the epicenter of the crisis in March, certainly had a big impact on the SkyBridge portfolio. What's your view now of structured credit? Where are you guys?
Jerry Pascucci: (19:57)
Yeah. So, look, this is an interesting one too, and this is where investing gets difficult. You might have a partner that's got some legacy issues. But sometimes the challenges are the opportunities, as we know. How do you make the decision between chasing a fresh pool of capital with no legacy issues that you're going to pay 20% of the profits away to day one versus a portfolio that you couldn't replace at the price it's currently marked at but there may be some firm issues, enterprise risk issues, reputational issues, or other things, and you got to decide how are you going to deploy that capital? You also, as I just alluded to before, have a tremendous amount of relative value analysis to do, more so than you had to do last time, between all the different things that I mentioned and all the different degrees of freedom and subclasses that you have to go through.
Jerry Pascucci: (20:47)
So I think we come away where most people do. In real estate related structured credit, we think right now relative value is in the residential side. I think commercial real estate is going to be a lot trickier, beyond the obvious hospitality, retail, and development being challenged and industrial apartments and offices to some extent being better. We all know where the concentration of sector exposure is in the controlling classes and securitizations. That's just going to take some time, and the fundamentals there are still pretty tough. The housing market's different, right? The housing market's different. It can go under a lot of support. The consumer being what it is to GDP and housing being what it is to the consumer's going to mean that there's going to be a lot more thrust and figuring out a path forward on the resi side.
Jerry Pascucci: (21:41)
By and large, with corporates, similar type of thing, [inaudible 00:21:48] equity's a difficult thing to assess these days. We all see the filings. We all know what's potentially coming. But we don't understand recoveries, severities, defaults quite well enough yet. So the corporate side is interesting, and you have more support there. Absolute value-
Anthony Scaramucci: (22:08)
But you're getting paid, though, right, Jer?
Jerry Pascucci: (22:09)
Yeah, I think you get-
Anthony Scaramucci: (22:10)
If you look at the spreads, you're getting paid for some of this risk, yes?
Jerry Pascucci: (22:14)
I think you are, but when I alluded to velocity before, right, the best opportunity probably has the highest velocity and mean reversion right now, which is RMBS. The other reason I don't say that RMBS is clearly and by a distance where I would be positioned most favorably is because it has that velocity or decay-
Anthony Scaramucci: (22:37)
Yeah. Oh, we agree.
Jerry Pascucci: (22:37)
... if you want to look at it through the other lens, decay of opportunity set associated with it, that could increase in velocity versus decay in velocity. I think on the commercial side if you own it, right, you're going to have a tremendous opportunity. Most of the commercial real estate exposure we have, certainly on the debt side, is in the hands of people that have tremendous toolkits, own servicing, have tremendous workout capabilities, have no leverage, no external dependence, have 10-year locked capital, have return to multiple with capital already. So when you have that scenario, right, you have unlevered, unencumbered cash flows with time, that's a whole lot different than trying to pick a spot to enter a draw down or make a decision whether you're going to stay with someone or move into a fresh pool of capital and start paying away gains.
Jerry Pascucci: (23:24)
We were fortunate enough to have a very late cycle posture coming into this, so we had things we were already doing, not in anticipation of this, but a late cycle posture. So we have some pools that we think are structured right, we have the right amount of time associated with them, they're not foresellers, so they can play some offense, right? So I think-
Anthony Scaramucci: (23:44)
I know. We're in total agreement. That's one of the benefits of-
Jerry Pascucci: (23:46)
Yeah, commercial real estate, from that perspective, very interesting. Our platform, if we just move away from structured credit a little bit, just by and large, I'm offering first loss risk in the places that I think are more resilient sector-wise, right? So maybe that's healthcare or tech or CMT. There's no reason to take first loss risk in wobbly sectors like property and energy and retail because you have the credit markets, you can take the senior position, and, to your point, you can get paid fairly well for the risk you're taking. Why run at the first loss position there at this point? Later on, when it's time to rescue and refi and deal with [inaudible 00:24:28], non-performing, we'll get there. But that's a different kettle of fish, different skill set. That's why the hedge fund business is so relevant in this whole exercise right now, because it's still a top of the stack, securities-driven, foreseller type of opportunity set. The question is understanding whether or not you have to rush.
Anthony Scaramucci: (24:44)
Well, we totally agree, and I think that's one of the things that we've been benefiting from, why we had our best asset fundraising in the month of June, because you're feeding into funds that are not going to participate in forward profits for a period of time, and yet you've got very well-priced assets with high yields.
Jerry Pascucci: (25:04)
That's right. Yeah, it's amazing-
Anthony Scaramucci: (25:04)
I got to turn-
Jerry Pascucci: (25:05)
It's amazing the-
Anthony Scaramucci: (25:06)
Go ahead.
Jerry Pascucci: (25:06)
I'm sorry, I'll wrap up this one. But it's amazing how the market doesn't respect that enough, right? That's because it's an emotional time and people are dealing with a lot of stuff in their businesses and in the health of their families and in trying to work from home. Even in a normal market, investors don't tend to get that discipline right. In this world, where it's a real hard world, it's even harder.
Anthony Scaramucci: (25:28)
Well, I know, I appreciate it. I appreciate you guys seeing that and seeing that as an opportunity in us. I've got to turn it over to John Darsie because we have a tremendous amount of participation right now. We've got questions coming in to Mr. Darsie. So go ahead, John.
Jerry Pascucci: (25:44)
Okay.
John Darsie: (25:44)
Yeah, and just a reminder to everyone watching, if you have any questions for Jerry, you can enter them in the Q&A box at the bottom of your video screen. As long as they're in-bounds, we'll ask them, and you'll get your answer. The first question is about when you're evaluating hedge fund managers' personal characteristics and organizational characteristics, what are some things that you look for when you're evaluating hedge funds for your platform?
Jerry Pascucci: (26:09)
Look, everybody's got the obvious stuff around performance at critical moments and all that stuff. For me, it's culture number one, we talked about that. I got to recognize what your culture is, and you got to be playing the same long game that I'm playing. Character, obviously, and character can mean a lot of things. Transparency, I guess, I would put in that category. Lack of surprises. Talent, obviously, and intellectual capital. Your ability to attract and retain talent is going to give you the durability that I want you to have over the long run. First and foremost, as I said before, as an investor, it's outcomes. It's not, "Hey, you can gather a lot of assets, therefore you're a priority," never been my game. I'd rather generate a great outcome on a small amount of assets than a bad outcome on a large amount of assets.
Jerry Pascucci: (26:56)
So all the risk-taking stuff that you would expect comes into play here, but I think culturally, because of my background and because I spent the earlier part of my career doing two things, right? I was a minimum market lender, which interestingly enough has moved out of the conventional financial system into the alternative world that I now live in, and I was an allocator. Those are the two things that inform me. I think people don't understand how hard it is to liquidate collateral. People don't understand how hard it is to turn things off, even things that are systematic, right? You got to kick the plug out sometimes. Very, very hard decision.
Jerry Pascucci: (27:30)
So I think there are elements of risk-taking that we look for that come from having a career building an investment process as opposed to having a career structuring or selling, right, if you will. That's what's really going to inform what we're looking for a higher level going in. The reason is because people I compete with might do 70, 80 products in a given year for a wealth channel. I'll do 20, which means every mistake I make is glaring, every success I have is glaring. I like it that way, right, because the value that we generate becomes obvious and it distinguishes our business.
Jerry Pascucci: (28:12)
But unless you have an investment background, it's a tough way to live your life, and so we look for people ... Because we're going to have fewer partners and because we're going to apply selectivity to the exercise, I got to believe that we're going to be dancing for a very long time. So that has to factor in early. Even if we think you're great for the moment, if you can't be transparent, we're not going to communicate, I don't respect your culture, you're transactional, you're looking to give me a deal, you're looking to redline every word of every document I show you, you're not long-term outcomes oriented, I go away fast.
John Darsie: (28:55)
The conversation so far has revolved mainly around hedge funds and real estate backed structured credit, but you cover the entire alternative investment ecosystem.
Jerry Pascucci: (29:04)
I do, yep. Yeah.
John Darsie: (29:05)
So private equity was the hot dot for the last several years leading into the pandemic, and we've talked to several distressed credit investors and others on SALT Talks that have expressed some worries about once the federal reserve and government support runs out maybe in the fall, what the private equity space is going to look like. Could you talk a little bit about concerns and opportunities you see in the private equity space?
Jerry Pascucci: (29:31)
Yeah, look, I'm not a huge believer in there's going to be a distraction and good money's going to get thrown after bad and they're not going to be able to find the cheapness because they're working out this or that. Look, I think it's foolish to think if these businesses were run on a mark-to-market basis they wouldn't show some wear and some pressure and some stress in some places. I think that'd be foolish to think. But they don't. They have the benefit of the structural advantages that they carry. As we've seen in the past, on many, many marquee transactions, with time and real operational capability and some help from the system and stimulus and/or rescue or whatever you want to call it, you can turn situations that look pretty grim into situations that turn out pretty well. It's going to be a very interesting vintage.
Jerry Pascucci: (30:26)
We've been saying for years, right, before this came, we're either going to get a break in the world late in the investment cycle, its vintage, and we're going to have overpaid for a lot, but we're going to get a break early in the vintage and we're going to find some unbelievable cheapness. So it's not going to be an average vintage no matter how you cut it. I think that's probably still true. So TBD there. Again, I think you're going to start to see dispersion. It's not really an engineering game as much as it is a straight-up bottom left to top right bull market. Those who really have the operational capability that everyone claims to have are going to fare through this a lot better, even if they wind up having made some of the mistakes that others did going in. How you manage through this is going to be interesting.
Jerry Pascucci: (31:20)
And let's not forget, secondary market is a lot more developed than it was. The co-investment business is a lot more developed than it was. Sometimes I worry about, in private equity, everyone's kind of all over each other's cap stack, if you will. I sometimes wonder what happens when a bunch of really shrewd investors who are all over the capital stack of each other's companies get into some friction. I think we haven't seen that, and we're going to. I think that's going to be an interesting part of this cycle, for sure.
John Darsie: (31:55)
We have two questions-
Jerry Pascucci: (31:56)
I hope that answers your question.
John Darsie: (31:57)
Yeah, no, that's great. We have two questions that are somewhat similar in nature, and I'll combine them into one. We deal with this at SkyBridge as well on a philosophical basis. But how do you combat the IBM problem? It's safer for an analyst to put forward an established manager that has a big brand name versus looking for emerging managers with a new strategy that might be interesting but maybe take some time to establish itself or perform well.
Jerry Pascucci: (32:22)
Yeah. So two ways. What I said to you before, and this squarely falls into that category, if you're not constrained in terms of ... If you don't have the license to think, you can't avoid the problem you just described, right? So the first thing you had to do was have the license to engage in that smaller manager and decide what you were going to believe and whether or not you could articulate that belief. That's step number one. Unless you structurally possess the license, I don't care who you are. You just can't do what you want to do.
Jerry Pascucci: (32:51)
The second thing is it's just got to be in the DNA of the process you run, not once in a while, not only when the world breaks, but it's got to be in your DNA. Your investment team has to be able to source, it has to be able to test its hypotheses, it has to be able to make mistakes, right? If you can't do those things, you can't learn how to have the appropriate discipline to invest earlier or smaller, right? I think you're right. Why in the world in an environment like we're in today would you want to take on any, say, enterprise risk? Right? Those are tougher things to price when you have uncertainty everywhere else. But when you don't, right, you might pivot your tolerances a little bit.
Jerry Pascucci: (33:41)
One of the best relationships I have in my business today and one of the best investment entry points I ever had was in the CNBSP pieces in late 2010, early 2011 with a partner called Rialto. I notice that some of you on the call might know them. Others can check out who they are. But at the time we engaged in that partnership, there wasn't a person on earth outside of the actual commercial real estate business that knew who these people were because they never had an asset management entity, if you will, or a sponsor or anything, if you will. We've invested with that group over every point in the cycle, trough, recovery, peak, and now again. They've proven to have the type of skill set that's durable enough to take you through each time you take a bite.
Jerry Pascucci: (34:32)
But without that willingness to be in a first close in a first time fund at a time when everyone was still consumed by residential real estate problems and not even thinking about commercial with a sponsor no one ever heard of ... It was the second product I ever put on the UBS platform. I could tell you how many phone calls I got like, "Hey, dopey, you work at a bank, did anybody tell you that," or, "You work at a Swiss bank, in case you haven't noticed," or, "What are you thinking?" We just said to ourselves, "Look, we're here to handicap all these exposures and opportunity sets, ex-ante, forward looking," and this is something that I took from the SkyBridge, Citi, Solomon DNA that we built, right? That's our job. Handicap the opportunity set, get the best possible expression, be really communicable about the outcomes you think you can generate, all the possible outcomes, and never look back several years later not knowing why you did what you did when you did it and with whom you partnered.
Jerry Pascucci: (35:36)
So if you can instill that in your process, you can invest it in those areas. You can't do them for a living every day. You have to be balanced commercially. They're not even suitable for a good portion of our investor base. But to whom they are, we owe that to them.
Anthony Scaramucci: (35:53)
Well said. At the end of the day, you're serving the customer. All we've tried to do at SkyBridge is a be a fiduciary but also provide an investment opportunity that people would look at over a long period of time, not measured by a month. Jerry, I met you on July 1 of 2010. It's July 13th of 2020, 10 years later. Troy, Ray, and I had a good 120 months. I'm sorry, a good 119 months. We had one bad month. It's sort of nuts. But, anyway, I'm ventilating-
Jerry Pascucci: (36:29)
Look, you got to look at-
Anthony Scaramucci: (36:30)
Pascucci, you're cheaper than my therapist, so I'm ventilating to you, okay?
Jerry Pascucci: (36:33)
You got to look at the way ... Thank you. You got to look at the way that risk is assembled. If that risk was assembled in a sound fashion and you had a clientele that understood the risk they embarked on and were realistic about the lost possibilities and probabilities could be in something as extreme as we've seen, I think you owe that at least some consideration as opposed to a knee-jerk reaction as well.
Anthony Scaramucci: (37:01)
Yeah, so on our next episode of Jerry and Anthony, I'll ask you why some wirehouses sell at the bottom. But since that's not politically correct, we're going to turn it back over to John for more questions. Go ahead, John. Don't answer, Jer. Don't answer.
Jerry Pascucci: (37:14)
No, no, I won't answer that one.
Anthony Scaramucci: (37:15)
Go ahead, John.
John Darsie: (37:16)
So, Jerry, you talked a little bit about process, and we had a follow up question about your ability to judge a manager's character with face-to-face meetings. But in an environment where you're working from home and you have a global pandemic and you can't conduct due diligence in the same way that you typically would, how has that affected your process, not being able to be in the same room with perspective new managers and evaluating decisions on existing managers on your platform?
Jerry Pascucci: (37:42)
Yeah, I won't kid you. It is limiting. Like I said, we do less. So there are fewer people we're going to get to that point with anyway. But it is limiting. It's harder to understand body language. I got invited by someone in the industry to listen to Molly Bloom speak. I wasn't able to make it to that particular session, but it was one of these things like, "Hey, why don't you come to this session and think of a question for Molly?" What I would've said to Molly was, "Your game is a game of tells. How do you see tells virtually, right, when you've got someone from the neck up and you have no idea what they're looking down at?" I think the answer is it's really hard.
Jerry Pascucci: (38:29)
So I think what you have to do there is your referencing's got to get deeper and wider and more off the run. You got to spend more time digging through some of that stuff. If someone's in a room with you and makes you comfortable, it does put your guard down a little bit. Maybe you would've only done six references instead of eight or eight instead of 10. Maybe you would've said to yourself, "Yeah, those references are good enough." But I think in this environment, you need to risk mitigate the fact that you only have a person from the neck up and you have no idea who else is in the room. There's no real panacea for that. I think it's something we're all trying to contend with, and, therefore, this default to safer pairs of hands, low enterprise risk, longer contract records, that trend is going to be very intact for the reason you just brought up.
Jerry Pascucci: (39:25)
It borders on asking yourself whether you're asking responsibly if you decide to go forward with a partnership that you don't feel fully comfortable in vetting. So I do think it's limiting, and that's what's causing some of the ever more concentrating trends in the asset bases, for sure.
John Darsie: (39:44)
So I'll ask you one more question before we let you go, and it goes back to a question that Anthony asked earlier. But the hedge fund industry in general was reputationally somewhat down in the years leading up to the pandemic due to performance and due to the out-performance of equity markets, which have now rallied back to near all-time highs and in the case of some indexes, back to greater than previous all-time highs. But in the post-COVID environment, what do you see as the outlook for the hedge fund industry in general?
Jerry Pascucci: (40:17)
Look, I'm always uncomfortable when the first loss is telling you everything's fine and the last loss is telling you everything's not. I think life works better when it's happening the other way. It's more natural. I can't claim to understand why the stock market seems to predict that we don't really have any issues and the ones that we do have, we can understand, digest, and are all 100% transitory. As a career alternative investor, we tend to be perma-bearers, we tend to have value biases, it's a hard pill to swallow.
Jerry Pascucci: (40:55)
That being said, the fed's going to support risk assets, and there's all kinds of other structural factors that create a very bullish sentiment. And, of course, you do have the winners in this new economy. So I could tell you two things, right? In my mind, the uncertainty's higher, which means the tails are fatter, which means hedge funds have a better chance. Just like death and taxes for me, right? Because it's hard to come up with a null hypothesis that says the world is not riskier tomorrow than it was yesterday, at least for a while. However that winds up, okay, there's so many pathways that lead to so many things that could be so destructive to an economy and a society, be they inflationary or deflationary, that it should provide a pretty fertile environment for trading-oriented strategies. It should provide a good environment for alpha shorting. It should provide a good environment for both bottoms up and top down, hedging, all the things that we have in our toolkit as an investing community to put to work.
Jerry Pascucci: (42:10)
I know it's been a long time. It was a long grind up for the equity markets and a pretty long grind out of favor for the hedge fund community. But I think there are bright spots. I think our opportunity set has to be better as a function of all this, and the volatility when you have things that you can't underwrite financially, like we talked about before, has got to be prevalent. So I think structurally we have the environment that we need to have, dispersion, volatility, shorting, risk mitigation. Leverage will be important at the right times, dislocation, complexity, distress, regulatory evolution. There's nothing that we need that we don't have.
John Darsie: (42:55)
Well, we agree. And, Jerry, thanks so much for joining us. Anthony, I want to let you have the final word before we read the end of the segment here.
Anthony Scaramucci: (43:04)
No, I think Jerry captured it well. We've known each other a long time, and what I love about you, Jerry, is that you combine a total academic understanding of what's going on with a lot of commercial instincts. So hopefully we'll get this out to as many people as possible because there's a lot to be learned in terms of the long-term wisdom that you're sharing with everybody. So thank you, Jer. And, John-
John Darsie: (43:31)
Yeah, we have a-
Anthony Scaramucci: (43:33)
When the SALT Talk is over, Pascucci and I are going to have a conversation with you about the portrait behind you. I just want to make-
Jerry Pascucci: (43:39)
we're definitely going to do that.
John Darsie: (43:41)
I'll keep trying.
Anthony Scaramucci: (43:42)
Yeah, yeah, yeah. No question. I've already sent the-
John Darsie: (43:43)
I try to find a background that makes you happy but-
Anthony Scaramucci: (43:45)
I've already sent it to a lot of our SALT Talk fans who are just silent. There's just silence, John. But go ahead. You have the final word.
Jerry Pascucci: (43:56)
So let me-
Anthony Scaramucci: (43:56)
All right, go ahead, Jerry. Say what you want to say, Jer, because it's horrifying.
Jerry Pascucci: (44:00)
Yeah, well, we'll get to George in a minute. Like I said, I think it's a period of time when we got to celebrate what this nation's about. So I'll tolerate George for the moment or whoever that gray-haired guy is.
Anthony Scaramucci: (44:11)
Not George Washington. It's not George-
Jerry Pascucci: (44:13)
Yeah, or whoever that French guy is or English guy you got back there.
Anthony Scaramucci: (44:16)
No idea.
Jerry Pascucci: (44:18)
Look, I just want to say thanks. This was a great opportunity for us to share some of the features of our business that we find or think or hope to be distinguishing. I thank you, Anthony, for your partnership over the years. We have known each other for a long time. I'm flattered that you would include me in something like this. As I said before, I look at the screen at all these very distinguished people who have accomplished so much in their professions and in their lives, and it's humbling to have my very repulsive face in a box next to those people.
Anthony Scaramucci: (44:50)
Hey, man. Don't kid yourself. You're an industry expert at a time where the expertise is super valuable. At the end of the day, our conference is really hubbed around the main arteries of what you do for a living. So we're thrilled to have you on.
Jerry Pascucci: (45:04)
Well, thank you.
Anthony Scaramucci: (45:04)
Glad you accepted the invitation.
Jerry Pascucci: (45:04)
I'm very grateful. It was fun. I hope we get to do it again, and I hope some people find it useful. But it was terrific being with you.
Anthony Scaramucci: (45:10)
Same here.
Jerry Pascucci: (45:11)
But thanks, John. I like [inaudible 00:45:12].
John Darsie: (45:12)
Yeah, thanks, Jerry. Yeah, somebody in the chat in the Zoom webinar basically said I was inspired by watching Hamilton on Disney+, so we'll go with that.
Jerry Pascucci: (45:23)
Is that stag you got back there your Patronus? What's going on over there?
John Darsie: (45:26)
Exactly. I brought some science fiction into it too.
Anthony Scaramucci: (45:30)
Oh my god.