Saeed Al Mazrouei: Investment Banking & Debt Management | SALT Talks #86

“We want Mubadala to be a pioneer as the entrepreneur organization for the government of Abu Dhabi.”

Saeed Al Mazrouei is the Deputy Chief Financial Officer of Mubadala Investment Company, a sovereign wealth fund for the government of Abu Dhabi. In this role, he oversees the group-wide finance function, supporting the delivery of the company’s growth strategy and ensuring the successful execution of strategic transactions and financing projects, as well as supporting the company’s business units in various acquisitive transactions and assets monetization.

Mubadala was created to focus on investing in and growing a more diverse business ecosystem within in Abu Dhabi. This includes working with American organizations like the Cleveland Clinic to build a world class healthcare system in Abu Dhabi.

One of the keys to creating the scale diversification is based on developing an entrepreneurial environment within Abu Dhabi and the UAE. This movement is important to creating sustainable jobs. “We are trying to build an ecosystem in the Emirates of Abu Dhabi; how can we help entrepreneurs, how can we help venture capital come and establish businesses to grow out of Abu Dhabi?”

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Saeed Al Mazrouei

Deputy Chief Financial Officer

Mubadala Investment Company

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi everyone, and welcome back to SALT Talks. My name is Rachel Pether and I'm a Senior Advisor to SkyBridge, a global alternative investments firm, as well as being the MC for SALT. A thought leadership forum and networking platform that encompasses finance, technology and politics. Now SALT Talks has a series of digital interviews with some of the world's foremost investors, creators and thinkers. And just as we do at our global SALT Conference series, we aim to empower really big, important ideas and provide our audience a window into the mind of subject matter experts. Today I am very excited to be speaking to Saeed Al Mazrouei. Saeed is the Deputy Group CFO of Mubadala Investment Company. One of the world's largest sovereign wealth funds. Before his current role, Saeed was seconded from Mubadala, to spearhead the launch of the Debt Management Office within the Abu Dhabi Department of Finance.

Rachel Pether: (01:05)
During this time he led more than $30 billion worth transactions, including a $10 billion joint venture between the Russian Direct Investment Fund and the Department of Finance. He sits on the board of several companies, including, but not limited to Abu Dhabi Commercial Bank, Cepsa, Abu Dhabi Future Energy Company, Cleveland Clinic Abu Dhabi, and the Abu Dhabi Pension Fund. Saeed, welcome to SALT Talks.

Saeed Al Mazrouei: (01:32)
Thank you for having me Rachel, pleasure to be with you.

Rachel Pether: (01:36)
Now. I severely truncated your biography and I apologize for that. So maybe let's just start by tell me a bit about your personal background and how you ended up in your current role in Mubadala.

Saeed Al Mazrouei: (01:49)
Maybe in short as they guess you have given a good brief on my bio. My name is Al Mazrouei. Have been with Mubadala actually since 2007, a few years after Mubadala was started in 2002. I started my career in the investment banking side here in the UAE for a couple of years before joining Mubadala. And then I joined the acquisition team. It used to be called the acquisition team back in 2007, was under the leadership of Harney who is also today, the executive director of Mubadala capital here in Mubadala. Then I decided after a few years to change my career for a new opportunity, as you mentioned to move to Department of Finance on secondment basis to establish the Debt Management Office. In 2009, with the global financial crisis, it was really critical and important for the government to establish an office that will be the window for all debt issuances for the government, as well as managing the rating of the government or the sovereign rating with the rating agencies.

Saeed Al Mazrouei: (02:59)
We have done a couple of issuances for the government, but we were also lucky at that time in 2010 and 2011, we saw increase in oil prices at 110, 120. We pivoted the focus more into looking into special projects here in Abu Dhabi. And if you would recall on the back of 2009, we had a couple of credit situation and insolvency situation either on the banking industry or on the real estate side where the government needed to actually intervene with these entities. I had the pleasure at that time to work with the chairman of Department of Finance on these couple of projects. And we were very successful in providing funding and liquidity either on the banking side or also on the real estate sector, which were large sectors for us at that time for the Emirate of Abu Dhabi.

Rachel Pether: (03:53)
Excellent. And I want to come back to the points about the debt capital markets a little bit later on, but you obviously work for Mubadala now, which is one of the world's largest sovereign wealth funds is not your typical sovereign wealth fund. And we can go into a bit more detail on that later, but we have quite a geographically diverse audience on the call today. So the benefit of those that might not know so much about Mubadala. Could you give an overview of its investment strategy and focusing.

Saeed Al Mazrouei: (04:22)
Of course I always try. I mean, Mubadala is very complicated organization. But let me simplify it, maybe for our audience into Mubadala Development Company and then Mubadala 1.0, and then Mubadala 2.0. So Mubadala Development Company was established back in 2007, and that goes all the way to 2017. And the purpose of Mubadala when it was created at that time we had Abu Dhabi Investment Authority, which was at that time, the largest sovereign wealth funds for the government of Abu Dhabi. And it's a fund that focus on financial investments and drives all their investments based on asset classes diversification or asset classes strategy. The government in 2000 and 2002 were looking for someone who can build businesses, build sectors for the Emirates or the Emirates for Abu Dhabi and for the UAE economy. And the main purpose was at that time is to create an economic diversification with sustainable jobs.

Saeed Al Mazrouei: (05:25)
In 2002, we had the first great projects for us, which was Dolphin. In 2002 energy sources was critical for us when it comes to power. As an energy security for us, Dolphin gas pipeline have helped and support the government of Abu Dhabi to actually provide enough gas supply for the power sector. And that was an iconic, remarkable project for us. Also, I can give other few projects there were, I believe have been key milestones that the government of Abu Dhabi as a shareholder of Mubadala was able to achieve. The leadership here in Abu Dhabi were looking for a world-class health system or world class health organization that can actually help and support the UAE national to be treated in Abu Dhabi or in the UAE vis-a-vis giving ... taking them abroad either to Europe or North America.

Saeed Al Mazrouei: (06:28)
And the vision is how can we have that world-class healthcare facilities in Abu Dhabi. And the launching of that was basically how can we partner with CCAD, with Cleveland Clinic in the U.S. by having CCAD or Cleveland Clinic, Abu Dhabi here in Abu Dhabi. What's really interesting now, after a few years after opening Cleveland Clinic, we have seen high quality feedback from individuals and patients either from Abu Dhabi or the region, that basically the vision that was said that instead of people traveling abroad and getting that high quality health care services to be delivered to them in Abu Dhabi, and we were able to achieve that vision, and we continue to improve on that.

Saeed Al Mazrouei: (07:18)
On recent transactions or recent initiative that we came up with, especially on the technology side. I think it's becoming a hot topic, especially with what Mubadala have been doing either with Vision Funds or direct investments that we are doing on the technology sector. And I guess we will touch base on that. In the coming few minutes is up 71. We were trying also to build an ecosystem in the Emirates of Abu Dhabi, how can we help entrepreneurs, how can we help venture capital to come and to establish businesses and to grow businesses out of Abu Dhabi? Last but not least, the catalyst fund, the asset management business sector we can grow it here and in the UAE. And I guess we have been trying now to deploy capital as an LP investments to give a Seed Capital either for private equity or alternative investment funds, or even on the equity capital market to establish their offices here in Abu Dhabi through a global financial market.

Saeed Al Mazrouei: (08:20)
And to sure, basically that ecosystem develop over the year, that was from 2002 to 2017. And that culture Rachel, we care about as an organization or as more Mubadala because we want to continue to be pioneer as Mubadala, as being the entrepreneur organization for the government of Abu Dhabi. And we want to continue to create sustainable jobs and economic diversification. Post the financial crisis in 2015, when we show low oil prices, the government started to give direction by consolidating sectors, either on the banking industry or even on the real estate side. And you would recall in 2017, there was an announcement, a merger between IPIC, The International Petroleum Investment Company and Mubadala Development Company. And here where I call it Mubadala 1.0, the Mubadala Investment Company, were established. Were basically the government said "We have an overlap in the oil and gas sector, why don't we create one unified window to ensure basically we don't have competition from both organizations. And at the same time you needed that scale to have a presence on the investment community." One year later it seems post the merger with IPIC.

Saeed Al Mazrouei: (09:42)
The shareholder basically realized that scale diversification is really critical and important by having a really large sovereign wealth funds similar to two ADIA. The decision came in 2000, I guess, to 2018, basically Abu Dhabi Investment Council to join Mubadala Investment Company, which is, I call it Mubadala 2.1. And that created really the large scale for us. Now we're around $230 billion company. We have created enough diversification in our portfolio, and we were able to manage to create a sustainable return for the shareholder. Abu Dhabi Investment Council, it's basically a full subsidiary owned by Mubadala. That subsidiary is being, have taken the endowment business model on the last 10 years, because they were established in 2000 and 2007. And their portfolio is a fund the fund were basically their business or their investment strategy focus on investing in asset classes through funds, through external fund managers who manages their capital on their behalf. This is in summary what Mubadala Investment Company is.

Rachel Pether: (10:58)
That's great. And I want to pick up on one of the points you made about that entrepreneurial spirit. A couple of weeks ago, we had had Alama hit up in the battle air space on SALT Talks, and he was telling this great story about how Strata had adapted their manufacturing line that was producing aerospace plant to create a 95 mosques and actually become an ex-altar. How, can you give me some other examples of how some investments have adapted during the pandemic in recent times?

Saeed Al Mazrouei: (11:34)
It Rachel, I think my view on this, I mean, post COVID-19, that's my personal opinion on it and what I have heard from others through our network. I think a couple of themes that I see them going to grow over the next few years before I touched base on Strata and other examples. Clearly digitalization is going to be disrupted across different industries, not just on the UAE, but across the globe. Working from home is something that we see it as a trend. And I don't think post COVID 19 era people will fully come back to work because I think working from home has created a lot of efficiencies for many individuals who are being able to cope with the work from staying at home. And I see that a big risk on the real estate side, especially on the commercial side.

Saeed Al Mazrouei: (12:30)
Less business travels I think that will have also its impact on the aviation industry. And I don't know how much disruption and production and profitability of these sectors. Consumer behavior has changed. And this is, will take me to one example before we touched base on Strata. As you mentioned, I sit on the board of ADCB and we have seen a lot of statistics post COVID 19, that the behavior of consumers have changed from the traditional way of doing banking by going to the branch and getting their services done physically. Today, the cash transaction have prompted to levels that we have never seen them pre-COVID 19. Usage of credit cards have increased. Also we have data and access to how much people are active on the application and the time that they spend on banking application, that have skyrocketed. All this gives you an indication that basically consumer have built the experience of how to use applications.

Saeed Al Mazrouei: (13:36)
They are satisfied with that customers because also we are on service for our customers and the service have shown very positive signals that customers, they want to continue to use that hence that will create an opportunity on the banking industry, because remember, if there is no credit growth, you will be focusing on cost optimization and reducing your cost income. And that at the same time, as it's being profitable for the bank, improving the return on equity, that also would reduce the number of jobs as you are starting to close branches, or to have branch closures, because you really don't need all this number of brunches. If retail customers more specifically are happy and ready to use all these online applications. On the retail side, I think the retail is going to shift completely from shopping malls to online. And maybe we have seen it within our families, with my wife and with friends that people, I mean, personally, I use not to shop online, usually go and buy consumer goods by spending some time on the shopping malls.

Saeed Al Mazrouei: (14:46)
Now you are forced to use Amazon and other online applications because of the COVID, because of the quarantine and the less movement that we see. So Strata is another good model to me that how the banking industry, how the retail industry, how these companies will change their business model, because you really need adapt yourself to the new era, because to me banking, if we're not going to be spending on digitalization, I think we are going to be lagging behind as a bank because customers are going to be demanding more technology, more applications to be in place. That's what Strata I think went for because yes, you are an aircraft composite structure manufacturing company, but on the long term especially if there will be a slow down on aircraft purchases then also you, the supply chain will reduce with that minimal growth on the aircraft manufacturing sector.

Saeed Al Mazrouei: (15:49)
So you really need to adapt yourself how you can pivot by creating new business products or creating a new project for you, be it at 95, or even to take a step back and to say, should I focus on personal protection equipments that basically can be a new business lines for me to cover for any losses that I potentially could have from the airline industry?

Rachel Pether: (16:18)
No, that sounds really interesting. And I want to actually just follow up on something that you said previously about this will Mubadala Development Company was more focused on economic diversification and job creation within the Emirates, obviously the UAE economy, I guess, like most economies have taken a hit during the pandemic. Will Mubadala 2.0, look to invest more locally, again, to support the regional economy, or how do you see that playing out in terms of investment strategy?

Saeed Al Mazrouei: (16:53)
We, as an institutions, we have been always in the centric of our strategy, always Abu Dhabi and the UAE, economic diversification has been always in our mind, whenever we see opportunities, whenever we see that Mubadala can play a role on that, we will continue to play that. Because it has been always mentioned by our senior managing director that, the culture of being a sector builder or a business builder, something that we need to continue to maintain as a culture, because that's our roots. And that's how we evolve as an organization. As maybe you have mentioned post COVID 19, I think data and statistics, they don't really look good in terms of what numbers are we going to see in 2019, I guess we going to see the GDP dropping by six to 8% this year, and maybe hopefully a potential of a growth of around 3% next year as you know, the UAE GDP has too large external factors that is impacting our growth.

Saeed Al Mazrouei: (18:02)
One is oil prices, as revenue represents oil revenue represents one third of our GDP and that volatility would have a significant impact on our growth going forward. Also, there are sectors be it retail, hospitality, real estate sector. Those sectors in combined, I think also they represent one third of our GDP. What's really important here for us is basically the international traffic that comes to the boy and to the UAE. Without this, I think the over supply of the retail or the real estate sector or the hospitality, it won't be covered by the local demand, hence the programs that are being set by the government related entities, be it Mubadala or other government related entities. And Dubai will have to continue to support the UAE economic growth by having new programs and new industry that will basically revive these industries to come back post COVID 19.

Saeed Al Mazrouei: (19:13)
One good example of that is Export 2020, which is going out to be Export 2021. It's hopefully it's going to take place next year, but that's a risk factor also that if it gets delayed again by another one year that is a risk on the UAE economy because it's going to take out many of visitors that they were supposed to plan to come to the UAE, but let's see how the virus will play. And we're going to see a vaccine by the end of the year.

Rachel Pether: (19:47)
Yes. Inshallah fingers crossed. I'm just interested when you talk about Mubadala 2.0, obviously across a lot of different asset classes, a lot of different geographies. How do you view the world when you break it down and to say for the economies will separate geographies?

Saeed Al Mazrouei: (20:05)
Maybe, I don't know, let me, maybe I think, why don't I give you some overview of our strategy and then where you feel you want me to speak more. I'm very happy to also to double click on specific areas, but Mubadala, even pre-COVID 19. I think our strategy has two folds. We spoke about the first fold, which is basically the local investments. And as I mentioned, this is on the core of our strategy and we'll continue to invest on the local economy where we see it's relevant for Mubadala and commercial basis. And we will continue support to help economic diversification and creating sustainable jobs here in the Emirates Abu Dhabi or in general in the UAE. But for us internationally, we will continue as an institution to grow and to manage our portfolio.

Saeed Al Mazrouei: (21:02)
We'll continue to enhance the resilience of our portfolio and manage the volatility of that portfolio to ensure basically we achieve an acceptable risk adjusted the retail for our shareholder. Tactically, maybe on the last 18 months or 24 months. We have embarked on a strategy on specific sectors. I'm going to come to those sectors, is to look for specific funds within the alternative investments, either be it an infrastructure on the private equity, where we invest with them through LP investments. We have a strong partnership with them, and we do a lot of co-investments that have turned to be good investments for us so far on the last 18 months of deploying this capital.

Saeed Al Mazrouei: (21:53)
But maybe let's double click now into sectors and asset classes. On the sector side, Mubadala is trying to focus on couple of sectors, technology, life sciences, consumer and financial services. On the technology side, maybe we have seen our investments a few years back with Vision Fund. We have direct investments either in North America and our San Francisco office to look into investing in venture capital, small ticket size, taking a portfolio strategy by seeing what could be successful. Also, we have a fund that is dedicated to Europe and clearly for us the themes there are mobility autonomous is something that we see it going to grow. And we will see a lot of capital going to that sub sector.

Saeed Al Mazrouei: (22:52)
Robotics is another area of an interest for Mubadala and energy storage. Those are the three or four themes that we continue to look to see if there are opportunities. And the reason for that is the technology sector will continue to grow over the next 10 years. We see a lot of capital and knowledge going toward that sector. Clearly after post-COVID-19, after we saw the market crashed a few months back ... we saw basically how the big five technology companies actually hold the market to achieve levels above 3,200 or 3,400 levels. So that's an area that we will continue to invest in. Life sciences and consumers. There are great themes there. Those two sectors have been growing around four to five sectors, more specifically in North America. So we see really till Wednesday, the themes, a lot of consolidation, because some of these sub-sectors of life sciences and consumer are very fragmented.

Saeed Al Mazrouei: (24:04)
So consolidation is a play. On the consumer side, disposable income has been growing in North America. And clearly we have, I mean, latest data have been showing household savings past 1 trillion, which is a good indicator that households have been de-leveraging and having saving, deploying that on financial assets, which basically it will give them the power over the next six to 12 month post COVID-19 to consume that. So consumer spending either on services or in goods, we're going to see something that will grow. 70% of the U.S. GDP also represented by consumer spending. So that will continue to be the play going forward. On the life sciences, I think there is people have the capacity to have health insurance, especially in North America. So spending on healthcare will continue, especially with the effect of COVID-19.

Saeed Al Mazrouei: (25:06)
Also the feasibility on the cash flow, especially with the investments that we have seen a lot of feasibility and very health, but the margins. Those themes have really attracted us to say, we want to focus on those sectors that makes a lot of sense for us to look at them and to invest with our partners, the private equity funds. Last but not least, financial services. We have been developing a strategy on financial services here in Mubadala and hopefully in the next couple of months, maybe it will be launched at the beginning of next year. It's a lot of sector, it represents almost 6% of the global GDP. It has been growing at four to 5%.

Saeed Al Mazrouei: (25:51)
The banking industry has been highly regulated post the GFC. So what's the interest here is actually many of the bank starts to spin off a lot of their non-core assets that have an impact on their capital adequacy ratios. And that's creating an opportunity for us. So for us, we're looking into investing in life insurance, we're looking for corporate brokers and general insurance. Also consumer finance, as I mentioned on how household starts to de-leverage and having savings, consumer finance near prime is an area that we like. FinTech is a big play with with payments. So those are the couple of sub-sectors that we're looking to invest in and the team are working on that strategy. And hopefully by the beginning of next year, we see the launch of that strategy.

Saeed Al Mazrouei: (26:43)
That's from a sector point of view, on the asset classes, real estate and infrastructure will continue to be an attractive sector for us because of the feasibility on the cash flow and the low beta that reduces the volatility in our portfolio. Renewable is a big thing for us, especially in Masdar. I think with energy transition ESG, those two big topics that have been pushing international oil companies to shift from IOCs to become an energy company. I think there will be more renewable projects and renewables, frankly speaking starts to become very competitive from a pricing point of view and that is creating an opportunity for renewable projects to get a bigger market share vis-A-Vis the other energy sources.

Saeed Al Mazrouei: (27:35)
Last but not least, from a geography point of view, maybe you have seen our investments in Asia, more specifically in China and India be it reliance geo or reliance retail and our SIP team, the Sovereign Investment Partnerships already investing in China. And we like both geographies or both countries because of the GDP growth that we see increase in wealth and wealth distribution. The urbanization rate, a pace that both countries are going through is actually creating an opportunity for us. Also, we have been very lucky in India also to partner with Reliance, Reliance as a very credible partner, a large corporation, have a very successful track record and execution capabilities. And we were lucky with other financial institutions and sovereign wealth funds to invest either on Reliance Geo or Reliance Retail. And definitely North America will always be an area that we will invest in, because of the size of the economy and the opportunities being created across different sectors in the United States.

Rachel Pether: (28:45)
There were so many things that I would like to pick up on there, and we've already had a lot of questions coming in from the audience and broadly they tend to some of the sectors or countries that you've just discussed. So I'll try and break them down accordingly. With regards to healthcare, are you mainly looking at that from a financial investment focus or are you also looking to bring the technology or the investments to the UAE? And the recent example I'm thinking of here is science 87, the clinical trials platform. So now those types of investments, are they things that you actually want to back to Abu Dhabi? Is it more just a financial investment?

Saeed Al Mazrouei: (29:30)
See, I think we need to segregate between the international investments and the national investments we do, but there is a coordination there. So for us, everything on the international side, it's purely driven by the expected financial returns that we are going to achieve either on direct investments, LP investments or our core investments. But at the same time between our local team, if they realize basically there is something that is really interesting, and that makes sense for us to establish it here in Abu Dhabi or in the UAE, you would see that coordination between the international team who have done the transaction with the local team to see if we will be able basically to copy or to paste this to reflect or to place something like Science 72 to be here in the UAE.

Saeed Al Mazrouei: (30:25)
But that's not the only example. I think there are many transactions that we have done globally that basically when we feel it makes sense and financially it makes sense for us to bring it here to Abu Dhabi or to the UAE. Definitely, that creates an opportunity for us to partner either with the government or to partner with the private sector to launch those projects here in Abu Dhabi.

Rachel Pether: (30:54)
Right. And there's actually a question that's come in from Kim Lustig which kind of ties in some of these things then points you've just made. Given your ownership or involvement with global foundries and ACA, do you see Mubadala bringing any large scale technology infrastructure investments into Abu Dhabi? You did touch on sort of data centers. Do you see those data centers or hardware manufacturing being brought into Abu Dhabi?

Saeed Al Mazrouei: (31:24)
Rachel, I think that the short answer, if it is relevant and commercially make sense for us to bring it to Abu Dhabi to the UAE absolutely we are going to bring it. I think we brought a lot of services industries, I think technology and the industry is more complex nature because of its complexity, but generally speaking as a vision or as a direction for us as an institution, we always try to see if there is a possibility that we can replicate something here in Abu Dhabi or in the UAE. And that makes sense, commercially we will definitely bring it.

Rachel Pether: (32:08)
Excellent. And I do want to take a step back actually and ask some Mubadala questions, but just another quick question, that's coming from the audience. And you mentioned financial services as a sector, as well. Is digital assets, an area that looking at, and what is your exposure to this portion of financial services?

Saeed Al Mazrouei: (32:31)
I mean, I want to explore in general our exposure, if I would exclude the national banks here, we own a large stake in First Abu Dhabi Bank, and Abu Dhabi Commercial Bank. Our waiting on the financial services relative to the overall of Mubadala's portfolio is very minimal. And that was the rationale behind this, why we have not entered the financial services sector. And especially it has that growth of four to 6%. It has been growing at 4% and there are a long list of potential transaction that we see that we can execute as an institution. On that basis, the team in the next couple of months, maybe at the beginning of next year.

Saeed Al Mazrouei: (33:26)
And that we'll touch base on the sectors that I have mentioned either be on the Fintechs or payment, but large part of that as we spoke that the sector itself, we like it a couple of sub-sectors of that. It's a priority for us. But really depending on how that strategy will evolve in the next couple of months. And what's the right start for us. Are we looking to do LP investments with funds and then do the core investment? Or are we going to partner with private equity right away to do co-investment opportunities? The picture today is not clear because we're still working on that strategy.

Rachel Pether: (34:12)
So you mentioned going into things as an LP, and co-investment. One of the other reasons that Mubadala isn't your typical sovereign wealth fund. And this ties back to the entrepreneurial point is that you do manage good passion capital. You're one of the first, I think the only sovereign wealth fund in the world to do so. Can you talk a bit more about that program and how you see that evolving over the short to medium term as well?

Saeed Al Mazrouei: (34:39)
Maybe we talked about how Mubadala has the spirit of trying to come up with new ideas, right? And we have this space of thinking outside the box and we don't really shy away from those ideas. So the team who have worked on managing third party capital came with that idea. And at that time it makes a lot of sense because one, we will be the first one as a sovereign wealth funds to manage their party, but not just that, the reason, but also it validates many things. It validates your institutions, and also it validate your knowledge, it validates your reliability as an institution to manage third party capital. And also it gives the opportunity for some part of Mubadala team to get to be on the other side of the fence where they're not managing one shareholder money or the government money, but they manage other financial institution money and they get scrutinized for managing those funds.

Saeed Al Mazrouei: (35:55)
I personally believe it's a great idea. And I think it makes a lot of sense because that asset management business, it can be grown to other asset classes and it could, it's not going to become the size of Mubadala or sovereign wealth funds, but also you could sell a GP as Mubadala to other financial institutions, either from the region or international and you will continue to grow that. And it could be a home grow and asset management business that Mubadala or a sovereign wealth funds have created. And at the same time they have investments and footprint across the globe.

Rachel Pether: (36:32)
No, I think it's always great to see how Mubadala's evolving like that. And certainly when you have that third party assessment or analysis, it's really a verification of what you're doing. I guess there's another, well sort of the initial part of Mubadala's journey into this transparency and taking on more external stakeholders was when you went to the debt capital markets. And I know you're quite active in the debt capital markets last year, obviously historically low interest rates. What sort of a cost of funding are you trying to achieve? And how do you look at the debt to equity ratio from Mubadala?

Saeed Al Mazrouei: (37:08)
So for us, I think the debt capital, I mean Mubadala have started that program back in 2009. And we look at that as a source of funding for Mubadala and managing our liquidity. Mubadala managing their portfolio either through asset divestments and monetization. And redeploy that new capital into a new investments. Also, there are government injection from time to time, historically Mubadala have, basically government have stopped that injection a couple of years ago. And now Mubadala is self-funded, or it comes from dividends that come from the large assets that we have today, be it the world of SEBSA, Borealis, Nova and OMV. So that for us is critical in terms of source of funding. If you would recall, 10 years ago, back in 2009, interest rate environment was different. Cost of funding was really high, and we started to build the portfolio of Mubadala when it comes to fundraising.

Saeed Al Mazrouei: (38:10)
And at the same time, if you would recall, also IPIC at that time it's independent from Mubadala and they have been doing their own debt funding. We embarked on a strategy on the last 18 months to really benefit from the advantage of low interest rate environment. So we have raised around $7.5 billion. Back in November, 2019, we raised $3.5 billion. And last May during the COVID crisis, we raised $4 billion. And the main reason for us is to create liquidity, a dry powder for the organization. But also we were able to bring the cost of funding substantially down. We were North of 4% today, I think we are close around 3.5%, and we are targeting to bring that below 3%. Relative to potential retains that Mubadala can achieve on the future, especially on the alternative investment asset classes on a double-digit higher. At the same time, the duration of portfolio today is around eight years.

Saeed Al Mazrouei: (39:16)
It used to be around six years before we raised 7.5 billion, but we continue to refinance any expensive debt to ensure basically our duration is North of 10 years, that will give the opportunity for the different investment teams within Mubadala to have the runway and to have the time to deploy capital, to manage those assets with enough time to create value for the next maturity that we will have on average over the next eight years or 10 years. So hopefully we have been successful on executing on that strategy. We'll continue to optimize Mubadala's balanced sheet but what's really important for me is the attractiveness of our debt as an organization. As you know, we have a very close relationship with the government as the chairman of Mubadala is the Crown Prince of Abu Dhabi Sheik Mohammed bin Zayed. Also, we have a rating equal to the sovereign rating, which is a AA rating.

Saeed Al Mazrouei: (40:17)
We have demonstrated as an institution, a lot of transparency, governance transparency. We are prudent in nature. So from a risk management point of view, the balance sheet that we have in terms of a debt equity ratio is low teens ratio. So what that means basically relative to other sovereign wealth funds or financial institutions, or even the ratios that are thresholds ratios, that's being set by the rating agencies. We are way below those ratios, which is really positive, and that have really helped us as an institution to be very attractive when it comes to any debt issuances. A good example in May, in around May, 2020 we raised $4 billion. It was almost 10 times over subscription. Also in 2019, we were able to raise 3.5 billion. We got three times over subscription, and that is for us basically a demonstrate how attractive the debt issuances or the debt paper of Mubadala.

Rachel Pether: (41:29)
I just wanted to pick up on some of the points that might, I guess, that long-term focus and which is obviously helpful, given the majority of your assets in the private markets. I'm interested to know how you actually benchmark that fund when you're looking at returns, how do you actually benchmark Mubadala if you do it all?

Saeed Al Mazrouei: (41:52)
I think there are a lot of benchmarks really depends on which sector you are. And so today Mubadala started to apply a relative performance and certain KPIs that we have. And technically speaking, if we take an example the oil and gas sector or natural resources then there are specific benchmarks that are being set and agreed between the portfolio management team and the asset management team. And this gets applied as if you wish on relative basis and based on the score card, that's being set for example, natural sources or petroleum and petrochemical. And then you apply this across the different 13 or 14 sectors that we have today.

Rachel Pether: (42:50)
Excellent. And we actually, we are officially over time, but we do have about a dozen questions left so, I'm going to ask two more questions and I wanted to ask one that's right in your wheelhouse, given the work that you've done at the Debt Management Office as well. We've had an audience question coming in saying, "Firstly, fascinating interview Saeed, very insightful. Do you foresee Mubadala in the driving seat to issue in the domestic market and local currency supporting the local debt capital markets?" Thank you for your question as well.

Saeed Al Mazrouei: (43:22)
I am personally very keen to see the government of Abu Dhabi and the federal government to start establishing the local debt capital market. This is a dream for me to see it in reality because I think the private sector, our economy needed this. I believe our colleagues at the federal level and the local government, they have been working on this. And hopefully we see both governments start issuing that because you need that benchmark before you see government related entities, be it Mubadala or other institutions to come to the local market. But also at the same time, we are very cautious and mindful when it comes to impacting liquidity. If the liquidity is going to be there. And it makes sense for Mubadala to issue on the local market and support the local debt capital market. Absolutely. We will be supportive.

Rachel Pether: (44:15)
Great. Thank you, Saeed. And you've answered so many difficult questions today that I'm going to end on a nice, easy one. We have had actually a couple of people ask who or what inspires you, and please give the Saeed answer, not the Mubadala answer.

Saeed Al Mazrouei: (44:32)
To me the challenge that you live in everyday. I think it's something that makes me work more. I don't think it's the title and I don't think it's only the actual investments. I think I am lucky to grow up here in Mubadala and to see the competition within the organization. It's not on the bad way. I think as a team working together in a transaction to achieve a specific thing and that journey that you spend either on the buy side or on the sale side, a good example for us to me is the journey of Cepsa. We spent almost 14, 15 months from the start to them to the finish. And you go through ups and downs on that journey. Sometimes it works with you, sometimes it doesn't. And those challenges actually it makes me work hard, push myself more beyond the boundaries and to challenge my team and the different teams that we're working with in Mubadala.

Saeed Al Mazrouei: (45:42)
This is what really makes me happy everyday to come to the office and to work with the different functions in Mubadala, but absolutely the inspiration that by supporting your family and making your family happy, especially we're going through very difficult time these days, managing kids from home or even to give the credit to the women and especially wives, taking the lead on, taking classes from home and making sure kids are taking class from home, it's very challenging. So this is an area where it pushes me as a father or as a husband to work more and to make sure that the family is safe and to protect them.

Rachel Pether: (46:35)
Well, thank you so much, Saeed, yes I think you do have a lot of roles to fulfill, but I think that's a very optimistic note to finish on. And from my side, I just wanted to thank you so much. It's been such a pleasure. Talking to you today.

Saeed Al Mazrouei: (46:48)
Thank you. I really enjoyed the interview with you.

Dr. Finian Tan: The Future of Deep Tech | SALT Talks #85

“If you want to create a circle of life for venture capital, you need every single part of it, and you need the country to have the political will to do this, and the capital and the R&D spend, and they must be in the right R&D environment.”

Dr. Finian Tan founded Vickers Venture Partners in 2005 with four partners, and has grown Vickers into a top-performing, global deep-tech firm with $3B under management across six funds and co-investments. Vickers invests in early-stage companies with technical solutions to solve large, global problems. Finian was Deputy Secretary of Trade and Industry for the Singapore government.

Serving as Deputy Secretary of Trade and Industry at 34, a major project was turning Singapore into a Silicon Valley for Asia. Creating that ecosystem is difficult and similar to building a national park that develops a natural self-sustaining circle of life; it cannot be artificially maintained. This effort sought to use venture capital, work hubs and regulations to allow start-ups to thrive in Singapore. “If you want to create a circle of life for venture capital, you need every single part of it, and you need the country to have the political will to do this, and the capital and the R&D spend, and they must be in the right R&D environment.”

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Dr. Finian Tan

Founder & Chairman

Vickers Venture Partners

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi everyone, and welcome back to SALT Talks. I'm Rachel Pether and I'm a senior advisor to SkyBridge Capital, a global alternative investments firm, as well as being the MC for SALT, a thought leadership forum and networking platform that encompasses business, technology, and politics.

Rachel Pether: (00:26)
SALT Talks is a series of digital interviews with some of the world's foremost investors, creators and thinkers. Actually, our guest today is really a combination of all three. Just as we do at our global SALT events, we aim to empower really big, important ideas and provide our audience a window into the mind of subject matter experts. Today I'm very excited to be welcoming Doctor Finian Tan to SALT Talks.

Rachel Pether: (00:54)
Finian founded Vickers Venture Partners in 2005 with four partners, and he's growing the company to become a three billion dollar, top performing, global deep tech firm. They invest in early stage companies with technical solutions to solve large global problems, and one of them happens to be, spoiler alert, a T-cell-based vaccination platform that can be designed for COVID-19. Before starting Vickers, Finian was a managing director at Draper Fisher Jurvetson as a founding partner of its Asian Pacific operations, he led the investment into Baidu and remained its largest backer until IPO. Prior to this. Finian was deputy secretary of trade and industry for the Singapore government. He received his doctor in philosophy and master of philosophy in engineering from Cambridge, and he received his BAC in engineering from the University of Glasgow. Finian, it's a real pleasure having you with us today.

Dr. Finian Tan: (01:57)
Thank you very much for having me, Rachel.

Rachel Pether: (02:01)
You're a difficult one because I just want to talk about so many things. I want to talk about your role with the Singapore government, your investment into Baidu, the work that you're doing with Vickers Financial Partners, and obviously, go into more detail about the COVID vaccine. But before we get into some of these in detail, tell me a little bit more about your personal story.

Dr. Finian Tan: (02:23)
I was with Goldman Sachs in 1996. I was based in Singapore and then London and New York. I was in charge of trading for Asia for a company called J. Aron, which was part of Goldman Sachs. Running Asia from New York wasn't good, so I decided to come back to Asia; I chose Singapore. I'm a Singaporean. In '96 I came back and as soon as I got back, I was approached and asked to serve in the administration as the deputy secretary in the ministry of trade and industry. It was a change to serve my country. I was then a young man of 34. Couldn't quite say no, so I became deputy secretary. Part of my role was to help make Singapore into a Silicon Valley for Asia.

Dr. Finian Tan: (03:11)
As some of you will know, Singapore's per capita income is pretty high. It's about the same as the US. The next stage of growth is entrepreneurship and innovation driven. It was natural for them to want to give me this task. I made three recommendations. One was the setting up of a billion dollar fund to jumpstart venture capital. The second was the setting up of a physical science hub, where people can live, work, play, study. The third was an interministry community to change rules and regulations to allow startups to thrive.

Dr. Finian Tan: (03:47)
With the government approved all three and made me the chairman of all three, and that started my life in venture. I kind of love adventure.

Rachel Pether: (03:57)
You have obviously been very successful as a venture capitalist as well, and we can touch on that shortly, but you mentioned that Singapore was aiming to become the next Silicon Valley, and I know many cities around the world have this aim and do you think that's a reasonable aim to have? Can you just create it using capital? I'd love to know your views on that.

Dr. Finian Tan: (04:31)
Well, many cities and countries have tried it with varying success. It's very difficult to do because you have to create an entire ecosystem and creating an ecosystem is never easy. For example, if you wanted to create a cougar national park, that's very hard to do because it's not like a zoo where you bring animals in and you feed them. In a cougar national park situation, you would have to allow them to feed on their own, so you have to have the grass, the earthworms, the rabbits, the deer, and then the predators, and the whole thing needs to go through the circle of life, and it needs to be self-sustaining. No matter what you do, there will be gaps. There will be gaps where you have to feed some groups in order to keep them alive for a while, and eventually, you reach a self-sustaining cycle of life.

Dr. Finian Tan: (05:30)
In most countries, it's just too difficult to do. You have to feed everyone, just like the zoo, where you have to feed all the animals and so you can import all the animals will eat. But if you want to create a circle of life for venture capital, you need every single part of it, and you need the country to have the political will to do this, and the capital and the R&D spend, and they must be in the right R&D environment. It must have the right stage of growth. I think if any country could do it, Singapore probably is in a good place, but it's not quite there yet.

Rachel Pether: (06:08)
That's great. I love that analogy of comparing it to a zoo or an actual ecosystem like the cougar national park. Is that really where your love of venture was born? Maybe you could tell me a little bit about that part of your journey as well and really getting this passion for venture capital and early stage companies.

Dr. Finian Tan: (06:34)
Venture is really a blend of financial and tech. I had a really good finance trade at Goldman and since I did my PhD in engineering at Cambridge, I am a tech guy. It was a nice combination of two skills. That's why I decided that what's I'm going to be. I joined a firm called Draper Fisher Jurvetson ePlant Ventures. They're pretty well known. DFJ is well known for Tesla, SpaceX, [inaudible 00:07:04], but at that time they were well known for Hotmail and Skype. I joined them as as founding partner for Asia and my first investment was a small company at that time called Baidu, which, as you know, become the Google of China. We took a very large stake in the company. We became the largest shareholder of the company in the IPO, so when Baidu listed in 2005, it was an extremely successful IPO. In fact, it still holds the record of the best performing IPO in [inaudible 00:07:38] history. That was very good. I had a lot of publicity. Appeared on front covers on magazines including Forbes. They called me the Baidu backer. With that behind me, I decided to start my own fund, and that's how Vickers was born.

Rachel Pether: (07:54)
What made you believe in Baidu at such an early stage? What was it about the company and its story and its prospects for growth?

Dr. Finian Tan: (08:06)
The year 2000 was a very difficult time because it was the first time that the internet came to the floor and there were thousands of companies. In fact, anything that had three Ws in front or had .com would shoot through the roof. They were worth billions on air. It was difficult to discern what would work and what wouldn't.

Dr. Finian Tan: (08:32)
I decided to, in my book, draw a line in the middle, put what I understood for sure would happen on the left, and on the right put things that I was still a little unsure about. The right side started filling up. [inaudible 00:08:48], InfoSpace, Yahoo, Amazon, eBay. I wasn't sure about the business models because they were all burning cash just for eyeballs.

Dr. Finian Tan: (09:01)
It started filling up, I stopped, and then I said, "What do I know for sure about the world?" Number one, I knew that China would grow. I was absolutely confident that that would happen. Number two, I knew that the internet would grow. That's it. I asked myself, "What could I invest in that will surely make money in these two things that I felt would happen for sure happen?" I concluded it would be the operating system of the internet in China. But what's the operating system of the internet? Is it Cisco? Is it the Explorer? I concluded that it was search because that's what everybody does. I asked the team, "What do we know about search?" Not very much.

Dr. Finian Tan: (09:56)
We went out, we spoke to all the incumbents, we spoke to all the customers of search, we spoke to all the companies that have come to the DFJ family. We spoke to those people that have gone outside of the DFJ family. After about a month or so, we huddled together and we decided that Baidu was the one that really stuck out, like a tall puppy. The reason was because search is very objective. It's speed and relevance, and you could measure. Baidu had a new architecture which was very related to how many people search for a particular item and click on it. It was linked to search results rather than using a directory. We felt that was the best. It was like a magnitude button, so we decided to invest in Baidu.

Rachel Pether: (10:53)
Fabulous. I think that appreciation and love of data has also carried into Vickers Venture Partners. I would love to know more about that because I think your offering is so unique here, even just we were talking before about the number of founding partners that are actually doctors. Tell me a bit more about Vickers Venture Partners and the focus on deep tech as well.

Dr. Finian Tan: (11:20)
We didn't start out that way. We started as more or less a general list VC, always drawing the line in the middle and asking ourselves what do we know and what we don't know, then trying to invest in core areas.

Dr. Finian Tan: (11:37)
But we were industry agnostic. We would invest in fintech, games, eCommerce, all sorts. After a while, we realized that we were very good at some parts of our business and not as good in some. We decided to split risk into three buckets. One is technology; does it work? IP, are you in the lead? Is there going to be a monopoly? And third, the market. Will people buy your product? We were not so good at guessing the market. I can't even guess what my wife likes, let alone my children, et cetera, let alone seven billion people. We only knew what we liked, personally, and sometimes we tend to extend that erroneously. But we were pretty good at intellectually guessing whether a tech would work, especially if it was our field of interest.

Dr. Finian Tan: (12:40)
We decided to take only one risk rather than three and we focused it only on the tech. Will it work? Market must be known and ready before we would look at it. We don't take IT risk. You have to own the IP. You have to be in the lad. After we did that, our performance really skyrocketed. Our home run pool increased from 28% to 50%. Our failure rate dropped from initially it was 34%, and then dropped to 20, and now, including core investments, is about 6%. That's when we started climbing up the ranks and today we have about three billion under management across seven offices globally.

Rachel Pether: (13:24)
Fantastic. Does this approach mean that you're more highly concentrated, like it's more of a high conviction approach, I guess, than some other venture capital firms?

Dr. Finian Tan: (13:37)
We're very different. Let me give you a few examples. When I talk about tech risk and I talk about not taking market risk, it requires some elaborations. People often wonder what kind of deals will not have market risk. Everybody has market risk. All companies have market risk. Not quite. I'll give you an example. Let's take a cure for cancer. If you actually had a cure for cancer, the number of patients per year is known, but incidence rate is known and mortality is known and morbidity is known, the prevalence is known. Everything is known. The only thing that's unknown is will the drug get FDA approval, how efficacious is it, how toxic will it be? That's a risk we are willing to take; it's a calculated risk. It's nicer when we reduce the risk to one bucket, and then we focus on building strengths in that bucket. That's why we have so many PhDs and doctors, because we double down on what we were good at, and cut out all the other noise.

Dr. Finian Tan: (14:42)
In most other venture capitalist investment committee meetings, the IC meetings would be very noisy. What do I mean by noise? One buy brings an eCommerce company, one guy brings a bike sharing, a ride hailing, game company, social network, and one tech company. For us, it's easy. Ride hailing out, eCommerce out, logistic out, game company out, social network out. Tech, okay, that's interesting. We would strip that future. We've decided we'll take the tech risk and we've decided that we will only do holy grail type breakthroughs. Breakthroughs that are so impactful that it will change the world and it will have a paradigm shift that will basically make everybody change the way they look at this particular problem. If it's a holy grail breakthrough that's still a dream, that's still risky. If it's a hold grail breakthrough that's already been made and everybody knows about it, it would be too expensive. We focus on a small goldilocks zone, where it's a holy grail breakthrough that has actually already been made, but requires the last push with data to convince everyone of this new paradigm shift. That's the only thing we do. As a result, out of the 5,000 views that we receive, in the past, maybe 4,000 would qualify. Today, less than 100.

Rachel Pether: (16:19)
That's a very easy filtering and screening mechanism, isn't it? I do want to talk, you mentioned cure for cancer, obviously, that's a very nice analogous to a vaccine for COVID, but I did just have an audience question come in, which is relevant to what you've just said. It was that if the market is ready for a company's products, i.e., if the market risk is known, does it often mean that your companies are in late stage when it comes to investments?

Dr. Finian Tan: (16:50)
Not necessarily, because if it's too late, then it's too expensive for us, so it would come under the second bucket. It's typically the third bucket, which is the goldilocks zone, where it's a breakthrough. Breakthrough in our view that has already been made. But people don't get belief. The reason why they don't get belief is because they haven't dug deep enough.

Dr. Finian Tan: (17:14)
Let me give you an example. We have a company called ROWDC. They have a biodegradable plastic alternative. In order to be an alternative to single use, disposable plastic, you need to meet three criteria. Number one, you need to be as cheap as plastic. Number two, it must feel like plastic and have all the material properties, waterproofness, high temperature, et cetera. Number three, it must be biodegradable. We had been hunting high and low forever and we found many, many companies that met two, but not three. Finally, we came across one company that could do all three. This was the only company that we could find, but they only had a small plant for 250 tons, so they had to scale from 250 tons to 25,000 tons. There was an apparent prototyping risk, and as a result, many VCs were holding back, unsure how risky this was. We rolled up our sleeves, went to the company, and in the midst of our due diligence, we found that the company had already tested their microbes in this big, full scale tank of 25,000 tons factory that we'll be using. They manually pull out all the microbes and the nutrients and they grew the material manually, which means the microbiology has already been tested.

Dr. Finian Tan: (18:50)
What's the rest? The rest are movement of oil through pumps, centrifuges and pipes. This is an old academic study. It's 100 year old subject. You learned it in flu dynamics. I've moved such oils in the refinery at Shell where I used to work before. Ten times larger. We could calculate it to the decimal. Actually, if you come to think of it, since it's a mixture of engineering and microbiology and both of them would work, one plus one would be two, so we felt that this is a breakthrough that had already been made. We invested, the company then started increasing its scale and talking to customers, and today it's almost a unicorn. They just closed a Series B round, it's a staple round with B1 and B2. After the milestones are hit in a few months, they will be a unicorn. We invested in the tens of millions just because we were I guess conscientious enough to immediately fly and dig deep instead of being affected by noise.

Dr. Finian Tan: (20:06)
If you had six companies to look at, one was a social network, one was ride hailing, one is going to be Twitter, one is going to be the next Angry Birds, and then you have a tech company that looks a bit risky, the priorities are different. For us, we drop everything, but the only thing we're looking at, we fly there tomorrow, and we roll up our sleeves and if it's the holy grail breakthrough that has already been achieved but just needs a little bit of push, that's the one we want.

Rachel Pether: (20:36)
Excellent. I guess that deep knowledge of the company really derisks the investment for you, doesn't it, because you have-

Dr. Finian Tan: (20:42)
Absolutely.

Rachel Pether: (20:45)
... so much. You mentioned you work on things or you look at investments where the market is known, the market is huge. Obviously, we would be remiss not to talk about the work that you're currently doing in the COVID vaccine development space. One of the companies that you're focused on within Vickers Venture Partners is Emergex. Let's please share with the audience the work that you're doing here, because it's really quite phenomenal.

Dr. Finian Tan: (21:15)
Yeah. This pandemic is affecting all of us, and everybody must be asking the question, "When will life return to normal?" Like, really normal. With parties and stadium events and rock concerts and going to clubs and not wearing a mask and not social distancing any more. That can only come from a vaccine that can eradicate the virus. When I saw "eradicate," I mean like smallpox or yellow fever or polio, where the virus disappears, or SARS-1. It cannot be the flu vaccine kind of efficacy because the flu is still with us, and COVID-19 is much more lethal than the flu. If all the protection you get is similar to the flu vaccine, which, by the way, is only 10% to 60% efficacious, life will not return to normal.

Dr. Finian Tan: (22:15)
Dr. Fauci was just interviewed recently and he said that if the vaccine is only 50% efficacious, we will still be wearing masks, we will still be social distancing, and unfortunately, the technology that's being employed by all the lead horses in the race, because there are, by the way, 177 companies to be racing to the vaccine finish line. 167 of them are working on antibody approaches, which are very similar to the flu vaccine. All of them working on the surface protein. The virus has a spike; everybody's trying to mimic the spike. I don't think that it's going to result in an eradicating vaccine. It will reduce mortality, it will reduce morbidity, it will reduce transmission, but life ain't going to return to normal until we have an eradicating vaccine.

Dr. Finian Tan: (23:11)
I mentioned yellow fever, smallpox, polio, et cetera. They were eradicated because they induce T-cell responses, not just antibody responses. Thankfully, there are 10 of us working on T-cell vaccines and I think Emergex has a very good shot at it, maybe the best shot at coming up with an eradicating vaccine, maybe seven, eight months from today.

Rachel Pether: (23:41)
Wow, that's a timeline we can all look to with some optimism. You mentioned 167 out of 177 are working on the antibody vaccines. What are some of the disadvantages of this? Do you think it will create a false sense of security almost, or do you see this more as a stop gap until we have something that can actually eradicate the virus?

Dr. Finian Tan: (24:15)
Let me explain the difference between antibodies and T-cells. When the virus enters the human body, it starts with moving in the fluids, through the lymphatic and the blood. Viruses are a small little bugger with little spikes. They will encounter antibodies in the human blood, in the human lymphatic system. Antibodies are little Y-shaped things that exist in the human body and we have all types of antibodies for every single virus that we have ever encountered and will probably ever encounter. We have antibodies for them, but not very much of each type.

Dr. Finian Tan: (24:55)
Let's say we get virus X. Virus X enters the human body and through the blood it will encounter some antibodies, which don't fit. One of them will fit, and that's called the antibody X. It will fit virus X like a lock and a key. Once it fits the surface of the virus, it will then say, "Oh, I need to neutralize this and I need to build memory for this." They will then start to build the army, which will take seven or 10 days, so that you have an army of antibodies that will neutralize these virus X. What the vaccine tries to do is the vaccine tries to look like virus X, but without the toxicity. They would copy the surface and typically, since it binds to the spike, they just have to copy the spike; they don't have to copy the whole virus. The Y only joins with the spike. It binds with the spike. That's what everybody's doing, 166 of them, designing vaccines that look like the spike of the virus.

Dr. Finian Tan: (26:01)
Using different technology, some of them, they take an adenovirus and then they use peptides to make the spike, and then they build it with carbohydrates. Some other people use inactivated coronaviruses, which already has a spike. Some of them are using MRNA, messenger RNA, which basically hijacks the manufacturing part of the cell to produce the vaccine, trying to mimic the spike again.

Dr. Finian Tan: (26:29)
Antibodies really focus on the surface of the virus and try to mimic the surface of the virus. What happens if a virus escapes an antibody and enters a cell? That's disaster, because if it escapes the shield of antibodies and enters the cell, it will then do two things. It will start to multiply frantically and build thousands of itself using the manufacturing capacity of our cell. The other thing that happens is the cell will try to kill the virus, and it will chop up the virus into little bits of viruses. These bits are then displayed outside the cell and become an antigen-presenting cell, and you have these little bits of virus outside of the cell. That says that I'm foreign. Our T-cells will then come and destroy them based on recognizing the little bits of the virus. Only a few T-cells, actually one type of T-cell, will recognize one type of bits of virus, and that T-cell will then clone itself and make armies, just like the antibodies did, so that when they see infected cell, then they recognize all these little bits, they will kill it.

Dr. Finian Tan: (27:49)
Killing infected cells is so crucial because infected cells are a factory that produces more and more of the virus, and it is the infected cells that cause the symptoms. Imagine if the lung cell was infected, then you can't breathe. If other parts of your body gets infected, that part of the body will not work very well, and you get puss, you get liquids, and you get pneumonia, et cetera. So you have to destroy infected cells to prevent the factory. You have to destroy the factory from making clones.

Dr. Finian Tan: (28:24)
If you wanted to induce T-cells, you have to mimic an infected cell. You don't mimic the virus. I just said, what does an infected cell look like? An infected cell has little bits of virus parts stuck to it. You don't have to copy the whole cell; you just need to copy the viral parts. This viral parts, they don't really come primarily from the surface of the virus. They come from the insides of the virus, because there's more volume than surface area. I'll give you an example. When you eat meat, not many pieces of meat have skin because it doesn't have the surface. It's the insides. The intestines don't have skin, the liver, the heart, the stomach, and all the flesh does not have skin. You have to copy the steaks of the virus rather than the horn of the cow. The steaks of the virus does not look anything like the face of the cow or the horns of the cow. Antibody approach just copies the horn of the cow, and we are copying the steaks that a cut-up virus looks like.

Dr. Finian Tan: (29:38)
What are the 10 of us doing that is different? I think that most of the people doing T-cell vaccines today are kind of intelligently guessing what it will look like. They use AI, they us computers to predict how the virus will be cut up by an infected cell. Maybe you will have the nuclear capsid which is like the intestines of the virus, and some people say it comes from the flesh. It maybe is 30%, 20%, 10% of the three different parts because that's what happened to flu, that's what happened with SARS-1, et cetera, and they used computer prediction.

Dr. Finian Tan: (30:19)
Emergex has decided to do something different. They decided to do it from first principles. What we did was we infected all the human supertypes; there are six supertypes in the world that covers 98% of all blood types, and we see what happens when these supertypes infected cells, what sort of bits of virus are displayed. We collected all of them and we did a mass spectrometry. Today, we are the first in the world to announce that we now have the library of peptides that expresses all the supertypes in the world, 98% supertypes of the world, and what the viral parts will look like. We're now in a good position to produce a vaccine that looks exactly like an infected cell, so we're very optimistic that it's going to work, and work very well.

Rachel Pether: (31:27)
That's very refreshing to hear. I think it's fascinating what you're talking about, mimicking the infected cell. How would that work in terms of mutations or COVID-19 different strands, because those T-cell-

Dr. Finian Tan: (31:45)
Very good question. Because it's mostly internal proteins ... Generally when viruses mutate ... I'll give you an example. If somebody wants to disguise themself so the police doesn't recognize it, it doesn't change his liver. It just changes its face, wear a hat, shave. Generally, surface proteins mutate and internal proteins don't mutate so much. Since we are mostly internal proteins, we can cope with mutation, and because of that, the efficacy of T-cell vaccines last 30 years, the efficacy of the flu vaccine waned 16% per month, mainly because of the mutation of the surface protein. We are talking about a potential T-cell vaccine that will be a single shot and will last for 30 years, and can protect us from every serotype of this disease.

Rachel Pether: (32:51)
We have one question that's come in from the audience on this, and we actually have about a dozen other questions that have come in, but I do want to ask one final question on the vaccines. When you talk about efficacy and when you say 50% efficacy, does this mean you would reduce the symptoms, or does it just mean that in 50% of the cases it's actually effective at all?

Dr. Finian Tan: (33:19)
We don't know, but what we know is it would ... the thing that causes an infection to become a disease, two things: One, it's viral load, and two is viral diversity. That pushes it past the bottleneck and then becomes a serious disease. If the antibodies can reduce viral load and reduce diversity, that's good for that person, but it tends to encourage escape mutants. For example, if you have antibody X and virus X comes in, then it's docked and then it mutates into virus Y. That's the one that goes out and infects somebody else. Suddenly, it doesn't work anymore for the other person, but it worked for you because ... time is the most important.

Dr. Finian Tan: (34:22)
The human body will produce its own T-cells and it will also produce its own antibodies and it's the best defense. The trouble is time. Because it takes a while to build the army, sometimes a person gets overcome by the disease and dies. Sometimes he gets very sick before he recovers. Sometimes it's asymptomatic because viral load and diversity wasn't very great, and you had the time for the defense to be built. The key about our T-cell vaccine is we have the army of T-cells on day zero. It might not give you complete immunity, it will not stop the infection, but it stops the disease and converts the disease into something that's asymptomatic or clinically no disease, or very light disease. That gives you the time for your body's own defense to grow its antibodies and to grow other types of T-cells to defend against this virus.

Dr. Finian Tan: (35:30)
In fact, our vaccine is a combination of T-cell vaccine that builds T-cells on day zero, and then, when the infection comes, the infection becomes the boost. It's the prime plus boost strategy. It's like when you get a booster shot of a vaccine. You get the primed T-cell and then the infection is actually a boost that brings all the other defenses. Together, it gives you real complete immunity.

Rachel Pether: (36:03)
With Emergex and the work you're doing, that is obviously a company that has huge global impact. It could potentially touch every one of us. Is impact a particular focus area for you?

Dr. Finian Tan: (36:17)
Well, we don't go out to make an impact, but because our criteria is a holy grail type breakthrough, it naturally implies an impact, and generally would be a very impactful company if we achieve success. There's some risk, technological risk, and by the way, when I say our failure rate is 6%, that's measured by dollars and not number of companies. Number of companies is larger than that, but we don't put more money after that so if it doesn't work out, we don't put more money in as a result. In dollar terms, our failure rate is only 6%. In terms of numbers of companies, it's larger. We don't always succeed, we don't always spot them right. Sometimes we encounter risk that we didn't foresee, but generally, really, really good. I think more than two-thirds of the time we're correct.

Dr. Finian Tan: (37:15)
We're very excited about Emergex, not just because we believe we can potentially produce a neuritic aiding vaccine, but also because of how quickly we can manufacture it. Because of our delivery mechanism, we can one day put it on the microneedle patch that could potentially be put on your arm for a minute, self-administered, no coaching required because it's an inanimate material that we're using. Instead of using a live virus as the carrier, we are using a particle that's stable and room temperature. It's very exciting. It will take us months to produce for the world, and it's so easy because you don't need somebody to administer it. You don't need a syringe, you don't need refrigeration, et cetera.

Dr. Finian Tan: (38:12)
Our first clinical trials will be with a microneedle syringe, but as we improve this, we can theoretically put it on a micropatch or a bandaid.

Rachel Pether: (38:24)
That's incredible. I think that lack of cold chain is also, just that speed for getting it to market, not requiring cold chain, and takes off that logistical burden as well, so that's pretty exciting.

Dr. Finian Tan: (38:37)
Some of the vaccines that are currently going to clinical trials require minus 80 degrees Centigrade to store, and that's a logistical nightmare.

Rachel Pether: (38:52)
Yep. That's very cold. As someone who lives in Abu Dhabi, I can only appreciate how cold that is. We just have a couple of minutes left, and we do still have so many questions that have come in. For any audience questions that we haven't had time to get to, please do just let one of the SALT team know and I'm sure Dr. Finian would be happy to answer them. I would like to end on maybe a softer question for you, Dr. Finian. Maybe you could share with the audience what is one of the early lessons that you learned when you ventured out on your own.

Dr. Finian Tan: (39:34)
The biggest lesson was, because of success sometimes you think that you're pretty good at this, and then realize that you're actually not so good at this part of it, but you were good on the other side. That took a while. We had some tough times. Companies fail. Later, looking to data, we realized and managed to pinpoint why we were making mistakes. We were going into a territory that we were not necessarily the best at: trying to guess the market. We're not good at crystal ball gazing. Some people are pretty good at that, but not us. We're boring tech guys and we like to take our time and go through the nitty gritty of tech, almost like doing a PhD itself, trying to figure out and learning about a particular topic. For example, we had to dig in very deep into immunology to understand the difference between antibodies and T-cells, and the difference between using computers to predict and using prospects for us. Why do RNA viruses mutate? How do they mutate? How do you solve the problem? Why is the flu vaccine a wrong approach? They took a lot of time and a lot of rolling up of the sleeves.

Dr. Finian Tan: (41:01)
We continue to make mistakes and we continue to miss good ones. That's the nature of the game. The beauty of venture capitalists, you don't need to be right all the time, but when you're right, you're really right. Is today worth maybe 1,500 times more than when I first invested. We're listing a company now in China that's 110x from where we invested it. In seven months, we could get an approval for Emergex, and if we do, this will be another 150, 200x type return, so even more. The bioplastic is another very, very interesting company.

Dr. Finian Tan: (41:43)
Recently, about a year now, we invested in a company in Calgary that has a geothermal solution to green energy. As you know, geothermal is the greenest of all green energy. That's super exciting. It's called Eavor and they have found a way to reduce geothermal prices by a factor of 10. Geothermal, the earth is always hot, and I don't know if you know this but the center of the earth is as hot as the surface of the sun.

Rachel Pether: (42:19)
I did not know that.

Dr. Finian Tan: (42:24)
It's always hot, so it's not like solar, where it's hot in the day, cool at night. It's not like wind; sometimes windy, sometimes not windy. It's not like hydroelectric, which destroys the environment. This is always hot, so it can be baseload and you don't see anything because it's all underground. The surface can be a nice beach, it can be a property that you build houses on. It's like you're using the earth as a battery. In fact, it's an earth battery and it's nuclear powered because that's how the earth is kept warm, through nuclear.

Rachel Pether: (43:03)
The projects that you're working on, for lack of a better description, they really blow my mind. It's been such a pleasure speaking to you today, and I'd love to have you come on in maybe another six months or so to give us a progress report on how you're going with Emergex, but from my side, thank you so much for your time today, Dr. Finian.

Dr. Finian Tan: (43:23)
Thank you.

Rachel Pether: (43:23)
It's been a real pleasure talking to you.

How Crypto Is Democratizing Finance | SALT Talks #84

“It's just pretty much at this point, generally accepted this asset class is here to stay and everyone's trying to figure out where this fits within their portfolio construction.”

Michael Sonnenshein is the Managing Director at Grayscale Investments, the world’s largest digital currency asset manager with more than $5.9 billion in assets under management across its family of 10 products – all of which provide access and exposure to the digital currency asset class in the form of a traditional security, without the challenges of buying, storing, and safekeeping digital currencies directly.

Dan Morehead founded Pantera Capital in 2003 – managing a billion dollars in hedge fund strategies. He previously served as Head of Macro Trading and CFO at Tiger Management with Julian Robertson. Dan began his career as a collateralized mortgage obligation trader at Goldman Sachs. Dan graduated magna cum laude from Princeton University with a B.S. in Structural Engineering and received the Carmichael Prize for his thesis.

While many take a Bitcoin maximalist position, there is reason to think multiple digital assets and currencies will ultimately emerge as long-term viable options. Bitcoin has demonstrated itself as the best digital store of value, but there are hundreds of other use cases for which blockchain-based assets can be designed. One digital asset may specialize in cross-border currency or property titles. “I think you're going to see a single digit number of important blockchains 10 years from now, not one and not 500, but it will be a handful.”

Bitcoin represents the launching pad for global financial inclusion. The Internet moves all kinds of data all over the globe and a reliable e-cash system represents the final piece of that puzzle. Financial value can now be moved seamlessly without going through the expensive and obstructive intermediaries.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKERS

Michael Sonnenshein

Managing Director

Grayscale

FULL BIO

Dan Morehead

Chief Executive Officer

Pantera Capital

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
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 public policy. SALT Talks are a digital interview series that we launched during the work from home period with leading investors, creators, and thinkers. And what we're really trying to do during SALT Talks is provide the same type of experience we provide at our global conference series, The SALT Conference.

John Darsie: (00:35)
Our two guests today, we're very excited to have them on, have both spoken at our in-person SALT conferences and we're looking forward to having them back at our next in-person SALT conference hopefully in 2021. But what we're trying to do is really provide a window into the minds of subject matter experts, as well as to provide a platform for big ideas that we think are shaping the future. We're very excited today to bring you a SALT Talk focusing on the digital asset space featuring Michael Sonnenshein and Dan Morehead.

John Darsie: (01:04)
Michael Sonnenshein is the Managing Director at Grayscale Investments, the world's largest digital currency asset manager with more than 5.9 billion in assets under management across its family of 10 products. Michael oversees the daily operations and growth of the business, in addition to maintaining many of the firm's key client relationships, including with financial advisors, family offices, hedge funds, and other institutions, as well as managing the development of Grayscale single asset and diversified digital currency products.

John Darsie: (01:34)
Prior to joining Grayscale, Michael was a financial advisor at JP Morgan Securities and prior to that he was an analyst at Barclays Wealth. He earned his bachelor in business administration from the Goizueta School of Business at Emory University which is also my alma mater and his MBA from the Leonard Stern School of Business at New York University.

John Darsie: (01:54)
Dan Morehead our other guest today founded Pantera in 2003 managing a billion dollars in hedge fund strategies, primarily focused on the digital asset space. Pantera is the first institutional investment firm focused exclusively on bitcoin and other digital currencies, as well as companies operating in the blockchain tech ecosystem. Pantera launched the first cryptocurrency fund in the United States when bitcoin was trading at $65 per coin in 2013. And Dan, thank you so much for calling me in 2013 to tip me off about this great new technology called bitcoin. But we'll talk about that offline after the webinar.

John Darsie: (02:32)
The firm Pantera subsequently launched the first exclusively blockchain venture fund and recently concluded raising its third venture fund. In 2017 Pantera was the first firm to offer a pre-auction ICO fund. Pantera's bitcoin fund has returned over 16,000% in seven years and has returned billions of dollars to its investors. Pantera currently manages around 700 million in capital in seven funds and three product groups, including a passive fund, a hedge fund, and a venture capital fund.

John Darsie: (03:05)
A reminder if you have any questions for Michael or Dan during today's SALT Talk. You can enter them in the Q&A box at the bottom of your video screen on Zoom. And hosting today's talk and making his SALT Talks debut is Brett Messing who is the President and Chief Operating Officer at SkyBridge Capital, a global alternative investment firm. And with that, I'll turn it over to Brett for the interview.

Brett Messing: (03:26)
So I'm going to start with you Dan. You and I sort of crossed paths at Goldman Sachs years ago. We're the same age. I'm very new to bitcoin but I have the zeal of the converted. You're sort of a bitcoin OG. So can you tell us how you made the path from Wall Street into bitcoin?

Dan Morehead: (03:45)
Yeah. I spent my career in global macro. Last year I was with Tiger Management where I worked with Julian Robertson looking for interesting disruptions around the world, Russian privatization or Argentine farmland or Tesla Motors. Every three or four years something like that would come up. And in 2011 I got introduced to bitcoin.

Dan Morehead: (04:05)
It took me a year or two to get my head around it because it's a kind of a trippy concept to have non-state sponsored money, but ultimately came to believe it was going to disrupt finance, wealth storage, dozens of different industries in a way that the internet had disrupted everything else but hadn't really touched finance or gold or money. And all those things are the largest markets on earth, and so the opportunity was going to be orders of magnitude bigger than all those previous trades.

Brett Messing: (04:35)
Wow. Well, I'm late but I'm happy to be here. Hey Michael, you're so young that we understand why you're in bitcoin so I have a different question for you which is today Grayscale announced some incredible fundraising numbers. In your digital fund you guys raised a billion dollars this quarter, 2.4 billion this year, which is just fantastic, great for the space.

Michael Sonnenshein: (04:57)
Thank you.

Brett Messing: (04:58)
Can you just talk a little bit about where you're seeing the funds flowing from and what sort of catalyzed that sort of substantial increase?

Michael Sonnenshein: (05:07)
Sure. Yeah, this morning we released our third quarter report which looks at investment activity across our 10 products. This is kind of ... Not kind of. This is our third record-breaking quarter in a row. About 80% of the investment that we're getting is coming from institutions. A lot of that is being done by hedge funds. And I think what's really interesting, particularly for those who attend SALT or who are allocators or who are at funds is that we're realizing and trying to put this message out there that it's not for any one kind of investor which I think a lot of people think that it is. I think the broad swatch of investors engaging in our products getting exposure to digital currency are everywhere from global macro funds to risk arb funds to value, momentum. It's really all across the board.

Michael Sonnenshein: (06:03)
And so I think for us the rate and the pace at which we're seeing investment, not to mention that investors are not only just looking at bitcoin but also diversifying across other digital assets has been really encouraging. And so it's just pretty much at this point generally accepted this asset class is here to stay and everyone's trying to figure out where this fits within their portfolio construction.

Brett Messing: (06:26)
All right. That's a good sort of launching off point. So the name of this talk is Digital Assets, and I'm going to out myself as a bitcoin maximalist. Right. We have one search engine, Google. We have one mobile provider, Apple. We have Amazon. Why do we need anything more than bitcoin? I'm going to go to Dan first and then I'll come back to you Michael on this here.

Dan Morehead: (06:49)
Sure. Yeah, I would say that you just listed a couple of different interesting use cases. There are lots of different use cases in cryptocurrency. There's wealth storage, the digital gold version of it. There's cross-border money movement. There's the property titles on the blockchain. There's hundreds of different use cases. And when a technology is disruptive, they call it a category killer. Blockchain's a serial killer. It's going to go through dozens of different industries.

Dan Morehead: (07:16)
But they don't need to be all the same. Bitcoin's amazing at wealth storage, is digital gold, but it's not very good at smart contracts or other programmable money type of applications. So I think you're going to see a single digit number of important blockchains 10 years from now, not one and not 500, but it will be a handful.

Dan Morehead: (07:35)
And one of my thoughts on that would be it's kind of like in the '90s being a Yahoo maximalist. Yahoo was a good company but there were 20 other really important companies you needed to invest in. The same with bitcoin. Bitcoin is very important, but there's some others that you should have some exposure to.

Brett Messing: (07:51)
Okay.

Michael Sonnenshein: (07:53)
I think that's exactly right. I think Dan has been in the space even longer than I have. I'm coming up on seven years. And I think we both agree that while probably today the killer use case for something like bitcoin may be that digital store of value or digital gold, that there are so many other use cases out there to be developed for bitcoin and other digital assets that we're pretty much probably still at the beginning or maybe bottom of the first inning of kind of where this asset class is going to go.

Michael Sonnenshein: (08:22)
We don't believe that it is a winner take all scenario Brett. I think that as this asset class evolves, there will ultimately be some cohort of digital currencies that exist side by side as a family, the same way you might look at the precious metals family. And each of those assets will likely have different use cases, different adjustable markets, different prices all part of building out a bonafide asset class around digital assets and it's just too early to say who the winners will be, who the losers will be, but certainly I think investors now appreciate that and that's one of the reasons we're seeing a lot of diversification, although for most investors their first foray into the asset class usually still is bitcoin.

Brett Messing: (09:07)
Mm-hmm (affirmative). Okay. What's interesting is a guy as I said I am new to it and buying bitcoin felt like a big deal. My interest in buying anything else at least right now, maybe when I learn more I'll feel differently, and I just, it just seems to me that for the next leg of growth is probably more people to look like me. But I'm new so I'll defer to you guys, but that's just one person's perspective. Can you ...

Brett Messing: (09:34)
One of the things that I think is challenging about bitcoin, we were talking about a little about this before we started or digital currencies just generally is explaining it to someone. I actually taught at UCLA for a while and I used to tell people, "You have to be able to explain something in one or two sentences or you don't understand it." I'd like each of you to give our audience your sort of why bitcoin, why buy it now, your sort of elevator pitch if you don't mind. I think that would be helpful.

Michael Sonnenshein: (10:01)
I'm going to answer that Brett with my kind of aha moment around bitcoin which was that I think that I believe that bitcoin can be the springboard to financial inclusion. I think the fact that the world has gone digital, money by and large has not. Everyone around the world has a phone, whether it's a brand new iPhone 12 or a simple feature phone. All you need is a phone or any kind of connectivity to send and receive bitcoin in much the same way that the advent of the cell phone totally leapfrogged the communications game, especially in the emerging markets where there weren't landlines. Bitcoin in a digital form of money that's global and borderless and basically lets you move value instantaneously and for free should be one of the catalysts that creates financial inclusion globally.

Dan Morehead: (10:57)
And Brett, I'd say that the way I think it's easier for people to get their head around it is, it's essentially the final piece of the protocol puzzle that is the internet. The internet has all these protocols like TCP IP that move all kinds of data around. And in the '90s Milton Friedman said the only thing missing was a reliable e-cash system. And that's essentially what bitcoin is and what these other blockchains are. It's a way to move financial value around without the very expensive intermediaries. Those intermediaries really haven't changed. If you think about how much the internet changed everything else in our lives, shopping, social, all these things are completely different. But banks, remittance companies, credit card companies, they're pretty much the same as they were in the '60s. A credit card is a piece of plastic with some eight-track tape glued to the back of it and very expensive. So it really hasn't been hit by the internet and that's basically what blockchain is.

Dan Morehead: (11:52)
And the analog I like to use is it's going to do to finance what VoIP did to the telecoms monopolies. Back in the day when we were in college it was really expensive to make an international phone call because every American had to use AT&T and every Brit had to use British Telecom. When we realized you could route Voice over the Internet, VoIP rates went down to essentially zero. It's free to stream Netflix on your iPhone now, and the quantity of calls went up so much that we don't even have enough copper on earth to run the internet if we were still running on copper. And that's basically what bitcoin and blockchain will do, it's going to route money over the internet, so money over IP.

Michael Sonnenshein: (12:28)
And Dan, I think you bring up a really good point which is that this whole system we have today around moving value, it's all based on mistrust. I don't trust you. You don't trust me. That's why there's a bank in the middle or that's why we have a credit card processor or whoever it is in the middle of everything we do. And bitcoin completely democratizes that and allows totally unknown parties to transact with each other in a way that is trusted. So it can really eliminate a lot of those frictions and time and money that go into moving value.

Dan Morehead: (13:02)
It is. It's not just between you and I who live in developed economies-

Michael Sonnenshein: (13:07)
Oh sure-

Dan Morehead: (13:07)
... with great financial services. I like your point about financial inclusion. There's three and a half billion people on earth that have a smartphone and only one billion of those have banks like you and I would recognize, those types of accounts. So there's several billion people that a lot of people call unbanked. But in my mind that word itself is an anachronism. It's like calling them unlandlined. They never got a landline. They went straight to mobile phones. They're not going to get a bank. They're going straight to mobile money. And bitcoin is the solution.

Brett Messing: (13:41)
There's been a lot discussed about the use case for countries where the currency is collapsing. I guess bitcoin is at an all-time high against the Turkish lira, it's in an all-time high against the Argentine peso. Is there any evidence that there are flows coming from these countries, in other words, or is it just like an academic concept that will this [crosstalk 00:14:03] for them?

Michael Sonnenshein: (14:05)
There's empirical data there. I mean, I think the analog that Dan and I are talking about is only made worse in geographies where governments are inflating their currencies or manipulating their currencies. I mean, a lot of people in these areas of the world wake up and whatever value they had yesterday, they wake up today and it's worth 20% less and nothing really happened that they were in control of that caused that to be the case. So those types of folks in those parts of the world are looking for really any way to protect their purchasing power and they have a serious mistrust of their government and their government's ability to regulate and administer their currency.

Michael Sonnenshein: (14:50)
Our parent company, Digital Currency Group has investments in digital currency exchanges all over the world, including in parts of South America, Southeast Asia, et cetera, and the volumes continue to just demonstrate in all of these companies how much growing interest in their user base and people actually using bitcoin in a lot of these different geographies. So it is really happening.

Brett Messing: (15:14)
Part of the reason why I asked, Michael, you and I talked about this, is as I said, I just bought bitcoin and we talked about this being sort of this trust, system of trust. It's weird to buy it in terms of it's on my phone. I got two-factor authentication. Now I got a security key. I've never bought anything that I've had to spend so much time thinking about protecting and I finally have it in place that I think is protected. Can we discuss what you see in terms of when Grayscale has done this, but it feels like we need easier on-ramps and I'm sitting here in Manhattan and that's why I wonder if I was in Turkey what's my on-ramp look like and are they, again, because it feels like I've invested in a DraftKing's account and there are too many zeros there for a DraftKing's account. So do you have any reaction to that?

Michael Sonnenshein: (16:06)
Yeah, I mean every day that goes by it is becoming orders of magnitude easier for folks to buy, transfer, hold, and safe keep digital currencies. Dan's business, my business, we're trying to eliminate a lot of those frictions and open up access to folks so they don't have to navigate some of that. But pretty much every geography you can think of around the world, there is an exchange or exchanges or order books where individuals can buy and sell digital currencies against their local fiat money.

Michael Sonnenshein: (16:42)
And you're totally right. Digital currencies are not for the faint of heart. There are complexities around them that make them more challenging for a lot of folks than handling cash or handling a stock or handling a bond because they are a bearer instrument. So I think one of the things that we're excited about and monitoring very closely is how all that infrastructure is being built to make it more foolproof and user-friendly for folks to handle digital currencies as seamlessly as they might handle airline miles, their Apple Pay, or even just SMS-ing bitcoin from one user to another if you don't live in the developed world and you're just using a simple feature phone. So a lot of that is being built out, but it's again, still early days and that exact experience you're having is evidence again of how early we are in the cycle of where everything is probably headed.

Brett Messing: (17:37)
And Dan, do you think we'll get larger, either more regulatory relief coming with a new administration or will I be able to buy this in a Schwab account? What do you see in terms of the regulatory and on-ramping landscape if you will?

Dan Morehead: (17:55)
Yeah. It's obviously a really important issue for institutional investors what's happening on the regulatory front. I think we have to be conscious that the US government has been pretty far ahead of this curve, and even in 2013 made a lot of rulings that are very positive for bitcoin and blockchain. The IRS ruled in 2013 that if you hold it for more than a year you get capital gains tax treatment which is way better than you get with holding gold which is a collectible, and normal currencies, fiat currencies are always ordinary income. If you held the euro for 20 years and sold it at a profit, you have to pay ordinary income tax on that. So most of the regulatory bodies have ruled.

Dan Morehead: (18:33)
The last one released, the SEC it hasn't been completely clear on when things are securities and when things are not securities. But the last big announcement is the OCC has given permission to any nationally chartered bank to custody crypto. That's wild. Like your issue with, yeah, you got all these two-factor authentication things you have to deal with. Going forward you're going to be able to discuss your bitcoin at your nationally chartered bank and then the kind of the brain friction you were just talking about goes away because it's just going to be like any other account you have at your nationally chartered bank. So most of that regulatory stuff is really behind us.

Michael Sonnenshein: (19:09)
Yeah. And Brett, I don't even think most people even know what the OCC is, or maybe at least didn't before this announcement came out, the Office of the Controller of the Currency. And I think for folks like Dan and his team and folks like my team and others around us, this is a very, very meaningful announcement from the OCC. When you think about regulatory clarity or lack thereof, we're not hearing that from investors anymore as it being a gating item to them deploying capital into this asset class. They actually feel that there is quite a bit of regulatory clarity, and that's not what may hold them up from investing.

Michael Sonnenshein: (19:48)
But thinking about holding digital assets at a nationally chartered bank is also causing all of the banks who I think for a long time have developed working groups and sandboxes and proofs of concept to move off of Zero and realize that they're actually going to need to deal with this asset class, and there isn't a better time than now for them to figure out what's their approach going to be and are they going to be late to the party or stand to lose business to other banks who move faster than they do.

Brett Messing: (20:20)
So it seems like we're getting de-risked from a regulatory standpoint. I guess Dan, you've been in this for a bit. Over the last three years are there other risks that had tended to be gaining items for people that you think have been mitigated meaningfully?

Dan Morehead: (20:37)
Yeah. There was one final one, custody. Five, six, seven years ago I was evangelizing institutional investors on investing and some did and got rewarded. Our first fund's up 140x. So there definitely was some reward for taking the risk. But custody's been a legitimate gating item for institutional investors. As I said, the regulatory stuff mainly went away a few, four, five years ago. But the custody thing was a real issue. And in the last two years have been some massive regulated custodians that have come out and it makes it just so much easier for a fiduciary to allocate capital to the bitcoin space. You have the New York stock exchange's parent has a company called Back that does custody. Fidelity does custody. Coinbase is now massive and well trusted. BitGo is one of the largest custodians within the blockchain space. And all those are highly regulated, have all the regulation that institutional investor would want. I think that's really helped open the door to much larger institutional investment.

Brett Messing: (21:47)
I have a question I'm trying to ask both of you which I ask with love as a bitcoiner which is we have this sort of amazing macro environment for bitcoin where incredible fiscal stimulus, monetary stimulus. We have Paul Tudor Jones putting 2% of his fund in it. We have Microstrategy, a public company putting 425 million in. We have Square putting $50 million in. We have Grayscale vacuuming up almost all the bitcoin that's mined. So it just leaves me wondering why aren't we above last year's high on the bitcoin price? Do you want to go first Dan? You have any thoughts on that? It just, it doesn't ... It feels like as bitcoin you couldn't have asked for a better sequencing event in this year, and yet we haven't breached the high of 19.

Dan Morehead: (22:36)
Yeah. So that'd be my main argument for why someone should put 2% or 3% of their networth into bitcoin is you love being invested in an asset where people are complaining it's only up 60% year-to-date in a global depression pandemic crisis. So that would be my argument, is it's up 100% from four or five months ago. It's up 60% year-to-date. And over the next year or two I think it will hit new highs. The bitcoin market goes in these two or three year cycles. It averages 209% compound annual growth rate over the last nine years with all the macro tailwinds and the fundamentals. I would think it's going to outpace that over the next couple of years, so it's a nice problem to have that we're kind of griping that it's only up 60.

Dan Morehead: (23:24)
And the bitcoin maximalist in you would lead me to point out that other things in the blockchain space are massively outpacing bitcoin. We're very bullish on bitcoin but other things have done well. Ethereum's up almost 200% year-to-date. So the blockchain space is really surging. Kind of a good mix of all the assets is a fund we run that invests in all the major currencies, trades them on a long short basis, it's up 122% this year. So the market is ripping. In the next couple years we'll probably see more of that.

Brett Messing: (23:59)
Right.

Michael Sonnenshein: (23:59)
I think, I've been through quite a few bubbles and bursts in the bitcoin price. And if you kind of look at the repetitive nature of this, bitcoin kind of goes through these big bubbles, it bursts, it kind of bases for a while, and then kind of makes its next move. I think certainly one thing that we probably would not want to see is just one of these parabolic moves out of nowhere because they're just not sustainable and they don't necessarily inspire a ton of investor confidence. But typically, when you see bitcoin going through this kind of range-bound time where it is now, flirting between kind of $10,000 and $12,000, it usually predates a pretty dramatic move in the bitcoin price, either to the upside or to the downside. And I think one of the reasons why we're seeing a period of more sustained price movement just kind of being in this range bound area really has to do with the development of a much healthier two-sided market.

Michael Sonnenshein: (25:01)
One of the things that I think has been a catalyst to draw a lot more investors into this asset class is the development of the derivatives market around digital assets, bitcoin and others are really healthy lending and borrowing market, the ability for folks to short. I mean, a lot of the institutions that we deal with would not be making their bitcoin investments in the way or the magnitude that they are if they weren't having the ability to put on a bonafide hedge against those positions. And that really again speaks to kind of the build out of the infrastructure. And to Dan's point, whether it's custodianship, the development of the futures on CME Group, what Bakkt is doing at NYSE, all of these are really important developments.

Brett Messing: (25:46)
Mm-hmm (affirmative). No, it feels like it's grown up a lot. In addition, you have very big four accounting firms willing to write audits about it, and Microstrategy and Square submitting SEC filings with it on their balance sheet, so I think it's interesting.

Brett Messing: (26:07)
It feels like more and more people are talking about it as digital gold. Dan, is that the right way to think about it, and does the macro trader in you like the idea of a long bitcoin short gold trade?

Dan Morehead: (26:20)
Oh yeah, I love that trade. Gold's been awesome for 5,000 years, but it's a little past its sell by date. And bitcoin is the 21st century version of gold. You can do everything the same as gold, is a fixed quantity. It's like the gold standard. But you can send it in one second to anyone anywhere on earth essentially for free, which is different if you have a lot of your savings as a brick of gold in a vault in Zurich. So digital gold is one of the many use cases of blockchain. Bitcoin's fantastic version of that. And you're seeing it in countries. Like China used to be one of the largest importers of gold. It's now one of the largest importers of bitcoin. It's just a great way to store your wealth, get it out of banking systems that might be suspect.

Dan Morehead: (27:05)
So I think one of the great use cases of bitcoin is digital gold. And with all the money printing that's happening right now, it's very much front and center all the gold bugs that I know are at least shifting some of their assets into bitcoin. And you mentioned Paul Tudor Jones. He wrote his investor letter a few months ago. It reminds him of gold in the '70s. And I think that's a great analog that in the '70s we were heading into a period of very high global inflation. The US even had the long bond go to 13%, and gold performed very well. I think we have even bigger version of that now.

Dan Morehead: (27:41)
And if you're talking about the global macro story, the numbers that the US is printing are literally off the charts. In June the United States printed more dollars than they did in the first 200 years of our country's history. So if your choice is own dollars, own gold, or own bitcoin, I would go all bitcoin. But if you're a normal investor that hasn't spent eight years thinking about it, you might as well put 3% or 4% of your assets in bitcoin.

Brett Messing: (28:10)
Right.

Michael Sonnenshein: (28:11)
Yeah, I think that's exactly right. Brett, I don't know if this predates your getting involved in the bitcoin space and becoming a bitcoin maximalist, but my team actually devoted the better part of last year to a national advertising campaign called #dropgold. We feel quite fervently that the next generation of investors, those who haven't even hit their prime earning years yet will not be investing in gold. It doesn't resonate with them. It's not something that they are going to have had a tangible experience with the way that they are buying things like Apple and Netflix and are growing up in a time when the things that are important to them are their airline miles and their credit card points and paying their friends on Venmo and buying bitcoin.

Michael Sonnenshein: (29:05)
So we think that with over $68 trillion passing over the next 25 years from older generations, baby boomers down to millennials and younger generations, that the way that those assets are currently postured today are going to change as that generational wealth transfer happens. And we're not going to go out and say we think all 68 trillion of it is moving into bitcoin in digital currency, but we'd be hard-pressed to believe that some portion of it doesn't make its way into crypto. And that's already starting to happen. Schwab put out this survey last year looking at what the top 10 equity holdings were for millennials, I think gen x-ers, and then baby boomers. And you guys wouldn't be surprised what they're invested in. They own stocks like Apple and Disney and Berkshire Hathaway, but noticeably the millennial segment, their fifth largest holding was Grayscale Bitcoin Trust. They're already allocating to this asset class and the empirical data is there.

Michael Sonnenshein: (30:08)
That's kind of our view on it. While gold is as Dan said had its time, we do believe that digital gold or a digital form of inflation hedge, things like that, bitcoin can really serve that role in a lot of investors portfolios.

Brett Messing: (30:24)
Well, I guess in the spirit of sort of the world changing, I saw yesterday that PayPal's market cap is bigger than Bank of America's and Square's is bigger than Goldman Sachs' which is amazing to me. It makes one think that why shouldn't bitcoin be bigger than gold, which I guess is a good transition point too. Dan, how does someone value this? How do you think about it in terms of it's undervalued, it's overvalued? I don't know that we have time to get into the stock to flow model but there are different ways that people are trying to value it by analogy. I don't know if they make sense but I'll be curious in your thoughts and then yours also Michael.

Dan Morehead: (31:09)
Yeah. I had a fun argument with one of my Tiger Cub friends who runs a big TMT fund. He said, "Hey, there are no cash flows to discount, so we can't invest in bitcoin." And I just, I love that mentality. It's like, "Well, where the cash flows of gold?" And it's worth $10 trillion. Everyone's gotten their head around that.

Dan Morehead: (31:26)
Part of the argument is just supply and demand. There's 21 million bitcoins. 8, 10 years ago there was probably 50,000 people on earth that thought bitcoin was interesting and they should own a bit. A few years ago was 500,000. Now it's probably 50 million people. And if five years from now it's 500 million people, the price will be higher. It is as simple as that. People, you don't really even need to know why people want to use it. Some people are using it as migrants sending money back home to their parents in their home country. Some people are using it to store wealth because they think their banking system might be bankrupt in their country. There's hundreds of different use cases. And the more people that do that.

Dan Morehead: (32:11)
You can do relative value analysis between the different blockchains. So you can say, "I think Polkadot is cheap relative to Ethereum," or, "I think bitcoin is cheap." Bitcoin right now is 58% of the entire market cap of the industry. That's been as high, recently as almost 70, and it's been as low as 33 so you can make those kinds of views. But ultimately, it really is a bet on whether you think at 350 billion, which is the total market cap of the entire blockchain cryptocurrency industry, is that appropriate? It's a very small fraction of what gold is. Currencies are 100 trillion and there's a lot of really crappy ones out there. So bitcoin could definitely take market share over. There's 200 currencies on earth. Bitcoin could probably replace about 150 of them. There's some really bad currencies out there.

Dan Morehead: (33:05)
To my mind that's the easiest way to value it, is to think, "Hey, it's a 350 billion. It's competing with things that are tens of trillions, hundreds of trillions. And if it has a 20% chance of getting a 20% market share in cash, it's going to be a 10x type trade." So that is the basics.

Dan Morehead: (33:24)
You do see some Wall Street firms trying to do very fundamental analyses of adding this and that and discounting it and stuff. I'm very suspect on those. I think it's more of a speculative trade, is definitely very volatile. But if you choose to invest you're thinking, "I'm risking 1x my money and I might make 10x, 20x, 30x my money."

Michael Sonnenshein: (33:46)
I think Dan's exactly right. And the way he just started that off with a friend of his sharing that, he couldn't come up with a traditional model to try and value bitcoin is actually exactly where we end up as well. It's frustrating that a lot of investors are trying to take an asset like bitcoin which didn't even exist 10, 12 years ago, and trying to throw it through the same kind of valuation models and metrics that they would for Bank of America stock or a municipal bond or whatever it may be. The truth is that as an investment bitcoin doesn't have any of the same attributes as those do. So when you look at trying to value it, you really have to take that entire lens off and look at it in a very different way.

Michael Sonnenshein: (34:33)
My team just authored a report called actually Valuing Bitcoin because we're experiencing this so much with our investors. And in the report we probably go through about 8 or 10 different metrics that individuals and institutions can look at to try and determine the health of bitcoin and whether or not there are certain signals that we can pay attention to help determine bitcoin's value. Some of those things include dormancy. We can look at how long bitcoins are being held. The blockchain gives us that forensic tool to allow folks to understand. Are people holding onto their bitcoins longer or are they moving around more? Are more bitcoins sitting on exchanges, meaning that they're more likely to be bought and sold? Or are more of them sitting off exchanges and in wallets because people are holding them and speculating on the price movement?

Michael Sonnenshein: (35:25)
There's a lot of different analytics that we can look at and they just don't resemble anything like a discounted cash flow or anything of the sort. I think outside of looking at blockchain analytics, a lot of folks do look at bitcoin to Dan's point on Wall Street about maybe markets that bitcoin stances disrupt. So if there is a couple hundred billion dollars worth of bitcoin in existence today, maybe just look at the market cap of gold. There's a couple trillion dollars of gold. If you apply some percentage that you think bitcoin is going to take of the gold market, with some probability you get to some pretty crazy number quite quickly if bitcoin captures 1%, 2%, 3%, 5% of the investable market for gold. So a lot of folks start messing around with metrics like that or taking share of the M2 money supply, things of that nature. But ultimately, the best way that we've seen people really look at this is looking at the underlying metrics that the blockchain provides.

Brett Messing: (36:25)
I think people need to realize that it's just bitcoin. It's just a new thing, and you can't value it the way ... All the these analyses feel somewhat torture to me, you know what I mean? It feels like it's likely to go up and trying to figure out how much it will go up feels like, you know?

Michael Sonnenshein: (36:44)
How do you value a Honus Wagner rookie baseball card.

Brett Messing: (36:48)
There you go. Exactly.

Dan Morehead: (36:50)
One of the examples I love using on that when people say, "I'm not to buy bitcoin because there's no intrinsic value." First, the US dollar has no intrinsic value. They just printed a trillion of them in June. There's nothing behind that. But the better example would be the intrinsic value of a Jackson Pollock painting's 40 bucks. There's some house paint, some canvas, but it's got a 70-year track record of appreciating so it's a good asset to hold. Bitcoin's track rate's only 11 years so I'm not saying it's as good as Jackson Pollock, but 10 years from now that'll be 20 years, and every decade that it adds, it adds more credibility to its long-term compounding annual growth rate.

Michael Sonnenshein: (37:31)
Yeah. And I think Brett, one of the things that we've been talking about with a lot of investors especially in this environment is bitcoin's verifiable scarcity. People are looking often at how much fiscal stimulus is being injected into the system and contrasting that with the finite amount of bitcoin that will ever enter circulation.

Michael Sonnenshein: (37:52)
It's almost as though when supply and demand typically intersect to create price discovery, bitcoin supply is known and predictable and so that doesn't really become much of a variable with respect to its value. So it's much more of a demand driven asset, which I think again is a different lens that folks need to look at it through when thinking about value.

Dan Morehead: (38:12)
And the last point I want to mention Brett, something we talked about before the show started is it's basically the demand is monotonically increasing all the time because people evangelize you. And then you buy some, and you read some more about it and then you start talking to your co-workers, and then they buy some. And there are very few people that ever actually just exit the market. So you're always attract ... It's like a one-way valve. You're always attracting buyers and there's very few people that ever sell.

Dan Morehead: (38:40)
One of my main thoughts is there's so many incredibly intelligent professionals like you that once you read about and you actually spend a couple days, you end up buying it. There's really very few people to go, "Oh, this thing's just a bubble. I'm going to get short." And you occasionally see a curmudgeon like Warren Buffett doing a one sentence negative thing about bitcoin being rat poison, but I've never seen like a multi-page negative report on bitcoin. Literally, I've been in this business for nine years and I've never seen anyone actually write a well-thought-out, very long thing on why one should be short bitcoin. And that's basically proof that almost everybody that actually does the work ultimately ends up buying it and getting long. And if we all just keep getting long, it probably just grinds up.

Brett Messing: (39:27)
No. Well, last thing, I know John has some viewer questions, but do you think it grinds up? Dan, in a prior life I traded oil. And it seems like in commodities, when you have a fixed supply, when the demand comes, Michael, whether you like it or not, it tends to get parabolic. And I agree that you want buyers to validate higher prices, but doesn't that seem quite possible here just given the [inaudible 00:39:54] dynamic?

Dan Morehead: (39:56)
Occasionally a bunch of things all come together and it's on TV all the time and it shoots up at a rate that's too fast. And one of the best stats about bitcoin is it's had a lot of down 80% bear markets. In the normal world like oil or whatever, that would scare people to death. The wild statistic is in nine years of its existence, bitcoin's only had one year where the low for the year was below a prior low. So even though it's had five down 80% years, even at down 80% it's higher than it was the prior year.

Dan Morehead: (40:31)
Bitcoin's definitely volatile octane stuff but it's grinding up at such a fast rate that you net-net come out. Anyone that's owned bitcoin for three and a quarter years has made money. It's one of those things. Which is not true your favorite market oil recently went negative. You had to pay people to take your production and essentially oil hasn't done anything for 30 years. It's basically flat. Bitcoin is the polar opposite of that type of asset class.

Brett Messing: (41:01)
No. I guess, so just to make your point Michael, I think that at 20,000 is almost like a straight print in an equity trading market. You just don't ... It almost shouldn't be counted. It was one month up and down. And if you took that off the chart, it looks much healthier, the upward grind that you guys are sort of talking about.

Brett Messing: (41:21)
Anyway, John, do we have a question or two-

John Darsie: (41:22)
Yeah. We have several emailed questions and some questions in the chat that I think are interesting. Obviously, we have now the cryptocurrency skeptics lining up to poke holes in this conversation about crypto. But the first question is, obviously you had the whole situation with Silk Road and some of the origins in terms of public perception of bitcoin being around sort of the nefarious exchange of money on black markets for things like drugs or whether it be weapons or whatever it may be. So it has that perception that continues to dog it. So how long term will digital currencies like bitcoin overcome that stigma and also overcome real issues like anti-money laundering, tax related issues, and other financial regulations?

Michael Sonnenshein: (42:05)
Yeah. John, whoever asked that question, respectfully has not looked at bitcoin recently, and they're holding on to some preconceived notions about this. Bitcoin, the best analogy I can think of is every time somebody uses bitcoin, it leaves a digital breadcrumb. So it is quite frankly the worst mechanism possible to use if you want to do anything the least bit nefarious or something that you wouldn't want to be known for doing. Today our parent company, Dan's firm, we've all invested in blockchain forensic and analytical tools, companies that have developed products and services around monitoring tainted addresses, tainted coins, and who are the biggest customers of these companies, the FBI, the CIA, the Treasury, you name it.

Michael Sonnenshein: (43:01)
So this idea that bitcoin is somehow for the underbelly of the world or nefarious activity is ridiculous. Not to mention that you've had now several auctions by the US Marshals Service actually auctioning off bitcoin that they've seized. If they thought that this was an illegal or illicit asset that they were auctioning off to the general public, I have a hard time believing they would be doing that if they didn't somehow believe that this was something that was permissible and was not going to be saying they were going to crack down on and that they got the right comfort around the asset in order to conduct multiple auctions.

Dan Morehead: (43:38)
John, I was involved in that prosecution, and the truth is actually the exact opposite of what your questioner is supposing, is there is a permanent paper trail of every transaction that's ever happened on bitcoin. It's published every 10 minutes to the public. We all know every transaction that's ever happened. That's really a terrible feature for committing crimes. And in the Silk Road, obviously the Silk Road guy was taking bitcoin. Everybody knows that. It makes the newspapers a lie.

Dan Morehead: (44:04)
The real story which doesn't sell a lot of newspapers so not that many people know is there were two US federal agents on the Silk Road task force that went rogue and were actually extorting money from the Silk Road guy and other criminals and laundering it. And they laundered it through five big banks and a big mutual fund complex in the United States and they also laundered it through Bitstamp which is the largest exchange in Europe.

Dan Morehead: (44:29)
I was the chairman of Bitstamp at the time and the CEO said, "Hey, I think we have a federal agent laundering money on our website." And I'm like, "You guys watch too many Tom Cruise movies. That's just not happening." So I went through all the data and I'm like, "Oh, that's bad. We got to report this." So we reported it to a second federal agent and he quit that day. And I'm like, "Oh, that's not a good sign. Why'd the federal agent resign today?"

Dan Morehead: (44:52)
And so we reported to a third one, and the punchline is, the first two were stealing money from criminals and laundering it with bitcoin. And we have every transaction that's ever happened. You could look it up yourself. It's all public, and they pled guilty and immediately sentenced 10 years in prison. That's the truth of using bitcoin for committing crimes. It's terrible.

John Darsie: (45:14)
Right. That's a pretty thorough answer. And I think it's something that the public is still getting comfortable in terms of mass adoption with bitcoin, but as you said, fidelity backed which is affiliated with a large institution, the custody situation, everything's moving in the right direction for certain.

Dan Morehead: (45:33)
Yeah, I think if the government had the choice today to approve either bitcoin or cash, there's no chance they would allow cash. Cash is mega sketchy. People do all kinds of bad things with it. And bitcoin really is terrible for committing crimes.

John Darsie: (45:47)
You can't catch coronavirus from bitcoin but they say you can transmit it through cash. I have another question. It's around China. It's sort of a multi-layered question around China. I know in the early life of bitcoin, as you mentioned Dan, a popular use case for it was people moving currency out of a country in which they didn't trust the future of that currency and that I know happened in China. People were evading capital controls. But then China while at first was attempting to regulate bitcoin and potentially stamp it out, they realized the power of distributed currencies and they're now trying to launch a sort of regulated digital currency. Why do you think they went through that evolution and what do you think if any is the future of regulated digital currencies? Would that undermine a truly independent digital currency like bitcoin or do you think it's a step in the right direction in terms of building multiple parallel blockchains that can act as a more efficient means of financial transaction?

Dan Morehead: (46:45)
Yes, a super important question. China has very unique nationalistic policies to build state champions in all the different industries, essentially freezing out western technologies and replicating them. They're doing the same with bitcoin. Bitcoin is a global technology and they're essentially replicating it within their own borders. Their announcement of their own national cryptocurrency was not a coincidence that came out three days after Facebook announced their Libra project which is a similarly identical to what China's trying to do.

Dan Morehead: (47:19)
It's essentially game on now. China is definitely developing a cryptocurrency that they would like it to be the payment rail of their citizens and then obviously their region and maybe the rest of the world. So now other countries, other regions need to get engaged and roll out a competitor because as much as you would love to get the toothpaste back in the tube, it's out. There will be a blockchain payment system in the world and it's essentially a question who you want managing that one.

Dan Morehead: (47:51)
The other projects like stablecoins like USDC that Circle does or Facebook's Libra, those will be popular. The former chairman of the CFTC, Chris Giancarlo, had a great op-ed right after the Chinese announcement. He said it's our Sputnik moment in currency that it's now a race between the superpowers of the world and the West should get engaged.

John Darsie: (48:17)
Michael, do you have anything to add?

Michael Sonnenshein: (48:19)
No, I think one of the big overhangs for a lot of folks has really been that they think that so much of the mining power is concentrated in China. We just publicly came out with one of our subsidiary businesses called Foundry which is a digital currency mining and staking business and really working to bring a lot of that hash power back to the US. The folks that, again, this is kind of similar to folks that may be looking at bitcoin or digital currencies from a couple years ago. A lot of that has been shrugged off and this has really been something that has been turned into a global phenomenon and that there's global participation around. So I think over time you'll see that even more evenly distributed around the world.

John Darsie: (49:07)
All right guys. We'll leave it there. I think we could go on for several more hours about this topic, and I think we're going to need to have you guys back maybe after the election as the regulatory landscape continues to improve and maybe bitcoin continues to trade higher. It's been a fascinating conversation. Again, it's an area that both from a SALT perspective and a SkyBridge perspective is of growing interest to us, and you guys are two pioneers in the space so it's been a real treat to have you guys on.

Michael Sonnenshein: (49:33)
Thank you.

Brett Messing: (49:33)
Thanks both.

Michael Sonnenshein: (49:33)
It's been great.

Dan Morehead: (49:34)
John, Brett, thank you.

Noah Kerner: Micro-Investing & Robo-Investing | SALT Talks #83

“I feel like, why spend your time on something that's not noble in pursuit if you have the opportunity to do that?”

Noah Kerner is CEO of Acorns, financial technology and financial services company specializing in micro-investing and robo-investing. Born in New York City, Kerner got involved with Acorns two months after launch as an adviser, investor, board director and then CEO. He is a 4X entrepreneur, Co-author of Chasing Cool with the former CEO of Barneys, and former DJ for Jennifer Lopez.

Acting on a lifelong mission to level the playing field in a world of haves and have-nots, Acorns was founded to bring tools of wealth creation to everyone. The goal is to make it easy to save and invest even small amounts of money, where typically investment tools are reserved for the financial elites. Acorns has an initiative focused on opening children’s investment accounts, highlighting the importance and value of early, compounding growth. It also seeks to offer investment education to prevent less experienced investors from overreacting to short-term market swings. “The market swings every day. It's in the red, the blue, black. It's impossible to stay calm and make rational decisions… great investors stay the course.”

Acorns Job Finder is the latest product launched by the company. Income is the most important aspect in people’s financial lives and serves as the basis of investment, so Acorns is now helping customers find a wide-range of job opportunities, made especially important during the pandemic.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Noah Kerner

Chief Executive Officer

Acorns

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone, and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. SALT Talks, if you haven't tuned into any of our series yet, is a digital interview series that we launched during the pandemic with leading investors, creators and thinkers. Our guest today is another one that merges those three topics, and we're very excited to have a wide-ranging conversation with him.

John Darsie: (00:37)
SALT Talks, what we're really trying to do with this series is replicate the experience that we provide at our global conference series, the SALT Conference. That's to provide a window into the mind of subject-matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. We're very excited today to welcome Noah Kerner to SALT Talks. Noah is the CEO of the micro-investing app, Acorns, and he's the co-founder of the shareholder rights startup, Say. His background is very colorful and diverse.

John Darsie: (01:08)
He's a four times entrepreneur. He's the co-author of Chasing Cool, and the former CEO of Barneys and also a former DJ. Noah built the leading creative agency for the young adult market, which was called Noise. Before being acquired by Engine, Noise developed hundreds of products and marketing campaigns for this generation. Including Facebook's first application, the first credit card to reward responsibility rather than spending for Chase, Vice's music website called Noisey, and the top-branded game in the app store.

John Darsie: (01:39)
Noah's been recognized as one of Billboard Magazine's Top 30 under 30, one of Adweek's Top 20 under 40, and Fast Company's one of their innovation agents and impact council members. Also, as a judge for the Webby Awards. He has also advised and invested in a variety of fast-growing startups, including WeWork, where he served as the chief strategy and marketing officer from 2013 to 2014. He's passionate about educating today's youth as well. He's lectured on entrepreneurism, FinTech and media at NYU, at UCLA, at Stanford and Columbia.

John Darsie: (02:16)
He currently serves on the board of VH1's Save The Music Foundation. Noah is a graduate of Cornell University, where he studied psychology and economics. I believe today he's coming to us from the beautiful Berkshires. Hosting today's talk is Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. With that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:42)
John, thank you. Noah, it's great to have you on. Thanks so much for joining us and congratulations on everything thus far. The cool thing about you, Noah, is you're just getting started, so I have no doubt that the next decade and the next two or three decades, you're even going to be more sensational than the last few. Congratulations. Let's go back to what motivates Noah Kerner. Go ahead. Where did you get all of this great energy, passion, innovation?

Noah Kerner: (03:12)
Someone told me, not that long ago, to write down your purpose, which I thought was a ridiculous ask, but I did it anyway. I sat down and just wrote what came out of me. What came out was, level the playing field. Then it is like look back in your life through the lens of that. Because for me, it was this organic process of like, "Okay. Level the playing field." I went all the way back to my childhood. I grew up in the East Village in New York, much like you. I was a public school kid.

Noah Kerner: (03:41)
I grew up around kids that didn't have a lot, but I had this weird dichotomy in my life where in the day I was with all these kids who didn't have a lot and at night, I was playing tennis with the wealthiest kids in Manhattan. That was every day going back and forth, back and forth. Then for high school, switched. Private high school by the day. I got turntables at 14, slightly terrified my parents and became immersed in hip hop and started doing hip hop nightclubs at 16. It was like by the day wealthiest kids in Manhattan, at night, grittiest nightclubs in the city.

Noah Kerner: (04:12)
That was the beginning of my life going in between these worlds and understanding the haves, the have-nots. I got to travel the whole country as a young person touring as a DJ actually, so I saw what was happening and how people were living. I felt like, "Huh, maybe it's time to dedicate myself to helping to bridge that divide. If I have the opportunity to do that, that would be a good use of my time."

Anthony Scaramucci: (04:38)
Okay. That was sensational. You got a great book. You have a great memoir in you, but I want to go on this a little further before we get into Acorn. When you say level the playing field, the way I understand it is you want people who are in the have-not category to have an equal opportunity, or at least to get closer to the starting line that other people have. What private high school did you go to?

Noah Kerner: (05:01)
Fieldston.

Anthony Scaramucci: (05:02)
Okay. There are wealthy people at Fieldston. There were probably some less wealthy people, but mostly wealthy people, so there was a divide. We know there is a great divide in the country, but what is that impulse, Noah. Go a little deeper. I'm not your shrink, but trust me, I'm a lot cheaper than a shrink. Go a little deeper for me. Tell me why that impulse and why that purpose?

Noah Kerner: (05:28)
Well, I think it's painful to watch. I think as a person, if you have any sense of empathy to see the way that this divide exists, it's just painful to watch. I don't know if I can combine my professional life and that sense of purpose, that's really good. To give a little more context. My father worked in banking for many years, but he was actually in the philanthropic side of banking. He was technically the first corporate social responsibility officer. He used to give the bank's money away to community development projects, but at the time, it was not a core part of the DNA of the bank.

Noah Kerner: (06:05)
It was because of the Community Reinvestment Act that they had to give the money back. I also saw this, working for these big banks, doing philanthropic stuff, but that wasn't really part of the DNA so I just always saw these gaps. That's the best way I can say it. I feel like, why spend your time on something that's not noble in pursuit if you have the opportunity to do that?

Anthony Scaramucci: (06:33)
I've got to ask you a question because this is just curious. You've been on both sides of it. You've been with the haves and you've been with the have-nots, but the have-nots are just as smart as the haves. Am I right or wrong? I mean, in my neighborhood, I mean, I was sitting up at Harvard Law School. I'm like, "Okay. I know you guys think you're all great with the blue and Brooks Brothers outfit on, but there were kids in my neighborhood that are as smart as you guys, if not smarter. They just didn't have the advantages." Do you feel that way?

Noah Kerner: (07:02)
And happier actually. I felt that way a lot. Yeah. I-

Anthony Scaramucci: (07:06)
Yeah. Possibly happier. Yeah. Why happier, do you think?

Noah Kerner: (07:12)
That's a good question. Maybe more freedom somehow. I don't know. I always felt more comfortable on that side. You know?

Anthony Scaramucci: (07:24)
Yeah. Well, listen, I've been on both sides, so I'll give you my view of it. It's not necessarily more freedom, but it's less expectation. If your dad is a crane operator, like my dad was, my parents thought I was going to Hartford Law School. When they took the map out, they were like, "Okay. We're going to Connecticut?" I'm like, "No, we're going back up to Boston. It down the block from Tufts." My parents didn't know any better, so if you don't have the expectation then there's a little bit of a relaxation to that.

Anthony Scaramucci: (07:54)
I felt a lot of people that I went to law school with were so fearful of failing because of what they needed to 'live up to' that they were pressurized. There's dilemmas on all sides. I appreciate that. I appreciate where you're coming from. You built an amazing business. Let's talk about Acorns now because it fits into your life plan and it fits into who you are as a guy. It's a brilliant idea. For those of us that don't know a lot about Acorns ... I do, but there's lots of listeners that may not. Tell us about Acorns. Tell us why you initialized it. Tell us how's it going so far?

Noah Kerner: (08:30)
Yeah. To get back to the leveling the playing field, at the highest level it's really about putting the tools of wealth making in everyone else's hands. That's like you asked the question, why shouldn't everybody have access to these things that have been reserved for the rarefied? That doesn't make sense. At the most basic level, Acorns makes it really, really easy to save and invest small amounts of money for the future. Then we also layer on top financial literacy as an integrated function inside the product. We've opened up over 8 million accounts in the U.S..

Noah Kerner: (09:01)
The customer base is really that it's the everyday American almost exclusively, and the product is designed that way. Functionally, we have a bunch of products inside. Like we help you round up your spare change, automatically invest the spare change into a diversified portfolio. You can set up a retirement account. It's the easiest way to set up a retirement account. Automatically contribute by the day, the week, the month. We have a kid's investment account, so if you just started a family, you can easily set up a kid's investment account.

Noah Kerner: (09:32)
Then we built out a banking product that helps you. Well, our goal is to get people to spend less, save and invest more. It all comes back to us for how do we help people maximize their saving and investing potential?

Anthony Scaramucci: (09:49)
You've attracted a very interesting investor list. You've got Dwayne Johnson, The Rock, Dany Garcia, you've got Jennifer Lopez, you have Ashton Kutcher. How did you get these people?

Noah Kerner: (10:04)
Probably mostly from former lives. You know what I mean? Getting back to the beginning of the story, just navigating these different worlds, music, entertainment, hip hop, whatever. I think the common thread for all of them is that they connect to the storyline. Like Dwayne Johnson is perfect. His company, Seven Bucks Productions, he started because he had seven bucks in his pocket. His story is the acorns to oak story. Our brand is all about, how do we help people move from being tiny acorns to mighty oaks? All those people share that. Jenny from the block, that whole storyline is the same.

Anthony Scaramucci: (10:43)
Well, I mean, I want to emphasize this because we got a lot of young people that listen to these SALT Talks. You kept your relationships, you didn't transact with your relationships. You made them holistic and you made them symmetrical so these people wanted to come with you in your life. It's not like you were just operating as a DJ, that was over, hasta la vista. You kept in close touch with everybody. The point is, no matter what's going on in your life, you could, as an example, work in the White House for 11 days, get your ass fired after 11 days.

Anthony Scaramucci: (11:16)
That could be a bad thing, but it could also be elements of good where now you've bonded with General Kelly who fired you, become personal friends.

Noah Kerner: (11:22)
Right.

Anthony Scaramucci: (11:23)
You see what I'm saying? There's a big lesson to people that you got to keep your relationships because these people have clearly helped you, but you've also helped them because you've built this amazing company. Now, let's talk about the transaction. I go to the store. I'm a member of Acorn. I go to the store, I buy something, it's $4.15. What does your app enable me to do?

Noah Kerner: (11:47)
We round it up to $5. The 85 cents automatically gets invested into a diversified portfolio of ETFs, so like thousands of stocks and bonds.

Anthony Scaramucci: (11:55)
That hits my Credit Corp or how does it round up?

Noah Kerner: (11:59)
It pulls it from your bank account.

Anthony Scaramucci: (12:01)
I got it.

Noah Kerner: (12:02)
As part of registration, you link your bank account. That becomes your funding source. We see your spending, and then we pull the spare change and invest it for you from your bank account automatically.

Anthony Scaramucci: (12:12)
Okay. All right. It's a brilliant idea. You've got companies out there that are known as robo-advisors, companies like Betterment or Stash or Robinhood, so how do you differentiate from them?

Noah Kerner: (12:25)
Yeah. To be honest, we don't really think about competition. I like the idea of blazing a path and leaving a trail. We pioneered micro-investing. We pioneered bringing financial literacy and education together in the product. We pioneered getting brands to invest in you for shopping with them. We move in our own way and we move forward in our own way and don't really look right and left necessarily. I'd say from the customer vantage point, the key thing to understand about Acorns is the customer we serve, the simplicity of it, the way it helps you grow and grow wealth and the number of tools we provide to help you unlock your potential.

Anthony Scaramucci: (13:13)
Tell us about Acorns Early. What does that mean? What's Acorns Early?

Noah Kerner: (13:17)
It's a kid's investment account, so parents can automatically set up investment accounts for their kids, as many kids as you have. You set up a recurring contribution and it just automatically invests into the kids' future for you. If you're an Acorns customer, it's pretty much 30 to 60 seconds to set it up. It just works like magic. You can see that we have a graph called the potential graph so you can see what that money can become through compounding over time, which I'm sure everybody here knows, but that's when your money grows on top of itself.

Noah Kerner: (13:46)
We have financial literacy for families. Then we have brand partners that are family-oriented and invest in you when you participate with them.

Anthony Scaramucci: (13:57)
It's amazing and it's also a reminder to people the earlier that you start investing, the more value there is in the compounding. You can give small amounts of money at an early age, end up with way more money than if you start out with large amounts of money at a later age. I think you're taking advantage of that for people and you're also explaining that to them, so there's a lot of wisdom in what you're doing. The COVID-19 has complicated investing. What is Acorns Grow and how is Acorns helping its users understand the opportunities of long-term investing in the COVID-19 landscape, Noah?

Noah Kerner: (14:35)
Yeah. Grow is our education product, and it started out of this idea that when you're an investor and you read the news, you're going to make bad decisions. The difference in this space between news and education, I think is really critically important, right? News is the world's coming to an end. The market's crashing every day. The market swings every day. It's in the red, the blue, black. It's impossible to stay calm and make rational decisions when you watch this. Education for us is providing information to our customers that helps them.

Noah Kerner: (15:13)
When the market goes down, you know this, that's the worst time to pull your money out. If you're not super sophisticated about this, and you're paying attention to the news, you're going to pull your money out because you're going to panic. My parents did that two or three times and probably lost 200/300% on their money. Our messages to the customers are, great investors stick with it, great investors stay the course. If you look back in time throughout history, every downturn has ended in an upturn. That kind of information is much more useful than the market went down a thousand points today. The world's coming to a fucking end. You know?

Anthony Scaramucci: (15:47)
Yeah. Well, I mean, I agree with you. I mean, we had Morgan Housel, who wrote the book Psychology of Money. What ends up happening is people get so emotionally charged about their money they do the exact opposite thing that they should do. It's based on the fight or flight response and most people have a flight response when it's their money because it's their life savings. They get very, very worked up about it. Also, they lose some confidence in the system so they think, "Okay. That number that I'm looking at on CNBC for that stock is just a number. It's not reflective of an underlying business."

Anthony Scaramucci: (16:23)
It's super important for people to be aware of that. You have become a very well-known enterprise. I mean, everybody knows about Acorns. Millennials, generation X and Z up into the old fogies like me. How did you do that? How did you get the proliferation of your brand?

Noah Kerner: (16:45)
Starting with, and I think this gets lost a lot, but a real focus on product and product quality and making sure the product is good so people talk about it and refer it. I mean, the majority of our growth comes from organic and referral growth. We focus a lot on things like NPS, which is net promoter score. How likely are your customers to refer your product to a friend? Making the experience great. From a marketing perspective, we have partnerships with everybody from The Rock to brands. We do a lot of press. We do search engine optimization.

Noah Kerner: (17:14)
We have our content publication, Grow, that gets a couple million uniques a month. It's a pretty holistic approach, but at the most basic level is thinking about how to make a great product experience so people love it and talk about it.

Anthony Scaramucci: (17:28)
All right. You're doing something pretty gigantic today, right? You're launching Acorns Jobs Finder, is that correct?

Noah Kerner: (17:35)
Yeah.

Anthony Scaramucci: (17:35)
All right. That's pretty huge. Okay. Mazel tov. Congratulations. Okay. Now, what are we doing with Acorns Jobs Finder? Tell our delegates about it.

Noah Kerner: (17:44)
Yeah. It comes back to the leveling the playing field thing and also, I think trying to be timely. I can't sleep at night when I think about what's happening right now and how much unemployment there is and all the statistics around how much people are struggling. There are pre-COVID and COVID reasons for why we did it and why we did it now. If you think about the banking industry at large, and we do that, just what are the gaps, right? Ask questions. Why doesn't the banking industry help people with income when income is the most important part of your financial life? This just seems like a weird gap in financial services.

Noah Kerner: (18:24)
We said, "Look, we help people save and invest money. To do that, we have to help people earn more money. If you can earn more money, you have the potential to save and invest more money." That was pre-COVID logic. COVID logic for why we did it now is obviously you know the statistics around labor and unemployment. This is a really tough time so we wanted to deliver millions of job opportunities, remote jobs, side gigs, part-time, full-time to our customers and say, "Look, there's a lot of opportunities."

Noah Kerner: (18:54)
There's a lot of interesting statistics around side gigs for example when you see the huge uptake in side gig activity during COVID. It turns out a lot of people don't know what type of side gigs there are, how to find them and what to choose. We said, "Let's bring this to bear inside of our product and bring these opportunities in a really important time."

Anthony Scaramucci: (19:17)
Let's talk about the pandemic. You said that you're having some sleepless nights. Are you having some sleepless nights related to the pandemic?

Noah Kerner: (19:24)
I have sleepless nights because it's hard for me given what we do to digest what's happening to people in the country. I mean, I obviously have some sleepless nights because of some of the activity happening in the world and in the country. Mostly it's if you're as immersed in this problem as I am, and we are as a company, it's very hard to sleep when you see these statistics. 70% of Americans not having a thousand dollar emergency fund. Our statistics show that the average American wants 75,000 to feel financially comfortable.

Noah Kerner: (20:00)
That's a pretty big, enormous gap that is not going to magically get filled. Unless we're helping people earn more, unless we're helping people save and invest for the future, unless we're helping people spend less so they can save and invest more, it's going to be very, very difficult to move into the future.

Anthony Scaramucci: (20:19)
Well, listen, I join you in having the sleepless nights. The reason I'm asking you is there are a lot of nights in the last six months where I've lost sleep because of all the stuff going on. The political ramifications of what's going on, the healthcare ramifications, the fact that we have this dystopian information, disinformation out there, worries me, but you're talking about the income divide. Let's address that for a second. Why do you think that that has happened to the extent that it has happened? It seems you could really trace it back to the last 40 years, Noah. Why do you think that that's happened?

Noah Kerner: (20:56)
Well, pretty much flat middle-class wages, rising debts. It's really I think-

Anthony Scaramucci: (21:04)
Okay. Let's address that. Why are the middle-class wages flat?

Noah Kerner: (21:07)
Well, there's a lot of reasons for why middle-class wages are flat, but I think when you ... By the way, one of them is when you look at payroll inside companies, a lot of the wages are going to healthcare costs and things like this. There's a lot of reasons. Combine that with the rising debts, and looks like this, and the rise of personal loans and credit card, credit card debt, and the increase in that, you get into a really difficult cycle that we're in. Unless it starts to go like this, I think we're going to be in a very difficult-

Anthony Scaramucci: (21:38)
Okay. CEO wages are going like this though, right? No?

Noah Kerner: (21:42)
Absolutely.

Anthony Scaramucci: (21:43)
Okay. You get CEO wages going like this, everyone else's wages going like that, that's going to cause some tension and anxiety and possible anger in a society, right?

Noah Kerner: (21:52)
A hundred percent.

Anthony Scaramucci: (21:54)
What do you think has happened then? Have we lost our noblesse oblige in the society? Are we catch as catch can where just everybody's out for themselves in an Ayn Rand kind of a way? Or we don't have the fabric knitting and stitching or social contract tighter together? What do you think is happening?

Noah Kerner: (22:16)
That's a really deep subject and obviously there's a lot to say on this. When I think about what I do and back to what I view as purpose and the idea of trying to level the playing field, if you think about banking, as an example, just look at credit cards and how the credit card industry works. You and I get credit card points and rewards paid for by the debt of other people who don't have a lot of money. I don't like using hackneyed phrases, but the system in many ways is rigged to enable people who have money to make more money and people who don't have money to go deeper into debt.

Noah Kerner: (22:56)
I think if you think about investing, even right now there's this whole range of savings products that have been pushed over the last couple of years, with a 1.5% interest rate, saving, saving, saving, saving. Well, you can't save your way to wealth. You can't even save your way past inflation. I think it's information. I think it's education. I think there's not enough people working to level the playing field and actually giving a shit about that. I think when people start making money and they get here, you don't want to come down from that position. People seem to ... It's actually always been a surprising thing to me.

Noah Kerner: (23:33)
Any modicum of success for me is incredibly humbling, but I meet a lot of people who get more successful and seem to lose sight of ... So it's a strange phenomenon. I think there's a lot. I think there's psychology. There's socio-economic forces, macroeconomic forces. There's a whole series of range of forces.

Anthony Scaramucci: (23:57)
Yeah. Look, I tell my conservative friends, "I got it. I understand that the rich want to get richer and I'm all for unlimited outcomes, but you got to be very, very careful because if you break the society and we disassociate the super wealthy from regular people, you will have an upheaval." It's just, unfortunately, that happens. You got to study five or 6,000 years of history. You are way better off figuring out a way to help your neighbor. Otherwise, you're going to be ending up living in a bob-wired security compound, sitting in your McMansion with your family while your neighbors are suffering.

Anthony Scaramucci: (24:34)
I'm not exactly sure if there's a social good to that. I don't understand why having 10% less and your neighbor doing better, isn't better for you overall, holistically. That's a whole longer-term philosophical discussion. Where is it ... Before I turn it over to John Darsie who's dying to ask you questions, and we got tons of questions in the queue, where is Acorns five years from now, Noah?

Noah Kerner: (24:59)
Our vision is to build a financial wellness system that helps everyday Americans save and invest every day. That's our stated vision. I'm sorry. What that means is there are many things you do in your financial life that impact your ability to save and invest, spending, earning, borrowing, literacy, all those things. We want to help you maximize all of that around saving and investing so you have as much saving and investing potential as you possibly can. In the next five years, Acorns will be much more of a system of products that work together. That's one.

Noah Kerner: (25:31)
We're already the largest subscription service in U.S. consumer finance. By the way, the subscription pricing model is also really important to the concepts we've been talking about, which is when you think about the way people are charged fees in banking, most of it is surprise and most of it is variable. Overdraft fees, minimum balance fees, all these things that pop up out of nowhere. Our thought is let's bring a very predictable, simple, transparent pricing model to this category and say, "It's $1 a month, $3 a month, $5 a month, whatever, here's what you pay. Here's what you get."

Noah Kerner: (26:04)
We have an ambition of a hundred million everyday Americans saving and investing every day. It's a pretty lofty ambition and ideal, but I think if we could achieve that, that would help to make a dent in the fabric of society. Also, literacy levels. Really, really getting people more financially literate and focusing on getting our customers, learning about all the things they need to learn about with their money. I think it's a travesty that financial literacy is not part of the core education, because how do you get dropped off into the world not knowing how to do your taxes? That doesn't make any sense to me?

Anthony Scaramucci: (26:39)
Look, you preach to the converted. Have you read The Richest Man in Babylon by George Clason?

Noah Kerner: (26:44)
I haven't. Tell me about it.

Anthony Scaramucci: (26:46)
Yeah. I want to recommend it to you because your whole business model is basically based on that. I read the book when I was 14. It had a big impact on me, but the central thesis of the book is if you want to get to independent wealth, you have to pay yourself first. If you have a cable bill and you have an electric bill, that's all fine and dandy, but whether it's $5, $10, a hundred dollars every month, you have a bill to yourself which goes into a savings account, or goes into a stock market account.

Anthony Scaramucci: (27:16)
I've been doing this since I was 14 years old, and it did have a dramatic impact in terms of developing the good habits of savings, which you are trying to do for so many Americans as people around the world. I'm going to turn it over to John Darsie, but Noah, I've enjoyed the conversation. I was your therapist there for about 10 minutes so I will send you a side bill and we can round that up into my Acorn account, okay?

Noah Kerner: (27:40)
You got it.

Anthony Scaramucci: (27:41)
All right. Thank you. Go ahead, John.

John Darsie: (27:43)
All right. Now, for the normal part of the session where Anthony is not acting like your shrink. What's interesting to me, and Anthony talked about this earlier, is how you've differentiated yourself from other FinTech players in the space focusing on investing. To me, the power in Acorns, and comment on this, if you will, is reinforcing positive habits. He talked about, we did a SALT Talk several weeks ago with Morgan Housel who wrote The Psychology of Money and writes a lot about that exact topic on his blog regularly as well.

John Darsie: (28:15)
How much of the platform is about reinforcing the right habits in terms of when you spend money, you should also be saving money and investing money? How have you guys thought about the investor psychology piece of this business?

Noah Kerner: (28:27)
Yeah. It's a good question. I mean, a lot of our customers have not saved or invested before, so what we find there's this ... And we talk to a lot of our customers. We get this feedback. There's this sense of hope and confidence that happens with discovering the product, and more importantly, the fact that you can actually save and invest money. The way the product functions is that there are a lot of ways to contribute really regularly.

Noah Kerner: (28:49)
You come back to the product, you see it happening right in front of your eyes and that from a conditioning perspective is really important because as you know, the act of saving and investing is just complicated. It's out of reach. It's just hard to do, so if we can make it easy to do, but also show you that it's happening right in front of you, we like to say celebrating growth and milestones, that helps people begin and it helps people build the confidence to be able to continue doing it. It's very much a conditioning.

Noah Kerner: (29:21)
I like the idea of, and ask the question, can we make saving addictive? Because there's a lot of addictive shit out there. There's a lot of addictive platforms that aren't necessarily good for you. If you could take those mechanisms and apply them to something that's really good for you, that's wonderful.

John Darsie: (29:38)
Right. Yeah. There's a great book called Nudge about that exact thing. Is that the same way that big tech companies use all of their research and AI capabilities to nudge people into behaviors that benefit the company, what if we as a public good started creating nudges into the right behaviors that actually makes people healthier and wealthier and happier?

Noah Kerner: (29:59)
Yeah. Richard Thaler is an advisor to the company. Very familiar. I love that book, but that's exactly it. By the way, the other side of this, and the other side of money for most people, probably all of us in different moments and different times, not all of us, but a lot of us, there's a lot of shame and embarrassment tied up in it. It's hard to talk about if you're struggling, you don't want to talk about it. The fact that you can find this place where little by little, it adds up, it builds a sense of hope. I think that emotional component is important because there's a lack of hope. There's a desperation in struggling with money. A hundred percent.

John Darsie: (30:45)
Yeah. No. It's definitely something that people are very reticent to talk about even within their own families. Talk a little bit more about Acorns Grow. We have a couple of questions about what's your long-term vision and mission for educating today's youth and our population in general, about financial literacy? How can we use technology to further pepper people with just these small stories about how you pay your taxes, how you understand the different taxes that you eventually are going to have to pay?

John Darsie: (31:13)
You see people like athletes coming into college football programs and going to play professional sports that buy a $2 million house without understanding the basics around property taxes and income taxes and understanding personal budgets. How are you going to use technology the way you've done with Acorns, the core product, from a Grow perspective to educate people?

Noah Kerner: (31:34)
Yeah. The best thing to understand is that the core product involves education. We don't think of education as a side thing. There is a separate website we have called Grow, but the education is part of the product. The way we think about it ... And by the way, we have not delivered on this yet. We will. Educating at the moment of decision-making is the way to crack this. It's very hard to get people to read content. It's very hard to get people to remember. It's harder. Richard Thaler will tell you, you could get someone to read something, but forget about trying to get them to remember it.

Noah Kerner: (32:07)
You've got to educate at the moment of decision-making. What that means in our world is product and education come together in one experience. Education is not branded entertainment. It's not over here. It's here. There are things that we'll do for you. Like we automate investing, but there are things you need to know as an investor to make good decisions. We can't automate the act of you not taking your money out of the market when it goes down. You have to know that that's a bad decision.

Noah Kerner: (32:35)
We have to educate at the moment of decision-making so that you are constantly reminded of every downturn ends in an upturn, every downturn ends in an upturn, every downturn ... This kind of stuff. We don't make it hard to pull your money out because we don't believe in that. You should be able to withdraw. It's free. It should be easy, but it's not a good idea to withdraw unless you really, really need the money.

John Darsie: (32:57)
Have you guys done any studies around the behavior of Acorns' investors relative to the general public in terms about how they react to periods of market volatility?

Noah Kerner: (33:08)
We have actually. First of all, during the pandemic, and this is not the case, historically, we've seen really high retention rates. There's a bunch of factors, but we attribute that in part to the constant barrage of education and information, making sure these customers have this. We've also run test controls during market dips to see what happens when we don't educate people, versus when we do, and there's a much better behavior among people who get educated through those periods. I think we like to have our hand held during those moments.

Noah Kerner: (33:40)
I'm sure when you talk to your parents or anybody who's ... Even I go ... I mean, I have financial planners. I freak out too. When things are sideways, I'll get them on the phone and they'll be like, "Okay." It's kind of embarrassing because of what I do, but I'll get them on the phone and I'll be like, "I mean, this one, are you sure? This one's different." You have to hold people's hands. Everybody has anxiety. Even the people with the most experience doing this, you still have moments of anxiety.

John Darsie: (34:15)
Yeah. We've had plenty of financial advisors on SALT Talks talking about that exact thing, is that their job is part investment manager, but the larger part of it is psychologists for their clients and reassuring them during periods of volatility to stay the course.

Noah Kerner: (34:29)
Yeah. I wish I had my conversations with my guys recorded because it would be hysterical.

John Darsie: (34:33)
Book recommendations [inaudible 00:34:34].

Noah Kerner: (34:35)
What'd you say?

John Darsie: (34:35)
Sorry.

Noah Kerner: (34:36)
Yeah.

John Darsie: (34:36)
We have a question about book recommendations. Anthony mentioned The Richest Man in Babylon, which is a great book. Do you have any authors, whether it's books or bloggers or anyone that you read frequently that help shape your worldview or any book recommendations that you're reading right now?

Noah Kerner: (34:53)
Well, as it relates to this stuff and behavioral economics and money, I actually am a huge Thaler fan not, so Nudge and Misbehaving and those books, I think are great.

John Darsie: (35:01)
All right.

Noah Kerner: (35:01)
As it relates to life, I'm a Churchill fan. I like to read biographies and I think The Last Lion, that series is one of the great series from an inspiration perspective. Like you said, this is as much about courage to move through difficult times as it is about technical knowledge. Man, nobody had more cards to move through a difficult time than Churchill. His great lines run through my head all the time, never, ever, ever, ever, ever give up. We'll fight in the hills, we'll fight in the streets.

Noah Kerner: (35:33)
Just that mentality, the optimist sees the opportunity in every challenge, the pessimist sees the challenge in every opportunity. Just all those reminders of stay courageous.

John Darsie: (35:46)
Well, our director of sales at SkyBridge is a massive Churchill fan. He's also British so he fashions himself as a modern-day Churchill, so I get to hear a lot of Churchillian quotes and everything every morning. In the middle of the pandemic was no different as we confronted all the issues that everyone in the world and in our country and in our industry faced during that time period.

Noah Kerner: (36:06)
Here's a good pandemic joke.

John Darsie: (36:08)
All right. Leave us with a nice Churchill quote to get everybody inspired as they leave today.

Noah Kerner: (36:13)
When you're going through hell, keep going.

John Darsie: (36:15)
There you go. Keep investing in your Acorns account because the compounding won't stop. Noah, thanks so much for joining us. Anthony, you have a final word for Noah before we let him go?

Anthony Scaramucci: (36:26)
No. Noah, I loved it. I hope we can get you back on. I'm looking forward to the future with you because even though you've already built an oak, I think that oak is going to turn into a redwood or sequoia. I'd like to figure out a way to invest me some money in Noah actually.

Noah Kerner: (36:41)
Okay.

Anthony Scaramucci: (36:41)
God bless you. Okay. We wish you great success.

Noah Kerner: (36:44)
Thank you.

Anthony Scaramucci: (36:45)
Keep up the great work for everybody.

Noah Kerner: (36:46)
Thanks Anthony. Take care.

Nathalie Molina Niño: The New Revolution for Women Entrepreneurs | SALT Talks #82

“I'd been on the receiving end of traditional venture capital coming from short-term-minded funds… short-term thinking that doesn’t help you build things that last. So I decided to go at it a different way.”

Nathalie Molina Niño is an entrepreneur, builder capitalist (at O³) and tech globalization veteran focused on high-growth businesses that benefit women and the planet. She is the author of LEAPFROG, The New Revolution for Women Entrepreneurs (Penguin Random House, Tarcher Perigee) and serves as a Venture Partner at Connectivity Capital Partners. Molina Niño launched her first tech startup at the age of twenty and is the co-founder of Entrepreneurs@Athena at the Athena Center for Leadership Studies of Barnard College at Columbia University.

Finding issues identifying as either venture or private equity, a group of like-minded entrepreneurs with a passion for long-term vision and sustainability coined a new term: Builder Capitalist. Venture capital too often promoted the kind of short-term think that prioritized quick turnarounds for profit rather than a long-term holistic approach to building. “What worries me is when the Shark Tank effect starts to happen and you have organizations like the media making it seem like it’s the end all, be all for all entrepreneurs.”

Too often entrepreneurs automatically see VC as the best source of funding when a small business loan may be more appropriate. Founders who take on VC can also find themselves receiving the short end of the stick once they come out the other side.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Nathalie Molina Niño

Builder Capitalist

O³

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello, everyone, and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology, and public policy. SALT Talks are a digital interview series that we launched this year with leading investors, creators, and thinkers. What we're really trying to do during these SALT Talks is replicate the experience that we provide at our global conference series, the SALT Conference, and that's really to provide a window into the mind of subject matter experts as well as provide a platform for what we think are big ideas and people that are shaping the future.

John Darsie: (00:45)
We're very excited today to welcome Nathalie Molina Niño to SALT Talks. Nathalie is an entrepreneur, a builder capitalist, and a tech globalization veteran focused on high-growth businesses that benefit women and the planet. She's the author of Leapfrog: The New Revolution for Women Entrepreneurs and serves as a venture partner at Connectivity Capital Partners. Nathalie launched her first tech startup at the age of 20 and is the co-founder of Entrepreneurs at Athena at the Athena Center for Leadership Studies of Barnard College at Columbia University. She spent 15 years advising organizations ... such as MTV, Mattel, and the Bill & Melinda Gates Foundation. During that time, she co-led the launch and the growth of a multinational technology globalization business with Lionbridge and turned it into a $100 million operation operating in 30 countries.

John Darsie: (01:41)
Molina Niño advises the WOCstar Fund, FullCycle, and BlueIO. She serves on the advisory board of the National Institute for Reproductive Health, WE NYC, which is Women Entrepreneurs NYC, and VoteRunLead, and she was honored with the Schneps inaugural Women of Wall Street Award for her influence in banking and finance and was named among People Magazine's 2019 Most Powerful Latinas. Prior to founding her previous venture, Brava Investments, Nathalie launched Nely Galán’s education venture called Self-Made and stepped in as the CRO of PowerToFly, which is the fastest-growing hiring platform for women in tech and beyond.

John Darsie: (02:25)
A reminder for all of you joining today. If you have any questions, you can enter them in the Q&A box at the bottom of your video screen. We're very excited today to welcome Sarah Kunst back as a moderator for SALT Talks. Sarah is the managing director of Cleo Capital, which is a venture capital firm that she started after a great experience early in her career at a lot of leading venture capital firms. And with that, I'll turn it over to Sarah for the interview.

Sarah Kunst: (02:51)
Thank you. Thanks, John. Super excited to be back. So, Nathalie, I am so excited that you are here today to talk to everybody. We just heard your amazing bio. Nathalie, it'd be awesome to just hear how you got here. We just heard about everything you do, and that is amazing, but I would love to hear about how you got here, and then we'll go from there.

Nathalie Molina Niño: (03:20)
Yeah, I want to congratulate John not just for getting through that ridiculously long bio, which I didn't know we were going to through.

John Darsie: (03:28)
Got to congratulate you for accomplishing all those things. It was hard enough to read it. Imagine doing it all.

Nathalie Molina Niño: (03:32)
I was going to say the pronunciation game is strong.

John Darsie: (03:36)
[Spanish 00:03:36].

Nathalie Molina Niño: (03:38)
There you go, there you go. I'm impressed, I'm impressed. I was actually going to save Sarah from having to do that because it's hard for most people. But, yeah, how I got here is Boulder, Colorado. I was in school at the time, and I sometimes think that ... To date myself, this is in '96, and I feel like anybody who could kind of code was getting money thrown in their general direction, right? This is before Boulder was as much of a tech hub as it is now. It was basically me and five dudes, and we were up to all sorts of things, and one of them was my first tech startup. I think that because anything that is that combination of both really painful and really sexy all at the same time, it is likely to create an addiction, and so it did, and so I started four more.

Nathalie Molina Niño: (04:32)
I spent about 15 years pretty deep in the trenches of tech, and, specifically, as John mentioned, tech globalization. So the latest venture in the space, one that probably is more my claim to fame, is we helped build the algorithm for Google in 42 different languages around the world, right? Obviously, Google needed no help in building the algorithm in English, but once it came to Croatia and Xhosa and Quechua and Spanish and French and Italian and Hebrew and Arabic, that's where we stepped in, and so pretty deep in the trenches there for a long time.

Nathalie Molina Niño: (05:09)
Left tech and found myself paired up with an amazing woman, Kathryn Kolbert, actually, who argued Planned Parenthood versus Casey, which is amazingly detailed in a recent documentary called Reversing Roe. She put a fire under me and just said, "You can't have spent 15 years in the tech industry and now disappear into the ivory tower of an Ivy League." As fun as it is to teach, you've got to get back in the game and you've got to leave it a little bit better than you found out. Of course, if you look at statistics, even 10 years ago, it wasn't better than I found it. We had results across all vectors, right, especially with women in engineering, we have half as many women graduating as engineers today as when I was starting. So I didn't leave the industry any better than I found it. You could argue I left it far worse. So she inspired me to get back in the game. I didn't want to get back in the game in the way that I had worked in it before, so I decided to do investing.

Nathalie Molina Niño: (06:14)
In 2016, I became a full-time investor. I launched my first platform, and I say platform because, as you know, Sarah, I'm not a big fan of funds. I'd been on the receiving end of traditional venture capital coming from short-term-minded funds my entire adult life at that point. I didn't really enjoy the process. I felt that they were more than just a cultural problem, which I think you and I are pretty deeply familiar with. There was also just a structural problem, where even the nice guys are subject to a structure that I think encourages bad behavior. By bad behavior, I mean short-term thinking, things that don't help you build things that last. So I decided to go at it a different way.

Nathalie Molina Niño: (07:00)
Then, to my delight, I found a bunch of other people who served as mentors and as inspirations for me who have actually been doing investing the way that I want to do it for a really long time. I thought I was inventing something new. I wasn't. Turns out there was a whole community of us, and we all struggled to articulate what it is we did. So last year, a bunch of us got together and we were like, "You know what? This is silly. People ask us, 'Are we venture? Are we private equity? What are we?' And the answer is we're builders." So we coined the term builder capitalist. We built an organization to connect us all so that we can share our best practices and so that founders can also find us, and, more importantly, so that we can put out into the world the idea that there is this other asset class. It's an alternative to venture capital. It can coexist. It's not about better or worse. But it's something that, for me, as somebody who has way more experience building things than flipping things, it's just more compatible to who I am.

Sarah Kunst: (07:59)
I love it. I also love that I've known you for so long and I think that's the first time I've heard the whole story because I think last time we were hanging out in person running around Davos, we did not get to those details because we were very busy doing other very important global things. Yeah.

Nathalie Molina Niño: (08:17)
Yeah, that's nice code for the fact that at a party that you invited me to, I accidentally punched a billionaire.

Sarah Kunst: (08:23)
That is true, but next time punch him on purpose. Just joking. We love billionaires as long as they're investing in us. So you've been a founder, an investor, and now you're a builder capitalist. You must just love venture capital, right? This must be your favorite asset class and you just want to see things go from zero to unicorn in two years and then SPAC out, right? Tell us how you really feel about VC and what doesn't work and a little bit about why because I think we all ... Clearly, I've drank the VC kool-aid, and I think we all just get used to thinking, "Well, that's great. You got a markup. What more could you want? You want to mark it up as much as possible in as short as time as possible. What could go wrong?" So tell us what could go wrong.

Nathalie Molina Niño: (09:11)
I think most founders know exactly what can go wrong. I will say this. Anybody who knows me is chuckling right now because they're like, "Oh, she's about to lay into Sarah. She hates VC." The truth is I don't hate VC. The truth is the metaphor that I used recently in a conversation that I had with Latin American investors, who, by the way, are so excited and are so drinking the kool-aid of the PayPal mafia and reading all of the back editions of Entrepreneur and Inc. Magazine ... They want to bring Silicon Valley to Latin America, and the fact is, is in Latin America, we have a long history of building things that last for generations. So I worry that people perceive me as hating VC. I do not. But I do think, and this is what I said to this audience, was, "If you were to give me a head when I have, sorry, an aspirin when I have a headache, I would be so grateful. Thank goodness I have an aspirin when I have a headache. But if I'm diagnosed with cancer and you hand me an aspirin, we're going to have words. It's inappropriate to give me an aspirin when what I need is something else."

Nathalie Molina Niño: (10:22)
I think that when you look at the popularization of an asset class that, let's be really clear, represents .5% of all business financing, and of that chunk, we take 100% of that .5%, the majority of that chunk goes to later stage companies, not what we would strictly call startups. That's what the data shows us. Then, if we take again that whole, that entire chunk of money, which again represents .5% of the whole industry, and we think about where it goes, it goes the vast majority into software companies, software, period. We can slice and dice that. We can say some of it goes into fintech, some of it goes into mobile, and everything else. But it's software, right?

Nathalie Molina Niño: (11:08)
So what worries me is that when the Shark Tank effect starts to happen, when you have organizations like the media making it seem like the end all, be all for all entrepreneurs, not .5% but all entrepreneurs, is to get VC, then you have a situation where you're giving me aspirin when that's not what I need. Not only that, but you're making me believe that the only thing in the world out there available to me, which is the part where it gets really dangerous, is aspirin, right? That's my beef with VC. It's not that it doesn't belong. It's not that there isn't a place for it. It's just that it's been misbranded as the end all, be all.

Nathalie Molina Niño: (11:50)
It has also been put out there as if there are no pitfalls, and there so are. Most people don't want to be fired from their own company. Guess what? If you're taking VC, you're probably going to get fired from your own company. Most people don't want to be in a situation where they have no control even if they are allowed to stay because they own such a tiny share of the company. Most people have this romantic idea of what it means when you exit when, in fact, in most cases, the founders end up getting the pretty short end of that stick. The only way that you can counter that is by retaining ownership, and the fast-track VC path is not the way.

Nathalie Molina Niño: (12:24)
I don't want to equate VC with fast because the fastest-growing woman-owned company in the United States is owned by my friend Nina Vaca. It's called Pinnacle. It's in the tech industry, and it didn't take one penny of VC. Microsoft didn't take a penny of VC. When Bill Gates finally allowed a VC to come in, it wasn't because they needed their money. It's because they fell in love with the Silicon Valley guy who was going to be a really great advisor and they let him have 5% of the company, which, P.S., they never even used that money. Another little software company that never took VC is WeChat in China, probably the single largest and most important piece of software in the world today, and they were funded by a builder capitalist firm that functions in a holdco, not in a VC fund.

Nathalie Molina Niño: (13:08)
So my beef is really just let's make sure that founders and the world at large, especially aspiring entrepreneur, sorry, aspiring investors, know that, yes, VC is an option. It's a very specific niche for a very specific purpose, and, P.S., there is a wide world of possibilities that are bigger and, actually, in a crisis like the one that we're in, where millions of companies are going under, way more relevant.

Sarah Kunst: (13:36)
I can't even disagree, even though you're talking against my book. But that's exactly the point, right? I have conversations with amazing budding entrepreneurs all the time and they say, "How do I get ready to take VC money?" I say, "Well, here's your business, right?" "Yeah." "Here's how you want to run it, right?" "Yeah." "What do you need the money for?" The conversation I have a lot with founders is, "If I gave you a million dollars right now, how would you start spending it tomorrow?" A lot of times, to your point, they don't really have a need for it or the things they'd spend it on should be financed via accounts receivable loans or whatever else. It's just, to your point, the thing everybody thinks they need to do.

Sarah Kunst: (14:17)
I also think, on the far other side of it, and I'd be interested to know if you have any thoughts about this, that right now a bunch of VC-backed companies are trying to go public via SPACs because that's the new aspirin, right? If you did take VC, now you're like, "Well, I should probably go public." Taking VC is great, obviously. That's what I do. Going public can be great, right? But just because you're a company who can get those things doesn't necessary mean, to your point, you're going to be happy on the other side of it. It doesn't mean your investors are going to be happy. Yeah, it is interesting how myopic I think people are about it. I see founders who chase and chase and chase trying to get funds raised for businesses that don't need outside funding, and they're founders who would probably be pretty miserable if they took that money.

Nathalie Molina Niño: (15:05)
You know what I also think it does? It lets the rest of us off too easily because the people who are out there providing debt, the people who are out there providing lines of credit, the people who are providing lots and lots of financial asset classes that are actually more relevant to most entrepreneurs, we're not getting the heat, not nearly as much heat. So we need to be stepping up, too. What are our numbers? What's the numbers for the other 99.5% of business financing, and who are they financing? Are they doing the same thing that VC is doing? And, by the way, yes, the answer is yes. They're excluding women, they're excluding people of color, they're excluding other sectors that are maybe not as sexy as some of the sectors traditional financing likes, not just software but some of the others like biotech and some of these others that are certainly not up there with software in terms of the amount of capital that they get but definitely up there.

Nathalie Molina Niño: (15:59)
So I think that that's the other thing that it does. When you shine a light in one teeny-tiny niche's direction, we're missing the opportunity to shine the light on the others. I would've told you a year ago that this is a thing that bugs me, and the reason that I'm so passionate now and that my level of how much it bugs me went from a two to a 10 is over 500 billion dollars of federal stimulus went out over the course of the last six months, and it went out in the most horrific way. It was designed from the beginning to be distributed through the same banks that exclude all the same people from the loans that they already have been giving for decades. So it was really engineered by design to exclude the same segment of the population that is the most entrepreneurial and then needed the help the most.

Nathalie Molina Niño: (16:47)
So what I worry is that that was a bomb that got dropped on entrepreneurs in the United States to the tune of millions of them. When you think about the fact that the average American doesn't have savings to last them two weeks, when the average family doesn't have $5000 in their bank accounts, that's something that makes giving people money with their [inaudible 00:17:11] in the world or what they want to do with their businesses, it went from being that's not a good idea to now going to, wait, this is dangerous. It's actually going to hurt the economy.

Sarah Kunst: (17:20)
Yeah, yeah. I totally agree. I've heard from many founders over the years that they were building something, if it started as something that was a small business before they took venture, and a lot of them end up taking venture because they can't get a small business loan. They literally can't get a quarter million dollar loan against their accounts receivable, even if they've been running the business for a couple years, especially if it's largely online. So then they go raise venture because they need money, right? That point certainly hits home that there are tons of businesses ... If you are a high-growth software business and you want to raise venture capital, that's probably going to work, right?

Sarah Kunst: (17:59)
But if you're not at all in those categories and you just get forced into it or shoehorned into it, I see this all the time with beauty brands, fashion brands, it's impossible if you're a loan officer who's a 70-year-old dude and someone's trying to explain to you how popular they are on TikTok or Instagram and you're like, "What?" Whereas if you're a VC, you see that and you go, "Okay, you're going to be able to move product. I'll invest in you." But then, if you're a VC, you say, "Okay, you didn't 100x sales year over year because you are not a highly scalable software platform. You are a beauty company." So there's a little bit of that disconnect. It's almost like when you take some of those early stage VCs and get them into business, a small business loan, people who provide small business loans.

Nathalie Molina Niño: (18:43)
You know what? I've been finding those that ... This is why the energy being directed in one direction or another worries me, is that if those same founders that you and I are talking about spend half as much energy as they do reading every classic VC rag and understanding what Andreessen and Sequoia are doing and understanding who the players are and reading their blogs and listening to their podcasts, if they spent half that energy getting to know every single loan officer in their city, I think we would see some different outcomes. It's not to say that there is enough of alternative capital, but I don't think that we're spending the energy.

Nathalie Molina Niño: (19:21)
If you see a press release about somebody closing a series A, you're not even remotely surprised because those are popping up all the time. But when have you ever seen a press release because somebody landed a million dollar line of credit? For the future of the company, that line of credit is so much more promising. They've not given up equity, it's non-diluted, it's likely to be something that gets replenished all the time and allows them to really grow at a faster rate. There are a million reasons why that line of credit is happier news for that startup than perhaps that closing of the series A, but you're not going to see a press release about it. So I think, on our end, we're celebrating the wrong things, and on the founder's end, we're expending energy also in the wrong places.

Sarah Kunst: (19:59)
Yeah. So tell me a little bit about ... With builder capital, is it just debt? Are small business loans the answer? Dig in a little bit about the differences between maybe ... We know what venture is, we know that that's not what you're doing, we know what loans are. Where do you sit, or what's the difference?

Nathalie Molina Niño: (20:20)
Yeah. I'm glad you asked, especially the thing about the small business loans. One of the misconceptions about builder capital is that the big, or at least intending to be big, companies that are on a fast track belong in VC and somehow the small businesses belong in builder. Builder is an alternative to venture, which means that we're talking about fast pace, we're talking about high growth. I'll give you an example of a recent exit from my mentor, who's a builder capitalist, is AppNexus, and it sold for 1.4 billion, and nobody would call that a small business, right? The other example, of course, that I mentioned earlier is Pinnacle or Tencent or even the last round of financing to Uber came from a holdco, not a venture fund, right?

Nathalie Molina Niño: (21:02)
So I want to dispel the myth that builder capital is another way of saying, "Hey, small business." We're talking about similarly ambitious, high growth, fast growth, wanting to be big and take over the world kind of companies, but, from an investment standpoint, I see the biggest difference being if you're more of the banker and you are much more interested in playing the numbers, which is fair. It's a high-risk asset class. You have to play the numbers. Modern portfolio theory is that, right? Modern portfolio theory is having you put a bunch of your energy in as far or wide a direction as you can and then knowing that only a subset of those are going to succeed.

Nathalie Molina Niño: (21:45)
I only quote him ironically, so if anybody thinks that I'm actually saying that I respect him, Peter Thiel calls it spray and pray. I find just about everything that comes out of his mouth offensive, but spray and pray, while it's offensive in my opinion, it is partly true, right, in the sense of you're spraying money in as far a direction as you can and then you're praying that some subset of those are going to survive. It's confirmation bias. People talk about people using spray and pray as a strategy as being really good at picking winners, when, in fact, what we know is that they pick their favorites really early. You cannot possibly put a lot of energy into 200 companies, right? So you're going to pick your winners really early. You're going to put love and energy into those winners. Then, surprise, those tend to be the pool where success comes out of.

Nathalie Molina Niño: (22:35)
If you're a builder, you're less interested in the numbers in terms of modern portfolio theory and you're more interested in being an operator, which means that your portfolio is smaller. You probably have 10, 15, 20 companies, and you're going really deep with a no fail perspective into each of them. AppNexus's founders and the funders who were involved, the builder capitalists early on, AppNexus was not going to fail, right? What's interesting about having a concentrated portfolio where you're very operational is that you're also taking large stakes.

Nathalie Molina Niño: (23:11)
So in a holdco environment, you're essentially structurally ... For anybody ... I know this audience is technical. You have a holdco, and then you're raising on an SPV basis usually, on a deal by deal basis, which means that if it's a healthcare company and it has that longer horizon and the time of maturity for that company is more like 10, 15-year range, you've got an SPV that doesn't dictate an arbitrary timeline the way that a fund does. But then you've got another company, say, [inaudible 00:23:36] security company in another SPV, and that cycle is more similar to maybe traditional VC. Maybe it is a two to five-year cycle, and that company is either going to acquire an IPO or they'll take the SPAC route, but it's got a shorter cycle by virtue of what it is.

Nathalie Molina Niño: (23:52)
The difference, I would say, from an investor standpoint is if you're the kind of investor, like me, that sucks at being a passive investor and you need to have your hands in there because you're just an operator through and through, then you're more likely going to be happy being a builder capitalist. If you prefer to play the numbers and do modern portfolio theory, that's exciting, too. That's about quantity. It's about volume, it's about scale in your portfolio. From a founder standpoint, the difference between venture capital and builder capital is what you can imagine, right? You're not having a cap table that's filled with a lot of different people. You're probably not giving them as much equity. But you are going to have to play nice with this builder capitalist that's basically going to sit with you and help you grow your company. If you don't want the investors to meddle as much, that might not be the model for you. But if you really want to partner with an investor that's going to sit right next to you and help you blow up your company and make it massive, then that's the trade-off.

Sarah Kunst: (24:46)
Yeah, yeah. No, that makes a lot of sense. I think a lot of founders, there used to be a thing in Silicon Valley, I guess it still exists, called party rounds, and it's like, "Oh, we have all these great people in." Then you pick up the phone when your phone's dying or when your company's dying and no one answers, like literally-

Nathalie Molina Niño: (25:04)
Or during a pandemic, I mean.

Sarah Kunst: (25:05)
Yes, no one answers. Yeah. For me, I've been surprised. As a former operator, I always want to be really helpful to companies. I don't invest in companies if I wouldn't be excited about helping them. So it always surprises me when I'll think, "Oh, I love that company, but I haven't had the chance yet to be super hands-on." Then I'll get an email from them that's like, "You're our most helpful investor." I'm like, "This is terrifying." If I'm the most helpful investor when we're still at a point where I dig in a lot on marketing and fundraising, and so when we're not at those points, I'm a little bit less involved, and if I'm still your most helpful investor before I've started to, in my opinion, help you, God help you because I don't know who else is going to. It is [crosstalk 00:25:53]-

Nathalie Molina Niño: (25:53)
Yeah, the bar's pretty low. The bar's pretty low. I will say again, for all the people that I think I just poo-poo VC all the time, it's not really the fault of the VC, per se. The model is designed to be ... Again, it's modern portfolio theory. It is about managing the portfolio of winners and knowing that there are going to be losses, right? But when you look at the structure, for example, the 2% fund structure allows you to have a pretty limited staff. So how is it possible that somebody who has 200 companies in their portfolio could possibly do the sort of hands-on founder first, all the things that everybody has on their website that says that they really spend a lot of time and energy with the founders? But how do you do that when you look at their website and they actually have two or three principals, maybe a couple venture partners, maybe a couple associates? How do five or six people pay lots of attention and give lots of love to a portfolio of 200? It's physically impossible, right?

Nathalie Molina Niño: (26:47)
So I think, for founders, there's a little bit of do the math, see what's actually there to support you, and see what's viable and what's real, and be realistic, right? All of these different forms of capital come with their pros and their cons. Again, my beef is just let's make sure that we educate founders so that they know, exactly to your point, that person probably was better off getting a line of credit or a loan. Let's make noise. Let's talk about all of the people in the small business loan or in the line of credit space or even in the venture debt space, and let's make noise about who they're serving and who they're not serving and how they need to do better. But let's not guide everyone towards this, I think, dangerous VC-only world.

Sarah Kunst: (27:33)
Yeah, no. The thing is anybody who's making that commitment, it is 10 times bigger of a commitment than a marriage. You can divorce anybody any day of the week. Getting an investor out of your company is nearly impossible. So, to that end, people should be super thoughtful about it, and if it's the right thing for them, great, but you should go in with 100% conviction, not just ... Literally, it's funny because the average age of founders, which ageism in tech is also very much a thing, but the average age of founders kind of correlates with the average age of people when they get married, right, or [inaudible 00:28:11]. So you see these people who've been dating somebody for five years and then they're engaged for two years and it takes them forever and then they go out and they raise money from a lead in a three-week process, and you're like ... My opinion is you're probably wrong on both ends, right? You're way too slow on one end, you're going too fast on the other. There is a time that makes sense for both of these things, and you are off. So that resonates a lot with me. We're going to have people drop questions into the Q&A.

Nathalie Molina Niño: (28:43)
Ooh, fun.

Sarah Kunst: (28:44)
It's going to be very fun. But, before that, we have a few more questions, or I have a few more questions for you. One of them is tell us about your book, why you wrote it, what it's about, where people can buy it, and everything like that.

Nathalie Molina Niño: (28:59)
Yeah. I'll start with the last, which is timely, as we are in the middle of an election. People can buy it everywhere, but obviously buy it at your local bookseller if you can. Leapfroghacks.com is the website, and it directs you to all the traditional places where you can buy the book. But proceeds of the book go to an organization called VoteRunLead, which VoteRunLead is in the business of getting women into elected office. They got Ilhan Omar in. They are responsible for training some of the most amazing people that are currently household names. They have a success record that is better than any VC fund that any of us has ever seen. Their win rate is pretty astounding.

Nathalie Molina Niño: (29:39)
But, yeah, I wrote it because if you and I just take, which is, P.S., a chapter in my book, this conversation around funding, around the fact that there's a world that is bigger and wider than just VC, I was just finding that as a founder, I think, like all founders, I inhaled every business book known to man. I got to the point where I would be pretty happy if there was a chapter or two that were relevant to me and the rest was honestly trash. I don't mean trash as in bad advice. I just mean not applicable to me, right? The whole chapter on friends and family round, I'm like, "You could have immigrants that grew up in the sweatshops of Los Angeles." Who are these friends and family that are supposed to be writing hundreds of thousands dollars' worth of checks for me? But I accepted it because I thought I'm an anomaly.

Nathalie Molina Niño: (30:28)
Then it wasn't until I went to the Center for Women's Leadership at Barnard and I was suddenly in a research institution and I was neck-deep in data that showed me my experience wasn't an anomaly, my experience is the experience of the vast majority of entrepreneurs in this country, and the literature out there just isn't speaking to us. The fact that we in our industry have the gall to call that entire round of financing the friends and family round in a country where most families do not have $5000 in their savings account just shows how out of touch with reality we are. Bottom line, I wrote the book because I realized that the majority of entrepreneurs were feeling what I was feeling and I was like, "What would it be like if an entire book, from A to B, spoke to the reality of most entrepreneurs?"

Nathalie Molina Niño: (31:17)
What would it look like if all of the examples were from people like Nina Vaca, so many others that have built their companies the way that most people have built their companies, right? Sometimes fast, sometimes slow, always retaining as much ownership as you can, being thoughtful about the fact that you are living in a world that you have to wake up in the morning and look at your neighbors and have some semblance of integrity and ethics in what you're doing. Most people do actually build businesses with that in mind, even if it's just about I have a local store and I [inaudible 00:31:51] with the neighborhood, right? So that was the motivation. I ended up packing it with stories of 63, I think, in total, amazing entrepreneurs so that it's not just me giving advice. It's me saying, "This is a really good idea, and, P.S., here's an example of somebody who did it and you can copy them." Because I think that that's the best sort of way, right? Just don't take my advice, here's an example of somebody who did it.

Sarah Kunst: (32:15)
Yeah, that's amazing. That is awesome. And what's your favorite leapfrog hack?

Nathalie Molina Niño: (32:24)
They bleeped my favorite one, and it's exactly what you and I just talked about, which is F-word the friends and family round.

Sarah Kunst: (32:32)
I like it. I like it. Yes, I agree. That is awesome. Oh, actually let's start with questions, and then I have a few more questions for you. But Paul [Teiland 00:32:47] asks, "What would an ideal exit be for a builder capitalist?"

Nathalie Molina Niño: (32:52)
Oh, I love that question. The last chapter of my book is probably also one of my favorites. It's called ... It's really about the idea of an alternative exit. In this case, and this is not my answer, but this is another ideal example. But it is just an example of the fact that exits have for some reason ... Again, going to that topic of being myopic, we think exits are IPOs or acquisitions, and there's a world way beyond just those two options, right? In the case of Hanky Panky, which is a 42-year-old iconic brand ... If there are any women on this call, I guarantee you they're probably reaching out touching their thong right now because it is a cult. Hanky Panky, people are obsessed with it. It's a highly successful brand, and two years ago, for their 40th anniversary, they announced to their 140 employees, they're entirely made in the US, they have an office in Park Avenue, and they're manufacturing in Jamaica, Queens, that they were handing the company over to their employees in an ESOP. That was their exit, right? And the founders are doing-

Sarah Kunst: (33:53)
What is an ESOP?

Nathalie Molina Niño: (33:55)
Sorry, it's essentially handing the shares over to the employees in a structured not really buyout but a transition. At the end of the day, the employee stock offering program, I believe, it might be. I might have the acronym wrong, which is thank you for calling me on that because I hate when people use acronyms and they don't actually know what they mean. But that's one option.

Nathalie Molina Niño: (34:19)
I would say that for builder capitalists, the big thing for me, I always call it the third option that nobody talks about, and that is that builder capitalists have traditional exits. They IPO. One perfect example is the builder capitalists who built 1-800-Flowers, right? The McCanns built that company. It's a family-owned company. They IPO'd it. It turns out, even despite the IPO, they retained majority ownership of the shares, and so it still very much is a family-owned business in many ways. It was built by builder capitalists, and it's still majority owned by builder capitalists. So IPOs are totally within the realm of possibility, and if that's what's right for a company, awesome. An acquisition, same.

Nathalie Molina Niño: (34:58)
The third option that I would say builders are obsessed with the thing that people like Warren Buffett are obsessed with, which is holding. If a company is growing and delivering to you quarterly dividends that you are happy, smiling all the way to the bank to the cash, why the hell would you let it go? Keep it.

Sarah Kunst: (35:19)
Sorry, as a VC, I don't know what word means, holding.

Nathalie Molina Niño: (35:24)
I know.

Sarah Kunst: (35:24)
I've never heard of it.

Nathalie Molina Niño: (35:25)
I can see your head exploding a little bit. Yeah.

Sarah Kunst: (35:27)
[crosstalk 00:35:27].

Nathalie Molina Niño: (35:27)
I have to say almost every successful VC that I have spoken to about this has that story. And they usually have a lot of stories like this, but they have that one story of that one that it's like, "If I didn't have a fund cycle that required that I deliver this IRR in this time frame, that one, we would not have pushed to sell or to IPO. We would've held longer. They would've probably doubled, tripled their returns, and I would've been a far richer, most cases, man."

Sarah Kunst: (35:59)
Yes. And it's interesting because you see, I think, with the private equity starting to get more involved in VC ... Because private equity, which is a very different animal, is in some ways similar to builder capital towards the end, in that they're starting to be the vista equities of the world, where they want to buy something and hold it for a while and make money and maybe hold it for a really long time. So there is an understanding of that. It just isn't in the venture class, the venture asset class right now.

Nathalie Molina Niño: (36:30)
I think I know what you're talking about with some of the folks that are holding for a little bit longer, but if you look at the actual fund cycles of private equity over a VC, their cycles are usually shorter.

Sarah Kunst: (36:41)
Yeah. No, they're [crosstalk 00:36:41]. Yeah, yeah, definitely, yeah.

Nathalie Molina Niño: (36:41)
A lot of the times, they're even shorter. They're talking about two-year turnarounds, right, especially when it's distressed assets or something like that. So that's the big difference, is that it's about cash out, it's about having the liberty structurally to be able to take one company, say, of the portfolio of companies and say, "You know what? This one, we're going to hold it, and we can because our structure allows us to do that."

Sarah Kunst: (37:03)
Yeah, yeah. So Rafael Febres-Cordero has a question. "Are you involved in businesses related to the Hispanic market in the US and Latin America, and then what is the best way to connect with you?"

Nathalie Molina Niño: (37:19)
I suppose I am, in that I am pretty visible in talking a lot about capital and where it's getting channeled and the fact that the single most entrepreneurial group in this country by any statistical measure is Latinas. Really close up there in terms of volume are Black women, and if you look at percentages, Black women beat everyone, which include, obviously, Black Latinas. So I would say, yeah, it's an area of interest, but I don't ever invest because of who the founder is, I invest on where the impact is.

Nathalie Molina Niño: (37:58)
The example that I give people, if a group of all-white male founders came to me with a company that is curing breast cancer and another group of all, say, women of color come to me with a new interesting lipstick line, both might be great investments, both probably deserve to be invested in, but I'm going to choose the breast cancer one because I can fix a leadership team, I can fix a lack of diversity on a board, I can't fix a business model that has limited impact. If you ask me to measure the impact between the lipstick company and the cure for cancer, there's a clear winner for me. One of them is going to impact the lives of millions and millions of women around the world, and the other one will probably make a handful of women rich, which is great, but I'm looking for scale, right?

Sarah Kunst: (38:56)
Yeah, yeah. Totally agree with that. Well, in our last couple of minutes, I want to [crosstalk 00:39:02]-

John Darsie: (39:02)
I have a question, Sarah. I'm raising my hand.

Sarah Kunst: (39:03)
Yes, okay, [inaudible 00:39:03], you have a question. What's your question?

John Darsie: (39:03)
I have a question.

Sarah Kunst: (39:03)
You have to ask it in Spanish.

John Darsie: (39:10)
Nathalie, [Spanish 00:39:10]-

Sarah Kunst: (39:13)
Even I [crosstalk 00:39:13] that one.

John Darsie: (39:13)
... [Spanish 00:39:13]?

Nathalie Molina Niño: (39:13)
I feel like I have to be the translator here. What's the impact of the pandemic on people looking for jobs in big companies, and is it versus small, sorry, big cities versus small cities, or-

John Darsie: (39:34)
[Spanish 00:39:34]?

Nathalie Molina Niño: (39:34)
Yes. I love that because I'm a little bit obsessed with the trajectory of cities that we have historically ignored. I have done a lot of work in places like Detroit and Baltimore and New Orleans, places with thriving economies, cities like New Orleans that are majority Black, Baltimore, right, but not enough capital has actually gone into the local community to build it out. New Orleans is particularly interesting because you've got a lot of startup activity but not necessarily the capital going into the people who were born and raised in New Orleans. So just because capital is going into a smaller city doesn't necessarily mean it's solving any of the problems in the city, which I would caution people to think about. But I still think that proximity to seeing capital and jobs and things being freed up to go into the smaller cities is really exciting.

Nathalie Molina Niño: (40:36)
I think it's exciting both from a business standpoint, because that means that there are all these undervalued assets in cities all around the country that we as investors can start to pour money into and see some really serious upside, but in terms of politics, I have to admit that's the other reason I think it's exciting. If we see more and more people who are educated at the best schools and who have learned to run businesses, mentored by some of the best people in the world, moving back to those cities or for the first time to those cities that have historically been ignored and under-invested in, then we're going to see a total change in the landscape of what the country looks like and maybe even start to see that predominantly red map turn a little more blue.

John Darsie: (41:19)
That's all I got. It was a great answer. Thank you.

Sarah Kunst: (41:20)
I love it. Great job. Perfect.

Nathalie Molina Niño: (41:23)
Amazing Spanish skills.

John Darsie: (41:25)
I know. It's deep in the back of my brain.

Sarah Kunst: (41:27)
[crosstalk 00:41:27].

John Darsie: (41:27)
Once upon a time, I was fluent, but when I'm forced to speak it, I can sometimes dig up some words. But I'd like to use it more.

Nathalie Molina Niño: (41:35)
I thought Sarah was just being mean, but you delivered.

John Darsie: (41:37)
Yeah.

Sarah Kunst: (41:39)
Good. He did it, he did it. And there's one last question that we're going to sneak in there and then we're going to end. Humanitarian Productions says, "Thank you very much for being such an inspiration to us Latinas, especially in the current US divisive climate. Question, what are the main distinctions between your approach and the traditional CSR approach?"

John Darsie: (42:00)
Oh, I want to give them, maybe while I'm talking, an opportunity to explain what they mean by CSR. I know that-

Sarah Kunst: (42:08)
Corporate social responsibility.

John Darsie: (42:10)
Yeah, corporate social responsibility, but I wonder if the person asking means ESG. Corporate social responsibility, if you think about the percentage of investment into the business community that's coming from corporations, so corporate-backed venture funds, for example, it's pretty negligible. So I don't know if that's what the person asking the question really means. But I don't know that I believe in corporate social responsibility. I think that it's a wing of the marketing department or it's a wing of the R&D department. I think the best form of corporate social responsibility or the best form of philanthropy, because a lot of the times, corporate social responsibility programs are heavy on the philanthropic side ... In my view, the most thoughtful and the most egalitarian and participatory form of philanthropy is called pay your taxes.

Sarah Kunst: (43:10)
I love it. I love it. Great. Well, you did a great job answering that, and you did a great job with all of this. We're so excited to have you here, so thank you, thank you, thank you. And then I think now to give it back over to John.

John Darsie: (43:23)
Nathalie, I just wish you-

Nathalie Molina Niño: (43:24)
Thank you, John.

John Darsie: (43:25)
I just wish you had stronger opinions, really. It would've made for a more interesting talk. But thank you so much for joining us. And, Sarah, it's a pleasure to have you moderating some of these talks. You bring, obviously, great knowledge and perspective to everything that we talk about, and you introduce us to people like Nathalie, so we're very grateful for your participation.

Nathalie Molina Niño: (43:43)
People like Nathalie who would never have said less unless it was Sarah asking.

John Darsie: (43:48)
Of course.

Nathalie Molina Niño: (43:48)
So Sarah's an asset. Sarah, thank you for inviting me.

Sarah Kunst: (43:50)
Thank you. Thank you, guys, so much. Yeah.

General H.R. McMaster: "Battlegrounds: The Fight to Defend the Free World" | SALT Talks #81

“I always wanted to lead soldiers, to be part of a unit that was committed to a mission bigger than themselves.”

H.R. McMaster is the Fouad and Michelle Ajami Senior Fellow at the Hoover Institution and Stanford University. A native of Philadelphia, H.R. graduated from the United States Military Academy in 1984. He served as an Army officer for thirty-four years and retired as a Lieutenant General in 2018. He remained on active duty while serving as the 26th Assistant to the President for National Security Affairs.

After serving many years in Afghanistan and Iraq, General McMaster was on the receiving end of policies and strategies disconnected from the reality on the ground. The tendency to view strategy only through one’s own lens can be described as “strategic narcissism,” where we don’t consider the influence other players have on an outcome. This calls for a shift towards “strategic empathy.” “Empathy is really our ability to consider, in particular, the ideology, the emotions, and the aspirations that drive and constrain the other.”

In attempting to tackle major national security issues, we are running into the warnings offered by President George Washington: rival political parties. It important to keep politics out of the military and that notion has become only more important as we’ve seen military deployed to cities and discussions around peaceful transitions of power.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

General H.R. McMaster

Fouad & Michelle Ajami Senior Fellow

Hoover Institution at Stanford University

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone. And 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 public policy. SALT Talks are a digital interview series that we launched during the work from home period with leading investors, creators, and thinkers. And what we're really trying to do during SALT Talks is replicate the experience that we provided our global SALT conference series, which we were looking forward to welcoming today's guests to that conference in May. Unfortunately it had to be canceled, but we have a consolation prize today having him on a great SALT Talks. We're very much looking forward to that.

John Darsie: (00:44)
But really our goal here is to provide a window into the minds of subject matter experts, as well as to provide a platform for what we think are big ideas that are shaping the future. And we're very excited today to welcome General H.R McMaster to SALT Talks. General McMaster is the Fouad and Michelle Ajami Senior Fellow at the Hoover Institution, Stanford University. He's a native of Philadelphia, Pennsylvania. He graduated from the United States Military Academy in 1984. He served as an army officer for 34 years and retired as a Lieutenant General in 2018.

John Darsie: (01:18)
He remained on active duty while serving as the 26th assistant to the president for national security affairs within the Trump administration. He also taught history at West Point and holds a PhD in history from the University of North Carolina at Chapel Hill, which is where I grew up, [inaudible 00:01:34] Hills. He's also the author of his most recent book, Battlegrounds, which is a groundbreaking assessment of America's place in the world, drawing from his long engagement with all the issues that he talks about in the book. Including 34 years of service in the US army with multiple tours of duty and battlegrounds overseas and his 13 months as national security advisor in the Trump, white house.

John Darsie: (01:57)
A reminder, if you have any questions for General McMaster during today's SALT Talk, you can enter them in the Q&A box at the bottom of your video screen. And hosting today's talk is SkyBridge founder and managing partner, Anthony Scaramucci, who also served briefly in the Trump administration along with General McMaster. A funny story about that before we get started. Gentlemen, McMaster is a very nice guy. And so when Anthony came and joined the Trump administration, he said, "Anthony, I want to throw you a welcome party." 11 days later, that welcome party still hadn't taken place. So General McMaster asked Anthony, said, "What are we going to do about the party, Anthony. Maybe we'll just turn it into a farewell party."

John Darsie: (02:32)
And that's what they did. So general McMaster and his wife were very gracious and welcoming and saying, thank you to Anthony for his brief tenure in the white house. But with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:45)
[inaudible 00:02:45]. Is that like a fun way to start the interview? Is this guy unbelievable? He's getting his two week notice, okay. Today at 4:00 PM. Is that nice? But in all seriousness, that was one of the more fun moments of my short lived career, eating those hamburgers in your backyard, where I think we were at Fort McNair. Isn't that correct sir?

John Darsie: (03:05)
Yes. Absolutely.

Anthony Scaramucci: (03:08)
That was a lot of fun for me. That's about it. That's a lesson for all the young people out there. You got to turn lemons into lemonade. Where you could get fired from the white house after 11 days, you better have a friend in General McMaster, they're going to serve you beer when you need the beer. Okay. So let's go right to the top of your life, because I think this is a super important part of your story. Then I obviously want to delve into our nation's national security and some of your thoughts and opinions on our country or our amazing country. But you went to the United States Military Academy at West Point. Why did you do that? What gave you that inclination?

General H.R. McMaster: (03:44)
Well, I'll tell you Anthony, ever since my earliest memory, I wanted to serve in the army. And it was a combination of, I think both my mom and my dad. My mom was a teacher and an educator and I became a voracious reader of history, from a really young age or reading the juvenile books on biographies and so forth. And then my father, he fought in the Korean war. He enlisted at age 17 to fight in Korea. And then he stayed in the reserves. And so I would see him in his uniform going into the Germantown neighborhood in Philadelphia, where the army reserve infantry unit was where he was first Sergeant. And then later a company commander if we got a direct mission.

General H.R. McMaster: (04:24)
So I always wanted to lead soldiers on be part of a unit that was committed to a mission bigger than themselves. We can build teams. I grew up playing sports. I think that fostering the teamwork and the cohesion within a military unit. And then to be able to operate together in tough conditions, but overcome challenges for a righteous cause. You can't beat that. And so I really was grateful for the opportunity to go to West Point and obviously to serve in the army for 34 years.

Anthony Scaramucci: (04:59)
Let me hold up the book, you know I'm not one for self promotion or for other people's promotion. You know I'm a very low key and somewhat shy guy, but let me hold up the book. And there is the book. You look like one mean tough son of a bitch on the book. But Katie and I, and your daughters know that you're like a little Teddy bear, but there you are on the book looking great. Why did you write the book? You also had another best-selling book called the Dereliction of Duty. I will tell you, I read this book about three weeks ago, H.R. And it is a brilliant expos on what is going on in the world.

Anthony Scaramucci: (05:34)
I would particularly emphasize in your book, the stuff you're writing about [inaudible 00:05:39] and the government of Russia and really what their plans are. I think it's a necessary reading for all concerned citizens of the United States and frankly, citizens of the world. But why did you write the books so?

General H.R. McMaster: (05:51)
Well thanks, Anthony. In places like Afghanistan and Iraq, where I served for many years, I on the receiving end of these policies and strategies developed in Washington that made no sense on the ground in these places. And so, what I wanted to do is write a book that could contribute to an improvement in our strategic competence, our ability to implement a sustained and sensible foreign policy to build a better future for generations to come. And what I'm arguing in the book, one of the themes in the book, Anthony, is this idea of strategic narcissism.

General H.R. McMaster: (06:24)
That we tend to define the world only relation to us and assume that what we do is going to be decisive to achieving a favorable outcome. Or what we decide not to do. And what we don't do is, we don't consider the agency, the influence, the authorship over the future that the other has. Especially our rivals, our enemies and our adversaries. And so, it's an argument for us to compete more effectively to improve our strategic competence, but in so doing as well, Anthony, restore our confidence. Confidence in who we are as a people. This is one of our big vulnerabilities these days, I think is how divided we are and how vitriolic this partisan discourse is. Especially in this election year, but it's this way for years.

Anthony Scaramucci: (07:09)
Well, I want to get to that in a second, but I want to stay on strategic narcissism. There's another term you're using in the book called strategic empathy, which I think is the opposite of that. So can you define both of those terms for our viewers and listeners?

General H.R. McMaster: (07:24)
Sure. So strategic narcissism as I mentioned, the foster world only in relation to us and therefore what we don't do is we don't really consider that the other has to say in the future course of events. It's a profoundly arrogant approach to the world. Empathy is really our ability to consider in particular, the ideology, the emotions, the aspirations that drive and constraint the other. And if we don't have this quality of strategic empathy, a term I borrowed from my friend and a great historian, exactly sure is, we misunderstand the challenges that we're facing.

General H.R. McMaster: (08:00)
We create opportunities for our adversaries and we develop policies and strategies that are actually counterproductive and based on wrong assumptions. So for example, I'll just go quickly through these. China is based on the assumption that China is going to liberalize. They're going to play by the rules, and they're going to liberalize their form of governance as well. Well, that assumption turned out to be false. That Vladimir Putin across three administrations, Anthony, that he's going to change. He's going to be like the Grinch and Christmas. His heart's going to grow two sizes bigger. He's just going to treat Europe and the United States and the West broadly in a fundamentally different way if we just reach out to him.

General H.R. McMaster: (08:38)
Iran, if we just conciliate the Iranian regime and welcome them in to the international community, they'll stop their four decade long proxy war against the great Satan, us, the little Satan Israel, and the [inaudible 00:08:51] I can go on. If there's a organizations in the book, it's to try to understand how the past produced the present as the best way to project into the future, to examine the assumptions on which our policies and strategies have been based, scrutinize them, test them, and then come up with a more full understanding of the challenges we're facing and make some recommendations.

Anthony Scaramucci: (09:19)
Okay. I think it's a brilliant assessment of what's going on. You're also offering some great recommendations in the book. You state early on in the book and throughout the book that you feel that even though you may have some policy disagreements with the current administration, or you may have disagreements with the president himself, you see yourself in the tradition of George Catlett Marshall, who was the chief of staff of the army, went on to become the Secretary of State for Harry Truman. Arguably one of the most novelist Americans. I think the two of us would agree on that.

Anthony Scaramucci: (09:53)
And he had this theory of staying out of the political fray, which was consistent with what George Washington said long ago. And so I was just wondering if you could talk a little bit about that, because I know when your interviews, you push aside some of the more polemic, old discussion, the political elements of that tell us why.

General H.R. McMaster: (10:11)
Well, you and I have talked about this execution. First I get your advice on this as well. I really think that our military has to stay out of politics. And as a serving officer and serving officer as national security advisor, I did my duty as best as I could for the fifth commander in chief under whom I served, since I entered West Point. And, if you go back to our founders, George Washington grandparents led at the English civil war. And George Washington had in his foremost in his mind keep that bold line between the military and domestic politics. The founders also really worried about factions political parties today. And how advocacy for a faction rather than a focus on our common identity or common interest as Americans could drive us apart from one another.

General H.R. McMaster: (11:01)
And again, in their minds, they're thinking of Oliver Cromwell, English civil war. Let's not do that. And so, as a historian, I'm very sensitive to that. And it's pretty sensitive to any indication that even in retirement, that I would get involved in partisan politics. I think it's important to keep a bold line in place. And also, Anthony, I think that what Americans did need at this stage. It's like a [inaudible 00:11:27] tell all book about the Trump administration. The problems as you know, and the challenges we're facing, they're bigger than any one person. They're bigger than even the president.

General H.R. McMaster: (11:36)
And of course we don't live in a monarchy. It's what I'm hopping, is that people will read the book, think about it. Have respectful discussions about the challenges we're facing. And I hope maybe expect more from our government officials broadly, in connection sound and a much more effective foreign policy.

Anthony Scaramucci: (11:57)
Listen, we agree intellectually on that, but we also have talked about another great general, General Cincinnatus. And so, for those on the call that don't remember General Cincinnatus, he was a great Roman general during the time of the Republic. And he was up on his form and he was asked to come down to Rome to put down the insurrection. And when he met with his fellow centurions, the insurrection abated, and the Roman senators wanted to make him a dictator. And he said, "No, I've been called to serve, and I'm here to serve. I'm not here to rule. I'm going back to my form."

Anthony Scaramucci: (12:31)
And obviously George Washington asserted that many times, our city, our great city, Cincinnati is named after him. And so you have some of your colleagues, Admiral McRaven, General Mattis, General Kelly, the great irony there, H.R as you know, he fired me pretty swiftly. But him and I have become personal friends, just goes to show you never hold his grudge. But all three of them have spoken out in different ways about president Trump. I'm going to ask you this question.

Anthony Scaramucci: (13:02)
It's June 1st, the president's clearing Lafayette Square, is using the military to do that. And then he's there with a photo op, obviously General Millie didn't like that. He had to speak out about it. Secretary Espert didn't like that. And General Mattis wrote about it in the Atlantic Magazine saying that this was a misuse of the military, and he felt that the president was a threat to the constitution. I asked John Kelly on SALT Talk like this if he agreed with General Mattis. Do you agree with General Mattis, General McMaster?

General H.R. McMaster: (13:33)
I have made the choice, Anthony, not to criticize the president, vice president Biden, anybody personally. What I do have no problem doing is criticizing decisions and policies of President Trump, or really anybody. Because I think we have to have these open discussions as Americans. In the book I'm very critical of a lot of the Trump administration's foreign policy. I'm very positive about certain aspects of it like China, for example. Lafayette Square it was a mistake, there's no doubt about it. It's regrettable. It was a bad decision. It was unhelpful in what should be an effort to bring us all together as Americans.

General H.R. McMaster: (14:14)
But you know what's happening, Anthony, is like this, okay, that's bad. And then the reaction to it can be just as bad. The suggestion, for example, that the joint chiefs of staff will have a role in a presidential transition that was made by the vice president Biden and others. That's irresponsible as well. With the great thing about our constitution is the executive branch has no say in the transition and our founders were brilliant, I think, in connection with anticipating what could go wrong.

General H.R. McMaster: (14:44)
One of the things that could go wrong as to the military and getting involved in politics, that would be terrible. And other things that would be terrible would be the military getting involved in transition or the executive, the sending president having a say. Who has the say? The American people have a say. And then also the Congress and the judiciary. The executive branch plays no role.

Anthony Scaramucci: (15:06)
The country's 244 years old, we've had 200 years of presidential transition of power. We'll take it back to 1800. We've always had a peaceful transition of power is a remarkable thing about the American experiment, where the losers in the election are willing to be ruled by or served by the winners in the election. The president has said that it's not 100% sanctified in his mind that he would accept the peaceful transfer of power. He's quite dismissive about it when he's asked about it. How do you feel about that? Do you have an opinion about, sir?

General H.R. McMaster: (15:44)
Well, yeah. It's just wrong, Anthony. What I write about in the book is how we were talking about Russia. But it's other actors, but mainly Russians in the lead on this. What they want to do is diminish our confidence. Our confidence in who we are as a people, our common identity. They want to diminish our confidence in our democratic principles and our institutions and processes. And so, for leaders to say, "Hey, well, the election might not be fair. It might be rigged or something." That's like playing right into their heads. It's being our own worst enemy.

General H.R. McMaster: (16:17)
And really, in 2016, and I think in this year in 2020, I don't think [inaudible 00:16:22] people care [inaudible 00:16:22]. I don't think he cared in 2016. In fact, in 2016, the Russians I think, were surprised as anybody that Donald Trump won. They had a whole campaign ready to go that said, "Hey, Hillary Clinton won because the election was rigged." And then they shifted it quite quickly because they started that campaign. And they realized, well Trump won. So they shifted it to that President Trump would have won the popular vote if it wasn't rigged.

General H.R. McMaster: (16:45)
And so what they're trying to do is sow doubts. Sow doubts about our democracy and no leader should give them space to do that. I think that it's just unwise, described Putin's campaign of disruption, disapprobation and denial. And you actually to combat it, you have to start in the opposite order. You have to get rid of his ability to deny it by pulling the curtain back when that activity, showing it's more fellow Americans, and that's the first step in inoculating ourselves against this really sophisticated campaign of political subversion.

Anthony Scaramucci: (17:20)
I think we're in agreement, we have internal and we have external threats. And so if you had to tick off some of the major national security threats for the United States, what would they be?

General H.R. McMaster: (17:32)
I think you got if we try at the top, Anthony. Ad the reason is, trying to tremendous resources and they are extremely well organized and determined to promote their authoritarian work into this model in a way that will make the world less free, less prosperous and less safe. And the party is driven by emotion and fear. Fear of losing their exclusive grip on power, fear of chaos. But also aspiration aspiration to, in Xi Jinping's words take center stage in the world. The way they're doing that is with a very sophisticated strategy.

General H.R. McMaster: (18:09)
And again, I use alliteration again of co-option, coercion and concealment. And their strategies aim to create short bile relationships, for example, across the world, and especially in the Indo-Pacific region in a way that will exclude the United States and others. I think what's really important for Americans to understand now is that, this isn't just a US, China problem. I think there's this tendency to personalize everything else around President Trump. Xi Jinping is not acting this way because Donald Trump is so mean.

General H.R. McMaster: (18:44)
Actually I think the Trump administration put into place at a very important and overdue shifted in our foreign policy towards China, the one of competition and recognizing China as a rival. And I think it's very important that wherever sworn in on January 20th, carry on that competitive approach.

Anthony Scaramucci: (19:04)
Well, at the same time, we can quibble about the style. But I do give the credit. I'm not going to demonize the president, whatever my disagreements are with him. I do give them credit for having good instincts as it relates to certain things related to China. But the president is also preaching something related to isolationism. And, we've been combating this for several hundred years. Obviously FDR had to combat it and 38, 39 and 40, he was vexed in terms of what to do. But he knew that America needed to get involved in the next global conflict. It's almost a prevention mechanism.

Anthony Scaramucci: (19:41)
General Mattis has said this to president Trump. I know you have said this to president Trump, that our position around the world is almost like a life insurance premium to prevent a catastrophe or a casualty insurance premium. This way we're there it'll prevent something from further getting heated. Do you think the president is right about his isolationist stance at this point in world history? Or where would you like to see our foreign policy?

General H.R. McMaster: (20:08)
Well, I think that this idea that our disengagement from complex challenges, oversees challenges that have big implications for security. It's a big mistake. And the areas in the book that I'm most critical of the Trump administration's policy and president Trump are areas in which he has replicated. And in some ways exceeded the flaws of the Obama administration, of course, to some of these problems sets. Afghanistan's bar breaking to me, Anthony. I think that it's not only regrettable and that will pay a price for it, but it's really reprehensible.

General H.R. McMaster: (20:39)
That we would partner really with the Taliban against the Afghan government. You'll partner with like this 5% of the people who've supported the Taliban against like the 95% of Afghans who want nothing to do with this brutal burgers organization. Because they lived off of the health of the Taliban from 1996 to 2001, they know what it's going to be like. So Americans might simply, again, we've been there almost 20 years. Like what are we doing? But as I lay out, it has not been a 20 year war. It's been one year war, 20 times over. It's been a war in which I think if we had deliberately set out to screw it up, we couldn't have done worse.

General H.R. McMaster: (21:19)
And I think that there is a way to partner with Afghans as part of a multinational effort and sustain very, very important counter-terrorist efforts there for a relatively low cost. But it is this drive to disengage that is a danger. I see the same kind of dynamic in the Middle East as well. And I'm not arguing, I don't think we should have like hundreds of thousands of troops there. This shouldn't be expensive, engagements, but it's really that sustained effort that enables our diplomatic efforts.

General H.R. McMaster: (21:52)
And it keeps us secure. If we learn anything from COVID, it ought to be problems that develop overseas. Once they reach our shores can only be dealt with at an exorbitant cost. Better to contain and deal with it abroad, than to let it recharge our shores.

Anthony Scaramucci: (22:12)
Listen, we agree. You say something in the book. I was just wondering if you could encapsulate it for our listeners and viewers about isolationism and about the potential crisis that could unfold as a result of a disengaged America around the world. I was wondering if you could encapsulate that force. I think it's a brilliant assessment of Afghanistan, and we'll also point out to people that please read the book because you go around the world literally.

Anthony Scaramucci: (22:39)
And it is a playbook and manual for exactly what's going on in the world and what America needs to do to respond to it. But let's stick on the isolationism for a second because lots of Americans are confused by this General McMaster. And I'd like them to hear it from you, why there's so much danger in isolation?

General H.R. McMaster: (22:58)
Well, first of all, it has been our Alliance system. It has been our Alliance together, military power that has prevented great power conflict for over 75 years now. And it's really hard as need to prove a negative. But I think it's a really good thing that we haven't had great power conflict for 75 years. And so, our Alliance system and Forward positioned US forces, not even a lot, but a significant number that integrate with our allies and partners. That's what gives you deterrence by denial. What that means is, you're convincing a potential enemy. In this case, you could say China and Russia powers on division lambast that they can't accomplish their objectives in the use of force.

General H.R. McMaster: (23:42)
And that's a good thing to prevent conflict obviously that would be devastated. In connection with jihadist terrorism, for example, that probably isn't going away, Anthony. It's going to be with us for multiple generations. What I read about is it was held this ISIS and Al-Qaeda alumni they're orders of magnitude larger than the Mujahideen alumni of the resistance to Soviet occupation to Afghanistan. And it was that Mujahideen alumni who committed mass murder in your home city, Anthony in New York on September 11th, 2001. And in Washington and over a field in Pennsylvania.

General H.R. McMaster: (24:19)
This is not a theoretical case. And we know that many other attacks in Europe were as a result of ISIS gaining strength when it controlled a landmass, the size of Britain. And so, the rise of ISIS didn't just happen. It happened because vice-president Biden called President Obama in 2011 from Iraq and said, "Thank you for allowing me to end this war." And of course, wars don't end when one side disengages. And we disengaged in a large measure diplomatically as well. What that resulted in is a return of war scale security and violence in Iraq, and set the conditions for ISIS to come back.

General H.R. McMaster: (24:59)
And so, just when you think the situation in Middle East can't get worse, it actually can. And it's our sustained engagement there that can create opportunities. Opportunities, I think such as those that you see now with giving the [inaudible 00:25:12]. Opportunities to isolate Iran, who is pouring fuel on this destructive sectarian civil war and exacerbating the humanitarian crisis associated with it.

Anthony Scaramucci: (25:26)
Listen, I was in Iraq in Baghdad in January of 2011. Our spring, as you remember, was bubbling up. General Austin, you remember General Lloyd Austin, he is one tall SOP. I felt like I needed still to talk to the guy, but.

General H.R. McMaster: (25:43)
Most of those big guys, it was Austin and Odierno [crosstalk 00:25:46].

Anthony Scaramucci: (25:47)
Ray is the tallest Italian I've ever met in my life, actually. I'm convinced that he's probably not Italian, but that's a whole other topic, but.

General H.R. McMaster: (26:00)
Also the both sport is a very handsome hairstyle out, I've noticed that.

Anthony Scaramucci: (26:04)
I remember that too. Of course, you have a very handsome hairstyle yourself H.R. We'll talk about that later. We'll talk about what we could do to help you there. But, I'm in Baghdad, it's January, 2011, General Austin, we ask him a question. Part of a Benz movement, the businesses, the extra national security. I say, "What should the troop level be?" He says 20,000. The Obama administration takes it down to zero. He says, "God forbid you can't do that because it'll lead to the rise of Daesh," also known as ISIS. So it plays right into what you're saying in the book. And it confirms that we need to de-politicize some of this stuff.

Anthony Scaramucci: (26:41)
But again, the American people, they need to be educated about this. And once they are, I think there'll be reaching a consensus decision closer to where you are. Let's talk about the president again for a second, because I was only there for 11 days, but we did have some fun together, you and I. Our interactions and with president Trump. How would you describe to the average person, your interactions with the president in discussing national security? Did he have a worldview? Was he being educated by your worldview? Was there a level of dogmatism or was there a level of flexibility? How would you describe those interactions?

General H.R. McMaster: (27:19)
Well Anthony, as you know, he's just reflexively contrarians, this is part of the style, and of course as a national security advisor, it's a unique position. It's a position of privilege and confidence because-

Anthony Scaramucci: (27:32)
Okay. But I'm going to stop you there. Because that was like some serious military language there with the reflectivity contrarian. So let me stop you because basically what you're saying is you'd tell him something and he'd want to do the exact opposite, which is "reflexively contrarian". And so, I just try to figure out what is that all about with the president, but go ahead. Reflexively contrarian.

General H.R. McMaster: (27:53)
He questions conventional wisdom. If you come in with the shiny course of action, and you say, "Hey, everybody agrees. This is the perfect thing for you to do. This is what you should do." That's not going to work. What I realized is, I could come up with the perfect process, the perfect course of action. We could do it. It would not be personally, but I could facilitate that from across the departments and agencies. But what we've needed to do, I felt, and I think this is true for any president, actually, Anthony, because I owed him multiple options.

General H.R. McMaster: (28:23)
I needed to give him a say in determining his foreign policy agenda and putting into place these policies and strategies. Anthony, I was only there for 13 months obviously, I can only speak to those months I was there. I think it worked in those 13 months, that approach of giving multiple options. Because what that allows you to do is to use, what are our goals? What are our objectives? As a way to evaluate those courses of action, you can assess them based on the degree to which they advance your interests, the degree of costs, the degree of risk and so forth.

General H.R. McMaster: (28:57)
And I think that produce good results in connection with the national security strategy. But also, as I mentioned, big shifts in foreign policy on Iran, in China and go on, in Venezuela, in Cuba. But that process works. I don't know what happened if our left. I'm not in a position to judge it. But I think one of my lessons from writing about the Vietnam period was that it was a disservice to Lyndon Johnson to tell Lyndon Johnson what Lyndon Johnson wanted to hear.

General H.R. McMaster: (29:29)
And I was determined, that I would not do that because it would be a disturbed to the president and the country. And, I think that's one of the aspects of how I approach my job that may have limited my shelf life, which I was at peace with. When I took the job, Anthony, I decided I was going to retire out of that job. It was in many ways a bonus round for me in 2017. I was thinking about retiring from active duty in 2017. So I would've had to start with you to continue serving, to continue serving the new president as national security advisor. I decided that moment when I'm done, I'm done and it's time for me to retire from our army as well.

Anthony Scaramucci: (30:09)
Well, it was also a bonus round for me, General. It was a little shorter bonus round. I'd have to calculate the number of MOOC's 13 months actually is. I have two last questions. I'm going to turn it over to John Darsie for questions from our audience. But, you write about in the book, these stationary islands that are being manufactured in the South China sea and parts of the far Eastern Pacific by the Chinese government. It's an encroachment on international waters. It could even be an encroachment on Japanese territory and other sovereigns in Asia. How serious should we be taking that threat? And what do you think that means for the US in terms of its national security?

General H.R. McMaster: (30:53)
Yes. Anthony, we should take it very seriously because I believe Xi Jinping thinks he's winning right now. He looks at us, he looks at the divisions in our society, sparked in large measure by the murder of George Floyd. He looks at our vitriolic partisan environment that we're in. The crises of a pandemic and the recession associated with it. And he always, he's a dictator. He's probably in an echo chamber saying, "Hey, you're on top. You're doing well." And he already believes that he had only a fleeting window of opportunity to realize the China dream, to take center stage.

General H.R. McMaster: (31:24)
And what you're seeing is aggression in the South China sea, as you mentioned, where he's destroyed complete ecosystems, by the way, to build these islands and militarize them. And if he succeeds, it will be the largest land grab, so to speak in history. But what he's also doing, he's also passing a national security law, there's regression progression of human freedom in Hong Kong. He is engaged in a campaign of cultural genocide in Shinchan. We are birth rates are down 60%. It's important. What's happening as over a million people are now cramped into concentration camps and he last week, Xi Jinping says, "Hey, I'm building some additions on to those concentration camps. I'm going to put more people in there for reeducation." But then you look at COVID-19, both war diplomacy, bludgeoning Indian soldiers to death on the Himalayan frontier.

General H.R. McMaster: (32:12)
The threats toward Taiwan, the threats towards Japan. It is a flashpoint. I think Taiwan is a flashpoint in the South China sea. And what I think all this shows you not to mention massive cyber attacks against us and against medical research facilities in the middle of the pandemic. This shows you, Hey, this isn't a US-China problem. This is a real-world China problem. And it's time for us to really focus on this threat and do our best to deter further aggression and convince the Chinese communist party leadership, Hey, you need to change your behavior or we're going to have to impose unacceptable costs on you economically in particular.

Anthony Scaramucci: (32:48)
I think it's a dour, but realistic assessment of what's going on. You write a lot about it in the book. I courage everybody to read the book. My last question, and I'm going to turn it over. You've got a great reading list. There are philosophers, scholars, military men, academics, there may even be a few hedge fund managers on your reading list. Tell me, who's influenced you the most in your career and your thought process?

General H.R. McMaster: (33:15)
Yes. A lot of people across my career. When I was with my mom, first of all, in terms of she instilled in me a sense of history. I think, the intellectual curiosity that I carried with me across my life. I rated that this book is to continuation of my self education in many ways. It's my Italian mom, Anthony by the way. And then, football coach/[crosstalk 00:33:42].

Anthony Scaramucci: (33:42)
That's one of the parts I like about you, H.R. I just want to point that out.

General H.R. McMaster: (33:48)
My football coach and it was also my history teacher in high school. My sponsors at West Point, both of whom were in the history department. One was also one of my rugby coaches at West Point and also a historian of US diplomatic history. They all inspired me. Casey Broward, who was the head of the history department at West Point. He helped me pick my topic on Vietnam. I had great professors, great professors at UNC Chapel Hill. Dick Cone as well, who's a wonderful man, was my advisor. The late Don Higginbotham, what a great guy. And you would love this guy. Great sense of humor and was a great historian. After I finished my exams, he said, "Congratulations, you now know more history than you will ever know."

General H.R. McMaster: (34:34)
And then of course many officers, influenced me in a profound way. My first battalion commander, Billy Jamie Gallon, who was, I think maybe bigger than Odierno. [inaudible 00:34:45] these guys was this huge, an amazing guy. African-American officer, which to be an armor battalion commander in the early '80s. Imagine with the changes we saw in our army, through the Vietnam period, post Vietnam period, a real charismatic leader. And I met so many leaders who exhibited strong qualities that I try to take from them.

General H.R. McMaster: (35:08)
And then of course you see some negative examples too. I would say that, across my career, John Atrazine is our ambassador and [inaudible 00:35:17] Raby now, that guy was great to me. Dave Patraeus, I think has always been tremendous. Martin Demson. We mentioned, Odierno Austin. The armies are family and I just think, young people, if you're listening to this, you joining our military is tremendously rewarding. I think because we have a smaller professional force, not as many Americans are familiar with the less tangible rewards of service. Being part of a team in which the man or woman next to you is willing to give everything, including their own lives for you.

General H.R. McMaster: (35:50)
And to be part of something that's bigger than yourself. And so, I admire these leaders who I mentioned, but I admired my soldiers. The younger generation gets hammered all the time. They're self-absorbed, they don't have attention spans, they don't understand the history. They're not patriotic. I'll tell you, if you want to see the best of our country, just meet some of our service men and women. They're extraordinary people. And they like what they're doing. They're bound together by an ethos. An ethos of self sacrifice and honor, and a sense of duty to one another and to our country.

General H.R. McMaster: (36:34)
And so, we we began talking earlier about the dangers of associating the military with political parties. We should never do that. And we should never associate the military with any sub identity in our country. When you're in combat and you've got bullets coming your way, you're not checking skin color, you're not checking religion or sexual orientation of the men or woman next to you. You're fighting together. And I think it's just a lesson we can learn these days, as divided as it seems we've become.

Anthony Scaramucci: (37:07)
Listen, I think it's a real lesson about the American military. I also think it's a lesson why the military is still considered one of the more trusted and more sacred institutions in our country. So I admire and appreciate all that General. I'm going to turn it over to John. We've got five or six minutes left to go in our SALT Talk, and he wants to pepper you with some questions.

General H.R. McMaster: (37:27)
All right.

John Darsie: (37:28)
In light of a general McMaster's comments about, how in the military there's a sense of cohesion that maybe doesn't exist in society and politics today. There's an organization called With Honor general that I don't know if you've ever been involved with. But, Rye Barcott who founded it as a friend of ours. Basically hos goals [crosstalk 00:37:45].

General H.R. McMaster: (37:45)
I know Rye, it's a great organization. Absolutely.

John Darsie: (37:47)
Yeah. Bringing more military men and women into the political realm, because when you get people who served beside each other in the battlefield, serving next to each other in the legislative branch of the government, you find a more collective purpose than you would otherwise, were today they're at each other's throat. So we always like to plug with honor, go donate. They support house races with veterans running in local districts. So we encourage everybody to see [crosstalk 00:38:12].

General H.R. McMaster: (38:12)
You have to propose by parts and legislation as part of the covenant you sign. Rye has done a great job of it. Thanks for bringing it up, John.

John Darsie: (38:21)
Yeah. Absolutely. So we talked earlier about how there's external threats and then there's internal threats. And what Russia has really done is tried to sow internal threats in our society, and they've frankly been pretty successful at it. The FBI recently foiled a plot from white supremacist militia groups to kidnap the governor of Michigan. They reportedly also were planning to kidnap the governor of Virginia, potentially there were talking about plans to do so. How do we fix that problem? Let's say Trump's gone, whether it's in four years, or it's in four months or whatever it may be until inauguration. How do we fix that problem and how do we fight back against Russian or another country's disinformation aim to sow internal division?

General H.R. McMaster: (39:07)
Well, I think the first thing we have to recognize is, we have to take this very seriously, this polarization in our society on all extremes. And what I think it's important to recognize is the Russians don't create these divisions. We create the divisions and they exploited those divisions. Russia's efforts to divide us on issues of race. The Soviet union's go back to the 1920s, but Hey, now they have new tools available. They have social media that already by the algorithms that dominate social media drive us further and further apart from each other because the companies keep more and more advertising revenue, which is more and more clicks. Which is, Hey, let me show you even more extreme content to get you to click even more. And then we have the issues of polarization of our political leads and our media.

General H.R. McMaster: (39:57)
How did it become this way? Where if you need a one direction politically, you watch one cable news ditch. You lean the other direction, you watch another one. We just had a presidential town halls yesterday, two separate. That was some people aren't hearing both sides. They're not hearing a civil meaningful debate. And I think that even our mainstream media, they're destroying themselves over either support for it or hatred for Donald Trump or so. It's crazy what's happened. And so, we all have to come together as Americans and be part of the solution for this. And I think we have to be intolerant of extremist, like those that were plotting against the governor.

General H.R. McMaster: (40:41)
And we have to recognize though that, our work's not going to be done easily here. That kind of extreme view is based on ignorance I believe fundamentally. Ignorance of our history and who we are, ignorance of our democratic process and ignorance of your fellow Americans. These are people who hate because they don't even know the people who are the object of their hatred. I just think we have to we have to do everything we can in our communities and universities, in schools, and in athletic organizations. Let's get people together. Let's emphasize a common identity.

General H.R. McMaster: (41:23)
I think history plays a big role in this, John. I do think that in many ways, our young people have been subjected to what I would say, and this might sound extreme to some people, but essentially a curriculum of self-loathing. That really portrays America as the problem in the world. And this is associated with the new left interpretation of history. I think we should be able to come together around, you'll not a contrived happy view of history, but a recognition of the nobility of this radical idea of our revolution, that sovereignty buys neither with kangaroo parliament, but with the people.

General H.R. McMaster: (42:00)
We could also be disappointed though, that our bill of rights and the elbow rights in our inner declaration of independence did not apply to all Americans. And it was only until our most destructive war, the 4 million people were emancipated from slavery. We can celebrate that, but also be disappointed at the failure of reconstruction. The rise of Jim Crow and the KU Klux Klan, but then also celebrate the civil rights movement and the dismantlement of the Jorah segregation and inequality of opportunity. But still recognize, Hey it's a work in progress as our founders knew it would be.

General H.R. McMaster: (42:34)
That our democracy had to be constantly nurtured. So I just think in Battlegrounds, I quote Richard Wharton, a philosopher, he said that, "National pride is to nations. What self-respect is to individuals and necessary ingredient for self improvement." And I think in many ways we have to make a concerted effort to come together as Americans and restore pride in who we are.

John Darsie: (43:04)
Well, general, we're going to leave it there. Thank you so much for taking the time to talk to us again, this is another interview we feel like could have gone on for another three hours. And we apologize to everybody who asked questions that we weren't necessarily able to get to. But you offered such a sweeping a great analysis of everything going on domestically and in terms of our foreign policy. We're very grateful for your time. Anthony, do you have a final word for General McMaster. And thank you so much for being nice to Anthony and giving him that nice farewell party when he didn't last longer than a carton of milk in the White House.

Anthony Scaramucci: (43:32)
The guy's getting fired General. I just want to make sure you just say hello to him. Maybe you'll see him out of the Hoover Institute. I just want to know if you're going to use the same picture when the children's version of the book comes out? Just a little intimidating there General. Okay. You may want to tone it down for the kids. Okay.

General H.R. McMaster: (43:50)
I'll work on my softer side [crosstalk 00:43:52].

Anthony Scaramucci: (43:54)
All right. But in all seriousness, our thank you so much. We got to get you to one of our live events, hopefully soon once the pandemic ends. My regards to the family, General. And we'll see you after the election, I hope.

General H.R. McMaster: (44:06)
Thanks so much. And thanks for this great forum too. Thanks. Take care.

Anthony Scaramucci: (44:10)
Great to have you on, sir.

Investors Talk Digital Decolonization | SALT Talks #80

“I continue to see virtually every day more evidence that we're not going to have the huge concentration of wealth and power in just 5, 10 companies that it looked two to three years ago.”

David Halpert is the founder, portfolio manager, and chief investment officer of Prince Street Capital, a specialist emerging and frontier market asset management firm based in New York and Singapore. With 30 years of experience researching and investing in the developing world, David coined the term ‘Digital Decolonization’ – a new paradigm for assessing investments in emerging and frontier markets, unveiling the concept in a 2019 white paper.

Mark Matthews is Head of Research Asia Pacific for Bank Julius Baer & Co. Ltd., an appointment he has held since June 2011. His research coverage comprises single stock, sector and select country analysis. In addition, he is a member of the bank’s investment committee, which determines asset allocation recommendations to clients.

It seemed possible we were headed towards a world where cross-border technology companies would reign supreme across the globe, instead we’re seeing a digital decolonization. Companies like Facebook, Google and Amazon seemed positioned to capture the global market. This trend now appears undercut by the emergence of regional technology companies that have quickly risen into massive institutions worth billions. “There is a sense really all over the world, including in the United States, that cross border technology companies playing such a big role in people's lives, whether their financial lives or their social and political lives, is problematic.”

Companies like Reliance Industries in India have attracted massive investment from the largest American corporations. In Poland, an Amazon-like e-commerce company Allegro is now worth $24 billion. Expect companies like these to continue to pop up and grow quickly in the era of digital decolonization.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKERS

David Halpert

Founder, Portfolio Manager & Chief Investment Officer

Prince Street Capital

FULL BIO

Mark Matthews

Head of Research, Asia Pacific

Julius Baer

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:12)
Hello, everyone, and welcome back to SALT Talks. My name is John Darsie. I'm the managing director of SALT, which is a global Thought Leadership Forum and networking platform at the intersection of finance, technology, and public policy. SALT Talks are a digital interview series that we launched during this work from home period with leading investors, creators and thinkers. And what we're trying to do during the SALT Talk series is replicate the type of experience that we provide at our global conference series, the SALT conference. And that is really to provide a window into the minds of subject matter experts, as well as to provide a platform for what we think are big ideas that are shaping the future. And none of our talks fully encompass our entire mission, as well as I think our talk today will encompass that mission.

John Darsie: (00:58)
We're very excited to welcome David Halpert and Mark Matthews to SALT Talks. And the focus of today's conversation is going to be on digital decolonization, which is a term and a concept that we'll get into more depth and during the talk. But it's a fascinating term that was coined by David, who is the founder of printery Capital Management. So, David Halpert, the founder, Portfolio Manager, and Chief Investment Officer for Prince Street, which is a specialist emerging and frontier market asset management firm, based in New York and Singapore. And I believe David is coming to us today from one of his homes in Bali. So we're very excited about that. With 30 years of experience researching investing in the developing world, David coined the term that I mentioned previously digital decolonization, which is a new paradigm for assessing investments in emerging and frontier markets.

John Darsie: (01:48)
He then build the concept in 2019 in a brilliant white paper that I encourage you to go check out, and we'll talk about it more on today's talk. Prior to founding printery in 2001, David managed a long only emerging markets portfolio at Zesiger Capital Group and worked in Indonesia as an equity research analyst. Mark Matthews our other guest today, is the head of research for Asia Pacific at Julius Baer, an appointment he's had since June of 2011. His research coverage comprises single stock sector, and select country analysis. In addition, he is a member of the banks Investment Committee, which determines asset allocation recommendations to all of its clients.

John Darsie: (02:29)
Mark has held senior positions managing the research and equity sales functions at financial institutions, including ING Baring Securities, Standard & Poor's, and Merrill Lynch in Asia. A reminder if you have any questions for David or Mark during today's talk, you can enter them in the Q&A box at the bottom of your video screen on Zoom. And hosting today's interview is Anthony Scaramucci, the Founder and Managing Partner of skybridge capital, a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (03:01)
Well, John, thank you. And it's a great honor to have you both on, I don't know if you've seen any of these before. But Mark and David, we'd like to start with the non Wikipedia question. So what can we learn about you guys that we wouldn't necessarily learn from Wikipedia? We're doing a Google search, why don't we start with you, Mark. Tell us, something about yourself that got you started and why you ended up doing what you're doing for career?

Mark Matthews: (03:31)
There's no Wikipedia for me anyway. So I'll just tell you, I guess the thing that you're looking for at least what pops in my head is most people come out to Asia, I've been in Asia for 31 years, to make money. And I didn't I came out here because my father was a professor of religious studies, and he specialized in Buddhism and Hinduism. And so from a very young age, I just had Asian bug. And I still do I think it's the most interesting place in the world. And there's actually no place I'd rather be.

Anthony Scaramucci: (04:10)
Before I go to David, tell us why. Tell us for people that... I agree with you actually, I love coming to Asia, I love being a part of that culture. But for Americans that have not had that experience, Tell us why you feel that way.

Mark Matthews: (04:25)
Oh, that's a tough one. I think it's just so exotic. I think, that's what turns me on. It's just a very exotic place. And the other thing I would say that pops into my mind is vibrancy. There's just so much going on. I guess you can get that in Manhattan, but you get that big time in cities like Jakarta and Bangkok-

Anthony Scaramucci: (04:50)
You can't get that in Manhattan anymore. I mean, I'm in my office today and it is a workday and you could blow a cannonball down that street not hurt anybody, unfortunately but, maybe it'll change again. Well, David good. I'm David, I'm loving the outfit By the way, you get the most exotically dress of the four of us on this SALT Talk. So tell us a little bit about your ventures and tell us where you are right now, tell us where you're located.

David Halpert: (05:23)
So I'm currently at the Bali Purnat Center of The Arts, which is the art center that my wife built here about 15 years ago. And which we use as a concert space and a conference space during normal times. At the moment, with COVID crisis, of course, there's essentially no tourism in Bali. So I'm here in part for morale in the island, because people have been worried about their jobs, unfortunately. But it's been a great time to be here, because there's obviously no traffic, and we're able to really enjoy Bali the way it used to be.

David Halpert: (06:16)
I came to Asia around the same time Mark did, essentially looking for a career opportunities, and it served me very well, continuously. And I've gotten to participate as an investor and as an analyst in some of the most dramatic wealth creation over the last 20, 30 years, this happened anywhere. Interestingly, of course, there's been a lot of questions about whether Asia is now done, either because of the breakdown in globalization from World Trade, or because of the US, China problems. And clearly Singapore, Indonesia they're having a recession this year. But I've been impressed as I look around Indonesia, by how much opportunity still there is for growth and improvement in people's lives and improvement in the efficiencies of things like transportation and manufacturing. So I'm really quite optimistic for the future here.

Anthony Scaramucci: (07:24)
So you've developed this new paradigm that you're calling, the markets are calling digital decolonization. So for those of us on this SALT talk, that don't really know what that means, and I actually think it's a fascinating perspective on what's happening in the world right now, what's happening, likely, in the post COVID world, tell us what digital decolonization is, and tell us what the investment opportunity is as a result of it.

David Halpert: (07:53)
So for Americans, the most dramatic example of digital decolonization would be the banning of TikTok. And India banned TikTok a few weeks before the US moved to ban TikTok. But, there is a sense really all over the world, including in the United States, that cross border technology companies playing such a big role in people's lives, whether their financial lives or their social and political lives, is problematic. And I don't know whether it's going to be as absolute as banning and blocking and all the stuff that's currently under discussion or it's going to be in more subtle mechanisms such as, preferential logistical support to the local e-commerce company against the foreign e-commerce company. But I continue to see virtually every day more evidence that we're not going to have the huge concentration of wealth and power in just 5, 10 companies that it looked two three years ago as if we might have.

David Halpert: (09:08)
And if you look at what's happened with Reliance Industries in India, where RGO has now attracted investments from Facebook, Google, and potentially soon the Amazon. I think that's a classic example of the digital decolonization movement where, financial investment is enabling the development of a local Indian, e-commerce, social networking, financial services powerhouse. And even more recently than that, three days ago, on the Warsaw stock exchange in Poland, you saw the IPO of Allegro which is an $11 billion company and in three days that stock has doubled. And Allegro is kind of Amazon of Poland. But that in Poland, which is not that big a country and not that big economy, you can already have a $24 billion e-commerce company. I mean, that tells me that we are going to see my 1.5 trillion target in terms of digital decolonization market cap over the next 5, 10 years.

Anthony Scaramucci: (10:25)
So basically, there are companies that are around the world that are similar to these five companies. But they are indigenous, if you will, to that local area that are going to be magnificent. So let me ask David, how do those companies create commerce? Will it be globalized, like the American companies? Or will it be local markets? David, how do you envision that?

David Halpert: (10:58)
So, I mean, I'm here in Indonesia, and I can speak most immediately to what I see on the street here. But I believe it's largely the same as what you would experience in Poland or experience in Argentina or experience in India. The big global multinationals, whether Chinese or American, don't really serve the local customer, as well as a local company can. They don't stock the same local range of products in their e-commerce offerings, they don't provide as deep a catalog of local language film, they don't teach the online learning program to the local education exam. And so it's a break down in this aggressive digital globalization that we saw really from around 2009 to around 2016. And, of course, there are going to be many things that are going to be completely globalized, whether it's 5G technology or GSM technology or Android or whatever, there will be many things that will be shared across markets. But I don't think it will be as concentrated in just a couple of companies as was previously expected.

Anthony Scaramucci: (12:33)
So Mark, how would you invest that Julius Baer in what David is talking about? This future vision for world technological commerce.

Mark Matthews: (12:48)
Well, what I try to do is to get David's funds on our platform, because he's a very good fund manager. But the other thing, obviously, you can do is find these companies yourself. And David, basically was talking about a few like one recent IPO in Poland. The problem right now in the emerging markets, excluding China, is that if you're lucky, each country has one, or maybe two. India is a good case in point, I mean, India is by emerging market standards, a massive market. There's really only one new economy, stock, which is Reliance Industries. So, what you could do is build a basket of those local champions pick one in every country, you got one in Argentina, you got one in Poland, you got one in India and you can probably add about a dozen on top of that and other emerging markets.

Mark Matthews: (13:48)
But problem is that not all of them will be good so, I think really, this is a very special and want to say, this concept is just in its fruition. And actually, it's David's concept. And so apart from him, I don't really think there is any vehicle to go into this. Then you're left with building a basket by yourself and probably getting some rotten apples in there.

Anthony Scaramucci: (14:21)
So David, sometimes there's a push back in the US, and this is primarily probably born from federal reserve interest rate policy is that, the emerging markets have an appeal. They seem like they are going to be the arc of future growth, but yet they never get to the expectations that people set on them here in North America, and so what's different about this, this time?

David Halpert: (14:51)
Well, I can talk about that at some length, but for example, Argentina has been a big disappointment as you know, and lots of people have lost lots of money in stocks and even more so in bonds in Argentina. But if you bought Mercado Libre 10 years ago, and you sold it today, you made more than 10 times your money in US dollars. So the tech thing seems to be so powerful that it overwhelms the macro problems of the country and that's even borne out in the price action of the NASDAQ stocks in the US. The US economy is in deep trouble, yet NASDAQ's close to an all time high. So I think investors at the moment at least are willing to look through the short term, macro economic disappointment of emerging or developed markets toward this future. Now, maybe these investors are wrong. It's a different subject, but this thing so far has worked really well.

David Halpert: (15:56)
Now, I would also say to the fact that emerging markets continue to disappoint. I think emerging markets on average disappoint, but several emerging markets have actually exceeded people's expectations over the longer term. So China and Taiwan both have proven to be remarkably successful economies over the long term, and are now basically developed countries. And there have been others smaller examples around the world, Poland has done very well, where a long term investor has made a lot of money even in the old economy companies. So it's not that bad. But yes, on average lending money to the government, Argentina is a very risky decision.

Anthony Scaramucci: (16:46)
Yeah, well, they've devalued seven times in the last 20 years. I think that's one of the issues that gets people worried. Mark, what's your take? Explain to our American listeners right now, the opportunity in India and China, how you see the world over there? And what are Americans missing that may not be traveling as much as the two of you?

Mark Matthews: (17:10)
So I think what I'd begin by saying is that, the emerging markets, and that includes Asia, have been a tremendous opportunity cost in aggregate over the last 10 years. So when you just look at the recent history of these markets, you would say, why would I bother because China for example, MSCI China, dollars, including dividends, has given you annual return of 7% over the last 10 years. S&P is twice that. And there I would say that just like in America, every decade is different in terms of the performance of sectors and you'll find that there's massive rotation and stocks that go to the top of the S&P 500. Every single decade they're different. I think in the emerging markets, the next 10 years will be that way, too. In fact, I know it will, because 10 years ago, 80% of the MSCI China index was what you'd call old economy companies. So banks, oil and gas, materials, petrochemicals, that kind of stuff.

Mark Matthews: (18:27)
And what happened was in 2018, New Economy companies like technology, telecommunications, healthcare, they surpassed the old economy stocks in their weighting in the index, and today they're about 70% and old economy are about 30%. So that intuitively means companies with much higher returns on equity and much higher earnings growth. And if you just look at the Shiller PE, which I'm sure you know, Anthony provides you a really long term, it's been quite a reliable indicator for long term performance 10 year performance, it's inferring about 9% per year for China over the coming 10 years. And by the way, it's inferring based on today's ratio for the US, 4% per year for the US.

Mark Matthews: (19:20)
So I think that's what I want to say and I also want to say that right now, there's only kind of one new economy stock in each of the emerging markets outside China. But that won't be the case, three, four or five years from now. And a lot of these countries their markets will mature into, I think, much more sophisticated, interesting markets as far as the major composites are concerned. Largely because in the old days, if you wanted to be Successful as a technology person, you basically had to go to Silicon Valley. And today you don't, you can stay in India, you can stay in Thailand, there's a lot to do on the ground in all of these countries.

Anthony Scaramucci: (20:17)
It's a fascinating time because Americans feel like they're looking inward, at least the political leadership. And so David, let me ask you this, political saber rattling, ongoing trade tensions, whether it's a Trump second administration or a first Biden administration, what do you think the role of US geopolitics is, in terms of how it's going to affect the outside world? Or will it not have any impact on the outside world?

David Halpert: (20:52)
So, Anthony of course, this is a huge question and a still pretty unclear in either of the outcomes. But I would tell you, what I see in my companies is that they are preparing for the supply chain to split anyway. So Taiwan semiconductor recently announced a $12 billion investment into a state of the art manufacturing facility in Phoenix, Arizona, and I believe that will be the single largest foreign manufacturing investment in the United States announced during the Trump administration. That investment is being undertaken with a plan to begin production in 2025. So they are looking through this current era in history and saying, we still need to have a huge fat in the US. So that tells me that that company at least thinks the supply chain is splitting. And many of the other manufacturing companies that I talk to, are signaling to greater or lesser extent that this is their base case.

David Halpert: (22:07)
So, companies that depend on cross, transpacific shipment of complicated manufacturing chains, I think, have to adjust to this new reality.

Anthony Scaramucci: (22:23)
In hindsight, and this is sort of a question for both of you, in hindsight, would America had been better off, ratifying and signing the TPP, the Trans Pacific Partnership?

David Halpert: (22:37)
What do you think? Mark's Canadian.

Mark Matthews: (22:45)
I feel that one of Donald Trump's legacies, will be that he started a process that was long overdue of... It's such a tough thing to just say in a sentence, but I'm sure you know what I mean. There was a very lopsided relationship whereby China was charging far higher tariffs on imports from the US than in reverse. Those were tariffs that dated from when it entered the World Trade Organization in 2001. And it was up less than a $3 trillion economy and people were very poor. And it was in need of adjustment. And the TPP, I guess, is a sort of tangent for that. But, the idea, I think that the US let too much leave the country, my humble opinion, is correct. And therefore, some kind of rebalancing was overdue and it's happening. David, why don't you take over.

David Halpert: (23:59)
So the irony of it is that the TPP, was actually quite a sophisticated document. And it was a more sophisticated document than, for example, NAFTA, which was written before a lot of changes in the economy. I think TPP, in retrospect, would have served the interests of the United States quite well. I think the US Canada Mexico agreement that this administration, negotiated in which Canada seems on track to ratifying, is probably a better agreement than what NAFTA was. I like requiring that Mexican auto factories pay $16 an hour, I think that's a very reasonable request. But the TPP was... Very few people have actually read the TPP and I have. And it was a sophisticated, subtle, 21st century document. But politically, it just wasn't viable and that's... I listened to Condoleezza Rice, talking at a J.P. Morgan conference a couple of days ago. And she had an interesting term, she said, "The American people are tired." And whether she's right or not, and whether they should be tired or not, I think that is increasingly becoming consensus in Washington about globalization and about the military expansion around the world and the free trade culture.

David Halpert: (25:55)
So... You take a billion dollars, and you build a factory in Phoenix, Arizona, and you've solved that problem. If you're Samsung, you already have a factory, you just increase the size of the factory that you have. If you're Huawei, you probably are not building a factory in the United States, you're probably planning your distribution to focus on the markets where you're going to be welcome, which include Indonesia. I'm not encouraging Indonesian entrepreneurs to plan a big export push at this point, I think that we need to look again at the domestic market here, the domestic market in India, the domestic market in Asia, which is still ludicrously underdeveloped.

Anthony Scaramucci: (26:49)
So when you when you lay out that macro backdrop, and again, this would be a question for both of you. How do you feel about the US dollar right now directionally? Where do you think the US dollar will go over the next five to 10 years?

Mark Matthews: (27:05)
Why don't I try that first. Now, the thing is that if we're just talking about the dollar index, two thirds of that is the euro. And on a five year view, I feel I'd much rather have my money in dollars than euros. Because I see Europe in bigger trouble. I see persistent malaise in their society, which percolates through into their economy, and an economy, which is so export oriented anyway, that it's sort of naturally structured to demand a weaker currency. And no really strong leadership coming up after Angela Merkel, unless Macron can somehow take over as the leader of Europe, and I know the Germans don't going to let them do that.

Mark Matthews: (27:50)
So anyway, if we're just talking about the dollar index, I would be perfectly happy owning the dollar index. But if we're talking about different crosses, then I guess the one I'll just mentioned, and then I'll pass it over to David would be the dollar renminbi. And I think the renminbi will appreciate. They just relaxed some reserve requirement ratios on onshore forex trading a couple days ago, because it had appreciated 7%, since May was a bit too fast for them. But I think that they're focusing internally, the new catchphrase is interloop or there's a variety of different ways you can translate it, but essentially means weaning ourselves off of imports from overseas, and developing our domestic economy more. And I think they will welcome over time a stronger renminbi.

Mark Matthews: (28:57)
They've done a lot to get into the footsie Russell global bond index, recently, for example, which will naturally cause a lot of money to go into China just to achieve benchmark status in that index. And I believe that a lot more people are going to be buying Chinese stocks over the next five years too, I think it's rising to core status in global portfolios. It was always sort of a tactical thing before. So that's what I think and David over to you.

David Halpert: (29:33)
I'm a big fan of haircuts as a way to measure currency competitiveness. And I would say one of the most expensive places in the world to get a haircut right now is Geneva. And Europe in general still feels quite expensive at one euro 20, I think. But getting a haircut in Shanghai or getting a haircut in Singapore, or getting a haircut in Indonesia is much, much cheaper. So on a long term basis, there still is a lot of structural undervaluation in the currencies in Asia in particular, to a lesser extent, in Latin America. And that suggests to me that while the Fed and all that can cause another round of evaluations if necessary, there is a long term value story for diversifying out of the US dollar. Europe would not necessarily be my first stop.

Anthony Scaramucci: (30:39)
Well, guys, I'm going to turn it over to John, because we have a ton of questions coming up in the queue, which I think are fascinating. So John Darsie, take it away.

John Darsie: (30:50)
Yeah. We have several follow up questions about the digital decolonization theme. Going back to digdec, which is the shorthand for digital decolonization. Is that a strategy just for technology companies? How does it factor in the service sector? Or what's the investable universe in terms of innovation as part of that digital decolonization theme?

David Halpert: (31:15)
John, thank you for that question. I should have been clear at the beginning. Digital decolonization is not limited just to the technology sector. The data revolution, the digital revolution, is currently impacting almost every aspect of economic life. Whether from the wearables manufacturing sector, or the services like financial services, travel services, education services, the power sector, the infrastructure sector, all of these are sectors where data and more sophisticated use of technology and innovation are increasing productivity and providing better services to customers at better prices.

David Halpert: (32:10)
So we view this revolution as not limited to any one sector. And indeed too much in the NASDAQ, the NASDAQ stuff has done great this year, it did great last year. But too much of that may not be the ideal way to express this idea of going forward. I'm particularly interested right now with the energy transition, which I continue to see gaining momentum right around the world. And that is much less hype than the e-commerce space, for example and there's still a lot of opportunity. Do you know? For here in Southeast Asia, only 2% of the electricity grids are renewable?

John Darsie: (32:55)
Wow.

David Halpert: (32:57)
And just growing that out, is going to create a huge opportunity in distributed power and power tech related investments in this part of the world.

John Darsie: (33:13)
Mark, I have a different question for you from the audience. And it goes back to your comments about the trade relationship between the United States and Asia and I think some of this digital decolonization, and David, you can correct me if I'm wrong is driven by the fact that there's increasing nationalism from a commercial perspective. So, do you think a closed United States, which I think the horse is sort of out of the barn in terms of the United States and the popularity of policies that are trying to bring manufacturing home and restore working class jobs in the United States. Do you think a more closed United States is a catalyst for increasing performance of assets in emerging markets, especially around this digital decolonization theme?

Mark Matthews: (33:56)
I'm not sure there's a direct link, although intuitively, there should be. Simply because I don't know... I mean, I guess what you mean is if the United States closes itself off, and therefore you would expect it to be a much less appealing place to invest in relative terms, the rest of the world would be more attractive, I guess I see that. But what I would just say is, by the way, the trade war, and the digital economy are very separate things. Services are counted in these trade balances. And when you're talking about America, cutting itself off or turning inward, I still believe that there isn't should be a place for manufacturing in America.

Mark Matthews: (34:58)
I'm in Singapore, which is a country with I think of much greater per capita GDP than the United States. And it's very expensive place, but the government still make sure that manufacturing is around 20% of GDP. Because not everybody can be a barista at Starbucks or a computer programmer at Google, there have to be jobs for other people. And I think there's a balance that governments need to seek between providing those kind of jobs and still remaining an open economy, and every country will have a different line to walk. But just to summarize, I do think that America's right actually to develop an economic policy that focuses on its middle class instead of multinational companies profits. And I think, at the same time, it can remain open, particularly as its service sector companies are really the giants in the world. So that would be my answer to you.

John Darsie: (36:09)
I want to finish with a pretty broad question. And we had a speaker at SALT, our Abu Dhabi conference last December named Parag Khanna, who you might be familiar with. He's a prolific author on topics related mainly to Asia. His most recent-

David Halpert: (36:23)
He lives in Singapore, so we've both met him. But-

John Darsie: (36:27)
He'll definitely be near the top of our list for SALT Bali 2022, which will teach to the people on this call right now. But, he wrote a book called The Future Is Asian, I found both his book and his speech at SALT, extremely compelling talking about the demographic shifts, and the economic shifts that are taking place that make Asia so compelling as an investment destination. So, I want to talk about emerging markets with a focus on Asia. What are first of all risks to that thesis? What are the positives that are maybe, that exists in these emerging markets in Asia that aren't talked about or valued highly enough? And in general what's your outlook for those markets over the next five to 10 years?

John Darsie: (37:09)
We talked about how they've sort of underperformed if you paint with a broad brush over the last decade. But, what's your outlook over the 5, 10 year time horizon? We'll start with David, and then we'll go to Mark.

David Halpert: (37:22)
So China's riding high if you notice price action after the US presidential debate on September 29, the Chinese stock market went straight up. So it's pretty clear that in the short term, at least, China's going to be doing well out of the dysfunction in the United States. Medium term, however, I think China is getting a bit tired, it's already quite wealthy, their labor costs continues to move up. As the currency appreciates, they're losing competitiveness, again to other markets, like Vietnam, and Bangladesh, which are getting some of these low end labor intensive manufacturing jobs away from China.

David Halpert: (38:10)
So I think select opportunities in China are still going to be great for the next 10 and 20 years. But, China Inc, per se, I'm not that excited. India is a different story. Its much earlier stage and most things. It is proving somewhat competitive in manufacturing, I would argue Bangladesh and Vietnam are more competitive. But there's just a huge amount of inefficiency in the Indian system, whether the agricultural system, the manufacturing system, transportation system, etc. financial system. So, I rationalizing India alone is a great 10, 20 year project. And Indonesia, is doing somewhere in between the two countries, but also just rationalizing Indonesia probably keep people busy here for 10, 20 years, even if the US shuts up completely.

Mark Matthews: (39:11)
So my-

John Darsie: (39:12)
Answer the same question if you would.

Mark Matthews: (39:15)
Sure. First off, what I would say, John, as you said, the demographics are great. Well, for some countries, they are but not for China. In fact, by the end of this century, China's population will be half of India, and the US combined. And I think even right now, the average Chinese is about the same age as the average American. But 10 years from now, 20 years from now, the average Chinese will be about, I think, 45 to 50. And the average American will still be about 35, somewhere around there. So anyway, that's besides the point. I said to Anthony in the beginning that I love it here, I still do after 31 years. But one comment I would make is a cultural one. I think that the societies here, I guess I'm speaking more about East Asian societies. In other words, Japan, Korea, China, Vietnam, but you could probably also throw in Thailand and a couple of others as well. They're very communitarian, is that a word? They don't really allow people to stand up and be wild and crazy and frankly, even where I'm from Canada, we can't be as wild and crazy as people in America either, we're much more communitarian, I hope that's the word.

Mark Matthews: (40:40)
And I think that really allows the geniuses to blossom when they do have the ability to come up with their crazy ideas and-

John Darsie: (40:51)
And express themselves.

Mark Matthews: (40:53)
Yeah, so I think that's something that's lacking here culturally. And it does put a break on innovation and creativity. And so that would be my comment, John.

John Darsie: (41:09)
Yeah, I mean, it's very interesting you say that. Anthony gave a talk to the US China Business Council. And he made that exact point, that free expression and the ability to use your creative muscles is a huge reason why the United States is such a home for entrepreneurship and innovation. We have one more audience question I want to ask to you, David, before we let you go. What are different types of digdec companies? Give us some examples across the spectrum of digital decolonization. And what does the IPO calendar look like in these emerging markets? And how does it reflect the growth of this digital decolonization theme?

David Halpert: (41:44)
So the IPO calendar looks great. Again, we just had Allegro in Poland on Monday. It already doubled and created $12 billion of input Mehta market cap in the last three days. We got a Kazakhstan deal coming up next week. We've got Ant Financial which is going to be a $30 billion transaction. So there's tons of things going on the IPO calendar. But, in terms of different kinds of companies technology, healthcare, power tech, edutech, FinTech are the five verticals we tend to be focused on right now. But I would expect all sorts of different applications of data science and etc, over the next 10 and 20 years. Or even less than five or 10 years. So I see a ton of opportunity in this. And as I said-

John Darsie: (42:42)
We're very excited from a SALT perspective, from a SkyBridge perspective to work with Prince Street, work with Julius Baer, and continue to dig into the opportunities that exist in emerging markets. It's not a monolith, there's different opportunities in different locations, for sure. And as you said, if you are able to pick the right companies, there's great opportunity, no matter how emerging markets as an asset class perform over the next five to 10 years. So thank you so much, David and Mark, for joining us on this SALT Talk. We look forward to revisiting these themes maybe in a few months, if there's a change in American presidential administration, as well, to see how that affects things. But, thank you so much for joining us, Anthony, you have a final word?

Anthony Scaramucci: (43:22)
Just so you guys know, John's trying to get out the Bali in the worst possible way so much so that he wants to do a SALT conference, David, right where you're sitting.

John Darsie: (43:33)
What's not to like? All these beautiful, there's a great burgeoning tech scene in Bali as well. And I think it fits in well with that theme.

Anthony Scaramucci: (43:41)
We're super excited about your future, gentlemen and the future of the world. And we're looking forward to learning more about digital decolonization. Thank you so much for joining us today.

David Halpert: (43:53)
Thank you guys. Mark, sleep well, and I really appreciate your taking the time to do this first.

Mark Matthews: (44:00)
I'm just honored that I could be here. Thank you.

David Halpert: (44:03)
See you all in Bali in 2022. Bye.

Anthony Scaramucci: (44:06)
Amen.

John Darsie: (44:07)
Hopefully sooner.

Nathan Gelber: Profiling Personalities in Investing | SALT Talks #79

“The focus of our effort is profiling the personalities of investment professionals and those who are involved in the investment process, to understand that decision-making process.”

Nathan Gelber is the founder and Chief Investment Officer of Stamford Associates Limited. Stamford was launched in 1984 with the vision to materially improve the traditional investment consulting model for UK pension schemes with a focus on providing superior investment solutions, generating superior risk adjusted returns and establishing effective governance structures. It has subsequently grown to become a leading international investment consultancy firm.

Behavioral psychology has only more recently entered the mainstream. At Stamford, though, behavioral psychology professionals have been used to better understand investment professionals and their decision-making process. Analytics are combined with in-person observations during the employee-hiring process as well as the day-to-day work environment. “Psychologists have 14 criteria which they are interested in; those include curiosity, independent thinking, and the willingness to go against the crowd and not be a follower.”

Transparency is key in the investment evaluation process. Bernie Madoff attempted to attract investment from Stamford, but his unwillingness to be transparent served as a non-starter for a company that uses a rigorous and holistic evaluation approach.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Nathan Gelber

Founder & Chief Investment Officer

Stamford Associates

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi everyone and welcome back to SALT Talks, my name is Rachel Pether and I'm a senior advisor to SkyBridge Capital as well as being the MC for salt, a thought leadership forum and networking platform that encompasses business technology and politics. Now, SALT Talks is a series of digital interviews with some of the world's foremost investors, creators and thinkers, and just as we do at our global SALT conference areas, we aim to empower really big, important ideas and give our audience a window into the minds of subject matter experts.

Rachel Pether: (00:42)
Today I'm very excited to be speaking to Nathan Gelber. Nathan is the founder and chief investment officer of Stamford Associates, which he founded in 1995 with the vision to improve the traditional investment consulting model for UK pension schemes. Since then, it's grown to become a leading international investment consultancy firm, and the Telegraph in the UK actually noted that it was perhaps the world's most thorough system of fund research for the way that they incorporate behavioral psychology into the investment process. Prior to founding Stamford, Nathan worked for Orion Bank in London and Hill Samuel & Co. Nathan, welcome to SALT Talks.

Nathan Gelber: (01:24)
Rachel, thank you very much. A pleasure to be with you.

Rachel Pether: (01:27)
Now you have a wealth of experience that spans over 40 years, so maybe just start by telling me a bit about your personal background.

Nathan Gelber: (01:37)
I started working in the city in the long distant past, about 45 years ago, and cut my teeth at two investment banking firms, one called Orion Bank Ltd, the other one as you say, Hill Samuel & Co Ltd, where I worked predominantly in corporate finance, as well as in investment management. After 10 years, I started my own business with the idea to help institutional investors to improve their investment outcomes by assisting them devising efficient investment strategies and populate those with the best investment management talent we're able to find for them. And when we're looking at the firm now, you see we employ roughly 42 people, have a global reach when it comes to placing our clients assets with talented investment managers, and oversee assets in excess of £70 billion.

Rachel Pether: (02:51)
Within the 42 people that you have, how many behavioral psychologists do you employ?

Nathan Gelber: (02:57)
We have worked with behavioral psychologists for the better of 20 years. It started as an experiment and developed into a very significant part of our analytics. And as we sit here today, we employ full time three qualified psychologists under the leadership of Professor Adrian Furnham, who used to be a head of behavioral finance at UCL in London, a preeminent behavioral psychologist.

Rachel Pether: (03:30)
So behavioral psychology now is much more mainstream than it was 30, 20, even 10 years ago. What initially generated your interest in this area?

Nathan Gelber: (03:44)
As you well know, Rachel, the mainstream of behavioral psychology really looks predominantly at the behavior of groups and tries to identify the traits that group behaviors display. We have taken this one step further because we're more interested in the behavior of individuals and individual differences, so the focus of our effort is profiling the personalities of investment professionals and those who are involved in investment process, to understand that decision-making process.

Rachel Pether: (04:27)
And so what does this actually look like in practice when you go into investment teams and then assess individuals? How do you actually incorporate the behavioral psychology element?

Nathan Gelber: (04:41)
Our work is holistic in nature and comprises [inaudible 00:04:45] analytics, as you would imagine from a firm such as ours, and integrated with it are the psychologists, so they are integral parts of our investment team and participate in each of our engagements with external managers, whether it is doing the appraisal and assessment process, or whether it relates to ongoing managing and monitoring, we always have a psychologist sit next to us at the table to observe things which the untrained eye simply cannot see.

Rachel Pether: (05:20)
And so with that [crosstalk 00:05:25].

Nathan Gelber: (05:23)
And feed in... I'm sorry.

Rachel Pether: (05:29)
Continue.

Nathan Gelber: (05:30)
The qualities feed into our overall appraisals and to the extent that they raise concerns, we take those concerns very seriously, and there have been instances where the psychologists gave us strong advice to pursue a give mandate because they just, for example, didn't feel comfortable with the decision making made by a group of individuals.

Rachel Pether: (05:55)
I'd love to come back to specific case studies of the managers that you have, let's say rejected for want of a better word, but we've already had a question coming in from the audience on what are some of the key questions that you ask your potential fund managers? And how detailed is the questionnaire?

Nathan Gelber: (06:17)
Well, the questionnaire we send out is a standard form of questionnaire which basically tries to summarize the investment process and individuals involved in those processes. This is more of what we would describe as fundamental due diligence. The substance of our assessment and appraisal process takes place at face-to-face meetings with prospective managers, and as I mentioned earlier, those meetings are attended by the psychologist as well.

Nathan Gelber: (06:54)
Whilst we on the investment side are essentially looking for evidence of investment edge, exceptional talent, and consistency of application of a well designed investment process, the psychologists have 14 criteria which they are interested in; those include curiosity, independent thinking, the willingness to go against the crowd and not be a follower. So there's a whole slew of different aspects which they are considering and it all goes into the melting pot, psychology together with investment, and we think it's how it should be.

Nathan Gelber: (07:51)
The sad thing in our industry is that the great majority of participants rely on past as an indicator for the future. We all know that is a very unreliable indicator, however, human behavior is such that we have behavioral patterns which repeat and are therefore more reliable, and in the context of making the investment decisions, in the absence of complete information, those behavioral aspects become a key determinant of success and repeatability of that success.

Rachel Pether: (08:35)
I love that approach that past performance doesn't equal future performance, but past behaviors do. And just to dive a bit deeper into some of the managers that you haven't gone with because of this analysis, there have been a number of high profile downfalls of managers recently, did any of these come across your radar? And maybe tell me an example of a manager that you didn't go with because of incomplete information.

Nathan Gelber: (09:08)
Well, the easiest example is Bernie Madoff. As you know, Bernie Madoff attracted a lot of attention from investors and was able to accumulate good assets under management. He knocked at our door twice in an attempt to attract capital from our clients, and we stipulated certain disclosure and transparency requirements, none of which Madoff met, and so we didn't even get Madoff in front of our psychologist. We said, "No, no thank you".

Nathan Gelber: (09:53)
Transparency is key to our ability to analyze and assess managers, and we make this very clear at the outset of any contact when it comes to appraising managers, and we forewarn managers of the thoroughness and granular detail, both from an investment perspective as well as from the psychological angle, and forewarn them that an engagement with us may not only be very time consuming and labor intensive, but may also extend over a longer time period, and therefore a process before we engage in analysis.

Nathan Gelber: (10:32)
So [inaudible 00:10:35] fall by the wayside, because they're not able or willing to be transparent, and others because they just don't fill the criteria. We have very high standards and client's capital is important to all of us and we want to make sure that the stewardship of this capital goes into those hands that we deem to be the most capable investors we can find.

Rachel Pether: (11:03)
So given this then, and the emphasis on transparency, what are your views on quant managers, and I guess by extension of that, the increase that we're seeing in artificial intelligence and investment management?

Nathan Gelber: (11:19)
We've thought long and hard about both the use of artificial intelligence, as well as quant based managers on behalf of our clients, because in theory, strategies could be a very good diversifier relative to the other more fundamental strategies that we're embracing for our clients. The disappointing conclusion that we have reached relating to both of those is that we are unable to garner sufficient transparency and clarity about the underlying processes. We endorse those, so to this date we have not used any quant based or AI strategy, and unless managers are willing to share what we would deem to be the black box content with us, it's impossible for us to make a professional assessment, and we just can't endorse something which we don't really understand how it functions.

Rachel Pether: (12:27)
Yeah, that makes sense. And I do have a couple more questions on the behavioral side before moving on to some more audience questions. How have you seen the acceptance of behavioral psychology change over time, given that you've been working in this area for a number of decades now?

Nathan Gelber: (12:48)
Well, if you look at the wider marketplace, I'm actually not aware whether any consultancy firm such as ours has embraced behavioral psychology the same way we embraced it and apply it in practice. Is it a sign of things to come possibly? What we found is that our own track record has improved tremendously since embracing behavioral psychology as part and parcel of our [inaudible 00:13:21]. We've gone from a manager selection hit rate of roughly 51, 52%, to 82% over the last 20 years, which is a clear indication that psychology must be a helpful ingredient of our overall decision-making process and indeed is helpful picking the right managers.

Nathan Gelber: (13:44)
But it's not only picking the right managers, it's also sitting through them through periods of under performance without losing one's nerve, and indeed, using psychology to say goodbye to a manager when perhaps the underlying performance numbers don't suggest that it is time to do so. So, procyclical behavior is not something which we endorse or engage with, it could be coincidental to what we're doing, but we are much more driven by looking into the future based on our most recent behaviors than anything else.

Rachel Pether: (14:22)
So just a quick question, how do you actually define hit rate when you mentioned it's increased from just over 50% to 82, how do you define hit rate?

Nathan Gelber: (14:36)
What we are doing is we are looking at manager appointment and the benchmark relative to which a manager has been appointed, and we measure whether or not over a protracted time period, let's say five or ten years, the manager has built an investment return in excess of the benchmark net of fees. So if you take the 82%, roughly you will find that it means that four out of five managers that we recommended and appointed have exceeded those benchmarks based on the criteria I just explained. So one out of five, if you like, has been a dud, whilst four out of five have been successful. And of course the math works in such a way that when you take them together on an aggregate basis, they're delivering to our clients. We would like improve our hit rate, but it's tough, we think, and talent is not easy to find.

Rachel Pether: (15:44)
No, that's certainly true, and I guess that leads quite nicely into the next question. Obviously, during the current pandemic, a lot of... Well, everyone actually is seeing levels of stress that they're not used to, everyone is under high pressure situations; in this current environment, what are some of the most common biases that you're seeing within your managers?

Nathan Gelber: (16:10)
What we're hoping for are behaviors which are consistent with the investment process that our clients have bought into. So we are observing whether or not managers portfolio footprints are consistent with our expectations, we're not necessarily second guessing whether they buy Shell and sell BP and whether these were good or bad decisions, it's much more a question of following the process as we set out at the beginning of our arrangement with them.

Nathan Gelber: (16:48)
During crisis periods, it is particularly important that managers stick to the guns and are not being tossed around by noise in the market. And when I look at one common denominator, if you like, amongst all the 40 plus managers that we're currently using for our clients, it is that behavioral aspect of sticking to your guns through thick or thin. It doesn't mean that you don't take into account the investment environment and the news flow, but we don't expect a knee-jerk reactions.

Nathan Gelber: (17:26)
So the biases amongst those managers remain to be steadfast in the investment philosophy and application of the process. And that's what we've seen this time around and in many other crises as well, managers usually are long-term orientated, have high conviction, IE concentrated portfolios, and what we do see again in situations such as this, is that they average down on their most attractive holdings. And again, it's something that we would expect in a scenario like that.

Rachel Pether: (18:07)
Now, we've had a number of audience questions coming in and some are related to your specific approach and some to the market, so I'll ask some related to your specific approach first. Have you done performance attribution in terms of asset allocation versus manager selection? And if so, what have some of the results been?

Nathan Gelber: (18:30)
Yes, we have undertaken analysis of asset allocation versus manager selection and security selection in particular, and what we find is that the long term asset allocation is a key driver to overall return. It also speaks to the risk profile of any given investor, and from investor to investor this is a very individualistic assessment. Once the asset allocation has been determined, we encourage our clients not to apply short-term tactical asset allocation, but stick to the strategic goals and use market volatility for rebalancing purposes, because skepticism vis-a-vis people's ability to add value to tactical asset allocation. Rebalancing, we believe, is the second best solution to long-term asset allocation, and what it means in practice is that by rebalancing you sell high and you buy low, which to us is a very attractive value proposition.

Nathan Gelber: (19:48)
In terms of added value through manager selections, [inaudible 00:19:53] and again, over long time periods, it's not unreasonable to expect an added value of roughly 2% per annum net of fees in excess of a state market benchmark, which over long time periods adds considerable value, as you can can imagine. However, excess returns can be variable and these kind of active strategies are not necessarily for the faint hearted because of the deviation from both an upscale benchmark and a relative benchmark over shorter time periods.

Rachel Pether: (20:32)
Within Stamford then, Nathan, do you have your own style biases? And I guess this goes back to a question from the audience as to what's your recent view on the dominance of growth stocks versus value stocks.

Nathan Gelber: (20:49)
We, do have certain biases that must not necessarily be characterized as style biases, but if I may just summarize them for a moment or two, and we're trying to understand the implication of those biases, so we are really quite allergic to its capital impairment. So one of the areas we're paying a lot of attention to, is trying to understand how managers think about capital impairment or realize losses, and in our analysis of past behaviors we're particularly keen to understand how losses have been occurred and why. And repeatability of a fairly high loss rate in a given strategy is something that would concern us for time. So we have a bias towards capital preservation, which leads us more to value type managers, but not exclusively value type managers, because growth managers can also have a capital preservation mindset, which is perfectly acceptable, but the volatility around capital preservation and growth orientated strategy is so much greater and therefore so much riskier than it is in value type strategies.

Nathan Gelber: (22:17)
Other biases we have really to long time periods, where we and our clients are long-term investors, so managers who have high portfolio turnover are not necessarily the ones we would favor. Equally, we are not great friends of high leverage in companies, so we are looking towards managers that are not necessarily running highly leveraged types of portfolios through the underlying investments. They're looking for people who have integrity, both integrity of thought, as well as integrity of ethics and morals, and people have a mindset which is clients first. Duty of care and governance, good governance, is key to what we think we are delivering to our clients. So these are fairly material biases, which eliminate a fairly lump of market disciplines.

Rachel Pether: (23:26)
And so looking here we've also had a question coming in from the audience on emerging markets. What's your view on emerging markets and assessment there, and are you seeing demand from clients in the likes of India and Africa and other emerging markets?

Nathan Gelber: (23:44)
We've been engaged in emerging markets for the better part of the last 35 years. We've been always exposed to emerging markets and managers who operate in those markets, both sitting in developed markets and those who are resident in India or China or Hong Kong, or in any other markets that could be relevant. Our experience has been favorable over the years, although the governance aspect relating to the underlying investments is one which is not always compared to Western standards.

Nathan Gelber: (24:25)
So we have a particular level of caution when it comes to understanding how managers think about governance in particular and the oversight over the deployment of our client's capital. So it's an area which has been rewarding for us, it's an area that has displayed considerable volatility, and you are aware of the various crises in [inaudible 00:24:52], whether it was the Russia crisis or the ones relating to the Far East some time ago. With a preservation of capital mindset, we are particularly cautious, but exposed to those markets.

Rachel Pether: (25:09)
And you talk a lot about governance, which I guess is inherently embedded in your process. If you're looking at ESG, obviously another big theme at the moment, do you also focus on the other letters within that? Do you also look at environmental and social issues, or is it really more the governance piece that you're focused on?

Nathan Gelber: (25:31)
Our predominant interest from our client's perspective is in the investment oversight and investment governance. However, as we look at managers, we are keen that they look at the other aspects of ESG as well. So between the underlying managers and ourselves, we cover the entire spectrum of ESG to make sure that our client's capital is deployed in a responsible and transparent fashion. It's important, it's important.

Rachel Pether: (26:05)
I couldn't agree more. Just one final question, we've had someone ask for recommendation from you actually, which is, do you have some recommendations for small institutional investors as well as family offices in terms of effective manager selection, when perhaps they have less resources and depth to do a full assessment?

Nathan Gelber: (26:30)
That's a tricky and challenging question. Our view is that it's very difficult to identify talent ex-ante, if we all accept the past record is not a reliable indicator for the future, it is equally difficult to analyze both from a behavioral as well as from an investment perspective what the prospects of a game investment proposition are. Invest managers are excellent in making presentations and preparing pitches. Reality often looks very different, and the ability to differentiate between a marketing pitch and reality is not always that easy. So it needs resources and experience to avoid making mistakes and pick those that will do well over time, but also unpick those when the time has come perhaps that they're running out of steam for one reason or the other.

Nathan Gelber: (27:30)
And what we are saying to family offices and smaller institutions who do not have internal resources, to either work with a firm like ours, where we can be helpful in one way or the other, or go passive. Passive is a very attractive way of gaining exposure to various markets and capturing beta, and not try and capture alpha when the downside can be quite unattractive [crosstalk 00:28:04] somebody you're confident in or do it yourself on a passive basis.

Rachel Pether: (28:11)
Yeah, because I guess even going passive as an active decision, isn't it, and one that you have to decide for yourself.

Nathan Gelber: (28:17)
Yes, exactly.

Rachel Pether: (28:19)
Excellent. Well, thank you so much for your time today, Nathan, it's been a pleasure talking to you as always and I look forward to continuing this discussion on behavioral finance at a future date. Thank you so much.

Nathan Gelber: (28:33)
Thank you very much Rachel, pleasure to be with you.

Michael Schmidt: Can the Government Be Repaired Following a Trump Presidency? | SALT Talks #78

“If you behave the way that the president did at a company or at a school, you would be ostracized, pushed off to the side.”

Michael S. Schmidt is a Washington correspondent for the New York Times, covering national security and federal investigations. He was part of two teams that won Pulitzer Prizes in 2018 — one for reporting on workplace sexual harassment issues and the other for coverage of President Donald Trump and his campaign’s ties to Russia.

What do you do when the most chaotic and out-of-control person at a company is the singular leader? This was the problem White House workers faced with Donald Trump as president. It was not possible to go higher up the chain of command in an attempt to moderate extreme behavior. “John Kelly could try and sort of box him in; the people around the president could tell him that he certainly couldn't do things. But at the end of the day, he was the president.”

It remains an open question as to whether the government institutions can be repaired following a Trump presidency. Perhaps his most lasting legacy will be his role in remaking the courts with young, conservative judges.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Michael Schmidt

Correspondent

The New York Times

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone and 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 public policy. SALT Talks or digital interview series that we started during the pandemic. And like many things that started during the pandemic will have a life, well after the pandemic, we've had a lot of fun with these. We started in about late may and we've had a lot of great speakers another one coming up today.

John Darsie: (00:33)
But what they are, are interviews with the world's foremost investors, creators and thinkers. And what we're really trying to do during the SALT Talk Series is replicate the experience that we provided our Global SALT Conference Series, that we have annually in Las Vegas. And we've also had several international conferences as well, for those of you who have attended. And that's to really provide our audience a window into the mind of subject matter experts, as well as to provide a platform for what we think are big ideas that are shaping the future.

John Darsie: (01:02)
And we're very excited today to welcome Michael Schmidt to SALT Talks. Michael is the Washington correspondent for the New York Times who covers national security and federal investigations. And his remit has grown a little bit in the last four years in terms of what he covers, given the volume of investigations that we've seen in this administration. And he was part of two teams that won the Pulitzer prize in 2018. One for reporting on workplace sexual harassment issues and the other for his coverage of president Donald Trump and his campaign's ties to Russia.

John Darsie: (01:34)
For the past year Michael's coverage has focused on the Mueller investigation into Mr. Trump's campaign and whether the president obstructed justice as part of, everything that went into that investigation. From 2012 to 2016, Michael covered the FBI, the Department of Homeland security and the Pentagon. He spent 2011 in Iraq chronicling the last year of the American occupation. From 2007 to 2010, he covered doping and off the field issues for the sports section of the Times.

John Darsie: (02:04)
And he started his career at the Times in 2005 as a clerk on the foreign desk. And has obviously earned a lot of trust internally there. Has taken on a lot of the big projects over the years at the Times. He's broken several high profile stories over the years. The first was to reveal that secretary Hillary Clinton exclusively relied on her personal email account. And when she was Secretary of State. In sports, he broke the stories that Sammy Sosa, David Ortiz and Manny Ramirez had tested positive for performance enhancing drugs. And he wrote about the treatment of young baseball players in the Dominican Republic, who were exploited by American investors and agents.

John Darsie: (02:41)
In 2017, he co-authored the stories that outlined how the former Fox News host Bill O'Reilly paid off a series of women who made sexual harassment allegations against him. For that coverage, he won the Livingston Award for national reporting, which recognizes the best work of journalists under the age of 35.

John Darsie: (02:59)
Michael also has a recent book out, which we're going to talk a lot about today called Donald Trump versus the United States. And conducting today's interview is going to be Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, which is a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthoy Scaramucci: (03:19)
Michael thank you and John thank you. And Michael, I got to hold up your book. See that. So not only am I self promotional Michael, but I'm also promoting of others, see that? If you want to others as you would like to do to yourself, look at this, right? So this book is amazing. I told Phil Rucker I'm sorry, this goes to the top of the stack on the Trump books and there's been a proliferation of them. But I thought you had a fascinating understanding of the personalities as well as the facts of what was going on. And so I would like to get right into it, if you don't mind. I'd like you to tell us about the work that you did on this book. In terms of the research, the interviews, obviously, certainly don't want you to give up your sources, but I want you to give us a little bit of a story of how you got a book like this, which to me reads like an internal transcript of the West Wing.

Michael Schmidt: (04:16)
So I think the biggest challenge that I had was telling a book that would be distinctive. We all had a sense that this was a chaotic time, really crazy shit went on unprecedented shit. The president was acting very irregularly unprecedented, but how do you tell a story that will stick? So what I tried to do was to concentrate on the human story of this. What is it like to be one of these people around the president trying to contain a president? What's that human experience like. We can sit here and we can go through the paces of all of the stuff that's gone on. You want to start with the Muslim ban and go through the tank meeting and all that stuff.

Michael Schmidt: (05:01)
But what does it really feel like when you're at the top of the government and there's no one else to call. There's no one else to help you. And it's just you standing up to a president. We know what it's like for a president to use power and for the people around them to help them do that. But I don't think we've seen as much in history, people trying to stop a president. What does that like? What does that chaos look like? What does it feel like to be one of those people? So that is what I tried to concentrate on and tried to tell that story.

Anthoy Scaramucci: (05:37)
Well, and obviously you did a great job of that. When I finished the book last night, my reaction was man, president Trump's next job could be replacing King George the third in the musical Hamilton. I mean, you said crazy shit, but he's batshit crazy. And so tell us about that. Tell us about people like John Kelly, Don McGahn, Reince Priebus, others that recognize, okay there's something seriously wrong here. So what are we going to do here to try to corral it, if it's even possible?

Michael Schmidt: (06:15)
The problem is that if you behave the way that the president did at a company or at a school or at wherever, you would be ostracized, pushed off to the side...

Anthoy Scaramucci: (06:26)
And John Darsie does behave like that at SkyBridge, but we're fairly tolerant, but most people would be fired immediately. But go ahead, Michael. I'm so sorry...

John Darsie: (06:34)
We all know who the crazy one is at SkyBridge is Michael [crosstalk 00:06:37].

Anthoy Scaramucci: (06:39)
Put yourself back on mute Darsie.

Michael Schmidt: (06:44)
So the thing is that, the fact that, this may sound a little simplistic, but the fact that the president was the president is what caused this problem. Because you couldn't just ostracize him. I mean, you could try, John Kelly could try and sort of box him in, the people around the president could tell him that he certainly couldn't do things. But at the end of the day, he was the president. And there was only so much that you could do to try and stop someone like that. So, we know what it's like to work at a company where someone may be, acting abnormally and needs to be sort of contained. But what happens when the person at the top is doing that? And what happens when the apparatus that is supposed to be there to serve as a check on the presidency when that's not functioning, what happens?

Michael Schmidt: (07:38)
What happens when that power is sort of loosely running around? And you have someone who is not more to norms. They're more to... It's unclear what they're more towards. So when you take those factors and you throw them together, what is that like? Because I don't think we've seen that a lot. So I said to myself, I said, in terms of how the power has unfolded here and how this is all structured, this is really unique. And I need to do more here than just capture sort of the paces of the story. They wanted to do tax cuts and they wanted to do it. We need to go bigger than that. We need to go inside the bodies of these people around the president to see what this experience was like.

Anthoy Scaramucci: (08:29)
If you... I mean, you make the case in the book, is I'm just curious in reaction. I mean, he's damaging the institutions of our democracy because he doesn't want to follow the norms or the procedures. And John Kennedy once said about the presidency, it's a great, great interview. Huntley and Brinkley interviewed him a year after he got the job. And he was like, well, I was in the house, I thought the action was in the Senate. And when I got the Senate, I thought the action was down the other side of Pennsylvania Avenue. And when I got to this office here, he was being interviewed in the oval office. He's like the action isn't anywhere. It's so diffused that we have to figure out a way to work together. But this book is really about Mr. Trump trying to or president Trump trying to assert himself in a way that is outside of that construct, outside of that power to diffusion. And so my question is, has he permanently damaged our institutions, our democratic process, our alliances? Is this something that's repairable in your view Michael?

Michael Schmidt: (09:30)
So I've thought an enormous amount about that. Because for a while I was convinced that, whenever this came to an end, the system would snap back into what it was. I'm less convinced of that today, but the real answer of what the Trump era meant and what impact it will have, will really be determined by what comes afterwards. Because if what comes after the president resembles more of this presidency, then it is truly a pivot point in American history. The presidency being used in a different type of way. But if it sort of goes back to what...

Anthoy Scaramucci: (10:13)
Define that way, if you don't mind. It's being used in a different type of way. So what way is it being used?

Michael Schmidt: (10:21)
I would say that the most sober way of describing it would just be that, in the post Watergate era, we started to live by a set of norms about how politics should be divorced from law enforcement and how the Office of the Presidency should be used sort of as the tip of the spear for the entire country. And I think that we've seen the Office of the Presidency and the levers of power used in a much more selfish way for the politician in this case, the president than we've seen before. And I think that we have seen politics become part of law enforcement in a way that we haven't seen before.

Michael Schmidt: (11:15)
Let me just point something out. The president said today that if his rivals are not prosecuted before the election it will be a great let down. It will be a essentially a great failure. Okay? I don't see that as a lead headline anywhere. Okay? The president's saying that about a criminal investigation is so pre-Trump era off the charts. Unusual that we've become... and this is the cliché. We become numb to this whatever. The president's saying that about a criminal investigation is just still so extraordinary. And we haven't moved on from it, but... [crosstalk 00:11:59].

Anthoy Scaramucci: (11:59)
Vice president last night is saying, well, we may not accept the electoral outcome of the peaceful transfer of power. I mean, it says same sort of thing. It's like, why are good men and women in the country accepting that Michael? Why isn't there more outrage?

Michael Schmidt: (12:19)
Let me tie that back to the book. The thing that Trump has done is his consistency in terms of feeding his base. And in terms of his loyalty to his base has created a tether between him and the base that has allowed, I think for behavior that the base would not normally tolerate to go on. And at the heart of that, I think is the judges. I think the fact that Trump has been so consistent on the judges and has remade the federal courts in the way that he has, not just with Conservative judges, but Conservative judges of a certain mold, of a very conservative mold of a certain age. And I think that the fact that the president has been so true to that, has created that tether, that umbilical courts. That has allowed for things like Mike Pence to say last night, not to fully commit to accepting the results of the election, to be at least accepted. By pick your number 30, 40 whatever percent of the country.

Anthoy Scaramucci: (13:22)
So you've got guys like, Senator Lindsey Graham, Kevin McCarthy, Senator Ted Cruz. There's so many people, that were trying to crush Trump in 2016. There were literally withering attacks day in and day out. Those people are now in the boat with Mr. Trump. And those people are the biggest sycophants of Mr. Trump. And I'm just wondering, what do you say about that? How has he been so successful in bending people who are that influential in that powerful to his will? What are they doing exactly? What's the order in their personality of their priorities that are allowing that to happen?

Michael Schmidt: (14:06)
I would actually ask you this question. And My thesis, and I want to see what you think about this. My thesis is that, they still don't understand the base of the party. So if you're Lindsay Graham, you're probably really surprised that Trump got as far as he did in the Republican Party primary. And then you're even more surprised that he became president and even more surprised that he endured and survived despite the way that he behaved.

Michael Schmidt: (14:34)
So what I think is that if you're a Lindsey Graham, you're not totally sure what the base really wants and is willing to go along with. And the only thing that you can recognize is that they've been willing to go along with this. So you have to dance, you have to grab the Baton and the parade and just start marching. Because I don't think that they fully thought the base would do this. And the only thing they know is that the base has gone with him. So they have to go with him. What do you think?

Anthoy Scaramucci: (15:07)
Well, I mean, there's many things I a bore in light, but racism is probably at the pinnacle in terms of what I a bore. Because just complete unfairness and talking about peace and social justice. And so this whole Southern strategy that Stuart Stevens writes about in his book, we had him on SALT Talk, and the acceptance of this sort of systemic institutionalized racism in 2020, I find reprehensible. And I would make a statement that if we don't figure that out in the Republican Party, Republican Party is going to end up on the ash heap of history. If Mr. Trump wins and they continue down this path, it's going to be aging, white people that buy catheters and SeaPak machines and my pillows from Fox News during the commercial breaks. That's going to be their party and it'll be a minority party for a generation.

Anthoy Scaramucci: (15:54)
And so if they're clinging to that, they're making a very big mistake. My odyssey with Mr. Trump was I was an establishment, Republican fundraiser working for Jeb Bush. He recruited me, I allowed my ego to impair my judgment. I was excited by the opportunity of working on that campaign. And so I chose to ignore, you could call it moral expediency or whatever you want to call it. The comments about the Mexicans, the comments about the immigrants, the comments about the Muslims. And I think I lost a piece of myself doing that, which I've apologized for. And I could no longer take the moving of the goalpost. When he told the four Congresswoman to go back to the countries that they came from, I told mayor Giuliani, hey man, they said that to our Italian grandparents, why are you a tolerating these races native as tropes?

Anthoy Scaramucci: (16:46)
And the answer is everybody wants to be in the bubble Michael. They want to be in the state dinner. They want to be in the presidential motorcade. They want to be on air force one. And there's a seduction to power that allows these people to conform to his behavior. So I don't like it at all. And I think what you're saying is interesting, but I would say something differently to you. We need leadership in the country that is more like a thermostat on the wall, as opposed to a thermometer. Mr. Trump is a thermometer. There's anger out there. Let's tap into the anger and all of these accolades gravitate to that. But we actually need a thermostat. We need somebody to say, okay, hey, we're going to punch in these coordinates. We're going to lower the temperature in the room.

Anthoy Scaramucci: (17:33)
I'm going to show you how we're going to do this. And we're going to calm down this middle-class and lower middle-class anxiety and anger by actually providing them something of substance, which could make their lives better. And so we're not doing that on a result of which they're catching waves that are coming towards the beach, and they're trying to surf those waves. And I just think they're making a huge mistake and it's going to really hurt that party. It'll also hurt the country, because you're going to have a lopsided country here soon. You don't want one party rule. One party rule has destroyed the city of New York. It's impaired the state of California. You need two vigorous parties. But this is about you, not me. You asked me the question, I shouldn't have been that long winded.

Anthoy Scaramucci: (18:20)
Let me go back to the book because I think this is an interesting thing about this book. Mr. Trump feels like he is one of the characters in Looney Tunes. The envelope is coming for him. It's about to hit him in the head. He escapes the envelope. He's tied to the rail track and here comes the train for some reason he's released from the rails and he gets out. How was he able to do that? How is he the Harry Houdini of political corruption and malfeasance?

Michael Schmidt: (18:50)
I think that the thing about Trump is that Trump can't take a punch, but he can take a beating better than anyone else. So like he can't take the day-to-day criticisms and it drives him crazy. But what he does is that he trudges on despite incredible embarrassment and sustaining things that if you or I or anyone was running for public office and did, we would have given up on and gone home. Let's say, for example, politician X was running for office and he on the trail said, what Trump did about John McCain about being caught. My guess is that, it's more times than not. That politician would have come out and said, I cannot believe I said that. I'm incredibly sorry, I'm retreating from public life. I'm going to go home. And I'm going to spend the rest of my life repenting, for what I said.

Michael Schmidt: (19:45)
But Trump was emboldened by that. And he just continued on. And I think his ability to continue on undeterred is one of his greatest assets. The day after Robert Mueller testified before Congress, in which he laid out, I mean, not very effectively, but he testified about what was in his report about obstruction and collusion. The next day, Trump picks up the phone and combines the greatest hits of obstruction and collusion into one event. And he asked the Ukrainian president to interfere in the election to help his candidacy by using his law enforcement powers. And I just don't think most people that would have endured a two year long investigation like Mueller's in which it looked at the use of law enforcement and obstruction and collusion in terms of ties, if using a foreign power and an election, would then go out the day after that person testified and combine the greatest hits into one thing.

Anthoy Scaramucci: (20:49)
When you interviewed your sources and lets your sources be anonymous, unless the ones that have been on the record in the book, do they have regrets? Do they feel guilty? Is there any sign of remorse or is it just I'm coming to you Michael, can, off the record, just to ventilate a little bit? What was your feeling about the people that you were interviewing?

Michael Schmidt: (21:14)
Let's put that question aside. Let's take on McGahn. Let's just take on McGahn for a second. Because McGahn comes to the Trump...

Anthoy Scaramucci: (21:21)
Okay. So for those... That's Don McGahn, the former White House general counsel, who was the lead lawyer on the campaign. Go ahead. Sorry Michael I just wanted to...

Michael Schmidt: (21:30)
So this is Trump top lawyer. McGahn came to the trough of the Trump presidency and he did three things that were remarkable. Trump gave him the power to remake the courts and he remade the courts. At the same time, Trump badgered him was nasty to him. And McGahn had to become a container of Trump. Trump's someone trying to stop Trump. And at the same time McGahn was a chief witness as a lawyer against his client in an existential threat to the presidency. In the end McGahn did all these things, but he walked away with two new justices on the Supreme Court that are made in the mold of a Scalia or a Thomas the type of person that he believes in. He believes in the courts more than anything else.

Michael Schmidt: (22:23)
And he walked away with no criminal exposure, a big legal bill and some pretty frightening experiences but largely intact. Does he regret that? I don't think so. Because he walked away with this invaluable thing of remaking the courts and being the person to do that. Did he have to put up with behavior that most people wouldn't have in order to do that? Yes. Does he regret that? My guess is no, because he got the courts at it. But it's a lot to...

Anthoy Scaramucci: (23:03)
So you're saying that the ends justify the means. Is basically what you're saying. [crosstalk 00:23:10] that's where the revocation comes in, right?

Michael Schmidt: (23:13)
That would be one of the rationalizations of the people around the president. It's like well, in the end the courts were more important than anything else. And I think that it's not as simple question as I regret coming to the Trump presidency. And I saw a lot of things that were bad and I should have done more. These people got things out of it. They got notoriety that got profiles that they wouldn't have had before. Some people say Don McGahn wouldn't have been the White House council under a more traditional president. I don't think five years ago someone said to you, you were going to be the White House communications director for...

Anthoy Scaramucci: (24:03)
I was yelling at Jeb Bush last week on assault dog. You should have won the goddamn nomination. I would have been anywhere near the White House. When Trump called me, after I got fired, I said relax, you made me as famous as Melania and Ivanka. I didn't have to sleep with you or be your daughter. So we're just fine. Let's move on. But McGahn calls Trump Kang or King Kong in this book, at least according to Michael Schmidt, why did he refer to him as that? Tell us why.

Michael Schmidt: (24:30)
Because Trump was needlessly destroying things and was sort of uncontainable and McGahn had a pretty good sense of humor and had to deal with this force of the president. And basically looked at Trump as this larger than life scientific character that would go out and no matter what you did would trudge on and destroy things for unnecessary things. I think that the thing that if these people and you may believe this yourself too, it's like it never had to be this hard for Trump. If Trump and I write about this in the book, McGahn thought if Trump just behaved like Reagan became caught up with the trappings of the presidency and allowed his people to ruthlessly execute his agenda, then he could have been really successful.

Michael Schmidt: (25:31)
And the thing about the Trump story that sort of undermines not my interest in it, but that sometimes undermines the stories that once or twice a month, Trump kicks the ball into his own goal and he blames the other team. It's not like two sides here where they're really plotting or whatever. It's Trump is just so ad hoc that it almost makes it less interesting. You almost wouldn't, in terms of the story, it's he just undermines himself at every point. And it makes you wonder, is the presidency maybe easier than we thought it?

Anthoy Scaramucci: (26:14)
And I get the point, I want to turn it over to John. And one second, but I have one last question I'm spending a lot of time, in the pandemic reading about interwar Germany. Which is a fascinating period in European history, which leads to the rise of populism and nationalism and ultimately fascism. Steve Bannon always said this, and you address it a little bit. I'm just curious if you'll share it with us here. When Trump calls the media fake news, it's an attack taught to him by Steve Ben and it's quite reminiscent to interwar Germany. Tell us in your opinion, why he's doing that? Why is that attack so successful? And what can the media do to sort of restore the trust that I believe it needs to have with the American people, with the preponderance of the American people?

Michael Schmidt: (27:06)
I think that the one of Trump's greatest strengths is not one that is dried to the legal powers of the presidency, but it's derived at what I would call the megaphone of the presidency. And it's the ability to say things that people will pay attention to and the willingness to say things. So it's not just the fact that he's the president and he goes out and he gives a speech. It's the fact that he's willing to say, 10, 20, 30 different things a day than most presidents wouldn't say. Because by doing that and just repeatedly hitting that note on the issue, like fake news, it has a lasting impact. And I think for the media to say that it doesn't, is wrong. Because you can't live in a world where the person with the loudest megaphone says, things like that and it doesn't have some damage.

Michael Schmidt: (27:58)
So, I think it's been incredibly effective, even if it's something that is incredibly simplistic, it's something we assume in the media that we're going to get attacked on some sophisticated thing on you got the facts wrong or whatever. We didn't just think that someone was going to come by and scream out. You idiots you're a bunch of fake news. So it sort of tests us in a way that, we're used to fighting things with facts. It's like, well here are the facts. And it's sort of hard to respond to a bull horn, with an answer like that.

Michael Schmidt: (28:33)
So, I think it's been super effective and I don't know what the remedy is. I don't know what it is. And I think that it is, this is sort of a cop-out when you don't know what to say, but I think that really, we will only be able to measure the damage of it after we have some time after whenever Trump is done in office to really look back and see if it really matters what comes afterwards. And if whatever comes afterwards is similar to Trump and this keeps up then we could be in some full real trouble.

Anthoy Scaramucci: (29:10)
Well said, I'm going to turn it over to John Darsie. Who's got questions from the audience, but then I hold the book up again. One more time, Donald Trump versus the United States. And I'm sorry Phil Rucker but this is the best book right now that I have read on...

John Darsie: (29:25)
Call Carol the author. Come on don't leave Carol out of this.

Anthoy Scaramucci: (29:27)
Who's that?

John Darsie: (29:28)
She's his co-author on the book.

Anthoy Scaramucci: (29:29)
All right. Yeah. Okay. I don't know her as well. You know what I mean? We got Peter Baker coming up with Susan. You know we're going to favor Susan in that interview. John, I'm just giving you the heads up on that. Okay. But go ahead. We got questions from the outside audience. Go ahead.

John Darsie: (29:42)
So your last comments were a great segue to this next question about what comes next. And I'm going to ask you to put your sort of prognostication hat on a little bit, but also refer to some comments that have been made in recent days by some Republican senators. And it seems like almost the quiet part is now being set out loud. Trump, he's basically tweeting out, we're not going to allow minorities to come into the suburbs, Housewives of America vote for me and I'll prevent low-income housing from coming to the suburbs. He's, he's shown a willingness to do some things to say some things out loud that maybe the Republican Party believed in but never had the courage to fight for so openly. And you now have Senator Mike Lee, who's tweeting out the fact that democracy isn't the objective.

John Darsie: (30:25)
He's saying that yes, while we have some democratic elements of the Constitutional Republic of the United States that ultimately our job as elected officials is to fight for prosperity, for peace and for Liberty. And so they're basically setting the stage for justification of a lot of the voter suppression and other heavy handed tactics that they're probably going to use over the next month or so. So do you think that portends for what's going to come in the next five to 10 years, let's say Biden wins and the polls are right. Do you think it's just going to be four years of very underhanded fighting from Republicans who think they're the guardians of American society and culture?

Michael Schmidt: (31:06)
I was really surprised by the Mike Lee tweet and really wanted to know more about what was behind it. Because I'd never seen anything like that. And I was surprised it didn't even get more attention, but I'd never seen a politician, sort of, for I guess Mike Liza, a Republican Senator to say something like that. So I don't know what to make of that. I think that, whatever comes after Trump, the tone of it will really matter. If the next attorney general let's say, Biden wins and the next attorney general, is a Democrat who has been out there for the past four years publicly really going after Trump. And it's then decides to turn the focus of the justice department back on the Trump administration.

Michael Schmidt: (32:02)
I think you're going to get a sense that, in this country it's whoever wins, the election is just going to go after the other side. And we're going to get caught up in sort of a continuous loop in that. Down that path is a pretty potentially dangerous thing. If the public, and what I'm saying is that if the public perceives it to be whoever wins goes after the other side. Because I think that in any administration that takes over for another, there's always some look back at the previous administration. But I don't think that we've ever thought that the result of an election was to go back and sort of prosecute the previous administration. But certainly Trump has made his desires to do that to the previous administration, a central part of it saying it as recently as today. So, I don't know. I think that sometimes when one side sees another side do something, they adjust to keep up with them and whatever they... If there's a tit for tat here, you're down a new and different path.

John Darsie: (33:22)
And just to add on a little bit to the Mike Lee tweet, Anthony responded to the tweet basically saying, Senator, is this the steroids talking or do you really believe that democracy is basically not the goal here? I know it's not the end goal but... And he got a lot of vicious replies from all of the Conservative think tanks. And it almost made me think that this was a bat signal that's gone out in the Republican Party to say, you know what guys, we have to embrace this messaging that Trump has embraced about voter suppression and all the things that we're going to have to do to maintain power with the party in its current form. And so that's somewhat troubling. And I think portends interesting times ahead over the next few weeks. But I want to pivot to the New York Times story about secretary Clinton's personal email use, which you broke that story.

John Darsie: (34:08)
And I find it curious that for some reason on Twitter and in social media, it's become fun to dunk on the New York Times for doing things that might potentially work against the interests of progressive Americans that are deemed as the subscribers to the New York Times, I guess. And so there's been a lot of, I don't know, accusations is not the right word, but sort of criticisms of the Times for giving oxygen to stories that might potentially benefit Trump or focusing on what might be perceived as small stories in the scope of the grand corruption that exists sometimes in the Trump administration. So how, when you're reporting a story, you stumble upon a story that might be negative on vice president Biden or secretary Clinton. How do you weigh the consequences of your reporting when you're writing a story?

Michael Schmidt: (34:54)
I think that it's a good question. I think that for what we do, it's pretty simple. We're going to follow the facts wherever they lead us. And we're here to cover the world around us as thoroughly and as authoritatively as possible. And to find out what has gone on behind the scenes, in terms of any political party of any person, to understand the larger forces in the country and to put them into context and tell that story. We're not here... We operate without fear or favor as we say, in our credo. And sometimes that means that you write stories that the president tweets nasty things about you. Sometimes that means that you write stories that the left gets very upset about. It's part of working in journalism and working at the Times, is that you're going to write things and people are not going to like them.

Michael Schmidt: (35:57)
And it's part of the job. And if you got into the job to satisfy people that's not what we're there to do, we're out there to sort of ruthlessly go after the truth and to try and tell that. And I think that at least before and I think still is, is that is an agreed upon bedrock of the country of one of the core values of the country. And I understand that a lot of people don't like a lot of things that I've written for a lot of different reasons. But if I'm getting up in the morning and heading out the door, I just don't head out the door anymore. Because I'm getting up in the morning and going to work. I think that if I'm trying to figure out how not to make people upset, then that's a bad way of starting a day. And it's my job to go out and just try and find the story. And we're not going to make friends in that process but we didn't get in into it make friends.

John Darsie: (36:58)
So this is sort of a personal follow-up question to Anthony's question about, president Trump's attacks on the media as the enemy of the people, from a personal standpoint, what has it been like to live through this era where journalists are sometimes targeted, whether it's with digital hate mail or at rallies, getting targeted. What's it been like to report in this highly charged environment on a personal level?

Michael Schmidt: (37:24)
I mean, the thing that struck me the most is the vitriol that has been directed at my colleague Maggie Haberman, which has been far more intense than anything than I have or any of us has confronted. And I think it's been very unfair and I've always said, Maggie can deal with the level of stuff that she has and the rest of us could deal because the rest of us face far less stuff. I don't know what the answer to it is. I think you just have to put your head down and get back to work and that sounds like a cliché and it sounds easier than it is. But that is sort of... It's the only choice that we have.

John Darsie: (38:07)
So we have a devil's advocate question from one of our participants and it says, if president Trump didn't pretend like he was going to be a continuation of the norms that existed in American government before him. He ran on the fact that, conventional government wasn't working for the people and he was there to disrupt it. So why would we expect him to fit into that mold of a traditional politician and conform to the norms that the American people have seen that have failed them? Do you think, the fact that he still has maybe 40% support is a reflection of just continued dissatisfaction with the way our political system is operating and serving people that have been left out from the economic growth we've seen over the last 30 years in the country?

Michael Schmidt: (38:48)
Yeah, totally. And I think that he's been very faithful to that base. I mean, if anything it may end up be his political undoing, is his unwillingness to tack to the center. But he has played to that base, what that bases wanted to here and what that base has wanted for him to do are fairly consistently. And I think that, that's why he has held on to them as strongly as he has. And I think one of the interesting things, the calculations that he may see is he is not moved to the center. And he is not tacked to the center in ways that probably would have been fairly easy for him. Because he seems so fearful of that base and that he wants to continue to feed that base. My guess is that the base would stay with him, even if he moves a little bit to the center.

Michael Schmidt: (39:35)
But he's been unwilling to do that. And I just think the real question, I think in this election will be, is how big is that base? How big is that base? And can that base still get him over the line? I mean, the polls seem to show that it's not, but I don't know. I think that's the thing. It's like, he's bet on the base. And not move to the center on anything.

John Darsie: (40:00)
So I know you're not a pollster or a political forecaster, and I want to end it with your prediction about what happens, come November. Do you think the polls are going to hold true? And if Biden does win, how do you expect based on your reporting in the book and about how Trump deals with these types of situations, how do you expect to him to handle a transfer of power?

Michael Schmidt: (40:23)
I don't know. I don't know. And I think that for us to get back for... I'm having a Mike Pence moment here, I got a fly on my head. I think for us to...

Anthoy Scaramucci: (40:41)
You moved a lot more quickly than Mike Pence. I just want to point that out.

Michael Schmidt: (40:47)
I think, for us to assume...

Anthoy Scaramucci: (40:50)
Then again you probably don't have the smell a shit from all the bullshit emanating from your head. So, the fly probably moved fast.

Michael Schmidt: (40:59)
I think that for us to expect... I think without being alarmist and trying to predict the future, which is our to do, I think that the president has shown an unwillingness to go along with norms. So anytime that you're heading into a situation that's based on norms, which I think we've learned in the Trump story, the country's a lot more based on norms and his own laws that if you're heading into a situation that's heavily reliant on norms and let's just say elections and transfers of power are heavily reliant on norms. You have to be open-minded to the fact that he's not going to follow norms. I'm just saying based on his behavior as president, he's not wanting to follow norms and he's been willing to do anything against those norms and a situation relying on norms. You guys are the math guys, the finance guys, but when you have factors like that, I think your chances of something are higher.

John Darsie: (42:03)
Well Michael, thank you so much for joining us. It's been fascinating following your reporting over the last four years, and even prior to that. But you're now a household name because of how much Trump has put the media in the spotlight. So, thanks so much for all the work you've done. Anthony, you have a final word?

Anthoy Scaramucci: (42:19)
Yeah. Michael, the only reason why we did this with these, we don't want to be the subject of one of your books. Okay? So John and I were buttering you up with this SALT Talk. Okay? In all series is I gotta tell you, this was a fascinating read. I'd recommend it to anybody, even if they don't have an interest in politics, you quote Shakespeare a few times in here. This is a Shakespearean story unfolding in American real time. I really enjoyed it, Michael. And thank you so much for joining us on SALT Talks.

Michael Schmidt: (42:50)
Thanks so much for having me. It's been great.

Anthoy Scaramucci: (42:51)
All right. Be well.

Michael Schmidt: (42:52)
Thanks.

Zulfiquar Ghadiyali: Why Success Is All About Execution | SALT Talks #77

“I never think any trait, or any weakness can be an obstacle if you have the right political alignment, if you have the right financing in place… it's all about execution.”

Zulfiquar Ghadiyali is the Executive Director of Directions Investment Holding Company (DIHC), under the chairmanship of His Highness Sheikh Mohammed bin Sultan bin Hamdan Al Nahyan. Ghadiyali’s family business spans across Asia and the Middle East in the fields of real estate, hospitality and general trading.

Growing up in India in a family involved in major construction projects provided early exposure to the real estate business. It also developed early an ability to manage politics of a project. After traveling extensively for work, a move to the UAE made clear that business and hospitality companies should first come to UAE and set up shop before expanding into other regions of the world- made effective due to UAE’s de facto position as the gateway to Asia. The desire from the family to build and their capital backing serves as two of the most important ingredients necessary to drive successful development projects. “I never think any trait, or any weakness can be an obstacle if you have the right political alignment, if you have the right financing in place… it's all about execution.”

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Zulfiquar Ghadiyali

Executive Director

Directions Investment Holding Company (DIHC)

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi everyone. And welcome back to SALT Talks. My name is Rachel Pether and I'm a senior advisor to SkyBridge Capital, which is a global alternative investments firm, as well as being the MC for SALT, a thought leadership forum, and networking platform that encompasses finance, technology, and politics. SALT Talks is a series of digital interviews with some of the world's foremost investors, creators, and thinkers, and just as we do at our global SALT conference series, we aim to empower really big important ideas, and provide our audience a window into the mind of some subject matter experts. Today, we'll be speaking to his excellency, Zulfiquar Z Ghadiyali. Zulfiquar is the Executive Director of Directions Investment Holding Co. Which is under the chairmanship of H.H Sheikh Mohammed bin Sultan Bin Hamdan Al Nayhan.

Rachel Pether: (01:00)
Zulfiquar's Family business spreads across Asia, and the Middle East in the fields of real estate, hospitality, and trading. He co-founded Los Angeles based entertainment company, Cinemoi, which focuses on artificial intelligence, and virtual reality, and he's also a major shareholder and publicly traded, Encanto Potash Corp. Zulfiquar is involved in various social entrepreneurship projects, he's the chairman of Blue Sky Village, and he also sits on the board of Beto Chang, which focuses on philanthropy using blockchain technology. Lastly, he's a board member of world defense holdings an ING Robotics based out of Montreal, Canada. Zulfiquar, it's a real pleasure having you with us today.

H.E. Zulfiquar Ghadiyali: (01:44)
Thank you Rachel, and thank you SALT Talks for having me on SALT Talks today. I hope we keep it salty and spicy today, and not boring. I look forward, yeah.

Rachel Pether: (01:55)
Is that a promise, or a challenge, I'm not sure? But when I was reading your bio, I subject down quite a lot. You've done a lot of things throughout your career, but before we begin, just tell me a bit about your personal background, and how you ended up where you are today.

H.E. Zulfiquar Ghadiyali: (02:11)
Sure, I'll be happy to. So I'm predominantly a hospitality graduate in various countries. So I started off with studying in my own city of Burke, which is Mumbai in India. And I studied hospitality at one of the heavily competing and a very, you know how Indian institutes are, there's a lot of competition for, see if you have to fight with perhaps 4 million students who compete with you, but that's a good way to bring up yourself. And after that, I went on to study more hospitality in Switzerland. And the idea behind me studying hospitality was not because I wanted to be a chef, or a cook, or something, but the idea was more or less to develop hotels, and evaluated real estate, when I come back to my family business, because as a predominant thing, as a family, we are a real estate company based in India.

H.E. Zulfiquar Ghadiyali: (03:04)
And I wanted to bring my expertise, and not just buried in buildings, and mortars and fixing the mortars, but to add some landmark to the location, and to that particular street or that particular city. So that was the reason why I wanted to study more of hospitality. So I went on to do masters from University of Cornell. And before that, I was at Swiss Hospitality School in Switzerland, and also went to London for University of London, as well as University of Derby, in the Derbyshire of course. And after all of these education, I worked with the Intercontinental Hotel Group, I worked with Starwood, I worked with higher chain of hotels and, in a very short span of time, I climbed the corporate hierarchy, because I was youngest to have that kind of qualification, and at the same time, ready to be kicked to different cities. So my management would be more than happy to let me take a transfer rather than asking Joe who was already 50 years of age at my level of designation, who's got family and can't move much easily.

H.E. Zulfiquar Ghadiyali: (04:07)
So in like a span of 40 years in the U.S I was in the Midwest, in Chicago, I was in Tennessee Nashville, I was in New Orleans, in Louisiana, I don't know how many of you all know about that place, but it's a beautiful jazz music place. I was in Los Angeles, I was in Miami, and then finally, I came back to India briefing, and I started with the hospitality, and real estate consulting. I realized there was a lot of brands who wanted to move into India at that time. It was a buzzing economy back then, I'm talking about early 2005 and 2006. That's when all the investments were coming into India, the private equity players were coming in. That's the year when all the Morgan Stanley's of the world are moving into invest money. So I thought it was an exciting space to start a career with consulting in the Asian economies, and the emerging markets.

H.E. Zulfiquar Ghadiyali: (04:55)
That went pretty well for me, and the turning point, what brought me into the UAE was one of the assignments for the hotel development, which I'm not supposed to talk about, but I went to meet the promoter, and they just negotiated a deal with one of the brands. And I happened to ask him if I can jump onto this assignment, and perhaps help him save some on the agreements. And he's like, what can you do? I said, I wasn't the other side, the side which is dealing with you today, at some point I used to be on that side, and they agreed to allow me to negotiate on their behalf. And we realized I could seriously save a good 78% for them. And that immediately made me blue-eyed boy of one of our own family members.

H.E. Zulfiquar Ghadiyali: (05:37)
And that was my beginning with the whole of family as an advisor, as someone who would be investment manager for them. With that as a career beginning in the UAE, it was early 2011, 2010-2011, that's when I started. And after that went on to find, found a couple of other large companies, which again I moved on from them. The idea was to encourage FDI into UAE, because I realized there was a big gap between people who wanted to come into business in UAE and they're bringing their investment. And I felt as an investment manager, if I have to invest money, I don't have to go into another country and invest, I rather could bring those companies into UAE, invest with them in UAE, which is the home for me, which there I have a better control over the market dynamics, and ones that rapport and once the partnership sets in, in the right way, then perhaps I could go with those companies to different countries, and explore partnerships. So the idea was from then on, from your country, come to UAE and from UAE, we go to the world.

Rachel Pether: (06:42)
That's great. Yeah. The sort of thing about the UAE being a gateway to the rest of the world does come up again and again. So I would like to touch on that a bit later, as well as the work, that you're actually doing under the chairmanship of his Highness. But you mentioned about your family business in India, what sort of things are they investing in? Do you think that the experience, and your personal family business has helped with working with the Sheikh, which I guess in some senses is also a family business?

H.E. Zulfiquar Ghadiyali: (07:12)
Yes, absolutely it does. And so a little bit about our family is that, we migrated from Iran almost 300 years ago into Bombay, which is the place where our family originates from, and the first sheriff during the bumpy presidency during the British rule was also our family. And we always were aggressive , and very much in the forefront in terms of business, and politics. And we started our career almost 150 years ago with business, was more of in the steel, and general trading of commodities, and land development. So what we see a Palm Jumeirah in Mumbai, in Dubai today, was something we developed in Mumbai in 1980s. So we have a fairly good amount of experience of dredging, and creating cities out of water. And we also known as pioneer for social housing, and slum rehabilitation. If you know the city of Mumbai, it has got a lot of slums, and a lot issues of poor hygiene, and poor housing quality.

H.E. Zulfiquar Ghadiyali: (08:11)
So our family decided at some point that we're not just going to be building buildings, and adding money to our coffers, but at the same time, we'll do a lot of social housing as well, letting me develop homes for poor people, and upgrade those lifestyles, and upgrade those land landmarks, and create a beautiful city. So we did well, and we rehabilitate more than 40,000 families so far. So we are known for our construction, we are known for our business in the business community we come from. So it's going pretty well. And my idea when I wanted to join the family business was, to build more assets that we can retain and hold, because more or less, whatever we developed was a residential and commercial, which we just sold, because in India it's not a very renter's market, more of a market where people just buy it out you know.

H.E. Zulfiquar Ghadiyali: (08:58)
They love to buy real estate, and gold of course. So, but I wanted to come back and build more hotels, build more malls, and value added real estate, where we could just look at longterm yield returns, and then create a readout of it and list store rates, that was my idea of doing things. Which I did for some time, I still continue to do, we are developing one of the tallest residential building in India right now, it's a 91 story building in a landmark location in Mumbai. And that was again, a good experience for me as well, because I was involved in planning from day one, and sales and marketing, and we did pretty well with that project. It's almost complete now, so we are up for another challenge.

H.E. Zulfiquar Ghadiyali: (09:36)
So yeah, the knowledge that I gained from family business certainly helped me since childhood I've seen master plans, and how those master plans were executed, how the politics was mainly managed, how the finances were raised, how the social stakeholders were taken care of, how we managed, and challenges with the technology, availability of resources, and also I've seen that whole nine yards, and legalities, and the environmental concerns. So the whole PESTLE analysis, the whole BST level was taught to me since the beginning of my life.

H.E. Zulfiquar Ghadiyali: (10:08)
So I never believed in SWOT analysis by the way, I never think any trait, or any weakness can be an obstacle if you have the right political alignment, if you have the right financing in place, and investment, and a capital. If you have stakeholders happy with you, and of course, if you've taken care of the legalities, and the environment, and the sustainability part. I don't think anything can be a weakness, it's all about execution, so, yeah, that's my take on that. So it definitely helps me yes, and today when I manage royal affairs with H.H Sheikh, and the team, and also going to help companies, the business just comes naturally to me, the moment I see the information memorandum, I know what to do with this company, and I know how to execute this business. Yeah. That helps.

Rachel Pether: (10:53)
I really want to pick up on the pieces that you mentioned on the sound social housing, and investing with impact as well, because I know this is an area of focus for you, and something you're very passionate about. But let's talk about the types of work that you're doing under the chairmanship of His Highness, are you looking predominantly at investments, or you're looking at bringing companies to the UAE? What are some of your focus areas there?

H.E. Zulfiquar Ghadiyali: (11:17)
So three things, one is of course investment, but like I said, I like to invest with companies where I have a complete, I won't say I'm a control freak, but I like to have my hands wrapped around it, you know. Like I don't believe anyone should have a right either it's my money, or it's someone else's money, nobody has a right to like play with it, or do anything which is called injustice. So I like to be, to start with, I like to work on a secure return kind of a model, where I have my downside protected for my capital, and anything on top, the distribution waterfall, I leave it more in the favor of the entrepreneur, so that he's more incentivized to work hard for the project. So that's my investment philosophy if you ask me so, but I look at it investing more for bringing in FDI into UAE, and once we have set up the businesses with this company, then I want to go with them in the biggest countries, like I said in the beginning.

H.E. Zulfiquar Ghadiyali: (12:14)
So investment yes, is very much a focus, then also there're a lot of companies will reach out to us when they look for a stronger partner in UAE, especially, you know, so, and they all feel, and somehow have a belief that having a strong Royal family office will definitely help them to navigate the whole nine yards of the system. So nothing wrong with it, I mean, we are as other everyone else, and we openly help them, and commit to supporting these companies to get all the business in place, and to attract the market, to attract the right kind of capital. And then from UAE to enter into Africa, to enter into the middle East region, because we see a lot of traction coming in from Egypt, and the rest of the North African countries, you know, they're booming very well.

H.E. Zulfiquar Ghadiyali: (12:59)
Just today morning, I was evaluating one of the projects from Tunisia, one of the smart cities that is coming up, and I was a surprise to see that the young population is so aspirational. They have a good education now, getting very good on education, the men, women ratio of, the sex ratio is very good. The economic diversity is very good, the demographics are very educated, and they have a very good future in place. So yeah, so Middle East, North Africa, and East Africa is booming. So that's what creates more opportunity for companies to set up their base in the UAE. And just to have some time back, I was in one of the webinar, and the more chaos people see worldwide, the more they want to come to UAE, especially right now is dealing with Chinese, and Indian companies. So the Chinese have a problem that nobody wants to touch made in China product anymore, and Indians have a problem that they cannot import Chinese goods anymore.

H.E. Zulfiquar Ghadiyali: (13:51)
So they are not able to manufacture, because most of their raw materials came from China. Of course, eventually they will evolve the whole local ecosystem, but by then, longterm everybody dies. So it's the short term survival, is a strategy for them, but we are helping these companies to migrate into, and set up something in UAE to our royal support. But that, again is becoming a very important task for us, and tech and, sustainable projects, emerging technology. We are about to announce our joint venture with one of the very larger sovereign fund for the Middle East, and UAE, and GCC strategy, so we'll be announcing that. That will add a lot of, it's a third party investment, but it definitely be routed through our company, and our holding company. So that would really add to us, in a sense that we be now able to actively invest much larger than what we would actually investing as a family office. So that is going to be our focus area as well.

Rachel Pether: (14:47)
And so when you're looking at these investments, you mentioned smart cities, and other emerging technologies, the SME area in the UAE is obviously a very staffed one in terms of capture, I think about 3.5% of bank financing, for example, goes towards SMEs. What are you doing to support those companies in the SME space?

H.E. Zulfiquar Ghadiyali: (15:11)
Yeah. Very interestingly you touched upon the SME, because last few months I've been focusing a lot on the SMEs, and the SME outreach program that we have created for, especially for emerging market companies, from Indonesia, India, Nepal, countries like Vietnam, and even Bangladesh, you know. There're lot of these small small companies, which have a lot of scalability possible. So we are helping these companies, and we are providing them with all of the possible approvals, and licenses that they need. And we are helping them create an ecosystem for themselves in the UAE. And that's the best way to bring back employment in the UAE right now, because a lot of people are losing jobs, and that's not a very happy situation. I mean, on LinkedIn, and social media my inbox is full of job applications, and I feel bad, because I cannot employ all of them.

H.E. Zulfiquar Ghadiyali: (16:00)
So it was in a way I wanted to do some things so that I can bring more and more employment. And if you look at the SME, they actually drive all the possible growth, in terms of housing, in terms of everything that, so FMCG, consumer durables, everything succeeds if SMEs are growing at a rapid pace, and the right way. So we have to doing quite a lot, we are helping them with the adequate financing, we are in fact helping them also to go and trade in Africa, if they have contracts from public, or private sector. We are helping them even with trading find trade finance what we call it to our limits, as well as we have couple of funds which only focus on trade finance with us. So we are helping SMEs to that effect. Yeah. Those are some of the things we're-

Rachel Pether: (16:45)
And you mentioned the hospitality industry. I know you have a lot of exposure to this with the family business, and also with His Highness, that's obviously been one industry that's been hit very hard with COVID, and the lack of travelers, and tourists. How has your family business, and the, His Highness' office adapted to this, and what are some of the changes that you've had to make?

H.E. Zulfiquar Ghadiyali: (17:14)
Well, in the His Highness office, the best thing is that it's a patient money, it can wait, and it is not in a rush to repatriate itself, because it's a legacy investment. For our family business, yes, again are not highly leveraged, so it's a very conservative family of mine, which doesn't believe in borrowing, they believe that their money, is their money. And it's recently just, they invited a couple of foreign players institutions to participate in equity, but otherwise they've always been homegrown, and self-driven company. So we're not very much in a soup, but I would say, yeah, situations are tight, especially the real estate sector is totally, I would say in a very, very bad shape in India right now, especially the luxury market, and we predominantly are known for luxury market.

H.E. Zulfiquar Ghadiyali: (18:05)
So luxury market has taken a lot of hit, but just seven years ago, we decided to diversify into affordable luxury where , we decided to sell smaller units focused on very small ticket size, under a million, because in Bombay, in a city like Mumbai, each luxury apartment could be a million, or two, or more sometimes. So we decided to be within a million dollar limit, in fact half a million kind of limits, and provide them with a lovely building, with great facilities, gymnasiums and everything that a family would acquire, a family of four perhaps. So we decided to design houses, smaller houses, smaller apartments, so that, but good locations, and with all facilities, so that people are tempted to buy smaller apartments. That kind of worked very well for us. So that way we were able to save ourselves at the Royal office, but there was not much of an impact. In fact, now that I'm driving most of the investment initiatives, my focus is all going to be investment in emerging technologies, and agriculture and agri-related businesses.

H.E. Zulfiquar Ghadiyali: (19:08)
So, very limited exposure to heavy Capex, very limited, I don't have any liking for real estate sector anymore. Some real estate, yes, some quality real estate, yes, which is income-producing, and which is, which has great tenants in place, which I know will last forever. And those are the projects that I'm highlighting, and taking interesting in, but otherwise not going into Greenfield projects, not going into futuristic long-term projects, but perhaps if there is a running office building, with a good 6-7% yield, I'm not very greedy, I'm happy with that, that gives you some realistic portfolio active. And of course when the market improves, you go in cash on it. But at the moment, it's going to be serious focus on emerging technologies, AI-based companies, or FinTech related companies. And with the new farm bill in India, we want to now focus a lot on agriculture culture sector, and retail. Yes, that's going to be the focus now.

Rachel Pether: (20:04)
Well, that's a really great segue actually, because I do want to go into, more depth on the impact investment path, but you mentioned some of the focus areas for India, and we've actually had a question coming in from the audience asking for your current views on the Indian market. I know you mentioned that you were doing some things, and the kind of $1 million affordable luxury range, but what's your current view on the Indian market? Is that still a very robust growth story?

H.E. Zulfiquar Ghadiyali: (20:32)
Well, if you initiate a project today, by the time you complete, it's going to be submitted between 24 months to 36 months, that's usually the time that you complete a project in, by then you will be in a very good situation. So if you're launching a real estate project, I would advise, you launch it in affordable luxury segment, don't go for a very high end, and don't go for the social housing, because there's already too many players in there, but affordable luxury is the sector. India is predominantly a self grown country, self grown market. It doesn't depend a lot on imports, it doesn't depend a lot on exports. So it's an economy within itself, so the most important factor is the political stability, and of course COVID has really made a big difference.

H.E. Zulfiquar Ghadiyali: (21:20)
I may have my reservations about the current government in India, but this is not a political forum, or a debate, so I will stay away from political discussion. But that is certainly some decisions which has not gone very well down with the industry. And that has led to certain impact, which is, I would say a sort of destructive, we Indians sometime can get self destructive ourselves, we're the smartest race on this world, and we are self destructive sometimes. So I think, but I think in the long-term, the market is very strong, and there's a huge potential. But in the short term, yes, there is a small pain. It just how you plan your financing, and don't go too much on, heavily exposed on debt. And even if it's a debt, make sure your cost of borrowing is under control, because the margins have been shrinking a little bit. So you may not have a big cushion on your earnings after paying such a heavy debt.

Rachel Pether: (22:11)
I know there was a big push a number of years ago to encourage more financial investment into India, and I think that's, that's worked quite well to some degree. Do you think that, that pace of investment is likely to continue? And I appreciate that you don't want to go into too much of the political discussion, but how do you sort of say that growth, and traction of investment playing out when the world sort of returns to normal post COVID?

H.E. Zulfiquar Ghadiyali: (22:42)
I think the recovery in India is going to be a case for a year, China equally, you're going to take six months to a year to recover. I believe the fastest to recover would be the developing countries, because they do not depend on exports a lot. So it's easier for them to recuperate within the country. So India, yes, but in a year. But I think the Western countries, especially in the developed markets, like the U.S, and the UK, and the European world, I think it will be a slow recovery for them, simply because they depended a lot on exports. And the countries who were importing from them are actually the worst effected.

H.E. Zulfiquar Ghadiyali: (23:21)
So it's going to be a little slow recovery, but like I said, I don't believe in threats, and weaknesses, and any kind of negativity, I believe in positivity. So there are a lot of opportunities actually that has come out away from Europe, some from Americans, and we are exploring, but again, not going very heavy on real estate, going very much on FMCG, going very heavy on consumer durables, we are going heavy on emerging technologies, which can be scaled very well in our part of the world, because that's what we can control. Like I said, I like to invest, I'm not a control freak, but I like to be sitting next to the driver, and work hand in hand, you know? So yeah, that's the, but I think that the company should be somewhere between 12 months, it's eight to 12 months.

Rachel Pether: (24:12)
No, that's great. And I'm with you on that Zulfiquar, I've been called a control for it before, and I took that as a compliment, so I understand your positioning there. We've had another question coming in from the audience, which I think you've answered in part with what you've just said about Europe. But the question was, I was wondering for such big markets and countries like UAE, and India, are these funds interested in investing in developed markets, IET European markets. And I think you did touch on that in your previous answer, but maybe you could talk about specifically in Europe, some of the sectors that you find most interesting.

H.E. Zulfiquar Ghadiyali: (24:50)
So, I I'm looking at some industrial projects in industrial companies, and corporations in fact in Europe, one such is an opportunity that we just gave a final term sheet to, which is a pharmaceutical opportunity from Germany. I think that's a very good opportunity, and the valuations are very sensible. I would not say it's a steep downwards for them, or a great deal for us, but it's a value for money. And I most importantly believe that that company will do very well in India ecosystem, and GCC ecosystem, because more and more people are spending on health, and so precaution has become more important than just a cure. So people are building to pop those multivitamins, and now more and more, the vitamin C has become a part of daily lives. So the health care is going to become the preventive healthcare basically. So that's another area of interest that I'm focusing on right now, preventive healthcare.

Rachel Pether: (25:51)
That's great, thank-

H.E. Zulfiquar Ghadiyali: (25:52)
Europe is playing an important role, because European companies have some of the great industrial projects come in the pharmaceutical industry, from a quality pharmaceutical comes from the area, so we are focusing on that.

Rachel Pether: (26:02)
So let's talk more about the impact investing phase, and firstly, I mean, it's great work that you're doing on this female empowerment, so I think that's really impressive everything you're doing in that space. But on impact investing more broadly, it's obviously very important for families to leave behind some sort of legacy, and not just financial for the next generation. So perhaps you can tell me more about some other initiatives that you're doing in the impact investing space, and why this is so important for you.

H.E. Zulfiquar Ghadiyali: (26:36)
Yeah. I mean, I believe like we have to invest our money, we have to invest our capital, but if that investment can create more jobs, and if it can make life easier, and better for as many people as possible. So that's one of the core principles, which I look at a project to invest. So I am not a very big fan of men on mars, or men on sartun, sorry, I mean this is just personally me. I believe even after 200 years of industrialization, we haven't solved the basic necessities of humans on this planet yet. So I think it's time to actually focus on that. So what are the sectors? And everybody's running for that urban buy of a marketplace, which is just 35% in most of the markets, especially in the emerging markets.

H.E. Zulfiquar Ghadiyali: (27:20)
Like the other day, some brand approach for partnering with them for India strategy, and they're like, Oh, the market looks very cluttered. I said, no, you're not looking at the 65% of the rural market, you're only looking at the 35% urban market, and urban incomes are shrinking, while you can put more money in the hands of the rural market, which is 65%. And like, how can we do that? I said, let's go and start agriculture, going back to basics sometime helps, you know. It's very basic sector agriculture, but what we are doing. So, and I have created a whole ecosystem around it, it's not just, it's a random thought for me that all let's go now to villages, no, it's not like that. The last five to seven years of my career, I have invested in a fertilizer company, I've invested in the potash, which is one of the very important component of fertilizer, I've invested in biostimulants, I've invested in seeds, and processing units. So I've done a complete backward integration for agriculture sector.

H.E. Zulfiquar Ghadiyali: (28:12)
And now, what we're doing is we come up with a very good scheme where we go into the farmers, we're telling them, okay, we'll give you everything that you need for your production and your cultivation, and your harvest, we will buy on a contract with you, and we'll pay you double the amount that the government pays you. So there is no corruption, there is no allegation of any wrongdoing, because we are paying anyways more than the government pays them. Right? So, but what we're doing is we're cutting down the middlemen, and because all the raw materials are owned by us, it's like our production, and our companies. So we have a very negligible cost in terms of cost of cultivation. So there's a cost efficiency, and yet, because we have a technology and direct sourcing, we are able to cut down the complete middle market thereby saving almost 45% of the cost. And that benefit we're passing to the farmer, and the rural areas, and at the same time to the urban market, which is the consumer. And the extra money, we are putting it back into the communities for healthcare, for education, for housing.

H.E. Zulfiquar Ghadiyali: (29:08)
So you are actually creating economy with that 65% of the pocket, and not just on that 35% in the urban area, where everybody is fighting, the Gucci of the world, designers of the world, everybody's fighting in that. I don't want to be in that clutter, I want to go where nobody's going, which is a much larger area, which is 65% of the market place. There is a light activities with agriculture, and the margins can be higher depending on how you processing, and international exports, and stuff, so that can really help, now that we can even grow in deserts. And we see half of China being desert, half of Northwest, part of India being desert, most part of Africa have absolutely no water. Even in those situations, we can grow using a modern agricultural technologies. So why not invest in that? So that nobody goes hungry? You know, that's my vision, that's my thought process when it comes to investing. Yeah.

Rachel Pether: (30:01)
And so I think that water question is actually a really important one. You know, we live in a part of the world that has very scarce, fresh water supply. What are you doing on the waterfront, and how are you doing the turning unfarmable land to farmable.

H.E. Zulfiquar Ghadiyali: (30:21)
So the're a lot of these new innovations, like just four days ago, I saw one very innovative technology. So, what they do develop is they have developed these paver blocks, which you put on pathways and walkways, and these are something which, so the major problem is we're not storing enough running water. You know, like most of the countries of the world barring some desert regions, which don't get rainfall, but otherwise, most of the regions of the world, they get good amount of rainfall, but still the water goes down the drain, and it goes into the ocean. So there's no one, no ways to conserve that, and in, especially in emerging markets, and developing, and under developed countries, there's no such enough investment available to kind of actually create those kinds of reservoirs, it costs a lot of money.

H.E. Zulfiquar Ghadiyali: (31:04)
So, simply if you made, make roads made of these blocks, the road, these blocks have ability to absorb water, and it takes it to the underground water reservoir in a central location, and it gives the water fresh for at least 12 years. So these are some of the innovative ideas that we're implementing, and agriculture, we just looked at one of the Israeli company the other day, they're number one in drip irrigation. And if it takes you one gallon of water, then you just need a hundred ML of water compared to that. It's just the way you irrigate the whole land. So yeah, water is important, but the absorption of water, it takes its own time. So you pour a gallon of water on a plant, it's not going to absorb all the water. It's like, you can't drink a gallon of water at one time, but within a period of one week you can drink a gallon of water, right? So, that's how it is. Yeah.

Rachel Pether: (31:55)
That's fascinating. [crosstalk 00:31:59] You did touch on looking at Israel, and investing in an Israeli company, maybe you can talk a little bit about the Abraham Accord, and if Israel is now a market that you're looking to more intently as a result of that.

H.E. Zulfiquar Ghadiyali: (32:14)
Well, like I said, I'm Indian as well, so I've always looked at Israel and Cinemoi, the company that you talked about, it's actually an Israeli founder. And so, I'm not new to working with Israelis, and my Jewish friends, in fact, 70% of my partners are Jewish origin. And we sit down, and when we look at the global conflict we laugh on it, because we feel technically there is no conflict between us. It's like I was using this very apt example like, I mean, Abraham Accord is basically the cord for the Jewish, the Christians, and the Muslims. So, we all believe in the same God at the end of the day, so it's like, we all alike, and we believe that Domino's has the best pizza in the world, it's just we have a problem with the delivery boy, so that's the only conflict we have, and the day we settled down on that conflict I think we are good to go.

H.E. Zulfiquar Ghadiyali: (33:06)
But I have a strong connection with a lot of my Jewish friends, and I believe they are just like you and me, and they want happiness, they want education, they want freedom, they want peace, and so as me, I want the same things in life. And some of the initiatives on cybersecurity, on automotive bagels, what I call AVs, and some of their drone technologies that we're working on, that you read about ING Robotics, we are working with some of our Jewish partners in that, it's a company found in Canada, of course. And I believe we have one of the best drone systems in the world. I cannot, of course get into the technicality here, not dependent for that, but definitely it's a very smart technology. We are working on smart cities, not just smart cities, but super smart cities. And there is a whole explanation to that as to how it can become super smart cities, which is absolutely aligned with the sustainable development goals.

H.E. Zulfiquar Ghadiyali: (33:59)
And I think that Abraham Cord, Abraham Accord, will actually open more opportunities for everyone in the region, because the most important consideration for every investor was, Oh, it's a hot region, it's a volatile region. Now somebody says it's a volatile region and your eyebrows really, you really think so? It's not, because the major region reason for conflict is solved now. So that has gone politically very strong message, that we are ready to make these no matter what it takes. And that is going to work very well for the whole region as a whole, not just for UAE. So people in the neighborhood were not very happy with the decision, I don't know why, because it's actually going to help them and every one of us. So in fact, everyone should have worked towards it. And I salute the vision of H.H Sheik Mohammed bin Said, and of course, H.H Sheik Mohammed bin Rashid, for kind of taking this bold initiative. And this is going to be a very long-term, and it holds a very bright future for the GCC and Middle East actually, and for the world, I would say rather.

Rachel Pether: (35:00)
Yeah, I completely agree with all of your points, except for the point you made about Domino's pizza being the best in the world. Rest of your points, I agreed with. We have time for one more question, so I'll just give you a slightly easier one to finish on. Perhaps you could talk about how you think your training in hospitality, and that that sort of customer outward focus has helped you in your career, and in your life to date.

H.E. Zulfiquar Ghadiyali: (35:26)
Yeah, I learned one thing like it's about, it's the 10%, which is the situation, and 90% is your reaction to that situation. So in the hospitality, I always learned about you attitude. So whenever I saw an angry customer, or a guest, you know, all it took was an appreciation, and a little bit of a care, a little bit of affection, and put yourself in their shoes, and think how are they feeling in that situation? You may feel like, Oh, how can I do this? And what can I do to make this guy happy? So if you leave that attitude and rather think, what is that that he wants, and how can I make him happy? And that will really go along way.

H.E. Zulfiquar Ghadiyali: (36:10)
So in my business dealings, I always, so whenever I prepare my presentation, I don't prepare for what I want, I prepare for what the other side wants from me. And if I'm going to give him what he wants, he'll automatically give me what I want, because that's how you win in business. So it's called the you-attitude, and I always carry that you-attitude with me. So that's something I learned a lot, and we were taught, no matter how much the pressure, you always will smile, and no matter how much the other side is stupid, or wrong, you'll always still smile. So, that always helps trust me.

H.E. Zulfiquar Ghadiyali: (36:44)
I've come across a lot of people, and not everybody's happy to see you grow and progress, but you take them in your stride, and that's what I do, and this is part of my training. And I mean, I can go on telling you the goodness of the hospitality, and service industry, but service industry just makes you for life, because your business is not done on the office table, but on the dinner table when you order a drink, and that's why we have our mastery, because we are trained in hospitality. So when you ask the next time for dinner, I'm going to suggest to you Alsace Gewurztraminer wine with lowriter oysters. So I'm sure that you're going to be more than happier, to have that kind of a starter with a lovely wine. So, I mean, that's how we are trained to dress to kill, and smile to impress.

Rachel Pether: (37:34)
Well, that's great. That's a very optimistic, positive note to end on. So, Zulfiquar I just like to thank you so much for your time today, it's been a pleasure speaking to you as always.

H.E. Zulfiquar Ghadiyali: (37:43)
My pleasure Rachel, thank you for inviting me. I've always been a big fan of you, and I think it's my fan moment today. So, Rachel thank you for inviting me in this lovely interview. And again, Joe thank you for helping coordinate this thing, and everyone who posts their questions, and people who are listening to us, thank you again for your time, and attention. And wish you all the best with your health, and wherever you are, please be safe this year, just save yourself as Jack Ma said, the biggest profit of this year is you are safe, and you're alive, that's most important.

Kurt Andersen: Author "Evil Geniuses: The Unmaking of America" | SALT Talks #76

“Technology changed the nature of economies and all the rich world. But in the US, we did this different thing of saying, no, all boats are not going to rise anymore.”

Kurt Andersen is the bestselling author of the novels Heyday, Turn of the Century, and True Believers. He contributes to Vanity Fair and The New York Times and was the host and co-creator of Studio 360, the Peabody Award–winning public radio show and podcast. He also writes for television, film, and the stage. Andersen co-founded Spy magazine, served as editor in chief of New York, and was a cultural columnist and critic for Time and The New Yorker. He graduated magna cum laude from Harvard College.

In the 1970s, a subtle yet radical shift took place in American politics that culminated in Reagan’s election. A pro-business vision of the economy displaced the working class policies of FDR’s New Deal. This set the stage for the next 30-40 years of policy consensus that ultimately drove the economic inequality we see today. “I was a little oblivious to and indifferent to the systemic change in the economy that had happened around it, starting in the seventies… I didn't realize until I went back and did the research how that had been not the beginning, but the end of a decade of strategic work of CEOs and rich billionaires and libertarians.”

While the middle class initially shared in prosperity, major advancements in technology and globalization exposed the systemic inequity. This has given rise to many of the cultural and political divisions we see today.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Kurt Andersen

Author

Evil Geniuses

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello, everyone. Welcome back to SALT Talks. My name is John Darcy. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. And we're very sorry for the late start today, a little bit of miscommunication on the timing, but our guest today is worth the wait. It should be a fascinating conversation about his recent book and observations about things that are going on in the country. But SALT Talks are a digital interview series that we launched during this work from home period. They are interviews with leading investors, creators, and thinkers. What we're really trying to do is replicate the experience that we provide at our global conference series, the SALT conference. And that's to provide a window into the mind of subject matter experts for our audience, as well as to provide a platform for what we think are big ideas that are shaping the future.

John Darsie: (00:54)
And we're very excited today to welcome Kurt Andersen to SALT Talks. Kurt is the best-selling author of a number of books, including several novels, as well as non-fiction books. Among his novels are Heyday, Turn of the Century and True Believers and his most recent nonfiction book, which we're going to talk about a lot today is called Evil Geniuses, The Unmaking of America. He contributes to the Vanity Fair and New York Times and was the host and co-creator of Studio 360, the Peabody award winning public radio show and podcast. He also writes for television, film and stage. He also co-founded Spy magazine and served as editor-in-chief of New York and was a cultural columnist and critic for Time and The New Yorker. A reminder, if you have any questions for Kurt during today's SALT Talk, you can enter them in the Q&A box at the bottom of your video screen. And now we'll turn it over to Anthony Scaramucci, who's the founder and managing partner of SkyBridge Capital, a global alternative investment firm, as well as the chairman of SALT to conduct today's interview. Take it away, Anthony.

Anthony Scaramucci: (01:56)
Well, first of all, Kurt, thank you so much for joining us. I loved your book. Before we go into the book though, I want to talk a little bit about your professional background, your personal background. It's a little cliche, but I ask everybody this. And I always learn something. As an example, yesterday or two days ago, John Brennan, the CIA director, he told us that he wanted to be the first American Pope and that his name that he had designated for himself when he was 14 was Owen the first, which was his family's, his mom's maiden name. So, I thought there's no way we're going to find that out Kurt on Wikipedia. So tell us something about your life that sort of triggered you to go in the direction that you went in with your career or something fun about you that we couldn't find on the web.

Kurt Andersen: (02:44)
Well, I really started doing what I was doing as a junior high school student in Omaha, Nebraska. I got a job on the student newspaper, Arbor Heights Junior High School. And started I guess being a journalist of sort, but really writing satire. That was my first quasi-professional writing experience and I loved it and they let me keep doing it, they let me get away with it through high school as well. And then I went to Harvard and was on The Harvard Lampoon there, that you could find on Wikipedia. But really even though I had done legit journalism and I write novels and history books, really having that founding self-tutorial in making mischief, I guess was the beginning of my writing life.

Anthony Scaramucci: (03:44)
And you were also one of the founding editors of Spy magazine with Graydon Carter. And so I want to go back to that moment in time. It was the roaring eighties. I was a prolific reader of Spy magazine as was everybody that lived here in New York. And you had Donald Trump on the cover once in a while but really what as [crosstalk 00:04:09]?

Kurt Andersen: (04:04)
We did have him on our cover once a while. In fact our first issue of Spy Magazine in October of 1986, the cover story, it was called Jerks, the 10 most annoying New Yorkers, of whom Donald Trump was one of them. And in his little write-up we did on him among the 10, he was just one of 10 at that point. He was saying that he could solve the nuclear missile issue with the Soviet Union. Just send him over there, he could learn everything he needed to know in an hour about nuclear missiles was his quote in the first issue of Spy Magazine. So yeah, we kept at him, investigated his bankruptcies and his bullying and all that he was then and remains.

Anthony Scaramucci: (04:46)
Who was the number one jerk? Did you have a ranking or did you or did you have to [inaudible 00:04:49]?

Kurt Andersen: (04:49)
No, I mean, ranking is the kind of thing we did. We didn't do it in that case. So he was just one of 10 along with Leona Helmsley and a lot of others.

Anthony Scaramucci: (04:57)
Okay. Yeah. Well, there you go. Well, you're really going back. All right. Well, let's turn our attention to your book, Evil Geniuses, The Unmaking of America. And basically for our viewers that haven't listened to read the book or listen to it on audible, it's a fascinating discussion about the US economic system and how it unfortunately was re-engineered, let's call it about 40 years ago to benefit elites. And so we had something going on and I don't know if you've read American Amnesia that was written about in 2016, if you haven't, I'll send you a copy of it.

Anthony Scaramucci: (05:33)
It basically said that we had this pretty good intersection between our government helping middle and lower middle income people through government activism and programs. And we had a pretty robust capitalist story going on in conjunction with that. We seem to have jettisoned one part of that about 40 years ago. We'll call it the Reagan revolution and now as a result of which income divide is widening even deeper. I'd like you to address that for our listeners. Explain why you wrote the book, explain what you have seen in our Zeitgeists economically over the last 40 years.

Kurt Andersen: (06:10)
Yeah, I'd taken a pause from writing novels to write this previous book called Fantansyland. That was about what I noticed really in this century, right? In the last 15 or 20 years. Which is to say how the belief in the untrue of all sorts. Believe whatever you want had gotten out of control in this country. And so that book was an attempt to figure out how that had happened. And I figured out that it was a really deep in our bloodstream, but it was under control. It was an okay balance for a few hundred years, right? Because the grownups when pushed came to shove were in charge. But then I realized as that book came out and I went out and talked about it, that that was really only half the story. That this inequality and economic insecurity and the sense of hopelessness and less upward mobility, all that economic stuff was the other half of how we got into the ditch or the ditches we're in.

Kurt Andersen: (07:12)
And how did that happen? And I realized because I was doing pretty well in the '80s and '90s as a journalist, as a magazine editor, as an entrepreneur, as all kinds of things. And which while I was voting democratic and I consider myself a liberal, I was a little oblivious to and indifferent to the systemic change in the economy that had happened around it, starting in the seventies, really. And in this evil geniuses, I traced back to how yeah, Reagan got elected and wow, that's new and taxes on the well-to-do were cut in half or more as they were on big business.

Kurt Andersen: (07:52)
That's a big deal. But I didn't realize until I went back and did the research how that had been not the beginning, but the end of a decade of strategic work of CEOs and rich billionaires and libertarians, and all these different people working in all these different ways to do what they did as, as you say it. To re-engineer the system, to hijack the system really, and to change it from this great kind of post new deal America that had worked for everybody, the rich got rich, the middle class got more prosperous.

Kurt Andersen: (08:28)
The working class were doing okay. This system was working, all the boats were rising economically pretty well together. And then it changed. And what I realized too, during the research for this book is that inequality increased elsewhere, right? Globalization happened everywhere. Technology changed the nature of economies and all the rich world. But in the US, we did this different thing of, of saying, no, all boats are not going to rise anymore. Your boats, you, 80% of less wealthy people are just not going to rise any more. Your incomes and your household wealth is not going to increase. And that didn't just happen by accident. It happened by a whole series of regulatory changes, changes in thinking, changes in norms, changes in law, changes in taxes that have left 80% of us, not better off than we were 40 years ago.

Anthony Scaramucci: (09:24)
And it's a brilliant exposition. In addition, where you're saying right now, what you write in the book, you really lay out what happened in the convergence of a lot of special interests that sort of allowed for this outcome to happen. I was dying to ask you this when I was reading your book. So now I've got the opportunity to ask it to you here. Isn't it the fault of the politicians though? Isn't it the fault of our public servants in a sense that they almost abided to special interests through the political lobbying, the payments, the junket, the packs that were formed to help them stay in power. And they sort of lost that, no bleach obliged, if you will, or that understanding that they were there to serve the American people, which included all of the American people, not just necessarily the people that were donating to them?

Kurt Andersen: (10:12)
Certainly, they have their large share of the blame along with, and the Democratic politicians do as well as the Republican politicians who were more unapologetically and shamelessly devoted to this change. But there's plenty of blame to go around. But what and it's easy to blame politicians. We're used to blaming politicians and they're are political figures who are among my Evil Geniuses, but I think it's important to look at the whole realm of people, including CEOs, including intellectuals, including people in the media who did all that they had to do in various ways or failed to do what they had to do in the case of Democrats, I would say, to stand up and say, "No, this is a raw deal. This is no longer the new deal."

Kurt Andersen: (11:09)
So, but yeah. But I think as I try to lay out in the book in so many ways, the Zeitgeist, the set of norms about what was fair, really just what was fair, were being changed on so many fronts. And so partly out of earnestness, Neo-liberal Democrats said, "Yeah, maybe we should go halfway. Maybe we're off the free market it's pretty good." And then basically lost their distinct vision of this sense of fairness and went along with the crushing of labor unions and went along with the end essentially of overtime pay, went along with reducing the minimum wage, all those things. And pretty soon, since there were no actual liberal Republicans anymore, there were the Democrats on economics took the place of liberal Republicans. Everybody was a Republican. The Democrats were just a little softer.

Anthony Scaramucci: (12:09)
It's very compelling stuff. You wrote about technology in the book about how it's exacerbated inequality created more insecurity. I'd like you to address that, but then also, how can technology fix some of this inequality as well? It's sort of an interesting thing. It's hurt us in one way, but it may be able to help us. You explain it. I'd like you to articulate it here.

Kurt Andersen: (12:31)
Right. Well, I mean, my first couple of chapters are a quick history of modern capitalism, of America, and of technology and how technology has been key to prosperity again and again and again. But technology can be good. It can be bad. It can make nuclear weapons, it can make nuclear power. It can make life easier, or it can make slavery worse through the cotton shin. It's the choices, it's the political public social choices that are made about how to use it. So technology, we moved from farms to factories, from factories to offices, technological change, good, use it well. We have this whole set of balancing mechanisms through government, through citizens organizations, through unions, all the rest. There needs to be this balanced system. In the 1970s and '80s we lost that balance. So it became simply fine for companies to lay off as many people as they could constantly as a way to do business, right? So sooner or later that catches up with you as it has caught up with us, there aren't enough decent paying jobs for human beings.

Kurt Andersen: (13:50)
And that is going to become a bigger and bigger problem as AI kicks into gear and makes fewer and fewer jobs necessary. How do you deal with that? So we can have a future that is more like a utopia frankly, where machines do all the work, but we got to figure out how to then share that bounty. And it's not just... It can't all go to Mark Zuckerberg and the investor class. I mean, we all did it together. By the way, as you know I talked about in the book how the United States government was key, is key to building doing all, making all kinds of businesses happen, including the internet and all of its businesses.

Anthony Scaramucci: (14:34)
Absolutely.

Kurt Andersen: (14:34)
Do we as citizens, taxpayers get anything out of that? We do not. So there is a social wealth that has been created that with all, with nanotechnology, with AI, all that. It can get even more fantastically prosperous, but it's not going to work if just the rich are getting richer. And just the people who own the machines and the AI are benefiting.

Anthony Scaramucci: (15:01)
Well, we're in agreement. There is another famous author, Malcolm Gladwell once wrote, I think it was in one of his piece. I didn't remember seeing it in his book, but he said that he felt that this proliferation of greed at the corporate level started with baseball free agency in 1974. He attributed it to Curt Flood. And he basically said, what happened was Curt Flood got his free agency. The court said he could be a free agent. Then you had the rise of Reggie Jackson. And Reggie is a friend of mine. He always will mention that he got a five-year deal, which was $600,000 a year. At the time it was a stupendous contract. And obviously you have Pat Mahomes now getting a half a billion dollar deal from the Kansas city chiefs.

Anthony Scaramucci: (15:47)
And Malcolm's point was once the sports athletes could make $25, $50 million a year, American CEO said, "Well, wait a minute, I'm doing a way harder job than them. What am I chopped liver?" They went to their boards and said, "Pay me more money." And you saw this whole proliferation. And so I guess the question I have is what is the counter dote to that? What could happen in the society to make people recognize, well, wait a minute, you got to look out for the little guy. Or wait a minute your compensation on a multiple of your poorest employee is just too high. And I know we want to compete for art at Sotheby's and have a big aircraft, but you may want to take care of these people, because if your neighbor's doing better, there'll be less social unrest. There's a public good to that for your family as well.

Kurt Andersen: (16:38)
100%. Well. So a lot of things have to happen. And one of the bits of the pieces of hopefulness that I take from this book and doing the work is that it changed, right? We had this new deal all in the same boat sense of common good even as the rich got rich. And we've always had an unequal society economically, and no doubt always will. But it's question of extremes and how ostentatious one feels no shame about being, in having and showing off wealth while most people have had no income increases, can't afford college and all the rest. So there's the, are we good people? Are we fair people or is greed good and profits all that matter? That's the question. That was changed 40 and 50 years ago. It can be changed again in through various ways.

Kurt Andersen: (17:33)
And to your point about the CEOs and earning multiples of their average workers, that wasn't a law. It just was the norm that for decades and decades the average CEO got 50 or 60 times the pay of his average worker. And that was a lot of money. Then it okay, fine. The '80S it goes up to a hundred times. But then in the '90S to 300, 400, 500, a thousand times as much money. Tell me that's fair. And, and, and, and it wasn't just the market working its way as we know. And as I discovered, really when I did the work and talk to people in finance and journalists and authors in finance that the pay that CEOs get is not some kind of free market. It is this clubby cabal that decides, as you say, because Curt Flood or Reggie Jackson are getting what they're paying like, "Hey, why aren't I getting paid this money?"

Kurt Andersen: (18:34)
So, how do you fix that? By preaching the injustice and fairness. But I also think just as Franklin Roosevelt, 75 years ago, understood, wait, rich guys like me and us, this system, this golden goose, isn't going to keep laying golden eggs for us. If the people in the Keynesian way aren't buying stuff to make it all work, right? The system needs a prosperous middle class to work. And I'm afraid that not only has the way we've changed the system 40 years not doing that, it's just going to get worse as more and more jobs become automated.

Anthony Scaramucci: (19:17)
Yeah. And I've made this case. I think you and I share our level of moderation. I have made the case of my friends. Well, you want to live in a barbed wired security compound in your McMansion while your fellow neighbor's suffering or do you want to figure out a way to help people stem the inequality this way they don't come after you with a pitch fork or a Tiki torch at some point, which will happen because it has happened throughout civilization. So we'll turn it over to audience producer. We're getting a lot of audience questions.

Anthony Scaramucci: (19:49)
But I have just two more questions for you. And they're tied to your other books, because you seem to have a knack for seeing things before other people see them and a knack for understanding what's going on. And so you wrote a best seller in the year, 2000, it's called The Turn of the Century. And for some reason before the iPhone and Facebook Kurt, you predicted what America was going to look like in 2020, you captured a lot of elements of our media, a lot of elements of what it would take to be successful in politics in terms of bombast and over-exaggeration. Tell us how you did that. Tell us what you saw back then and why did it come true? And what do you see over the next 20 years?

Kurt Andersen: (20:34)
Well, that was my first novel actually came out in 1999. And I've looked back at it fairly recently, and I Pat myself on my back because it didn't see the future in some ways pretty clearly. I don't know, in that case, because it wasn't a nonfiction book and I hadn't written a big nonfiction book, although I'd been a magazine writer and a magazine editor. I think because it was fiction and this near future fiction, it allowed me to sort of tune into my instincts and intuitions in a way that if I were writing a serious piece of journalism, I wouldn't have allowed myself to do. So, it was this funny, it was this interesting time where again, I saw things happening. I saw how in a way that hadn't been true in my younger life how money was everything and how this blurring of distinctions between fiction and reality was just becoming a real problem and on and on.

Kurt Andersen: (21:39)
So I was able to piece it together, I think in fiction by depicting again, the present and near future in a way that writing speculative fiction allowed me to do. Then I think with this last big nonfiction book Fantasyland, and then with The Evil Geniuses as well, I really took what I learned to some degree as a novelist, through telling stories and seeing the big picture rather, and focusing on small facts and details and figures as well, but seeing the big picture in a novelistic way that I hope I bring to these nonfiction histories as well.

Anthony Scaramucci: (22:22)
Well, in Fantasyland, you wrote that in another best seller, you wrote that into 2017. You said something fascinating about America. You said that the society has a peculiar susceptibility to falsehoods and allusions. Tell us why you feel that way? It's obviously true. I just want to understand why [crosstalk 00:22:42]?

Kurt Andersen: (22:41)
Yeah, yeah. Yeah. Well, see, I didn't know. Again, both of these books begin with a question of like Evil Geniuses, how did things get so screwed up and insecure and unfair economically? And that one was, how did that happen and how old the thing was that? And so I just began some years of research and it really is, it's not unique to America, but it is so definingly present in America. It is so deeply part of our character I realized when it wasn't just a thing that had happened since the internet.

Kurt Andersen: (23:12)
At first, I thought, "Oh, maybe it's the internet helped that. And it certainly God knows then." And I thought, "Oh, it's the late '60s and '70s where everybody could do their own thing and find their own truth. And yap, that's part of it too. But then I just kept tracing the threads back in time and saw that literally from the first European settlers where they were coming here, because it was going to be the new Jerusalem and or they were going to find gold in the dirt in Virginia. Again, it was neither of those turned out to be true, but the Americans self-selected to believe that. American self-selected to believe in advertising. Right? Okay.

Kurt Andersen: (23:53)
The first big mobile advertising campaign was to get settlers to come to these money-making colonies and downplay the harsh realities of that. And because we are, and always were such a uniquely religious place, that in its extreme forms also led us to believe things that aren't necessarily true. Our knack for entertainment. And then as entertainment become more and more extraordinary and Hollywood and movies and television, again that helped blur this, this our sense of I think the real and the fictional in a way that isn't unique to Americans, but my God is part of our defining quality.

Kurt Andersen: (24:41)
So on and on and on grownups, it was a thing in balance and the serious people and experts and people knew what they were doing were still in charge. And then that establishment control started in all kinds of ways, started going out of control in the 1970s. And Fantasyland, I finished before Donald Trump was nominated for president. It came out right after he was elected president, and he wouldn't have been in that book, probably. Probably wouldn't have been mentioned if he hadn't run for president. But then just as I'm writing this eccentric history of America, here he comes embodying everything in that book, Fantansyland. And so, one of the small silver linings personally, it was that he illustrated this theory of how America had gone to hell that I wrote without him being even present in the thinking or execution of that book.

Anthony Scaramucci: (25:44)
It's amazing. I'm going to turn it over to John and we've got a ton of audience questions. The book Evil Geniuses, The Unmaking of America. Probably one of the best books I read this summer. I did a lot of reading in the pandemic-

Kurt Andersen: (25:59)
I appreciate that, thank you.

Anthony Scaramucci: (26:01)
Congratulations on the book, but before I turn it over to John, just quickly, what's on your nightstand? What are you reading?

Kurt Andersen: (26:07)
Oh, I am reading, what did I just read a book called Mill Town, about this town in Maine, that, and by working class woman who grew up there and how that town has been effectively torn asunder by the very things I'm talking about. It's sort of a micro version of about Evil Geniuses in that way. That's the book I'm in the middle of. I just started Anne Applebaum's, the Twilight of democracy. So I'm reading happy, uplifting books.

Anthony Scaramucci: (26:41)
If you know Anne, I just finished her book. If you know her, reach out to her for me. I'd love to get her on one of these days. I think she's fascinating. She wrote quite a book. That's a very, I won't ruin the ending there, but it's a great book.

Kurt Andersen: (26:52)
Yeah.

Anthony Scaramucci: (26:52)
Okay. John fire out those questions, we've got a ton of audience participation. John is working from the new SALT studio. So he's sparing you his ancestors. He's a big time wasp so he's got, I don't know, white wigged people in his background. So he's sparing you that today. Go ahead.

John Darsie: (27:12)
Ignore his antics Kurt, but you argue in the book that we've gone back to sort of a pre-new deal world order. And that's a theme that we've had a few speakers that have touched upon during SALT Talks. One of which was Daniel Okrent, who wrote The Guarded Gate, which you might've read. So, if we're in a pre-new deal world order, we obviously need a new deal to get us out of it. What in your view does that new deal need to look like if we can get a more progressive president into office? What do we need to do to jumpstart our climb out of the current morose?

Kurt Andersen: (27:47)
And I just want to make the point that it's not, in my view, a world order. We are exceptional in the world in these ways. But so, I've always loved the line history doesn't repeat but it rhymes. And so we can't say, "Oh, we need this thing exactly like we did it in the new deal. And we did this thing exactly like we did in the new deal." But the idea of the new deal, that there's an essential place for the government and society in general to make the free market economy more fair, more legitimate, more trusted, all those things in all kinds of ways, whether it's antitrust enforcement or so forth are important. But 2020 is obviously a very different time than 1932 or 1936.

Kurt Andersen: (28:46)
And not at least in the way that as John Maynard Keynes saw it back in the 1930s. Technology and machines are changing the nature of work in this profound way that I don't think is going to be, it's going to be sort of, it'll just sort itself out like things sorted themselves out during the 20th and 19th centuries during the previous industrial revolutions. So you've got to have things on the table, like a universal basic income. Andrew Yang was never going to be nominated let alone elected president probably, but the fact that he's so intelligently had this particular critique of what was problematic about our economy, which is to say not enough decently paying jobs for enough human beings because of the miracles of technology and how are we going to deal with that. That in all of its... However we do end up dealing with it, needs to be on the table as all kinds of people, Mark Zuckerberg, for instance, and others in Silicon Valley have signed off on.

Kurt Andersen: (29:55)
So that's one way, but first we need to re convince ourselves, relearn the necessity and virtues of having a social understanding that everybody needs to come along if we're going to get to the promised land. And not just because it's good and it's fair and it used to work great and from 1945 to 1980, it worked fantastically. But the system is just not going to work. FDR was called a socialist in 1932 and 1936, and he saved American capitalism from its greed and from its excesses and from its misguidedness. And again, as his cousin Teddy Roosevelt had begun doing the progressive era a generation earlier. So there's lots of ways to do it.

Kurt Andersen: (30:54)
And again, do we need more higher taxes on people like me and probably you and those of us, a lot of people watching? Yes, of course we do. Because we have plenty. And I think if you're a fair-minded person and you're not utterly committed to just me, me, me, me, me about all things economically, people will come to understand that, yeah, this isn't working. And by the way, it works a lot better in all these ways in other countries.

Kurt Andersen: (31:28)
The fact that having universal health care has been made so contentious is also crazy because show me just for starters, show me how it works better here than it does in all these other rich countries. That by the way and one of the things I hated about the democratic primary process and their arguments about healthcare and how it should be dealt with was there isn't just one way that Denmark, Germany, Canada, Australia, France, Japan, all these other countries do it. They do it in a whole bunch of different ways with different versions of private and public but it's universal and nobody goes broke paying for healthcare.

Kurt Andersen: (32:10)
So there's a reason that became the central, how do we fix this mess question in the democratic primaries and in this election? But that is an obvious beginning. But it's all these ways in which just the basic security that people did feel Americans had and felt when I was a kid and my parents felt coming out of the war. We need to figure out ways to restore that in this very new situation with AI and all the, AI and globalization that make all the problems very different than they were 70 years ago.

John Darsie: (32:52)
So do you think, and this is an audience question, do you think the extreme views that we're seeing reflected in our politics today are the results of our leaders driving us in that direction or a reflection of the way our culture has become divided?

Kurt Andersen: (33:08)
It's both, there's a lot of chicken and egg problems in this that I talk about in Evil Geniuses. I think and there are conspiracy theories on both sides. There are extreme views on both sides. Everything is true on both sides, but it's asymmetrical. It's insanely more true on the right. Now, why did that happen? That happened because the rational, smart, evil geniuses in politics and finance and C-suites and the rest understood that to get what they needed to do done in the 1970s and '80s and 90s, they needed to have enough people to get elected. And who are those people going to be? There aren't enough rich people and CEOs to form a party. So you need a bunch of people who are not rational or not educated or not whatever.

Kurt Andersen: (34:10)
And how do you get them? Well, you get them by riling them up and making them afraid of everything and everybody. And that leaves, inevitably has led in this country, which by the way of course has a certain history of toxic racism and bigotry to extreme toxic political feelings. And I think at what may be the end of this long 50-year cycle that came after this other long 50-year new deal cycle, that in the desperation to hold on to power, the right in the form of the Republican party has unleashed the extremism on their side to this horrible and ultimately I believe self destructive. Self-destructive both of the republican party. And if it's allowed to go unchecked America, that this there's self destructive way.

John Darsie: (35:11)
So we have another audience question, I think is interesting. Because you talk about some of these themes in the book. They talk about a book that's titled Fairness and Freedom, and it basically compares the evolution of the United States and New Zealand, which were two open societies that were founded by British colonists. And it basically talks about how New Zealand adopted an approach from an early stage of that country's life around the collective good. Whereas the United States was more about libertarian individualism.

John Darsie: (35:39)
And we've seen those two different approaches achieve success in each country, the United States and our philosophy around individualism has certainly been part of the economic miracle here. But at certain times it's also been a detriment to us. One of which you could talk about is COVID. You see New Zealand has zero cases while the West wing has 37 and counting. So, what do you think has created that environment? Do we need a reset of that brand of individualism that's become a sort of our trademark in the United States? You talk a little bit about how China maintained some of its political system while resetting their economic system as well. So how do we find more of that balance?

Kurt Andersen: (36:21)
Yeah. Well, I do talk about China and what they did in the late '70s. And I think where we are now requires perhaps as significant and radical of a change as they did and it worked out well for them, didn't it? The individualism thing is interesting. That's a real thing, right? That's a real thing in the founding of the United States. And then became this mythologized real thing as well. But we also had this intense sense of community, even back in the 19th century, the height of Cowboys and resettlers and all that kind of mythic individualism. Small towns became this sustaining place where people helped everyone. Then when we got big corporations and bigger population and bigger government, everything else, we used governments, local and federal and used unions and used all these non-individualistic means to balance out the individualism and to make sure that there was a sense of the common good and the common.

Kurt Andersen: (37:37)
So, yes, we have this in our system and it will always affect, and people want to be who they want to be. And that's been great and grand and beautiful in American history. But my argument, my theory of the case is that starting around 1970, that just got out of control. It just got out of control and was privileged over everything else. And for these Milton Friedman Knights who are major part of my Evil Geniuses, they used that to help themselves and kept helping themselves. So, it was always there but it was always there in balance with this sense of we are Americans together. We help each other and all that. And then, I say it's like a chronic condition that sort of was fine. And to be in the bloodstream intellect was allowed to just metastasize out of control, which I think is what's happened.

John Darsie: (38:43)
Well, Kurt, thanks so much for joining us. I think we could talk for three hours. No problem about these themes, because they're the big themes that we're facing as a country today. And hopefully we can have you back on in a few months when maybe the landscape is a little bit different and we can talk about some of these energetic government policies that hopefully can help lift us out of the current predicament. Anthony, you have any final words?

Anthony Scaramucci: (39:04)
I need to know when your next book is Kurt so I can start investing in that direction [crosstalk 00:39:10].

Kurt Andersen: (39:07)
As soon as I know I'll let you know.

Anthony Scaramucci: (39:11)
All right. Well, exactly right. Well, thank you so much, Kurt. We appreciate it. Hopefully we can get you to one of our live events at some point. I think you would enjoy that and-

Kurt Andersen: (39:20)
I'd love that.

Anthony Scaramucci: (39:20)
... enjoy the chemistry there.

Kurt Andersen: (39:22)
Thanks.

Anthony Scaramucci: (39:23)
All the best to you, Kurt.

Kurt Andersen: (39:24)
See you.

John Brennan: Life Inside the CIA | SALT Talks #75

“U.S. divisions are fueled not just by the domestic demagogues, but they're being fueled by the countries abroad who want to see the U.S. in disarray, that want to sow the chaos and confusion here in the United States, really undermine our ability to fulfill our global responsibilities as well as to grow economically, politically and militarily.”

John O. Brennan served as director of the Central Intelligence Agency from March 2013 until January 2017, following a long a career in U.S. intelligence and counterterrorism. As director, he was responsible for intelligence collection, analysis, covert action, counterintelligence, and liaison relationships with foreign intelligence services.

Division among Americans on issues ranging from taxes to climate change creates opportunities for people and groups both foreign and domestic to weaken the United States’ standing in the world. Cyber tools have become more powerful in their ability to deceive and distort the truth. “They want to sow the chaos and confusion here in the United States, really undermine our ability to fulfill our global responsibilities as well as to grow economically, politically and militarily.”

Increased partisan polarization in Washington has threatened the traditionally non-partisan nature of national security among politicians. Foreign adversaries like Vladimir Putin have taken full advantages of those rifts in American politics and sought drive a wedge between U.S. politicians and citizens whenever possible. Looking back at the run-up to the 2016 presidential election, mistakes were made that allowed many of Russia’s subversion tactics to succeed.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

John Brennan

Director, Central Intelligence Agency

(2013-2017)

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Joe Eletto: (00:07)
Hello, everyone. Welcome back to SALT Talks. My name is Joe Eletto and I'm the production manager of SALT, which is a global thought leadership forum and networking platform encompassing finance, technology and geopolitics. SALT Talks is a series of digital interviews with the world's foremost investors, creators and thinkers and just as we do at our global SALT conferences, we aim to bolt and power big important ideas and provide our audience a window into the minds of subject matter experts. We are very excited today to welcome Director John Brennan to SALT Talks.

Joe Eletto: (00:39)
John Brennan served as director of the Central Intelligence Agency, from March of 2013 until January of 2017. From January 2009 to March 2013, Director Brennan was assistant to the president for Homeland Security and Counter Terrorism, shaping the US government's counter terrorism strategy and coordinating Obama administration and policies on Homeland Security, Counter Terrorism, Cyber Attacks, National Disasters and Pandemics. Director Brennan began his government service at the CIA, where he worked from 1980 to 2005 and specialize in Middle Eastern affairs and Counter Terrorism. He served the CIA's intelligence briefer to President Clinton, Chief of Staff to then Director of Central Intelligence, George Tenet and Deputy Executive Director.

Joe Eletto: (01:28)
In 2003, he led a multi-agency effort to establish what would become a National Counter Terrorism Center. Serving as the center's first director in 2004. He retired from the CIA in 2005 and worked in the private sector for three years. Mr. Brennan currently is a distinguished fellow at the Center of National Security at Fordham Law School, a distinguished scholar at the University of Texas at Austin, a senior intelligence and national security analyst for NBC and MSNBC and an adviser to a variety of private sector companies.

Joe Eletto: (02:00)
If you have any questions for Director Brennan during today's talks, please enter them in the Q&A box at the bottom of your video screen and hosting today's talk is Anthony Scaramucci, the founder and managing partner of SkyBridge as well as the Chairman of SALT. I'll turn it over to Anthony to begin.

Anthony Scaramucci: (02:16)
In addition to me John, I've got Robert Wolf with us, who's our partner on Strategic Worldviews, who was one of President Obama's economic advisers and was the former CEO of UBS Americas. It's great to have you on. I got to ask this question because this is my typical first question and we're going to turn it over to Robert in a second. But you've had this storied career, amazing patriot, but there's something about you that we don't know, that we can't find from Wikipedia and I know you've buried a lot of your stuff because you're in the CIA. But I want you to tell us something about your upbringing that we couldn't find from Wikipedia and how it created or helped you to create the career [inaudible 00:02:59] that you ultimately went on, John, Director Brennan.

John Brennan: (03:03)
Well, Anthony, first of all, thank you so much for the invitation and to participate in this conference today. Really, really privileged to do so. I grew up right across the river from New York city in Hudson County, New Jersey. Went to elementary and high school over there and then went to Fordham College in the Bronx. I was, grew up in the hard scrabble streets of Hudson County and really enjoyed that upbringing, but one of the things that relates in my memoir Undaunted, which is going to be released tomorrow, talks about my Catholicism early on and my interest in becoming a priest. So, until I was about 13 or 14, I was determined to enter the priesthood, but also, my ambition was to become the first American Pope. Again, I grew up in a very religious household and I was on that track and then when I got into high school, I guess, some other things diverted me from it. But, I had always hoped to be the first American Pope, especially when I was younger, who was Pope John XXIII, who was instrumental in terms of reforming the Catholic Church. So, that's one of the things that I think, probably is not known in Wikipedia.

Anthony Scaramucci: (04:13)
All right. I'm so happy I asked that question. As a fellow Catholic, so I have to ask this follow up question, if you don't mind. What was your name? What we're you going? We're you going to be a pious? Were you going to be a John, a Paul? What was the name you we're thinking of?

John Brennan: (04:29)
Well, my middle name is Owen and that's our family name, so I didn't know if I could in fact get the approval for the College of Cardinals to become Pope Owen I, but it was one of the things that I have thought of [crosstalk 00:04:40]

Anthony Scaramucci: (04:40)
You see that? This is new information, ladies and gentlemen. This is why we do SALT Talks. Look at this nugget of information we pulled out of our former CIA director. Let's talk about Undaunted and congratulations on the book and I see it there behind you and I have to confess, I haven't gotten it yet, but I look forward to reading it. Tell us why you wrote it. Tell us why we should read it, sir?

John Brennan: (05:05)
Well, in the preference of the book, I talk about the principle purposes. One purpose is to try to correct a lot of the mischaracterizations and misrepresentations that are in the public arena. About what the CIA does, what the CIA's mission is and also, what happened while I was CIA director and a CIA officer. It's just so much information out there that I think, people take as gospel and I wanted to at least provide my rendition of events and developments that took place during my career. But, more importantly, I wrote this book in order to give American citizens and especially young Americans a better sense of, what the national security establishment is like, what it's like to have a profession in intelligence or law enforcement and to give a bit of a behind the scenes look at how fascinating, how challenging and also, how rewarding that life of public service is.

John Brennan: (06:02)
I would like to be able to be able to convince young Americans who have tremendous skills and intellect and talent, to really consider public service as a part of their future career. This country faces enormous challenges in the 21st century and we really need the best and brightest that this country has to offer, to help keep this country and their fellow citizens safe. Unfortunately, I think, the chaos and confusion in Washington over the last several years has really discouraged a lot of young Americans, the students that I talk to at universities. It has discouraged them from filling out that application for FBI or CIA or the foreign service exam. I tell them, this is exactly the time they should be doing it and they should disregard all of that political nonsense that's going on in Washington because it's really important that this country stay strong, stay prosperous and secure in the future and we need them to join this public effort.

Anthony Scaramucci: (07:03)
You talked a lot in your career, I'm certain it's in the book abour our foreign adversaries, but also the fights that we're having domestically. If you could give us unclassified threat assessment right now, what are some of the greatest threats to America at this moment, Director?

John Brennan: (07:23)
Well, certainly there are a number of challenges on the international scene. Vladimir Putin continues to look at the US-Russia relationship as a zero-sum game and believes that anything he can do to bring the United States down is to Russia's betterment. We have issues with China, clearly on the trade front. We need to grapple with this growing Chinese behemoth on the international scene, both politically, economically and militarily are on terrorism, proliferation, these are all issues. But this is where it really requires the United States to have a much more united and unified approach to dealing with these world challenges. The United States, I'm a strong believer in American exceptionalism. Not because we're better or smarter than anyone else, it's because we've had tremendous good fortune having this wonderful large country with bountiful national resources, large sea coasts, navigable rivers, arable land. Much more than any other country and we're also the melting pot of this global community.

John Brennan: (08:32)
So, I think, we have exceptional responsibilities on that global stage and if we're going to continue to fight among ourselves and be polarized and have demagogues try to further divide us, we're not going to be able to fulfill the responsibilities we have on that global stage. So, I think, the greatest threat to us right now is the internal divisions that we have experience, especially over the last several years. Donald Trump is not the sole reason for that by any means. He's more of a symptom of this polarization within our country and I really do think that we need to find a way to try to bridge some of those differences and not be as internally divided as we are.

Anthony Scaramucci: (09:13)
Before I turn it over to Robert who has a set of questions for you and then we're going to take questions from the audience and one last question for you on this session. It's about our differences because you and I think, see the world very similarly, we have great love of country and we see the unity in the togetherness of the country more than we see our separation. Let me ask you, it's a two-part question, what is causing the separation, internally and then how are adversaries exploiting or making that separation, either through the use of social media or other things that they're doing and let's call it active measures to divide us even further, Director. Tell me what you think is the symptom and the impact on the system and then how ours it be exacerbated from the outside?

John Brennan: (10:03)
Well, clearly we're dealing with a lot of challenges in this day and age and the Americans have a lot of different views on climate change, on taxes, on social issues, on abortion. I think, there is a need for this debate within the United States because we're not going to be unanimous on these issues and that's fine. But, I think, there is a lot of effort to try to fuel the animus that exist between these various groups. As you point out, these internal US divisions are fueled not just by the domestic demagogues, but they're being fueled by the countries abroad who want to see the US in disarray. That want to see the chaos and confusion here in the United States, really undermine our ability to fulfill our global responsibilities as well as to grow economically, politically and militarily.

John Brennan: (10:58)
So, when I look out in the 21st century and issues related to for example, the digital domain, the cyber realm, which you point out. There's a lot of information operations underway to try to shape the perspectives and to distort the facts and the truth of that the American people are going to be [inaudible 00:11:17]. This is an effort to try to further divide, as we saw what happened in the 2016 election, the Russians were not just trying to undercut Hillary Clinton, [inaudible 00:11:28] Donald Trump, they also were trying to divide the Democrats between Bernie Sanders and Hillary Clinton. So again, that division within the United States here, really helps a lot of these foreign countries, these foreign adversaries, who again are trying to diminish the tremendous capability, the tremendous potential of the United States and this is where I do criticize our politicians in Washington, on both sides of [inaudible 00:11:53]. I'm not a Democrat or Republican, I served for six presidents, three Democrats, three Republicans, they all took their jobs very, very seriously.

John Brennan: (12:01)
Although I disagree with the policies of everyone of those presidents, they all approached it with the appropriate attitude and seriousness that the position deserves. Unfortunately, Donald Trump has not done that and that's why I decided to speak out in this second retirement of mine and I wish I didn't have to do that. Anthony, I just wanted to say thank you to you, to speak out, speaking out forcefully and honestly. I wish more people would do that because we really need to get this country back on track for all Americans. Not just for a particular group or political party.

Anthony Scaramucci: (12:35)
Well, I do appreciate that, sir. You ruined my punchline, I'm just going to say that I'm very shy and introverted, but now that you've thanked me, I have to accept your thanks and as you know it's not easy for either of us, but we both love the country. The first time I met you was actually at a [inaudible 00:12:51] launch, I think, we were over at the university club after I just gotten back from Afghanistan and once you come back from Afghanistan as a civilian and you see the magnitude of our problems over there, it totally colors your opinion differently than if you don't have that information. So, somebody like you that has been given the gift to have all of these information, to be the patriot you are, we're very grateful to you. Robert has questions as well and I'm going to turn it over to the audience and it's a real honor for us to have you, sir. And-

John Brennan: (13:21)
Thanks again, Anthony.

Anthony Scaramucci: (13:22)
Can you hold up the book? Because I'm a little bit of a promotional person. Let's bring the book up and put it up there because I don't have my book. There you go. Okay. So, we'll be out there promoting that book for you, sir, but go ahead, Robert.

Robert Wolf: (13:36)
Well thank you, Anthony. It's always easy to follow you when I send you my questions and you take half of them upfront. So, I mean, this is a-

Anthony Scaramucci: (13:43)
I was going to take [crosstalk 00:13:45]

Robert Wolf: (13:44)
This is the way the partnership works with Anthony, John, so be aware. [crosstalk 00:13:48]

Anthony Scaramucci: (13:49)
I mean, I know you're smarter than me, that's why I would've been cheating off you in law school, but I mean, what can I tell you. [inaudible 00:13:55] the questions.

Robert Wolf: (13:55)
Well, perfect segue, because I do want to thank John before I begin with the questions of, we have something in common. The president went to Florida and then John decided to pass them on to my alma mater at Wharton, so that at least we have that one thing in common that we all went to the same school. I guess, together. So, thanks for that handoff. I'm going to start something a little lighter, John. You're a very serious guy, I think, that's what we love about you because when we listen to you, we know you're serious and so, we have to actually listen because the detail matters. But, what do you do for fun?

John Brennan: (14:35)
Well, after 33+ years in the government, I quite frankly didn't spend as much time with family. I know that's almost a trite, explanation about why people retire from the government, but I missed out a lot in terms of children and grandchildren as well as on culture, so I'm catching up through your reading books. I'm trying to get into better shape, I try to exercise every morning when I was a CIA director, but now as I'm getting up there in age, I'm trying to make sure that I am watching my diet and walking-

Robert Wolf: (15:10)
The question was, what do you do for fun?

John Brennan: (15:12)
Those things are fun for me. They really are. And spending time with family and-

Robert Wolf: (15:17)
That's great.

John Brennan: (15:18)
... and as a grandfather, there's nothing that beats being a grandfather [crosstalk 00:15:21]

Robert Wolf: (15:22)
Good for you.

John Brennan: (15:22)
... it's a lot of fun.

Robert Wolf: (15:23)
I want to take from where Anthony went. We're going to go a little deeper, but you mentioned you worked for three Republicans and three Democratic presidents and even though you had disagreements, you respected them and they respected you. Otherwise, you wouldn't have not lasted. Anthony and I started this business going into our second year, called Strategic Worldviews, that is non-partisan, bipartisan, however you want to explain it. We have Austin [inaudible 00:15:51]. We have Steve [Moore 00:15:54] and Jason [inaudible 00:15:55]. We've done meetings with you and Susan Rice and General Kelly and Tom Bossert, all walks of life and H.R McMaster is going to be following you. I guess, the first thing that we want to know is what was the turn of bipartisanship? When did it just start separating where literally everyone goes to their corners?

John Brennan: (16:21)
It's a good question. Given that I was in the intelligence community and business for many years, I always enjoy being able to go to the intelligence committees on TheHill. In the 90s and even after 9/11 attacks, especially because it was a strong bipartisanship as you say, maybe even non-partisanship. Whether they were Democratic or Republican and they would hang their political affiliation at the door and then really deal with [inaudible 00:16:46] issues. Unfortunately, and I haven't been able to put my finger on it and I think, part of it is a result of the explosion in that digital environment and so much information is going out there. That bipartisanship really has diminished because the fringes on both sides are pulling people away from this center. If you look at the number of seats in the house in the senate, very few of them are really competitive. They're either red or blue, it's because they have been pulled to those ends of the spectrum and I really do believe that there is a need to have get back to the days where Tip O'Neill and Ronald Reagan can actually sit down and have real disagreements, but also raise a glass together and recognize that they have a large responsibility than just to their party or to themselves. They have a responsibility to their country.

John Brennan: (17:37)
Unfortunately, I think, there had been too many craven politicians over the last decade, two decades that really have just intentionally misrepresented the facts in order to promote their personal agendas, their partisan agendas and it is to the [inaudible 00:17:53] of this country. But, we see it, not just here in the United States, but also in other countries around the world. We see a lot of these fringe groups in Europe that are able to now become, in France for example, Marine Le Pen, it was pulling in the single digits, six or eight percent, but then she's able to challenge the party, they were able to challenge for to be ascendant in the government. I think, we're seeing this phenomenon globally, that there is this polarization taking place, partly as a result, I think, of reactions to globalization.

John Brennan: (18:29)
Globalization, I believe is inevitable and it really has better society around the globe, but there are a lot of people who are reacting adversely to the increasing intrusion, as they see it of foreign workers, of foreign influences, of migrant populations and that has led to greater nativism and a [inaudible 00:18:54] that really has led a lot of people to have this adverse attitude toward things that are new and progressivism. At the same time, there are a lot of influences that come in and that are not respecting some of those national identities and national traditions. So, I think, part of this is revolutionary evolution in terms of the global landscape that really is pitting the old world against the new world. I think, some demagogues take advantage of it.

Robert Wolf: (19:25)
That segues into the next question, pretty easily. I don't want to make it nationalism and protection versus globalization, I want to actually center it where we are today. So, how should we look at a Trump re-election versus a Biden presidency from a national security perspective? They cannot be more stark and feel [inaudible 00:19:46].

John Brennan: (19:47)
Yeah. Well, having worked closely with Joe Biden throughout the Obama administration for eight years. He is somebody who is deeply experienced in a lot of these foreign affairs and national security issues. Joe Biden is somebody who would like to bring our troops home from places like Afghanistan, Iraq. He has seen the horrors of war close and I do think he doesn't believe that the United States should be involved in the military adventurism that actually got us involved in Iraq. Afghanistan was a much different situation. But, the thing that I think, Joe Biden will do differently than Donald Trump was doing, which is to really reach out to our partners and allies around the world and to recognize that the United States is strong because of those relationships because we have fulfilled that leadership role. The mantra of America First, America First, that Donald Trump issues, really has quite shrilled to the ears of a lot of our partners and allies around the world because it makes appear that the United States is going to try to advantage itself to the disadvantage of others.

John Brennan: (20:49)
So, I think, one of the first things that Joe Biden would do is to really try to get those relationships back on track and also, try to deal honestly and directly with the issues such as North Korea's nuclear program, that has not been reversed and that continues to develop and grow. I think, Joe Biden will deal with China in a very forceful manner, but I think, he's going to be much more surgical and much more strategic as opposed to blunt instruments. I think, Joe Biden will bring a different approach. I think, if Donald Trump gets re-elected, he'll continue along this path with the obsequiousness toward Vladimir Putin as well as trying to demonstrate a muscularity with little, quite frankly little substance behind me.

Robert Wolf: (21:42)
Well, you brought up Putin, so I'm going to stay with that. You were working with the Obama administration during mid 2016. In retrospect, do you think the public should've been more aware of the Russian interference on the election and when you look at the moves made by James Comey, that seemed to have really change the outcome by many perspectives, not all. Bring us back to that time and maybe if it was, call it a mulligan, what would you have done? Not you, but what do you think should've been done?

John Brennan: (22:26)
Well, it's an important issue and it's still living with us now and I devoted a couple of chapters in the book to it. It was quite evident I think, to people within the Obama administration as well as to the American public that Russia was trying to interfere with the election. It was in the media, it was in the press and seeing Donald Trump's public calls for Russia to find Hillary's emails, he made no secret of his relationship and interest in having Russia assist him the election. It was a very, very difficult time and we we're very concerned about possible interference by Russia in the technical infrastructure of our electoral system. We were trying to understand whether or not they were going to do something to try to affect the votalities, we saw that they were navigating into a certain state systems. We didn't know whether they were going to try to pull down the voter registration roles or not, but what was much more impactful as well as insidious were there information operations. All the things that they did in social media, things that I have learned about, an awful a lot, since I left the government.

John Brennan: (23:30)
In terms of the personas that they would put out there in Facebook, in Twitter, misrepresenting themselves as Americans and really influencing the attitudes and views of American citizens and I do think, it did effect votes by what they did. I talked in the book also, about Jim Comey's decisions to have that press conference as well as to notify congress that he was basically reopening the investigation just about a week or two before the election and I have tremendous respect for Jim Comey. I never saw a partisan bone in his body, in terms of how he carry out his duties as FBI director, but, I disagree with those decisions. Sure at 2020 hindsight is much more greater fidelity, but I don't think he should've done those things. I don't know all the things that he took into account when he made those decisions, but I do think that on the eve of an election and given the Department of Justice guidelines that really, should not do anything in the period of time before a general election-

Robert Wolf: (24:35)
Does that correlate to the idea that, we should or should not have proliferated what was happening from the possibility of what Russia was doing because it was really pushed under the carpet.

John Brennan: (24:54)
Well, there were public announcements by the Obama administration about Russia's attempts to interfere with the election in October. Secretary of Homeland and Security Jay Johnson and Director of National Intelligence James Clapper came out with a statement about it. We did send messages to the Russians, I think, I was the first US official to brace the Russians when I spoke to the head of their internal security services in early August of 2016 and told them to knock it off. I don't know whether or not our warnings to them dissuaded them from doing more than what they did. In the book, I talked about some of the options we considered, including rattling the Russia's cyber cage. Everybody thinks that China and Russia have much greater cyber capabilities than the United States. That's not true. We have tremendous capability, but on the eve of a hotly contested presidential election, did we want to engage in a cyber war with Russia, because they could escalate that and their objective was to undermine the integrity of the US election.

John Brennan: (25:53)
By doing that, by doing something in the cyber front, would that have prompted the Russians to actually increase what they did? President Obama did not want to do anything that was going to interfere, one way or the other in that election. I think, we have to still learn a lot about how we can deter these types of attacks, whether they be technical attacks or information operational attacks because I think, the foundations of our democracy is really depend on them.

Robert Wolf: (26:19)
John, I want to carry from that today. One of the top streaming movies is called, The Social Dilemma and maybe how you learned [inaudible 00:26:31] post-CIA, I would probably say, I'm learning things as well with having kids in their 20s.the documentary really goes after internet privacy and the lack thereof. When you know think about Facebook and Twitter, one, should it be a more closed environment? Should it be regulated? Should we even be on it? What do you recommend to your grandkids on Facebook, on Twitter? You don't have to go into detail about each of those, although we'd loved to have you view that, but more, how do you look at social media and then, the idea of we're giving away our privacy and our data?

John Brennan: (27:16)
Well Robert, this is the question for the 21st century and for our country. How are we going to try to have the digital domain continue to advance our prosperity and our security and not undermine it? Because it is the environment where most human transactions and activities take place these days. The challenge is, the digital domain is owned and operated by the private sector, about 80 or 85%. So, what is the appropriate government role in that environment? What should the government be doing and we see that the Chinese and others really have this very authoritarian and suppressive policy toward the internet. But, here in this country, we really cherish the foundations of freedom and freedom of speech and privacy [inaudible 00:28:05]. There is a tension between those things on one side of the ledger and then security on the other. How is the government going to work with the private sector to try to better enhance the security of that digital domain?

Robert Wolf: (28:19)
But you know that news and newspapers, I mean, those are regulated.

John Brennan: (28:23)
Well, they are, yes. But, I must tell you because when I was at the White House, cyber was in my portfolio. It's one thing in terms of the physical world and regulating things that you can actually see and touch. That's why we have regulations whether it deals with orders or [inaudible 00:28:42] or the physical media. When you start getting into that digital environment, it means so much is happening there, it's almost like a wild, wild west and I'm glad to see that the Facebooks and the Twitters now have less [inaudible 00:28:54] than they did earlier. When they thought they were not being exploited, but I didn't say that they have totally [crosstalk 00:29:00]. What they're doing now, is i think, recognizing that they are being exploited by mal actors whether they be foreign or domestic and they need to tidy up their own systems and do more self regulation and I think we see more and more of that. But, I have long called for a national commission, just like we had after the 9/11 attacks.

Robert Wolf: (29:21)
Yeah.

John Brennan: (29:21)
So, that there's a national commission, bipartisan commission, independent commission that is going to look at this issue of the digital domain. Bringing together the futurists, the technologists, the engineers, the businessmen, the bankers, government officials and others, to try to do what we can to ensure that, that environment is going to thrive for our children and grandchildren. But, I must tell you, there's still a lot of stuff that goes on there.

Robert Wolf: (29:46)
Beyond Twitter, are you on an other social media platforms?

John Brennan: (29:49)
No. No. The only reason why I'm on Twitter is because I felt that Donald Trump was just almost monopolizing that. I didn't want to seed that environment to him. But now, I'm-

Robert Wolf: (29:57)
Yeah, me too. I'm on Twitter only because Scaramucci use to go after me when he was with Trump, so I had to do the same thing.

John Brennan: (30:03)
Yeah, exactly. [crosstalk 00:30:04]

Robert Wolf: (30:05)
We're similar that way.

John Brennan: (30:06)
Yeah.

Anthony Scaramucci: (30:08)
You get fake news Director Brennan, even on a SALT Talk. Robert, because we're going to run out of time-

Robert Wolf: (30:14)
Right.

Anthony Scaramucci: (30:14)
... let's ask him a couple of these questions that have come in, if you don't mind.

Robert Wolf: (30:18)
Thank you.

Anthony Scaramucci: (30:19)
Director, this is a great one. How do we restore that reputation of these great agencies, the CIA, the FBI, assuming that you can get to a post Trump administration?

John Brennan: (30:31)
Well, I'd like to think that my former colleagues at CIA, FBI, NSA and other places are continuing to do their work. Unfortunately, I think, there has been some people at the top of these organizations that have abused their authorities. The William Barrs, the John Ratcliffes, the Richard Grenells and others, but I do think that their rank in file, the women and men who sacrificed so much for their fellow citizens really feel strongly about that mission. What you need in the Biden administration is for a President Biden, a Vice President Harris as well as other senior officials of both parties to really highlight the importance of their work as well as the confidence they have that these individuals are going to carry out their work and their mission irrespective of whatever political party might be empower and irrespective of what their own personal political sentiments might be. I do believe that it's resilient to environment.

Anthony Scaramucci: (31:25)
Director Brennan, I'm going to ask you for a little bit of a lightning round here because we've got series of questions and I want to keep you to our schedule. But, I think these are very interesting questions. Let's do a little bit of a lightning round. Do you think Saudi Arabia will follow the UAE and Bahrain in normalizing relations with Israel?

John Brennan: (31:45)
I think, ultimately, yes. It all depends on what happens I think, in this presidential election. Mohammed bin Salman, the crowned prince of Saudi Arabia, who basically controls the reigns of power in Saudi Arabia is very close to Donald Trump and Jared Kusher and I do think, that Joe Biden is going to take a different approach to Saudi Arabia, particularly to MBS, given MBS has responsibility for their horrific killing and dismemberment of Jamal Khashoggi.

Anthony Scaramucci: (32:12)
Okay. What is your opinion of the elections, sir based on your intelligence and your life experience? Is it possible to steal an election in the United States?

John Brennan: (32:25)
Steal, I do think that Joe Biden is going to have many more votes and more electoral votes as a result of the election in November 3rd. I do think that Donald Trump and his advisers are going to pursue legal challenges and try to bring it up to the Supreme Court. I do believe that his election is going to be more lopsided than maybe some people think and the lopsided nature of that, I think, will basically undercut their ability to present these legal challenges. But, I didn't think Donald Trump is going to be elected in 2016, I didn't follow domestic politics at that time. It shows that I didn't appreciate the extent to which Donald Trump was able to hoodwink so many Americans in the vote.

Anthony Scaramucci: (33:11)
The threat assessment, sir. It's a month after 9/11, of their 19th anniversary. Your threat assessment of domestic terror here in the United States from foreign adversaries or domestic adversaries for that matter. What's your threat assessment?

John Brennan: (33:30)
Well, I am very concerned about these homegrown groups of whether they be on the right or the left. I think, there is a real problem with white supremacists groups here in this country. The QAnons and others and I do know that there are a number of foreign actors that try to stoke those fires of violence and extremism here in the states. We also see it on the left as well and so, I think, the bureau, FBI has its work cut out for it to try to identify those foreign links as well as their sources of financing because a lot of these groups really do rely on the financing that may come on from abroad as well as from various domestic quarters.

Anthony Scaramucci: (34:09)
Just a question on QAnon, sir. I don't know if you've read the book, Active Measures by Thomas Rid. It was recommended to me by General McMaster. But when you read the book, it feels like QAnon is inspired by Active Measures. Is it a Russian intelligence movement? What do you think is going on with QAnon?

John Brennan: (34:29)
I don't think it was initiated or incubated by Russia. I do think, there are domestic players here who start this, but then foreign actors like Russia, specifically Russia, particularly since there are a lot of folks within the Russian establishment who had very right wing of sentiments themselves provided support and enabled the growth of QAnon. But, when I was in the government, they were enough spots within this country that were the source of right wing, extremist supremacist movements.

Anthony Scaramucci: (35:09)
Last question and then will turn it back to Robert. Is Afghanistan, in your knowledge of the region, is Afghanistan ever going to be what we would describe in the west a stable, democracy, less tribal and more integrated into the global community or is Afghanistan going to be what it has always been, just a very difficult spot in the world?

John Brennan: (35:38)
I'd like to think that we're going to see incremental progress in Afghanistan over the coming decade or two. But, anybody who has illusions that we're going to see western style democracy break out in Afghanistan, I think, are just deluded themselves. During the Arab spring when there is a lot of hope, including the Obama administration, that democracy was going to develop in a lot of these countries, democracy is not like a light switch. Here we are 240 or so, years after, our independence, we still are working on some of the democratic processes and foundations. So, I think Afghanistan is going to continue to go through some tough times, but I'd like to think that it's going be a lot of blocking and tackling and you're going to be grinding out, not yardage, but footage, I think, in the coming years.

Robert Wolf: (36:24)
Thank you. Just to go back to where we are today. If you were the director of the CIA during this COVID crisis, how would you think of it whether the importance of reopening the lack thereof or the need for protocols, the impact of security. How would you think of it and because right now, the way we think of it, there is no protocols which is why it opens and closes, the cases are higher today than they were Memorial Day, more deaths today than they were Memorial Day. It seems that the direction is getting worse, not better and then you have the White House, have their own super spreader.

John Brennan: (37:09)
Yeah. In fact, when I was at the White House as President Obama's assistant for Homeland Security, it was when we had the H1N1 pandemic in April and the rest of the 2009 year and it was quite a challenge and we had to go to school on trying to find out exactly what we needed to do first, how we needed to rely on the medical experts and data. But, one of the things that I really appreciated from President Obama was, he told us to rely on the medical experts, rely on the data, insure that data is going to be the foundation for policies and guidance that we give out, but also make sure that we're not confusing the public and that there needs to be coherence. One of the things that I really criticize in the administration for is the lack of coherence in its communications to the American public and how it undercuts the guidance from CDC and clearly, they want to put a positive spin on things.

John Brennan: (38:04)
When I was director of CIA, if we had some type of health crisis, I want to make sure that I understood exactly what the recommended guidelines were or how we should deal with this challenge, the medical challenge, what should be the protocols to point out, how we should rotate staff, distance and making sure that we're doing everything possible to minimize the impact of this virus, but there does seem to be a some chaos and confusion within the executive branch and this is when the American people look toward leadership. In the aftermath of 9/11, it didn't matter if you were Democrat or Republican, George Bush, when he stood on the embers of 9/11 of the attacks of the World Trade Center with the bull horn, he was speaking to all Americans rallied behind the Bush administration to get Al-Qaeda. The same thing should be happening now and unfortunately, all's has happened is bare divisions among ourselves and either with the medical community. So, I do think, coherence of approaching and communication is critically, critically important.

Robert Wolf: (39:07)
So, I'm going to play a little devil's advocate here, but it's not really made, so I'll explain it to you. There's this book, Three Seconds Until Midnight and actually, it was the Steve Bannon who recommend it to us, that some of us read it, but that's a different story, but it's written, it came out November of last year-

Anthony Scaramucci: (39:25)
And so, he read it anyway, John, I just want to make sure you know that [inaudible 00:39:29].

Robert Wolf: (39:30)
It's written by two epidemiologists and what they will say to those politicians and those agencies is that, after the AIDS epidemic took place, that CDC and NIH started starving the idea of viruses and how to look at viruses and that this was very much in our face that out of China with what Africa with rats and bats that these viruses would come, but instead we put all our money towards diabetes and cancer research and that we should have seen this coming because we were not prepared for it and this came out like, I said, less than a year ago. Do you feel that there's truth to that in a way or do you feel or not?

John Brennan: (40:21)
Well, I think that's the H1N1 pandemic in 2009 really gave us a lot of lessons about how to deal then with Ebola and other types of health challenges, medical challenges around the world. Have we done everything possible to prepare for the next medical challenge or pandemic? Probably not because it requires a lot of investment in terms of contingency planning and unfortunately, specially the way our government works and with election cycles, there is not that continuity I think, of effort that is required to deal with the multiple challenges that we face in the country and there are so many out there. So, you have terrorism, you have proliferation, you have Russia, you have [inaudible 00:41:08], you have China, you have pandemics, you have health issues, you have climate and one of the real challenges for any administration is the prioritization that you give to this issues and how you then allocate resources. But, clearly, I think, on the health front and when I think about and I know about some of the various initiatives around the globe on genetic engineering, other types of things in the biological front, it really worries me.

John Brennan: (41:32)
Because there is tremendous sophistication out there and tremendous opportunity for people to use the scientific knowledge for bad purposes. That's where I think, there needs to be again, an approach, a bipartisan, non-partisan approach to these issues, so that we don't allow the most recent shiny object to distract us from taking care of the multitude of issues and challenges that we face as a country. And again, going forward, I mentioned cyber in the digital realm, that wasn't an issue for us 50 years ago, now it is one of the most important issues. Climate change, what are we doing on a regular basis? Just like pandemics and viruses, what can we do now, so that when something like this occurs, we are better positioned to deal with it and I still think we have a lot of ways to go before we're better positioned as a nation to deal with these issues.

Anthony Scaramucci: (42:28)
Great. [crosstalk 00:42:29]

Robert Wolf: (42:29)
This is my last question. Do I have time for one more, Anthony or not?

Anthony Scaramucci: (42:32)
Yeah. Let's fit it in quickly because I want to keep him on time, but go ahead.

Robert Wolf: (42:35)
Yup. So, today one thing Anthony and I talked about and all our clients is that, systemic and equality is in our face. Health and equality, wealth and equality, education and equality, race and equality and we're seeing it every which way in the country today. How would you look at that from a national security perspective when literally every aspect of our life today is showing that this recovery is really a K-shaped recovery of the haves and have nots and it's literally separating more than we could ever imagine, just from security perspective.

John Brennan: (43:16)
Yeah. Well, that's not an easy question and it doesn't have a short answer to it. I think, you're absolutely right. In equality, across so many areas, wealth, income, opportunity, education, you name it. It's fueling a lot of these problems again, not just here in the United States, but also globally, both within countries as well as between countries and so, maybe what we're facing right now, with the COVID and the economic downturn and this recovery that is quite bifurcated as you pointed out, maybe it's going to bring it to stark relief. The challenges and the problems here that we need to try to course correct. Democracy and capitalism have served us well over the last two centuries and I am a firm advocate of both, but I do think we need to think through how democracy and capitalism are going to thrive in the 21st century, given the ecosystem that they operate within now and just because something might've worked a 100 years ago or 200 years ago, does not mean that it doesn't need some adaptation, so I do think the issue of inequality, especially inequality of opportunity is one of the most important issues that I do hope our government and other governments will address.

Robert Wolf: (44:25)
Thank you. Anthony?

Anthony Scaramucci: (44:27)
Well, Ambassador Brennan, thank you so much for joining us on SALT Talks. I hope we get you back after the election and have a little bit of a debriefing on where we think the world is going. For me personally, sir, I'm glad that you're not Pope Owen I. Okay, because something tells me, you would've been a really strict Orthodox Catholic pope. Okay, just getting that vibe from you and so, I'm enjoying you as our former CIA director. I just want to thank you so much for your service to the country and your amazing patriotism, sir. You're a true patriot and we're big fans of yours, sir. Thank you again.

John Brennan: (45:03)
Well, thank you, Anthony for the kind words and thank you for what you're doing today and this invitation. I really appreciate it. You take care [crosstalk 00:45:09]

Anthony Scaramucci: (45:09)
Good luck with the book. Let's hold the book up one more time. See, I usually do this, but I don't have a copy.

John Brennan: (45:14)
It's officially-

Anthony Scaramucci: (45:15)
There you go, Undaunted by John Brennan [crosstalk 00:45:18]

John Brennan: (45:17)
Officially released tomorrow. Yeah.

Robert Wolf: (45:19)
Great.

Anthony Scaramucci: (45:19)
Check your bookstores starting tomorrow, okay? Well, God bless you, sir. Best of luck with the book. All right, Robert and I and Joe will see you soon and that's it for SALT Talks.

Peter Gleysteen: The Future of CLOs | SALT Talks #74

“There's been a positive IRR to the equity on that junior layer, they got their capital back with some kind of return on over 98% of every CLO that's ever been issued. That's an astonishing statistic for people who don't think they're safe. They're not safe if you have to sell.”

Peter Gleysteen brings more than 40 years of bank loan experience. Before AGL he had two prior employers, JPMorgan Chase and CIFC, a loan asset manager he founded. At the bank this included lead banker on many of the largest LBO, M&A and re-structuring financings in the 1980’s and ‘90’s, running global loan syndications, responsibility for its global corporate loan portfolio, and serving as corporate chief credit officer. More recently he built CIFC Asset Management into a leading private debt manager with $13B in AUM, serving as founder and CEO from 2005-2014.

Syndicated bank loans are a non-traditional asset class in that they’re not securities, but loans, meaning they’re not sold on an exchange. Its appeal to long-term investors go up when interest rates are high and see most retail investors sell when rates drop. Because of the unstandardized nature of bank loans, each one is customized by the regional bank. “It's also one of the reasons why the returns are so high because of compared to almost anything else, there's a lot of excess return in bank loans.”

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Peter Gleysteen

CEO & Chief Investment Officer

AGL Credit Management

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone and 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 public policy. SALT Talks are a digital interview series that we started during this work from home period. And what we're really trying to do is replicate the experience that we provided at our global SALT conferences. And what we're trying to do at our conferences and on these SALT Talks is to provide a window in the minds of subject matter experts, which were primarily investors, entrepreneurs, and public policy thinkers.

John Darsie: (00:39)
We're also trying to provide a platform for what we think are big, important ideas that are shaping the future and bring you interesting investment opportunities as well. And we're very excited today to welcome Peter Gleysteen to SALT Talks. Peter is the founder of AGL Credit, and he brings more than 40 years of bank loan experience to SALT Talks today. Before AGL, he had two prior employers starting with J.P. Morgan Chase, and then more recently CIFC, a loan asset manager that he founded.

John Darsie: (01:07)
At the bank, this included being the lead banker on many of the largest LBO, M&A and restructuring financings in the 1980s and 1990s, running global loan syndications, responsibility for its global corporate loan portfolio and serving as the corporate chief credit officer. And more recently he built CIFC Asset Management into a leading private debt manager with 13 billion and assets under management. He served as its founder and CEO from 2005 to 2014. A reminder, if you have any questions for Peter during today's talk, you can enter them in the Q&A box at the bottom of your video screen. And hosting today's talk is SkyBridge Capital Partner, a co-chief investment officer and senior portfolio manager, Troy Gayeski. Troy, I'll turn it over to you for the interview.

Troy Gayeski: (01:53)
Yeah. Thanks so much, John. Peter, it's such an honor to have you here. John went through your very impressive, resume way to briefly because we're typing strain. As we start the SALT Talks, we always like to focus on more, the human side of the investment manager or the guests. Could you give us a little input on your past, some of the decisions you made that led you to have this rich career, and if there were any several moments that were particularly important.

Peter Gleysteen: (02:18)
Yes. And thank you for that. A very fulsome introduction. I think the most important thing that drove my life and career has been the fact that I grew up internationally. My father was a us diplomat. So through my childhood, up through college, I moved every couple of years, went to schools in different societies, in different languages, living in countries like Indonesia, the Soviet union twice, but then Soviet union, France I'm half Swedish. My mother was Swedish. The reason I say that or why that's so important to me is I learned early that the same reality can be perceived and express completely differently by different people in different cultures, different languages.

Peter Gleysteen: (03:05)
So that was an early lesson made me very interested in fact it was kind of a survival requirement for me to understand, not just what I thought of something, but what was the underlying reality. So it made me really interested to understand how things work, below the surface. So when I was looking for a job graduating from college, I was trying to find something that would be stimulating interesting. And I decided I really would go somewhere where I could learn more about how the world got stitched together. And the only conclusion that I found appealing was through finance, where you can see how social and economic interactions occur, all be it through the lens of credit in a bank.

Peter Gleysteen: (03:50)
And by going to a bank, I didn't have to pay to go to business school because I was actively paid to go to learn. And that's how I started in the banking. I'll just add that was very fortunate to have joined what was then called chemical bank, because it was the bank, as many people know that acquired most of the other banks in New York and other places and kept changing its name. But I was always on the same place. That accounts for the long career continuity I've had, both organizationally and in terms of my expertise, which is bank credit. More, most critically I'll speed up and then stop.

Peter Gleysteen: (04:31)
In the mid 80s, I was the co-founder of what became the leveraged finance and syndications business. John mentioned that part of my background. But I've been personally directly. Let me just add. And when I say co founded, that was with the great banker, the late Jimmy Lee. So I actually knew him since I started because we were both in the same training program together in 1975. But in any event... I've been part of bank credits long before it became an asset class and part of its evolution and every step of the way into now being a very mature and well-tested institutional asset class.

Troy Gayeski: (05:11)
That's quite an impressive background. Peter, I'll tell you, I haven't heard the term chemical bank for quite since. I think the last time we used to abandon at about as a four John's RC was born. So let's go way back. So, hey, obviously you have tremendous expertise and the broadly syndicated loan market, and that's a very keen focus of your firm. Could you explain to the investors and those that aren't invested in the space, why you find it attractive and what are some of the key characteristics now, particularly relative to other asset classes out there in corporate credit?

Peter Gleysteen: (05:47)
Yes, that's a great question. And I'll just start by making the-

Troy Gayeski: (05:51)
Thank you very much, Peter, thank you very much.

Peter Gleysteen: (05:53)
Big statement that broadly syndicated loans are misunderstood. It's actually a superior asset class, but it's really widely misunderstood, but let me start. It started with the fact that I started in banking. So if a bank's making a corporate loan, let's go back to old fashioned banking. You put into deposit, you expect that to be a hundred percent safe and that if you want to take the money out, you take it out. What are the banks do? They invest and try to invest in very safe assets. So the assets are bank loans are senior, they're secured. They have priority over any other capital in the capital structure. But the key point when I say misunderstood, the asset class is not a loan it's hundreds or thousands of loans. It's the combination and the power of the earnings power of the net interest income of the entire portfolio that generates the stable, very steady Eddy cashflow.

Peter Gleysteen: (06:51)
And more importantly, that diverse universe of borrowers creates the safety. But let's say you have a 200 loans and two or four of them become a real problem. Well that's two or four loans. And if the loans on average are generating before live or before the reference rate say 5%, and if the loss given default or the loss that you would realize on alone is half of 1%, those losses are usually covered just by your net interest income. So the underlying capital that's invested, whether you're a bank making alone or an investor investing in this asset class, the principal invested the capital has never really at risk. If the portfolio is competently selected and managed and there's this steady cashflow stream. So then you're going to ask why do banks get in trouble? Why do people get in trouble? Why do people do stupid things?

Peter Gleysteen: (07:48)
Well, in the case of credit you can make a couple of mistakes. You can, first of all, have high concentrated risk. Meaning instead of having 200 or 300 loans having, let's say three or 30, and worse if you put them all in the same sector. And the other is the mispriced risk. And God help you if you do both. If you've concentrated risks, that's mispriced and that's historically how banks and investors get into trouble. But if you do the reverse, which is not hard to do, which is why still do it. Why would I... I'm still doing it because it's, why would I not? For me, it's the gift that keeps giving because it's safe. And it's really interesting by the way.

Troy Gayeski: (08:30)
Yeah. So Peter, could you touch upon the term senior as well? Because even today we find people don't understand how important is to be senior in the capital structure versus second wean, or what's commonly referred to as the high yield bond market.

Peter Gleysteen: (08:44)
Certainly. So it's analogous to a home mortgage. When it gets a mortgage buys a house, God forbid, if you don't make the payment fee, the bank and take the house from you. And whether the mortgage was 10% or 50% or 70% of the value of the home, they get the whole thing. And then they can, in the case of a home mortgage sell the property and then anything left over you, the owner will get the residual. It's the same with senior secured loans, which typically are between 40 and 50% of the total capital structure of a borrower.

Peter Gleysteen: (09:24)
So if there's a dire problem, we're actually from the bank and the lender and its associated investors like us to recoup their capital. There's typically a 50% value cushion underneath. And when this broadly syndicated bank loan to lose money, that means everything underneath is wiped out from that a huge cushion. You then amplify that by investing in not one loan, but say 250 loans. Just having this... For those who are statisticians, you can see how that distribution of hundreds of borrowers and just a few problems and mistakes are easily supported by the earnings power and the safety of the whole portfolio.

Troy Gayeski: (10:14)
So Peter, you're making a compelling case for the attractive risk reward of this asset class, which has been syndicated now for about 20 years, really going back to early two thousands. Could you talk about what type of investors are gravitating towards it and how they're using it to potentially replace traditional fixed income right now?

Peter Gleysteen: (10:33)
Yes. Not many. The asset class has grown. Broadly syndicated loans, it's about 2 trillion. That's roughly 1.2 trillion held by non-bank investors in the balanced, by the originating banks, usually in the form of revolving credits, but at the same borrowing framework. But the... It's because it's not a traditional asset class. In the following a couple of ways, first they're not securities they're loans. I'll come back to that. And, and they're originated by banks. So you can only access them by investing, if you're a long-term investor with a manager like us, who's investing in these loans. And they're also some managers who have retail funds. The appeal to retail historically has been because bank loans are floating rate. They have always been appealing when people were expecting interest rates to rise. And when interest rates are falling or low most retail investors actually kind of sell.

Peter Gleysteen: (11:45)
So it's not something that is an easy sales peach, for what I'll call an institutional Salesforce in the retail brokerage world, that's interacting with investors, and it's not something that you can buy on an exchange because they're not securities. Another thing about bank loans is they're highly unstandardized. Each one is different, it's customized by the regional bank originating bank, to that specific borrower and what they're using the money for. So it's highly customized. Well, it's also one of the reasons why the returns are so high because of compared to almost anything else, there's a lot of excess return in bank loans. But institutional investors like everybody, especially in this era of low interest rates and credits to traditionally viewed as a fixed income type of investment, institutional investors want safety, they want a meaningful, robust cash yield. Which increasingly you can't get in traditional fixed income products.

Peter Gleysteen: (12:56)
And people are noticing that if bank loans actually have that. And when I say they have that while rates now are near zero, including labor, which is the reference rate for medically syndicated loan, or at least syndicated bank loans. The actual cash distribution that you would get if you owned a portfolio of probably syndicated bank loans is the same or higher than it has been because credit spreads actually have widened and offset the decrease in [inaudible 00:13:25]. So here you have a product that's continuing to provide a thick robust, slightly higher cash coupon where everything else is kind of near zip. So it's affecting a lot more interest. I'll add one more thing, which is that most institutional investors have traditionally viewed, the five-ish percent that I mentioned that a bank loan portfolio throws off as not interesting enough.

Peter Gleysteen: (13:55)
But they like it when you apply leverage to it, which is why CLO's have emerged as such a large product. And there's like seven or 800 billion of CLO's outstanding holding all these syndicated bank loans. And the leverage, which can be as high as 10 times. You can have less leverage structures. And we specialize in that actually. Magnifies the great attributes of broadly syndicated bank loans, which are safety, strong cash distribution, or a coupon. And also liquidity.

Peter Gleysteen: (14:25)
I haven't mentioned that bank bonds are liquid. I'll come back to that if we have time in a second. But those three attributes, safety, cash, and liquidity can be magnified by applying leverage. The leverage that you want it to be non-market mark. You want it to be long-term leverage where that leverage that debt is repaid only by portfolio cashflow was not by price changes in the underlying assets. Just like a margin call. That's a bad thing. But CLO has had this terrific long-term structure and increasingly investors now for quite a while, have been investing in this. And I think given where interest rates are there, there's going to be a lot more interesting.

Troy Gayeski: (15:10)
So Peter, okay, along those lines, before we get into CLO's, which we will in a second. Can you lay out what the total return differential is right now versus a portfolio of syndicated bank loans like your own versus the 10 year treasury yield or [Lightboard 00:15:25] or even vanilla high yield bonds?

Peter Gleysteen: (15:29)
Sure. Without getting into the other asset classes. Because those are well-known levels starting with near zero for short-term treasuries. So at the asset class level, you just had an actively managed portfolio or the syndicated bank loans, including [Lightboard 00:15:48], which is 20, 30 basis points, as opposed to 3%. Really low. You can getting five to 6%. It depends on the manager and the portfolio strategy. It could be lower, could be higher. I call it five to 6%. If you add leverage to that, you go with CLO's level leverage. Hit the pause button, by doing that, the investor who wants the highest return is investing underneath the debt that's providing the leverage. So they're the junior capital. So there's one part junior capital and nine parts that on top of you.

Peter Gleysteen: (16:28)
But if you're in that junior capital investor, instead of getting the five to 6% return, you can get, in my experience 18 over 20% or more of a beta kind of a thing, I would say 12 to 15%. But definitely in the teens. So for people who're saying five is too low and I want teens, CLO's are really interesting. And by the way, there's some good research that indicated that every CLO that's ever been issued since the first one, I think this is Wells Fargo research. There's been a positive IRR to the equity that junior layer, they got their capital back with some kind of return on over 98% of every CLO that's ever been issued. That's an astonishing statistic for people who don't think they're safe. They're not safe if you have to sell. Let me just make the point that whether you're investing in bank loans straight up or with some degree of leverage, those great attributes of ongoing cashflow generation, consistent safety and liquidity to fine tune the portfolio, those are things that are advantages and create steady Eddy returns and safety over time.

Peter Gleysteen: (17:40)
If you suddenly have to sell need liquidity for redemption reasons or worse, have a market value paced debt and have to sell because prices change. That's a bad thing. So this is a product that I think very strongly is really only for long-term investors. And then you get all these great advantages, which leverage only magnifies. I'll add that we know global investors by type in individually quite well and kind of the sweet spot for most investors, is a seven to 8% return. Now to get that, they do a wide spectrum of investments, call it a mosaic or a tapestry, private equity, Timberland high yield bonds. Just every asset class you can imagine, hoping that the combination of them over time, it's that seven to 8%. For the safety reasons and the consistent cashflow reasons that I was describing.

Peter Gleysteen: (18:40)
You can get that using a CLO strategy by using a little leverage, not a lot. Say two times leverage. Will generate... Pre COVID it was generated kind of an 8% plus return. All in broadly syndicated loan returns have step shifted up since. So a new investor going and now it counterintuitive. This is actually a great time to invest in this asset class because there's more return for risk. So with around two turns of leverage, the return opportunities around 9%, which is a little bit of a push into that kind of magic 7% that most people want.

Troy Gayeski: (19:18)
Yeah, it's pretty impressive. And speaking of not selling, let's go back to March. Where many structured credit assets, including CLO's and level loans suffered substantial losses. Despite the fact that the fundamental credit quality was still sound. And the question of whether you would realize your cash flows was very much settled. So do you think it makes sense for markets to be focused too much on liquidation value in times like March or April or going back to Q4 of a laid after leaving failed. Or do you think it makes sense to look longer term with the power of the cash flows compounding over time?

Peter Gleysteen: (19:54)
That's a great question. And I think you just answered it at the end, because-

Troy Gayeski: (19:59)
Is that a lean on that one Peter a little bit?

Peter Gleysteen: (20:00)
That was excellent because the strength and the value of the product, again and as I said, it's really for long-term investors. It is that forward cash earnings, power that's safe. So it's the ability to hold something long-term that every quarter is going to generate cash. And if you hold that investment, you're going to just getting that cash and incidentally for an actively managed portfolio in our experience, and certainly our expectations going forward.

Peter Gleysteen: (20:32)
There's also an opportunity to generate realized capital gains. So it's both cash plus a little upside down the road. If you're panicked or if you're forced to sell for whatever reason, especially in like March when prices almost instantly collapsed along with everything else, as the markets went through a boo bionic plague type panic that quickly fortunately abated. If you were selling, that was terrible.

Peter Gleysteen: (21:05)
It's because there was no bid. So if you're selling when there's no one buying, of course prices vomit. But back to the core question of valuation, the liquidation value of something, even if you say, let's say the liquidation value for a loan is a hundred cents. And the principle is a hundred cents. The loan is $1 or 1 million or 100 million. If you can sell it for that amount, that's certainly fair value. But if you do that, you're foregoing the opportunity for that future earning stream that I was describing. Now, if the market, because it's frightened or by the way most markets certainly, the broadly syndicated loan markets driven by three interwoven factors that sometimes are one of them dominates. Those are fundamentals what's really going on in the economy in each borrower. Market technical is the balance of supply and demand of investors buying and selling and sentiment.

Peter Gleysteen: (22:06)
So in March we had sentiment via panic. So if the price of a loan that's eventually going to repay 100 cents is selling for 80 cents. Not only you foregoing giving up that forward earnings power of that asset, that's worth a hundred cents, but you're taking a 20 cent loss. So it's a terrible way to value probably any asset. But certainly that is forward earnings power, but certainly broadly syndicated ones.

Peter Gleysteen: (22:40)
That's not to say there isn't important value to market prices because there is, you do want to know what it's worth, especially if you did have to sell. And especially if you want to optimize the portfolio and buy something to improve the risk profile or return targets, especially if loans are cheap, which they are now by the way, and you want to be a buyer and lower prices are a good thing in that context. But there's a difference between performance valuation and liquidation.

Troy Gayeski: (23:15)
It's so segue back into CLO's and we were talking about this before we started the session. The broadly syndicated loans, roughly 95, 96 cents in a dollar right now, double re-CLO is roughly 83 cents in the dollar. Can you talk about why you think there's still that big price discrepancy, even though we don't know an analyst or a credit market participant now that would argue that double B's are not money good? People debated, hey, March, April, maybe you do get some bumblebees cracking. You have enough high enough chemo defaults. You have low enough recovery rates, but that was really settled by June and July. You still have this massive price disparity. What do you think drives that when it's clearly not fundamental value?

Peter Gleysteen: (23:57)
That's a really good question. I would say a couple of things and by the way-

Troy Gayeski: (24:02)
I'm on the roll Peter, I'm on a roll.

Peter Gleysteen: (24:04)
As everyone probably knows just listening to us that I'm not without opinions. So in CLO's, as I was describing before, above the junior capital so-called equity layer, there are various levels of debt, and all these layers or [tranches 00:24:22] are rated. And most of the debt is triple A, roughly two thirds of the capital structure of the CLO is triple A debt. That's really cheap, attractive debt. But there all these other slices, a single lay slice, triple B double B. And you're talking about the double B's.

Peter Gleysteen: (24:42)
The top end, the two thirds at the top, the triple A asset... By the way, so triple A, where do you get paid if... And this is a long-term debt with no market value triggers. And also with shorten on-call periods is very favorable optionality for the junior capital, the so-called equity. The triple A's mainly held by banks as long-term investors, insurance companies and some pension funds.

Peter Gleysteen: (25:07)
When you get to the triple and double B layer, so-called the mezzanine layer of CLO's. Those are mainly held by credit hedge funds. And it makes sense that if you go back to the math that I was describing, two thirds of all the debt is Triple A. There's not much debt left anymore. And if you take that and then if the bottom layer is 10%, that leaves like 23%, if you take that 23% and divided between AA, single A, triple B, double B, maybe single B, each of those tranches are really small. So of course it makes sense that credit hedge funds can invest it, because these are not big amounts. So they're traded they're held not in long-term hands.

Peter Gleysteen: (25:53)
So if a bank is investing in a triple A that has a 10 year final maturity, you're making an investment decision that could be there for 10 years. But the mezzanine investors are trading oriented and are looking for, because the capital structure is that it's needlessly complicated with 10 layers. And there's often between two and 400 loans in any given CLO, we're at the low end spectrum, by the way, closer to 220. That's a lot of complexity which changes the value, especially because people's assumptions on how to value those forward cashflow streams are changing. These are very sophisticated investors, so they use models. They're not looking at liquidation values. They're looking at that forward cashflow stream and the discount in it. So they're traded in a very thin market. So there's a lot of volatility. When you have something that's very complicated. It's trading from time to time, but very few buyers. And especially if some of them suddenly have to sell. So we know that in March, April, some people came under the gun because of the kind of financing arrangements that they had had to be sellers. But it's-

Troy Gayeski: (27:09)
Well Peter, as we sit here today, then you would generally agree with the statement that double B cash flows are money good and worth far yet they still traded 83. Plus you get a 550 to 650 coupon. So it looks like a pretty compelling investment right now, total return standpoint right now.

Peter Gleysteen: (27:24)
Totally. [crosstalk 00:27:26] I would say-

Troy Gayeski: (27:27)
[inaudible 00:27:27] you're participating in correct?

Peter Gleysteen: (27:29)
We do. There's opportunities there and we do have a secondary fund. It's a small piece of our AUM. But there's a very clear opportunity. I'll point out though. The devil's in the details. So it's who the manager is, what their strategy is. And for professional investors, the underlying portfolios are available. We can actually get it if we were considering someone else is... If someone wanted to look at one of our CLO's, you could based on our last quarterly payment date. You could see every single loan investment that we have in that fund or CLO. And incidentally, every BSL broadly syndicated loan is rated by both Moody's and S and P. There's a ton of information. There's research. There's a whole nother subject of private side information and public side investing. I won't go into that probably if we get time. But it's an area where homework really pays off and experience pays off even more.

Troy Gayeski: (28:30)
So that would be what we refer to as a classic alpha proposition. The credit research, looking at private versus public. That's one of the areas where you guys generate not only beta from the asset class, but also alpha to security selection, and perhaps having a bit more knowledge than the next manager that's not quite as experienced. Would that be an appropriate summary?

Peter Gleysteen: (28:51)
Yes. Thank you. And I'll just add that. So my background, as I said earlier, I come from the banking world. So I come from the world from making loans, not taking, I'm not taking something that someone else created it's offering you as an investor. So I would call myself more like the cook, the dishwasher, Maître d', the waiter. And most investors as the people going to the restaurant ordering Alec card. So I'm more familiar with where these come from, how they come to be made, what the issues are, what kinds of information is available.

Peter Gleysteen: (29:26)
And how to put the pieces. And I'll go back to when you asked about my background, I made the comment that I learned early, that things are often not what they appear. And that motivated me early to kind of understand what was going on, as opposed to just the way things appeared on the surface. Because I noticed in different countries that it was the same reality, but people expressed it and lived it differently. And for good reason, and that was great and I feel a great beneficiary of that. And when I found a career in an asset class that had a terrific continuity with great attributes of what I just been describing, safety, steady Eddie ongoing cash flow and liquidity. So you can change things. You can change your mind at the backstage. Changed the investment profile. That's why I'm in my fifth decade of doing this.

Troy Gayeski: (30:19)
Yeah, it is a rich history. So obviously the pandemic has affected pretty much everyone on the planet. It's affected some investors negatively, others positively. But in terms of your firm, how has it impacted your ability to put capital to work, particularly for new investments where you've raised quite a bit in the past six months?

Peter Gleysteen: (30:40)
Yeah. So we were really surprised. So in March it looked like the world possibly could end. So we immediately reevaluated every investment stress test. And said "Oh my God, the recession is not a year or two from now. It's happening now. And it might you the worst ever." In that process, we concluded that some positions we should have less of, or not have any at all and made the adjustments. It's a liquid asset class. But the main conclusion was, wow, most of these borrowers are gonna make it. And some of them are actually quite strong. So it was as if every person on the planet had a complete medical test. And you could know everything. Who's going to survive, who's going to thrive and who needs intensive care. So the asset class suddenly had credit risk much more visible.

Peter Gleysteen: (31:35)
And let me just add that there's two forms of credit risk. There's financial credit risk, how much leverage, what kind of loan agreement, are there covenants? Those types of risks are visible. In fact, they're hiding in plain sight. More important risk is basic credit risk. What kind of company, what's the industry, what drives customer demand, what's their competitive position. Those things change and are frankly mostly opaque. And that's where you need to do all the work. The COVID recession made basic credit risk suddenly really evident. So you can make much more, both risk management decision on an informed basis, but also... These are clearly survivors. These are better than survivors. And they've been hugely sold off. Now prices have retraced quite a bit, but they're still discounted. So we concluded really quickly that this was a great investing opportunity.

Peter Gleysteen: (32:32)
So the surprising, I said, we were surprised in March. By the way, AGL, slow at organizing new activities was legally formed in March of 2019. So not that long ago, although the firm was fully formed before that date. All the employees, partners, capital bank and all that stuff. But in March of this year, 2020, we had about over 2 billion of assets under management for our funds. But now we have like 4.3 going on 4.4 billion. So with more than doubled since COVID. Why? Because of these incredibly compelling opportunities and our investing partners, understand that. And when they want the money to put you put the work to get the benefit of more risk or... There's slightly elevated risk across the board because of the uncertainties of social distancing from COVID and how that's changing businesses and how our economy and societies will operate, but there's way more return. So-

Troy Gayeski: (33:40)
It's truly incredible. Your assets have doubled more than doubled under management in six short months. It's a real tribute to the inefficiency and the opportunity, the assets that you traffic in. Plus obviously the skill that you and your team have historically. Now let's approach this from a different angle. We typically run across a few efficient market theorists. There aren't many left. Because anyone that's studied markets the last 20 years now, not even longer. I know there's plenty of inefficiencies all the time. And they're particularly exacerbated in times of stress.

Troy Gayeski: (34:17)
Could you better explain to people or at least attempt to why, even with rates this low in the fed, haven't expanded their balance sheet by 3 trillion ECB, not far behind money supply growth exploded, we're 20.1% more money supply now than coming into March. How you could still realize such attractive returns and such high coupons in a backdrop where you just say, [inaudible 00:34:43] zero, 10 year treasuries, 50 or 60 basis points, IGE yields, one and a half to 1.7 [inaudible 00:34:52] around 1.2. Why do you think even in an environment like this, you could still continue to get such attractive yields?

Peter Gleysteen: (35:00)
That is a great question. And I don't have a complete answer but I can make a couple of points. The first and at the most simplistic level, the asset class has always been in capital markets. Usually if you go to the capital markets, you get the lower of whatever the execution is. It's whatever investors are willing to buy whatever you're offering the cheapest in terms of cost to the issuer. The broadly syndicated loan market is the opposite. While the new issue prices for loans change over time are driven by, as I was saying. Fundamentals, technicals and sentiment. It's the higher of what the banks who originated need require. And by the way, their cost structures keep going up for a whole bunch of reasons and what investors require. Now, when we talk about investors who invest in us, I said that that group's about 1.2 trillion.

Peter Gleysteen: (35:54)
It's like eight different kinds of investors. It's CLO's, it's retail funds, it's credit hedge funds, not only buy CLO's securities, they also buy loans directly. It's insurance companies, it's informed foreign banks. All these different investors have completely different motives, different time horizons, different ways of valuing things. Almost all of them are public side. And as I said before, each loan is different. They're rated. Most investors are first influenced well, okay. What, your most investors work in large organizations and have to explain things to the higher ups. So the higher ups are reading whatever they're reading or whatever terminal and it's saying, "Broadly syndicated loans are risky. Their private equity, CLO's are highly leveraged." They have a really negative... They should have a halo and instead have a stigma in terms of how they're portrayed.

Peter Gleysteen: (36:51)
So at a high level investors have to explain to the higher up, why they're doing this despite this kind of negative perception. When you have a recession, nevermind one, that's unprecedented because of these behavioral changes that are best made in some industries and we're just hitting the pause button. Since a year ago, triple C rated assets. I mentioned, all of these ones are rated. The triple C contingent, is more than double triple C is kind of a danger zone. We don't intentionally, we don't invest in anything that's triple C. We could have something that becomes triple C. We have very hard lineage that, but the point is, that's more than double. Why? Because we have a recession, there's a lot of risks. There's a lot of uncertainty. So in that environment, when I said that spreads step shifted up, ignoring interest rates, whatever the regular way spread levels were, investors require more returns.

Peter Gleysteen: (37:49)
So spreads have lifted because risk actually is higher. If you actually get into the innards of portfolios, you can either create new portfolios or discover an existing ones. That they're really safe, that they're managed in the way that the risk profile is actually improved. They're actually safer than they were, but actually have higher returns. One thing I didn't mention is... That's really helpful. There's over a thousand borrowers in the broadly syndicated loan market. And these are mostly private companies. It's the backbone. These are the mid to large companies that are the backbone of the U.S economy. These are not the multinational companies that you can buy a public equity in or an investment grade bond. These are private companies, they're not investment grade. Most of them are very healthy. So it's a terrifically inefficient space.

Peter Gleysteen: (38:50)
And I could talk probably for days about it, including how syndicated lending came about the transition from banks, to just making loans to the same borrowers, to becoming a capital markets activity. And then it became a capital markets activity that included investors in not just banks. And that was mainly because there weren't enough banks from risk management standpoint that to finance the growth of private companies that wanted to be financed. So it's actually quite inefficient. That has a very interesting total bank based history. And of course these are originated by banks structuring.

Troy Gayeski: (39:28)
That is a tremendous excavation. If I could sum it up before we turn it over to John to close things out. It's basically because the banks and the investors are always demanding a higher yield than they think the risks they're taking A and B, even though your view is that there isn't demonstrably more risks, given the increase let's call it a V-shape recovery in certain industries. Investors are demanding even more return now because of the uncertainties in the world. Would that be a fair summary of those two points?

Peter Gleysteen: (40:00)
Very, good summary. I'll add one more piece to that. And we should record this. At the long [crosstalk 00:40:09]

Troy Gayeski: (40:09)
I think we are I think John [inaudible 00:40:11]

John Darsie: (40:11)
Oh, we're recording in it.

Peter Gleysteen: (40:13)
At a lower level, I mentioned that the asset class is not a syndicated loan. It's all of them. That's what [inaudible 00:40:20] the safety.

Peter Gleysteen: (40:22)
Yes, if you take a loan and we're in a riskier environment, people are demanding that loan should have more return. So they all do. If you take... Then if you take a big, if you create a big portfolio of them, they are generating more cashflow that funds out any possible losses, you're actually getting more return, which is creating more safety. So counterintuitively, there's an increase there's a perception of increased risk or reality of increased risk. That's pushing spreads up. But there's much more pushup, as you said, in spreads and there is risk and you have to have that push in banks and investors have to be paid more from what they think the risk is.

Peter Gleysteen: (41:05)
And when you apply that X increment on every single loan at the portfolio level, it creates a higher return per unit of risk. So if you had the amount of risks that you were, that you wanted or were willing to take was X, and you stay at X, you rebalance portfolios to the risk. The risk is the same. You're getting paid much more for that same level of risk, which why [crosstalk 00:41:28] asset level.

Troy Gayeski: (41:29)
Peter. So we're going to end it there on my end. It's been a real pleasure to speak with you and learn about your background and hear you articulate the compelling case for the leverage loan CLO and broadly syndicated bank debt market. I'm going to turn it over to my partner, the managing director of SALT, to close things out with some questions from the audience. Go ahead, John.

John Darsie: (41:48)
Thank you, Troy. It's been a fantastic conversation. We have a couple of great questions from the audience. So I'm going to take two questions. I'm going to put them into one. So we don't take too much of people's time and Peter's time, and you've been very gracious to join us Peter, thank you very much. Given your experience in building these bank loans, have you seen any shift in the underwriting language of these loans, pre COVID versus now, has standards shifted from higher Cub light, has issuances ramped up? And also the returns we've discussed are historical when we had higher loan covenant standards. Do you have concerns on a go-forward basis that recoveries with respect to the current loan market environment, specifically the degradation of loan covenants and lender protections, especially in issuances from 2018 to 2019?

Peter Gleysteen: (42:38)
Those are great questions. So first of all, since COVID, credits... Like I said before, with credit risks, there's two kinds, there's financial risk and basic risk. With credit quality and underwriting standards. There there's two kinds, there's the quality of the documents and whether there's covenants or not, and separately, how rigorous and how high are the standards in terms of which borrowers, what companies get financing. So on the former, which is covenants or what people would call loose documentation, loose terms. There hasn't really been much change. It's the same. And the main reason for that is people who invest in this know that these loans are well structured. The borrowers are credit worthy, and the math of more return for risks that I was describing is present. So there hasn't been pressure from investors.

Peter Gleysteen: (43:40)
The investors would like to have better documentation, but that hasn't happened. That hasn't happened. I don't expect that to happen. And I think this time I couldn't say why. More importantly though. I think credit standards, real credit standards, like who gets the money have improved. And I'll make two comments. One is post COVID the average new issue or in the broadly syndicated loan market. That means a borrower comes to the market with a new loan banks, underwritten and presenting a new loan. The average borrower is a larger company with less leverage with better ratings and is paying more. So it's a higher quality borrower. Back to the first point, the documents have not improved, but a stronger borrower. The other comment that I'll make is if you look at this over a 10, 20, 30 year timeframe, the average borrowers over time have been improving.

Peter Gleysteen: (44:39)
If you were to look at the typical leveraged buyout of the 1980s, which is when I cut my teeth and really big leveraged finance, you'd be horrified with the capital structures. On how much leverage and some of those on some of those buyouts. If you were to compare the current cohort of borrowers with the ones in the O six O seven pre financial crisis year. What you would find is, borrowers today are air quality. So that trend over time has actually been through higher quality, not lower quality, even though the terms of the documents are clearly loose.

Peter Gleysteen: (45:21)
And I'll just add that, that's mainly a phenomenon. Most the growth of the broadly syndicated loan investor base has been driven by the determines that crossed over, the move of traditional high yield investors that continue investing high yield, but also to invest in loans. Because typically the borrower has the downstairs high yield bond and the upstairs, or the broadly syndicated loan. Now high yield doesn't have covenants, never seen private side information, so they never demanded it and don't need it. So that's one of the... It's a structural reason why, covenant has effectively gone away. And from that standpoint, loans and bonds have converged. One is still the security and one is still alone.

John Darsie: (46:08)
Peter, thanks so much again for taking the time to join us. And Troy, thanks so much for taking the time to moderate today's discussion. I think it was fascinating, Peter, as you mentioned, this was recorded. So anybody who joined late or wants to clarify some of what you said, they can always go to the SALT website within two or three days, we'll typically post these episodes on demand. But thanks everybody for tuning in, it was a real pleasure to have you on Peter.

Peter Gleysteen: (46:33)
Thank you for having me and thank you audience for listening and hopefully you're interested. Thank you.

Sarah Kunst: How Diversity Leads to Better Investment Performance | SALT Talks #73

“The way that I've been flipping it… when [as a black woman] you have to be twice as good to get half as much, it means you *get* to be twice as good.”

Sarah Kunst, managing director of Cleo Capital, is an investor and entrepreneur who has worked at Apple, Red Bull, Chanel & Mohr Davidow Ventures. She is also a contributing editor at Marie Claire Magazine. She founded LA Dodgers backed Proday and has served as a senior advisor at Bumble where she focused on their corporate VC arm Bumble Fund and on the board of the Michigan State University Foundation endowment.

Growing up middle class in a 300-person Michigan town, it was understood that to go out and achieve more would require hard work. Early career positions offered exposure to tech heavy hitters like the Winklevoss twins and Jack Dorsey. Insatiable curiosity in their work and the Silicon Valley industry eventually provided the opportunity to break through as an emerging fund manager, raising a $3.5M venture fund in 2018. “That was the second largest, first time fund by a black woman, VC in America ever. Three and a half million, I'm not misspeaking.”

A career founded by building out early stage companies has seen multiple projects, even in the time of COVID. This includes identifying individuals out of work and bringing them together to generate ideas before ultimately launching them into companies. Diversity is key in these companies’ success. “We know that diversity drives better results… because they're going to be able to see around corners a lot better if everybody has a slightly different perspective on where the corner is.”

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Sarah Kunst

Managing Director

Cleo Capital

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
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 public policy. And we're on the back half of a great SALT Talks double-header today after a great SALT Talk this morning with former Florida, Governor Jeb Bush, and we're very excited for this afternoon SALT Talk as well. Our SALT Talks are a digital interview series that we launched during this work from home period with leading investors, creators, and thinkers. And what we're really trying to do during these SALT Talks is replicate the experience that we provided our global SALT conference series, which our guests today attended our most recent international conference in Abu Dhabi in 2019 and was extremely impressive. So we're very excited to have her back on SALT Talks, but what we're really trying to do is provide a platform for what we think are big, important ideas that are shaping the future as well as to provide our audience a window into the mind of subject matter experts.

John Darsie: (01:03)
And we're very excited today to welcome Sarah Kunst to SALT Talks. Sarah is the founder and managing director of Cleo Capital, which is a venture capital firm that she founded. She's also an investor and an entrepreneur. She's worked at some of the world's leading companies across different sectors, including Apple, Red Bull, Chanel, and previously at Mohr Davidow Ventures. She also started her career briefly as a scout at Sequoia, one of the leading venture capital firms in the world. In addition to being a contributing editor at Marie Claire Magazine, she previously founded a Los Angeles Dodgers backed startup called Proday, and has served as a senior advisor at Bumble where she focused on their corporate VC arm at the Bumble Fund. She also serves on the board of the Michigan State University Foundation endowment, and Michigan State is her alma mater. So she followed sort of a non-traditional path into venture capital, which I'm sure we'll talk about.

John Darsie: (01:55)
Kunst has been named a future innovator by Vanity Fair, Forbes Magazine 30 under 30 and a top 25 innovator in tech by Cool Hunting. She has been recognized for her work in Business Insider as a 30 under 30 woman in tech and a top African-American in tech and PitchBook and top black VC to watch. And she was also honored as a top woman in STEM by Create & Cultivate and Marie Claire Magazine named her a young gun to watch. She has written for TechCrunch, Forbes, The Wall Street journal, Fortune, Entrepreneur.com and Marc Andreessen named her as one of his 59 Unknown Rock Stars in Tech, which he came out with a couple of years ago. Just a reminder, if you have any questions for Sarah during today's SALT Talk, you can enter them in the Q and a box at the bottom of your video screen and hosting today's talk is Anthony Scaramucci, the founder and managing partner of SkyBridge Capital, a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:55)
Well, the only thing I can think of Sarah is I'm so happy that I wasn't competing with you for my spot at Harvard Law School in 1989. My resume sucked, I would have never gotten in up against this. I mean, this is incredibly impressive. So congratulations and really honored to have you here.

Sarah Kunst: (03:13)
Thank you.

Anthony Scaramucci: (03:15)
So I'm a little bit of the same mundane repetitive questions sometimes, but I always find this part of our talk fascinating. Tell us something about where you grew up, how you got raised, what you were thinking about as a kid and how you ended up doing what you're doing. What was the process that led you to where you are today?

Sarah Kunst: (03:38)
Yeah. Well, I mean like most venture capital investors, my first two jobs were on a firm. So grew up in a town in Michigan of 300 people and we used to ride our bikes through the irrigation because we didn't have fancy backyard pools, which turns out was probably not the best thing because it wasn't exactly organic farming. But I'm still here and my skin didn't fall off. So came from this tiny town and always had an eye towards... when I was young, I would just read constantly. I would go to the library and I would just pick an aisle and read my way through it and then read my way through the next aisle and read every magazine I could find.

Sarah Kunst: (04:17)
And as soon as somebody gave me the internet, I started playing around and learning how to code a little bit and was always just deeply curious, and had parents who were always really supportive of it, but made it clear to me that, Hey, we're nice, middle-class people and if you want more, you're going to have to work really hard. And so I always grew up with a ton of curiosity and a ton of understanding that if I wanted it I'd have to work for it. So I did not inherit $400 million from my dad, like your former employer. So I had to start somewhere.

Anthony Scaramucci: (04:50)
Hold on. It was 421 million, I think. No, I'm just kidding.

Sarah Kunst: (04:54)
I know I didn't even inherit the 21 million. So I started there and I worked at KFC in high school, which I still am trying to get on their board now because I think I'd be the only board member who actually worked there. And after high school went to Michigan State and I started working in tech because I needed to work. So worked at Apple, as a campus rep and that sort of opened my eyes to there's a whole business and marketing side of business. I was an advertising major in the tech industry. And the consumer internet was just starting to explode or you remember the day we got Facebook. And so those seeds were laid early. Went to New York after college. It was 2008, I worked in marketing at Chanel, which was a great job. I got amazing discounts, but it turns out 2008 was not exactly the right time to be in luxury marketing, so that didn't work well.

Sarah Kunst: (05:43)
And when that sort of started hearing names like Madoff and Bear Stearns falling, it became clear that that luxury was not going to be the place to be and I jumped over to the tech side. I ended up working for the Winklevoss twins, at a media startup they had at the time and got to get a really kind of front row seat to what was going on in the tech world. That was kind of post Facebook lawsuit, pre Bitcoin. I was incredibly early in crypto but I did not savour or mind nearly enough. But I have an email from 2011 where I said, I'm telling all my Tinder dates about Bitcoin, which is really kind of the email of an era.

Sarah Kunst: (06:29)
And I was in, and once I was in the tech world, I saw how innovative it was, how fast moving, candidly how fast you could make and lose a bunch of money. And I was hooked and worked in startups for several years, ended up as a venture capitalist at a big fund. Started a company, raised some money, lost some money. And when I was thinking about what to do next a few years ago, I'd become a general or a limited partner investing in venture funds at Michigan State University. And I just saw this hole in the market where early stage investors, especially who looked like me just didn't really exist. And I said, well, I have all this experience. I have a ton of passion for helping founders. Why don't I go start a fund? So I did it.

Anthony Scaramucci: (07:10)
Well, first of all, congratulations it's an amazing story. And I think it's all that we have a lot of young people that listen to these talks. And I think it's a lesson for them that you have to think very boldly and you have to be willing to take on the risks that you've been able to take on. So congratulations for all of that. Before I go to the next question though, tell me about Bitcoin for a second, your opinion of Bitcoin. What's your opinion... and I'm an old fogy, so I don't really understand it. We had the Winklevoss twins at our conference. I thought they did a magnificent job of explaining it, but put it in your words, do you like Bitcoin as an investment, do you see a future for that digital currency? And if so, why? And if not, why not?

Sarah Kunst: (07:50)
Yeah. I mean, I think if you want to day trade cryptocurrencies, you still certainly can, there are other cryptocurrencies that are maybe better than Bitcoin because there's more fluctuation. But the reality is that the world is only getting more digital and when you look at sort of Tyler Langlois, once described it to me, as Bitcoin is gold with wings. So it's sort of the ultimate hedge, it's your ultimate bug out bag but you can access it from anywhere. And we see that when you watch the amount of crypto that's been purchased by people in places like China, Venezuela, there's a huge understanding of that.

Sarah Kunst: (08:25)
But then the other thing is that as the world gets more digital, as there's less trust in our day-to-day lives, the ability to have a distributed ledger that allows us to, I don't have to trust you to take money from you because there was sort of the ultimate escrow in crypto, if done correctly. And so I think that will all cash go away and will all credit go away and will people only use crypto? I doubt it in the next 10, 20 years. But do I think that cryptocurrency which far predates Bitcoin is here to stay and has a real relevant place and the blockchain is a distributed ledger and kind of source of truth, have a place in our very digital and very kind of fake news world moving forward? Absolutely, I do.

Anthony Scaramucci: (09:14)
Okay. Well, good to know. I got to do some more homework on it personally. I'm obviously well behind everybody else. Silicon Valley, Wall Street, not just Silicon Valley, Wall Street, but many areas of our economy struggle with diversity and it's not just race, it's also gender. So you are a young black woman working in the industry. How hard was it for you to break in and what's the experience been like for you and how do we make it better? Because we obviously have to make it better. So how are we going to make it better?

Sarah Kunst: (09:46)
Yeah. I think that getting in wasn't particularly hard partially because the way I did it was such a side door, that it was a little Trojan horse ask. And I won't pretend that was my master plan, the website I worked out for the Winklevoss twins, that kind of got me into tech, was a nightlife website called Guest of a Guest. And so I wasn't coming into Google saying, I'm going to be your lead engineer. I was for years, just kind of a PR and biz-dev girl floating around New York. But the difference is that I would meet these people via Jack Dorsey, Garrett Camp, the Winklevoss twins, some of the early Facebook team, all of these people who went on to become huge tech names.

Sarah Kunst: (10:30)
And I wasn't just interested in going to a party with them. I would literally sit them down and ask them, one of the richest tech billionaires in the world before he became that. I remember when Nate was trying to hit on me. And I said explain to me what a down round is, which is when you raise a round of capital at a lower valuation than last round. And the poor guy was like, I'm half drunk and trying to hit on this girl and she's making me explain finance concepts. And it was like five years before I ended up in venture capital.

Anthony Scaramucci: (10:56)
Was he able to explain it half drunk?

Sarah Kunst: (10:59)
He did an okay job, but he's also never had a down round. So I guess it's partially that he didn't have the firsthand knowledge.

Anthony Scaramucci: (11:04)
John and I didn't know this, so I'm going to keep interrupting. Did you give him the Heisman or karate chop at the Adam's Apple? What did you give him?

Sarah Kunst: (11:11)
I let him walk me home. I shook his hand good night. And I went into my doorman building and said, don't let that man inside.

Anthony Scaramucci: (11:17)
All right. Good for you. We'll be teaching diversity training and combat skills and all that [crosstalk 00:11:25].

Sarah Kunst: (11:24)
Exactly.

Anthony Scaramucci: (11:25)
Good for you.

Sarah Kunst: (11:26)
So for me there was a lot of that to get in, but then once I was in, there was certainly a place, especially when I went out to Silicon Valley where you really ran into that glass ceiling. And it was clear that if you thought that you had an equal seat at the table, you were wrong. New York historically has been a much better place for female founders. I think it's a better place for diverse founders, but the reality is the real money in our industry is in Silicon Valley. And if you've following along some of the sagas on Twitter recently, Silicon Valley is still not great at diversity.

Sarah Kunst: (11:58)
And so for me, it was looking at that and saying, nowhere is great at diversity in America. So if we're going to go into investment banking, even female teachers are paid less than male teachers. Even though we think of it as a female profession, does that make sense? So what I decided to do was just sort of figure out a way in, and make friends, make allies and just keep going. And I raised a three and a half million dollar venture fund in 2018. That was the second largest, first time fund by a black woman, VC in America ever. Three and a half million, I'm not misspeaking.

Anthony Scaramucci: (12:33)
Well, good for you. I think there's something that you're doing. If you don't mind me saying, and I want you to react to it is you're pushing ahead despite the obstacles, you're not becoming overly sensitized to the obstacles, you recognize the injustice of them, but you've got your four-wheel drive moving over them irregardless of them, is that fair to say?

Sarah Kunst: (12:55)
Yeah. I mean, I think that there's nothing else you can do. What am I going to do? Just curl up in a ball and die. I have to do something to make money. I have to do something to build my career. And I still think that out of every industry, tech's one of the only industries where anyone can become a billionaire in five years. You can't just pop up from a state school or a college dropout and go make a bunch of money on Wall Street because you can't get through the door. There's such a high barrier of credentialism. And so I still think tech is the best place. It's just that even the best place in a country like America is still pretty crappy.

Anthony Scaramucci: (13:33)
But there's something very admirable value, this is my observation of your career. And when you spoke at SALT and things that you're doing, you don't have a chip on your shoulder, at least you don't appear to have a chip on your shoulder. When I was told the early part of my career, I'm not going to mention the firm or the name of the person, but they told me that I should be really landscaping their property as opposed to working inside the organization with them. And the person just literally flat out said that to me. And I was probably less emotionally mature than you are Sarah. And I got upset about that and it really bothered me.

Anthony Scaramucci: (14:06)
And so, of course I overcame it and I said, you know what? I got to go start my own business because this way I'll be able to have a better control of my destiny without those biases and prejudices. So have you done that? How have you managed because many people listen, the injustice is there. It's subjectively there many people get very upset about the injustice. And I'm not saying you're not upset about it, but you seem like you don't have that chip on your shoulder, which I think is a very healthy thing. I wish when I was your age, I didn't have it, frankly. And so how are you doing that?

Sarah Kunst: (14:39)
Yeah. One, shout out to my therapist, we spend a lot of time on this stuff because it is frustrating.

Anthony Scaramucci: (14:46)
We need to get a referral to the therapist. So just remember, when SALT Talk's over, I want the therapist's number. I know I'm not going to get the same therapist, but a comparable one, but go ahead, keep going.

Sarah Kunst: (14:55)
I like it. So, that's certainly a huge part of it, but I think I've had this conversation a lot with startup founders. And there's a scene in the black community. And I think other communities, marginalized communities have the same sort of ethos where you have to be twice as good to get half as much. And it's just deeply unfair when you think about that. But the way that I've been flipping it recently when I'm talking to founders, because that is still largely the case is, when you have to be twice as good to get half as much, it means you get to be twice as good. And so there is no one, you guys know a lot of emerging fund managers.

Sarah Kunst: (15:31)
There are very few emerging fund managers kind of White dudes who sort of showed up and ask a couple of people for money. And they got it because they went to the right school or grew up in the right neighborhood, who I would not be happy to go toe to toe with and look at my contacts, my track record, my network, what my founders think of me, my reach, my press presence, all of that stuff. There are very few people that I wouldn't win.

Sarah Kunst: (15:56)
And so if I have been forced to be this good, but I also am this good, great, I'm this good. And so to me constantly being angry about the way the world is, doesn't get you nearly as far. And then the last point I'll make is, in history class, in fourth grade or whatever, you have to write a report about the time of history that you would have most liked to live in. For me, it's literally every day, because even with what's going on in our world, our government, our everything, Black women have never had more rights than we have right now. We've never had more capital. We've never had more freedom. We've never had more autonomy. We've never had more potential. And that's on one hand, just deeply sad. But on the other hand it's, how lucky am I that I'm born now and not 80 years ago?

Anthony Scaramucci: (16:46)
Well, I mean, I'll add something to that, which I think is a very excellent perspective on your part, but you're also a pioneer and a role model for the future. And so, I did a lot of work in the gay community related to marriage equality and some of the people said to me, it was rough for me 30 or 40 years ago. It's easier for this generation. Maybe it is, or it isn't, I'll let the generation make the comment themselves. But the good news is those people felt rewarded by the work that they had done, that they were making it easier for future generations. So, God bless you for all of that. John is dying to ask questions. And I'm trying to big for John right now, I'm trying to put [crosstalk 00:17:30].

John Darsie: (17:30)
I'm just hoping that by the end of this talk I'm still employed. I stumble over reading the intro every time we do this show. And Sarah is obviously so intelligent and eloquent that I'm just hoping I don't get fired after we get done with the SALT Talk.

Anthony Scaramucci: (17:44)
You're not getting fired. I know that's why you have all the sympathy, baby pictures up there on the wall. He usually has this really big waspy bookcase that he's trying to impress people with. But now we're going with baby pictures. So maybe he does feel like he's getting fired, but don't worry. You're not getting fired. So two more questions, then we're going to turn it over to Mr. Darsie. Your startup, you worked in different stages at places, Apple, Red Bull, Chanel. How were those companies different and how are those companies similar? And I'm just wondering about the ethos of a successful business culture. Are there elements in each of these businesses, even though they're in very different sides of the economy, are there similarities in these businesses or not?

Sarah Kunst: (18:32)
Yeah, I mean, absolutely. So to speak specifically about Apple, Red Bull, Chanel, I worked at all of them by the time I was 24. And there's two kinds of common threads, Red Bull and Chanel are both largely privately owned. And not necessarily by the original founders, but they're still very tightly held. And then Apple, I worked there in college and so it was sort of right at the end of the Steve Jobs era. And that, well, a public company was so driven by his vision and the striving, those companies are... Apple's amazing on margins, really all of them are good, solid, fundamental businesses, but they're really marketing machines. Chanel is selling you things you can buy a 1000 other places, as is Apple, as is Red Bull.

Sarah Kunst: (19:21)
The reason that you're choosing them. And the reason that they're all category leaders is because they understand something about product in marketing that in just a drive for excellence in those areas that very few companies, either one, understand and two, are willing to double down on. And it's that consistent sort of, excellence is a practice. And you have to set a bar for yourself that's so high. And then anything that doesn't meet it, you have to reject and you can't rest on your laurels. And so I think when you look at why and how these companies, particularly Chanel and Apple have managed to continue to just so out perform their peers. A friend of mine said, retail's in a free-fall with COVID and Chanel increased their handbag prices by $1,500 because they do that every year.

Sarah Kunst: (20:12)
So the best time to buy a Chanel bag is always today because next year it's going to be, the prices only go higher and they can do that because of the excellence and because of the brand integrity. And so it 100% sort of shaped the way that I view the importance of brand and legacy and reputation and integrity. Because if you have those as a company, you can keep thriving even when nobody else is. And if you don't, as soon as there's a downturn or a hiccup, you're going to be done for it.

Anthony Scaramucci: (20:42)
Makes total sense to me. I think it's again, another insight, somebody down on their dumps, they got fired from a job. Let's say they said something stupid on the job. And they got unceremoniously fired after 11 days maybe, something like that. What would you recommend to that person down in the dumps, that's been blown out of a situation?

Sarah Kunst: (21:07)
I used to be the queen of trying to fix things. Something would go wrong and like, how do we fix it? How do we salvage it? How do we fix it? And now I generally have, it's almost like falling knives, should you try to catch a falling knife? No. You'll end up stabbed, you'll let it fall. And so, I remind myself of this consistently when things fall apart, let them fall and that's not everything. That's not, I'm never going to pay rent again, whatever. That's, if you're doing your best and you're showing up and you're putting kind of Goodwill and good faith into something, and it's still not working and you do kind of the reasonable amount of work to make it work. And it just won't work. Then stop and consider that maybe you let it fall apart. And then the next thing, the next act, the next whatever is going to be 10 times better.

Sarah Kunst: (21:55)
And I think we intrinsically know this in maybe our dating relationships. How many of us have spent way too long? And then we are like, Oh my God, I should've dumped that person a long time ago when they first did X. And I'm so much happier with the new person, but we don't always translate that into our work lives or even things like with COVID. If you're trying to salvage the before, if you guys were trying to pack us all into, an Abu Dhabi conference room right now, this wouldn't work nearly as well as the talk series, which has maybe opened up a whole new way to reach people.

Anthony Scaramucci: (22:27)
I agree. So your message is try to go with the flow and evolve as you go. Don't worry about the fall. I think it's a good message. Okay. So I'm going to turn it over to Mr. Darsie. Go ahead John. We've got tons of questions for you, and it's really great to have you on Sarah.

Sarah Kunst: (22:47)
Thank you. Great to chat.

John Darsie: (22:48)
So Sarah, you worked as a scout at Sequoia briefly, and you worked for a couple of other venture capital firms. First of all, for people on the call who might not be familiar with the role of a scout in Silicon Valley, could you explain what that means? And then also, I know during the pandemic, it's very interesting we talked about this in our pre-call the other day, you started a fellowship program for people who have been laid off during the pandemic, which I think is ingenious, because what you have is so many talented people that have been laid off because of things purely out of their control. But if you're a company looking to hire tech talent right now, it's actually a great time to be hiring because of all these talented people who are now out there on the street, talk about what you did with that fellowship. And what motivated you to do that, after you just explain to people what a scout does.

Sarah Kunst: (23:34)
Yeah. So scout investing is an esoteric little area of venture investing. And it started, kind of 2008, 2009 when Facebook blew onto the scene, and if you were in college then, or you were kind of right around that 17 to 23 year old age range in the call, 2005, you were very aware of Facebook. If you weren't, you had no idea that it existed. And if you've seen the movie, The Social Network, you kind of see some of that play out where all these big venture funds are like, wait, what is this thing? And by the time they knew about it, in an ideal world, as a VC, you own maybe 20% of a company at the first round of funding. And you want to buy that for maybe a half a million, a million bucks.

Sarah Kunst: (24:17)
If the company has grown to millions of users, and that seems percent of the company is going to cost you astronomically more. And so scout investing came out of the insight that the rise of the consumer internet meant that VCs couldn't see every single company on day one anymore, or day zero. But that, because they invested in all these startups, they had this long tail of people who weren't yet personally liquid. They're not rich, they're coming out of college, they're joining a startup, they're making a little bit of money, but they have this massive network. And they know which of their really smart friends are starting companies and going to work for companies. And so scout investing is basically angel investing on somebody else's dime. So when I was a scout at Sequoia, I was angel investing. Just like many of you might, the difference is I hadn't worked in finance first. So I couldn't just go into my bank account. I was going into Sequoia's bank account, which is much bigger, so it's much better.

Sarah Kunst: (25:11)
Bu that's what scout investing is. And over the life of, since scout investing has been introduced, there's been amazing returns. Jason Calacanis, who's a pretty high profile angel investor. He invested in Uber and Twitter through a scout vehicle. So it wasn't his own capital. He was making a little bit on the back end once the money came back. But those early dollars that turned into in the case of Uber or a 50,000 X return. A lot of that ended up going to Sequoia. And so it's a great deal for Sequoia, and it's a great deal for Jason because investing other people's money when you don't have any, is far better than not investing at all. And so I was a part of Sequoia's program and loved it so much that it's even a part of my fund now.

John Darsie: (25:57)
Fantastic. And talk about Chrysalis for a minute. So I thought that was a brilliant idea to take all of this great tech talent that has been laid off as a result of the pandemic, again, because of things beyond their control and bring them all together to help incubate new startups and to help each other find new jobs and things like that. Talk about that program, why you launched it, what the result was and what it taught you about the industry.

Sarah Kunst: (26:22)
Yeah. So, I remember in 2008, early 2009 just the world, all of a sudden fell apart. New grad, working, and all of a sudden my friends who hadn't yet gotten jobs, there were no jobs to be had. And people who worked at companies they were downsizing and when I went to switch jobs, the landscape could not have been more different than then what I would intern in New York in 2006 and money grew on trees. And so seeing that, I ended up at a startup and I ended up at a startup partially because the bigger obvious companies to move to weren't hiring. And I'm so happy that I ended up on that path instead of saying, Hey, I'm kind of done at Chanel maybe I'll go to Louis Vuitton. And then just being on this other rollercoaster that took me in a very fancy, but totally different direction that I don't think was the right path.

Sarah Kunst: (27:16)
So fast forward to the spring, when in one month tech lost 30,000 jobs. So companies like Lyft, Airbnb, there's layouts everywhere. There's hiring freezes, sales teams for almost everybody were just slashed. And it reminded me so much of that 2008 moment and some of the world's richest venture capitalists, would go on Twitter and say okay, it's time to build. And then everyone's like, great. What do we build? How, and they're like, I don't know, I'm on my yacht. It's time to build, you go figure it out. And I looked at that and I was like, I don't have a yacht yet, but I know how to build. And I know how to hold space for people to come together. And I know how it feels to be like, Oh my gosh, my entire plan, my entire life, my salary, everything just got blown up. What does this mean about me? Not understanding that it has nothing to do with you and it has everything to do with macro economic circumstances far outside of your control.

Sarah Kunst: (28:13)
And so I thought, I can't give these people money. I can't fix a pandemic. But what I can do is create a space, we largely use Slack and we created a space and Tech Crunch wrote about us. We had 100 of applicants, we ended up accepting a few over 100 people. We had everybody from a CFO of a publicly traded company to literal rocket science PhDs, tons of tech workers across all different disciplines, all different geographies. We had people from Israel. We had tons of people from America, people from all over the world. And so we all came together and I said, okay, guys, you got to just start generating ideas.

Sarah Kunst: (28:51)
Because these are all people who are deeply successful in their careers and they were great at building startups for maybe Series A on, but that zero to one. That idea of space, it's not hard to do well, but if you've never had to do it before, then you just truly don't understand it. So we literally, I just made them start using their idea muscle. Every day, without fail you had to log into Slack and share five ideas, they can be terrible ideas. They could be great ideas. They could have something to do with tech. They could have nothing to do with tech. You just had to start throwing out ideas and talking with other people about ideas. Then after a couple of weeks, they started to spend more time with each other, chatting, getting to know people, doing little calls around ideas and teams started to form.

Sarah Kunst: (29:36)
And then we took them through the Google kind of sprint process design sprint of bringing an idea into the world quickly, they started testing ideas> By the end of the six week program, we had over 20 projects that have been started over 10 of them are actual companies. They're C Corps, they are incorporated. We've had multiple companies get into accelerators. We've had a lot of people get jobs through networking in the program. Some have gone into venture capital now themselves. And we have people who are earning money and revenue for their companies. And these are all people who came into the program with no thought in their mind, March 1st or even March 31st of 2020 that they were going to get laid off and become a startup founder.

John Darsie: (30:25)
Well, that's incredible. It's great to hear. Something that we try to do at SALT, as well as make mutual introductions and to incubate the type of idea generation that you did in such a short time post pandemic. And congratulations on building that out so quickly. I want to talk about investment trends for a minute and your fund, Cleo capital you're invested, I think in 20 plus different startups, what types of investment themes were you focused on pre pandemic? Do you still believe in all of those themes and are there any new themes or acceleration of different trends that you've identified as a result of the pandemic that you're particularly excited about putting money to work in those channels?

Sarah Kunst: (31:06)
Karen Levy from boxes is one of my investors and he sat on Twitter and I deeply agree with it that what we're seeing right now during COVID is the acceleration of seven years worth of digital transformation for companies happen in a number of months. And will there ever be offices again? Of course there will be, when the pandemic end, they all do eventually. But will it ever be okay to say, no, you can't call in on video for this. Even if you have a really good reason to no, you can't possibly do this job remote. No, the only way we can get work done is by all being in person 40 or 60 hours a week. I think those days are over. And when you think about it, what are work hours 9:00 to 5:00? Why is it eight hours? Well, because there's 24 hours in the day and Henry Ford needed three shifts to make Model T's around the clock. That was 1905. So now we're 105 years later and some random guy's, random idea to maximize output of factories is still what governs our day to day, the majority of our lives.

Sarah Kunst: (32:17)
And so I think that acceleration is somewhat permanent. I think that very few investors, venture investors are investing in companies now that are strictly around COVID because pandemics don't last forever. Companies, I invest at pre-seed right which means that most of my companies are at least 10 years away from selling our IPO. And there may be only a few years away from going public via SPAC, but we're still not there. And so the idea that I want to invest in companies that are building for the moment instead of building for the next decade is just not going to be accurate. So that being said, I think the other sort of pandemic in this country, that's coming to stark relief this year of racism and social injustice has also accelerated some trends where people are saying, Hey, AI. It's always a joke every year or so some new fancy organization releases an AI bot on the internet and says, Hey Twitter is going to train it.

Sarah Kunst: (33:20)
But then 24 hours, the bot is basically a deeply racist, sexist, homicidal maniac. And that is without fail because when you just learn from Twitter or when you just learn from people in the world, you realize the lowest common denominator is really low. So is a company that does AI for good. Suddenly feel more relevant, post the protest this summer? Yeah, I think so. But it was always relevant. It's just that nobody was focused on that. Does the bot for pandemic detection? Is that going to be interesting if it also works for other, social health issues, public health issues? Sure. If it literally only works for the very specific strain of SARS-CoV-2 then that's probably not going to be very relevant in even three or four years.

John Darsie: (34:09)
So I want to talk about seed stage investing for a little bit. Late stage venture investing growth capital is, I wouldn't say straight forward, but you have a data set. You have a company history to go off of, and you can do it in a more robotic way in terms of identifying companies that are still private. But if it basically shown, promise that they're going to be a successful company. Seed stage investing, and there's a lot more art to it, I would guess than there is science where you're having to identify certain character traits and founders, you're having to evaluate different ideas. What are the prevailing characteristics that you look for in companies and in people that you're investing in at a very early stage?

Sarah Kunst: (34:51)
You're absolutely right. With a later stage company, you're sort of looking at historical performance and guessing that the future results are going to hold relatively. And it's almost more like private equity at a really early stage. With startups, it's basically going into a hospital nursery and looking at babies and guessing which ones are going to be successful adults. And so it is a lot more nebulous. And when you think about that analogy, what you want to know is less about the baby's height or weight or whatever, responsiveness to light. What you want to know is one of the baby's parents like? What environment is this baby going to be raised in? And it's kind of the same as startups where you're around saying, is this founder coachable? Who else is on the team? What does the market look like? Who have they found to get around them as advisors? How do they?

Sarah Kunst: (35:47)
It's a lot of kind of blue sky questions and sort of feeling through, is this founder going to be responsive when a pandemic hits, when a new legislation hits, when Google decides to get into their space or are they going to be super dogmatic and say here's the path I'm following the path no matter what. And you're like, okay, but the bridge ahead of you is out. So are you sure you don't want to take a different path? You're going to fall through and they're like, no, no, I'm good. This is the path. So I look for kind of, I would say a lot of neuro-plasticity. I want people who are learners, who take advice, who take other people's opinions, who think fast, who are nimble. And for me, that also means, we know that diversity drives better results. So I also want to see a diverse team and that doesn't mean 10 people who look like me around the table. It means a diverse team because they're going to be able to see around corners a lot better if everybody has a slightly different perspective on where the corner is.

John Darsie: (36:48)
So we have a question from one of our viewers about scouting. So a lot of what you described as scouting is that as a young person or somebody from a unique background, you might have special insights into different companies that are being launched that might not be on the radar of the top tier private equity for venture capital firms. Our question is about international scouting. So you came to SALT Abu Dhabi in 2019, you were at Milken Abu Dhabi as well. And I know you attend a lot of events and you speak at a lot of events and you're obviously a great speaker. What do you see as the opportunity internationally? In terms of scouting startups, do you see sort of a rise in entrepreneurship and some markets that aren't traditional hubs for entrepreneurship, whether it be in Africa, the middle East Asia, and are you looking to get involved in any of those markets?

Sarah Kunst: (37:40)
Yeah, I mean, absolutely. I think that you'd have to really not be able to read the tea leaves. You'd have to have never gone to a world history class in your life to think that Silicon Valley will always be the hub of innovation. We also know if we're being totally honest with ourselves, even our president knows that China's sort of the new hub of innovation right now. Silicon Valley still has a massive edge but there's a lot more neck and neck there. And very few startups, very few unicorns in Silicon Valley, China, or anywhere else in the world, aren't getting a ton of their engineering talent from India, from Russia, from former USSR countries. And so there is innovation everywhere. Estonia is a country of 3 million people. And most of you couldn't find it on a map if I gave you 100 bucks. But Skype came out of there and now it's this massive powerhouse. They have the most advanced government in the world.

Sarah Kunst: (38:37)
So innovation, I am not at all the person who coined this, but talent is equally distributed and opportunities aren't. And I think that the same way, John, you and I kind of came up in an era where maybe for our parents' generation, the idea that China would be an economic powerhouse was crazy. But then for us, it feels weird to think that that wasn't always the case. I think that our children and certainly our grandchildren someday are going to be like, what do you guys mean you didn't think that Africa was going to be a massive powerhouse? What do you mean you didn't think the middle East would be a massive powerhouse? When you look at the populations of the world, a lot of Asia is aging out. And a lot of Europe, the average age is getting a lot younger. Meanwhile, in places like Turkey, you have the majority of the population is under the age of 25. And in most of Africa, that's the case.

Sarah Kunst: (39:28)
And so there's so much more one, just more people and more ability to innovate because, the smartphone penetration in the U.S. is so high, but you can go to countries where they're just getting started with those things. And so there is a worldwide sort of, I think moment that we are quickly moving towards just a lot more innovation. And I think that if you are not aggressively looking at your strategy to get allocations, to get capital in some of those markets and to fund people from those markets and to help support people who sort of come here for education or jobs like boomerang back and start companies there, wherever there is. You are missing the boat by so far, and it's not a boat. It's the fanciest out in the world because this will be the trillion dollar opportunity, in the next 20 years. And as I think I've said before, I really like yachts.

John Darsie: (40:27)
There you go. I think you do these long-term seed stage investments. So I'm timing it out as price, six or seven years until you have your yacht. I'll be coming to you around then.

Sarah Kunst: (40:37)
That's [crosstalk 00:40:37] more than five years from being a billionaire in my industry.

John Darsie: (40:41)
There you go. So I wish you'd told me about Bitcoin in 2011 on Tinder.

Sarah Kunst: (40:46)
Where were you on Tinder?

Anthony Scaramucci: (40:49)
Why don't you take your pictures down and give it up ad go join Sarah. Okay. I can see where this is going Darsie.

John Darsie: (40:55)
Maybe, but on that theme of international entrepreneurship and technology development, we have an interesting SALT Talk coming up in a couple of weeks with a guy named David Halpert. His fund is called Prince Street, but he coined this term called digital decolonization, where it's basically the idea that all of these countries, rather than allowing Google and Facebook and Apple to come in and swallow their tech industries domestically, there's sort of a tech nationalism that's on the rise where these governments are looking to provide a platform for companies domestically to be successful. And so Google, for example, just bought a large stake for many billions of dollars in reliance industries in India is an example of that.

John Darsie: (41:36)
And it'll be fascinating, you and I have traveled a lot internationally, and it's just so exciting to do our SALT conferences abroad and to travel and talk to people in these different places. Because like you said, the demographics in places like Southeast Asia are exploding in a very positive way. And in 20 years, like you said looking back at some of these things, it's going to seem obvious. But right now people aren't necessarily as focused on it as they should be.

Sarah Kunst: (42:01)
Yeah, I absolutely agree. And my thought, if I were sort of talking to some of these countries concerned about the digital decolonization issue and I think that India and China provided a pretty good groundwork for this. I think that there's something to be said for letting these big companies come in and train your workforces and build up connectivity and sort of get people to understand that you always want to learn on somebody else's dime. The startup work I did for the Winklevoss twins, it was probably some of the worst sloppiest work I'll do in my life. Sorry, Cameron and Tyler, because I was 23 and learning. And I would have much rather learned on their dime than learning now, when I'm having to run my own shop and pay myself my own salary. So, I think some of that happens in this digital decolonization where these countries are hopefully letting these companies in really learning from them, but keeping an escape patch so that they can also say, Marie Kondo style, thank you for your service, you no longer bring me joy. Goodbye. We're going to start our own, whatever it is.

John Darsie: (43:09)
All right. Well, Sarah, it's been a pleasure having you on. Anthony, do you have a final word for Sarah? You're ready to replace me now? Two minutes later.

Anthony Scaramucci: (43:21)
No, I just want to say to her, if I ever get fired again, because anything can happen in my life. I'm calling you for the referral to a therapist. I'm going to ask you for a job, Sarah, what else can I do in a situation like this?

Sarah Kunst: (43:33)
You can always come be my intern.

Anthony Scaramucci: (43:35)
Say it again.

Sarah Kunst: (43:36)
You can always come be my intern.

Anthony Scaramucci: (43:38)
Okay, great. I would look forward to that. Okay. At some point that may be a better job than what I got now. So you never know, you never know what's going to happen, Sarah. But I want to congratulate you on what you're doing and your courage. But more than anything, I want to congratulate you on your attitude and your spirit. And so may that take you as far as you want to go, Sarah. God bless you. Thank you for joining us today.

Sarah Kunst: (44:02)
Thank you.

Christopher Toomey: Money Management Principals | SALT Talks #72

“We saw one of the quickest recessions we’ve ever seen and one of the quickest recoveries we’ve ever seen.“

Chris is a partner of a top NYC-based Private Wealth Management team managing ~$5 billion in client assets. Their clients include high net worth individuals, family offices, foundations and organizations, money management principals, institutional money managers, small cap banks and offshore investors.

We saw almost $3 trillion deployed through the four stimulus bills delivered by congress, almost equaling the normal tax receipts of the United States in any given year. Despite the inorganic nature of capital flow, markets should go higher.

With regard to tech stocks, “there’s a reason why tech companies have outperformed so dramatically.” They are changing how we do business and live our lives, all while maintaining pristine balance sheets. These businesses are here to stay, but they are comparatively expensive. Depending on the election, there may be sell-offs later on in the year to take advantage of potentially lower tax rates.

“I don’t think [interest] rates go back to normal, but I think they go higher.” Value trading will be driven by a cyclical rebound, improving financials and net interest margins, and projected economic growth coming to fruition.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Christopher Toomey

Managing Director & Founding Partner

Morgan Stanley Team Global

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello, everyone. Welcome back to SALT Talks. My name is John Darsi. I'm the managing director of SALT, which is a global thought leadership forum at the intersection of finance, technology and public policy. The SALT Talks are a digital interview series that we started during the work from home period, to replicate the type of experience that we provided our global SALT conference series. And what these are, are really conversations with leading investors, creators, and thinkers.

John Darsie: (00:33)
What we're really trying to do is provide our audience a window into the minds of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And we're very excited today to welcome Chris Toomey to SALT Talks. Chris is a partner of a top New York city-based private wealth management team. That's affiliated with Morgan Stanley and they manage around five billion in client assets.

John Darsie: (00:55)
Their clients include high-net-worth individuals, family offices, foundations and organizations, money management principles, institutional money managers, small cap banks and offshore investors. Chris began his career at JP Morgan's private bank and he was there until 1998 when he joined Lehman Brothers. He's held various positions throughout Morgan Stanley, transitioning from portfolio manager of the government credit portfolio to building out Lehman's third-party long only manager platform. As senior vice president, he was responsible for manager due diligence and often assisted in providing asset allocation and investment advice for private wealth clients. He joined Morgan Stanley Private Wealth in May of 2008.

John Darsie: (01:38)
Chris has earned various distinctions including membership in Morgan Stanley's president's club. He was recognized by the Financial Times as one of the top 400 advisors and by Forbes shook top wealth advisors. He's spoken at several conferences about alternative investments, including the SALT conference, Hedge World and the Investment Institute. He's also appeared on CNBC Squawk on the Street, Fox Businesses, Fox Business News FBN:am Show, as well as Wall Street Week, he's also appeared within Reuters as well.

John Darsie: (02:09)
A reminder, if you have any questions for Chris during today's talk, you can enter them in the Q&A box at the bottom of your video screen. And hosting today's talk is Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, a global alternative investment firm. Anthony is also the chairman of SALT. And with that, I'll turn it over to Anthony for the interview.

Anthony Scaramucci: (02:28)
[inaudible 00:02:28] Unmute myself here. I'm sorry. I had myself muted because I've got my kids in the background here, Chris. Okay. I've got a great room Raider today, but I've also got kids outside shooting Nerf bullets at me while we're speaking. So I apologize for that. But let's go to your personal background for a second. You and I met probably 2005 or six, I think you were at Lehman at the time, if that's correct. Tell us your early start. What were you thinking about being when you grew up? As an example, John wanted to be a physicist and, of course, I wanted to be an astronaut. What did you want to be when you grow up and how the hell did you end up in this business?

Chris Toomey: (03:07)
Well thank you for having me. I appreciate it. It's a big difference from being at SALT in Las Vegas. And you're right, Anthony, we got to know each other very well during the integration between Neuberger and Lehman Brothers. At the time Lehman Brothers was growing out of their asset management from the spinoff from Shearson about four years before that. And we acquired a bunch of different asset management companies, the last being Neuberger Berman, which also proved to be the biggest and probably one of the best. And so it was great getting to know you and working on that integration.

Chris Toomey: (03:43)
But to answer your original question, I went to a small liberal arts school in upstate New York. I was an English major. I took my LSATs and I think like you, I was thinking about going into the law. But before I went to law school, I figured I would intern in New York at one of these white-shoe law firms. And so I was doing interviews and a bunch of my friends who I had econ classes with told me, "If you're going to go down to New York, you might as well start interviewing with some of these banks." And at the time it was the 90s where everybody was working hard and there's lots of money to be made. And I said, you know what, maybe I'll go work for an investment bank and see where that takes me. And if I want to go to law school, I'll go to law school.

Chris Toomey: (04:33)
I got an opportunity to work at JP Morgan, learning about managing wealth for ultra high-net-worth families. It was a very exciting time in the 90s, as you remember. And from there, I got an opportunity in 98 to go over to Lehman Brothers who, as I mentioned before, were starting to build out an asset management business. And so at the time it was 150 year old firm, but it was really feeling like a startup. I was employee number 11 of what became Lehman Brothers Asset Management. And I guess the rest is history.

Anthony Scaramucci: (05:08)
Well, what I love about the story is that it was a weird arc to your career path, but you love what you do, obviously, because you're so good at it. So let's get into it. Stock market is at an all time high, having a good day today, it was down more than 30% in March, which we both know. Is the snapback justified given the state of the economy? And if so, why and where do we go from here, Chris?

Chris Toomey: (05:38)
Yeah, I think that's a good point. We saw probably one of the quickest recessions we've ever seen with one of the quickest recoveries we've ever seen. If you look at the numbers, the market did bottom in March 23rd. Initial claims peaked at the end of March at about seven million. We also saw the unemployment peak around April. Retail sales bottomed in April. ISM bottom in April. So we had that natural bottoming process that you would normally see with the recession. It just happened very quickly. And the flip side to that is while we had a very, very difficult to store GDP number in the second quarter, our expectations is that we'll get a very good one in the third quarter. And so what is it? It's all basically about stimulus, right?

Chris Toomey: (06:32)
If you look at 2019 federal tax receipts were about $3.4 trillion, if you take the four different stimulus bills combined they equal about $3 trillion. So in that stimulus, we basically almost equal all of the federal tax receipts that we normally take in, in one year. And all that money was used to prop up the economy, keep people from going into work and spreading the virus, and it stimulated the economy and it stimulated the markets. And so I think, putting money to work when the market was at 2200 was a little bit easier than putting to work at 3,500, but we think it's definitely justified and we think the market's going to continue to go higher.

Anthony Scaramucci: (07:16)
Let's talk about equities for a second because you and I watched this stuff very carefully. The tech side of things, like 10 to 15 names, Chris have dramatically outperformed in the recent rally, will that continue? Is value investing dead? Is passive investing ruling for the next decade? What do you make of what's going on? And where do you see things in terms of the trends?

Chris Toomey: (07:44)
I think there's a reason why these tech companies about perform so dramatically. One, they're breaking paradigms, they're growing at astronomical rates and they're changing the way that we do business. And as opposed to the period that I entered the market, when everybody was chasing technology companies that weren't profitable, these companies are making tons of money, they've got pristine balance sheets, and there's a reason why people are looking at them and saying, "Are these monopolies really good for the economy?" They've got impenetrable balance sheets. They're growing at astronomical rates and a period where there's some real concern about what's going to happen because of COVID, it's become a safe harbor trade. So if you look at it, I think 25% of the return in the S&P 500 is driven by these names.

Chris Toomey: (08:34)
I think it's about 50% with regards to the NASDAQ. Yeah. I think if you look at what Mike Wilson saying in our global investment committee is saying, "These businesses are here to stay, but they're probably a little expensive here." And so I think it wouldn't be a shock to me if I saw a bunch of these names starting to sell off for a variety of reasons. One, depending on what your view is of the election, there is a high likelihood that we could see tax rates go higher. And so for that reason, you could see some investors taking some tax loss selling between now and the end of the year. And a lot of these investors have huge gains in these names. So you could see that providing some downward pressure.

Chris Toomey: (09:15)
I also think you could probably see with the proliferation of some of these new technology companies coming into market, where you've got a lower market cap, you've got higher growth rates, investors taking some money away from their winners and looking to get into next year's or next decades where it's. I think the question with regards to value stocks, I think you've got to look at what's driving those returns. When you think of value, you think of defensive names, but large majority of these indexes are basically financials driven. And as you know, coming out of the credit crisis, there was a tremendous amount of regulatory pressure put on banks. And so what you saw was while banks they got much better and more efficient with regards to using capital, they took their leverage down dramatically.

Chris Toomey: (10:06)
So the return on equity has come down dramatically from prior to the credit crisis. And so that's been a drain with regards to financials ability to outperform and keep up with technology companies. Now, if we do get a normal V-shaped recovery, and from a cycle standpoint, we see a regular cyclical type rally, which we're anticipating, part of that might include a situation where interest rates start going higher, and I think we're in a situation where interest rates we're at about 50 basis points, they were going towards 80 basis points and everybody was having a heart attack that rates were going higher.

Chris Toomey: (10:46)
I don't necessarily think rates go back to normal, but I think they do go higher. So I think there's a couple of things that would drive the value trade. One is, do we get a cyclical rebound? Two, do financials start to see improvement with regards to net interest margins? And three, do we continue to see the economic growth that we've been expecting to see?

Anthony Scaramucci: (11:14)
Is there a scenario where the bottom part of the S&P... So right now it feels like it's the S&P 10 or the S&P 15, and then the S&P 45, but really the bottom part of the S&P that sort of S&P 250 to 500 has really underperformed Chris, is there a scenario where it rotates and that starts to outperform? And if there is what would be the catalyst?

Chris Toomey: (11:43)
I think a catalyst would be that traditional V-shaped recovery, so that you typically see the names that have underperformed, like financials, energy materials, consumer discretionary outside of a couple of tech focus, consumer discretionary names, really starting to do well. And I think that is going to be basically driven by two things. One, we're getting a lot of results with regards to a vaccine and treatments over the next four to eight weeks with regards to treating COVID. Secondly, is continued stimulus with regards to fiscal stimulus. Now we're in a situation right now, between the Democrats and Republicans, where originally we were thinking there would be some sort of compromise going into the election, anticipating maybe another stimulus bill of about a trillion dollars.

Chris Toomey: (12:33)
The Democrats are pushing for over $2 trillion. And you're seeing everyone starting to ratchet down their estimates with regards to getting some sort of fiscal stimulus between now and the election. Our view is, we're probably more leaning towards no stimulus before the election than stimulus was before the election. But our view is that, shortly after the election, we'll see some sort of stimulus between one and $2 trillion. I think that type of stimulus will continue to power us through, and continue to increase GDP. And we'll start to see some of those other sectors start to participate.

Anthony Scaramucci: (13:14)
We're talking about a V-shaped recovery, but we've already had a lot of time be expended. We've got six months of time that's been expended, somebody who likes talking about it's a K-shape meaning, some of us are doing well and some of us are doing less well. Why are you still confident in a 'V-shape recovery'?

Chris Toomey: (13:37)
I think it's because if you look at the data, the data is telling you that it's V-shaped, if you look at retail sales, we're seeing consistent growth in retail sales. If you look at personal savings, the consumer's actually in great shape going into COVID and their balance sheets have actually improved during COVID just with regards to the stimulus checks that they're getting. If you look at the manufacturing, you're seeing manufacturing continue to pick up. And if you look at places like Asia and particularly in China, you've seen that they've actually recovered to pre-COVID levels.

Chris Toomey: (14:11)
So our anticipation is we get to pre-COVID levels of GDP, probably sometime in the second half of 2021. And as such, that should be anticipated by the market and continue with the follow-through. So while our base case right now on the S&P 500, doesn't provide a tremendous amount of upside on the S&P in general, our view is, is that there's going to be opportunities to go well above our bull case. If you look at different areas to take advantage of.

Anthony Scaramucci: (14:43)
When you were growing up in the business, as was I, we talked about asset allocation being 55/45, 60/40 depending on the person's age, 50/50, et cetera. But do you think the 60/40 model, the portfolio model of 60/40 is viable today, given where interest rates are?

Chris Toomey: (15:05)
No, I think that's the crux of, I think, asset allocation right now. Historically, it was always about that base of fixed income, where you were collecting a certain amount of cash flow and maturity was always going to provide you your principal back in return. And then you took risk on the equity side of your allocation. Right now, if you look at the global debt market about 85% of it yields less than 2%. So if you're a foundation, you're an endowment, you're an individual family that's looking to live off of your retirement assets, and you're only making two and less percent on your fixed income. There's no way that you're going to be able to meet those goals.

Chris Toomey: (15:45)
And so I think what you're seeing is whether it's from a regulatory standpoint, where regulators are saying, you know what, we need to provide high-net-worth investors and retail investors with options besides fixed income to provide that stability, to provide that cash flow, to offset the volatility of the equity market, or it's just the natural progression with regards to where people are putting assets. In our view, the traditional asset allocation has become very outdated and you need to start thinking differently.

Anthony Scaramucci: (16:19)
Let's stay on this for a second, [inaudible 00:16:21] huge low rate environment, obviously stocks have gone up in that environment, hedge funds have typically underperformed, just pockets of them done okay. But really since 2012, hedge funds have really not performed well. What role do you think hedge funds play in portfolios going forward?

Chris Toomey: (16:44)
Yeah, look, I think there's a reason why hedge funds have underperformed since 2012. You saw a situation where a lot of money was flowing into the space, and the pendulum swung too hard. And you had a lot of people managing money that probably shouldn't have been managing money and the amounts of money that they were managing. And so it was only natural that you'd start to see those opportunities dry up and hedge funds underperform. What I would say is, is what we saw in 2008, 2009, during the global financial crisis, and what we saw coming through the COVID crisis was that our hedge funds for by and large did exceptionally well this periods.

Chris Toomey: (17:25)
When you looked at macro, whether you looked at equity long short, whether you looked at multi-strat, with these periods of uncertainty and this periods of volatility, and really a dispersion between great companies and not so great companies, there was a real good opportunity to generate alpha. And in our view, we think that that's going to continue and that you'll to see continued amounts of capital flowing into the hedge fund space.

Anthony Scaramucci: (17:56)
One part of that market though, and the hedge fund side structured credit did not do well during the crisis. So, what happened there? What do you think happens there? And what do you say to your clients about that?

Chris Toomey: (18:09)
Yeah, look, I think it was a very scary time, very similar to the global financial crisis. When you're at dinner and you're receiving calls from friends on desks, friends at hedge funds, hearing rumors about this hedge funds going under, that hedge funds going under, these hedge funds over levered. And then when the banks came in and changed the margin requirements on a lot of this paper, we knew that there was going to be a bloodbath. And I think you notice this as well as I did when the treasury secretary is doing a press conference and talking about, on the run treasuries versus off the run treasuries, you knew they were looking exactly at where the heart of this problem was, which was overlevered players and structured credit. And what I'll tell you is, is it's the old adage, you could be right, but with the leverage, you might not be around long enough to see being right.

Chris Toomey: (19:06)
And so a big part of this I think is, was leveraging the space. I think a big part of this was players that shouldn't have been in the space, and the space had to have a shakeout. And so we saw that shake out, and it was painful for a lot of those players, but that pain provides opportunity for us going forward. And so in our minds, if you've got exposure to a structured credit, if you're looking to get exposure to structured credit, it's probably one of the few places in the bond market that is still attractive. And what I would say though, is I would be very selective with regards to how you play it, really looking at diversifying into managers and funds that have a long extensive history of being able to manage in that space, understand what the risks are.

Chris Toomey: (19:56)
Many of these pieces of paper are very esoteric and you really need to know what you own. And then they also have to have the wherewithal and the ability to withstand a potential pullback. We still haven't seen the stimulus come through that, we're expecting at some point, there's going to be a talk with regards to a double dip recession. If the economy continues to kind of mull along, we don't have a vaccine and we don't have stimulus. And so in that type of situation, you really want to make sure you've got a manager that's not necessarily selling into those markets, but taking advantage of that weakness.

Anthony Scaramucci: (20:38)
We both do it as a long time. This is my 32nd year doing this. I find that high net worth individuals, which I have been managing money for high net worth individuals for 32 years. And we have, Morgan has Alon who talked about the psychology of money. I find that people get very emotional with their money and justifiably. So I'm not saying otherwise, but it seems the best strategy is to be unemotional. And so when sharp selloffs take place, if the fundamentals are okay, it makes sense either to add money there or to stay patient. So have you found that to be the case with your clients? And if you have, what psychological things do you do to help your clients through those things? Or do you think about these things in a contrarian way?

Chris Toomey: (21:31)
Yeah, look, I think it's the crux of what we do, which is providing our clients with the right advice at the right time. And while you've been in the business a little bit longer than I have, we've been seeing one crisis after another-

Anthony Scaramucci: (21:45)
Don't rub it into me. The conversation was going great up until that moment, all of a sudden the conversation got a little disturbing, don't rub it in.

Chris Toomey: (21:55)
In fairness, we've seen quite a few crisis over our time in the market. And in each of those we've come out of them. And we've seen the guys that have been able to take advantage of those pullbacks. And in many cases, it's all about having a plan and being disciplined. So when you're talking to your clients and you're talking about what you're trying to achieve, in certain situations, when markets are elevated, when things are going along as they should, there isn't a whole lot to do. But when you do see those periods where the market sells off 30%, that's why we're here. That's why we've got cash. This is why we want to rebalance our portfolio.

Chris Toomey: (22:34)
You want to have something that's doing well when the market's selling off. So you have some dry powder to put into these markets that have become cheap and that you want to get exposure to. And so the good news is we left Lehman Brothers about 120 days before the bankruptcy. We brought in a lot of new business during the global financial crisis, and we did exceptionally well for a lot of these clients. And when COVID hit and the markets sold off about 30%, we were ready. We went back to the same playbook in 08, 09, and our clients were prepared for it. And so they were holding their noses like we were in some situations because, you don't know when you're going to pick the bottom, but you know, that the probability is that those times that you're going to get a really good return by doing the right thing.

Anthony Scaramucci: (23:26)
Well, let's talk about that because you had a pandemic, 1918 pandemic, 100 plus years go by, we have another pandemic. You did have the financial crisis seems like a dress rehearsal, frankly, for the pandemic, but your portfolio construction ideas and your view of risk management have been changed by the pandemic, or are you unchanged? Like what does the pandemic say to you about where you need to be from a risk management perspective? Or does it not say anything and just say it chalk it up to it being a meteor strike?

Chris Toomey: (24:05)
No, look, I think it's one of those things, what we have to be prepared for. We have to be prepared for the known unknown. And this is a situation where, who knew we were going to have this crisis coming? And so you need to make sure that you build portfolios that can withstand some of these pullbacks and that you're going to have the capital and the wherewithal with regards to take advantage of those cheaper prices and take advantage of that opportunity. So I think what it did was it just reinforced the fact that you need to stick to your knitting. You still need to have a plan in place, because these things are going to occur. They've been incurring probably every seven to eight years. And if you're not prepared, and know what you should be doing, you're going to miss them, or you're going to make a mistake.

Chris Toomey: (24:54)
I'd say the difference with regards to COVID versus GFC is the fact that interest rates now are so low and just having kind of a 60/40 portfolio, or having some long duration fixed income in your portfolio, was really going to be helpful in each of these situations. But now that rates are so low, you're not necessarily getting that reward that you used to get when the market sold off. And so you really have to start thinking differently. And so what it did is, it really is accelerating our asset allocation decisions in investing in other things like hedge funds and private credit and private equity, and in places like real estate. And so, getting some real stability on the other side of your portfolio with those types of asset classes, I think is really necessary just given the lack of opportunity on the fixed income front.

Anthony Scaramucci: (25:50)
All right, I'm going to turn it over to Darsi. He's been dying to ask you a few questions. You got a lot of questions in the queue and you got tremendous amount of participation today, Christopher. So I'm impressed with that. And let's start it over to John Darsi, who's going to try to out shine you and me now. So we get ready to me, get ready.

John Darsie: (26:09)
Of course. I want to build on, you've alluded to this a couple of times, and you just mentioned that again, the idea of trying to drive returns outside of the traditional core fixed income part of your portfolio. And even now with equities, having rallied back to highs, trying to drive returns elsewhere, we have a question about private equity, whether it's direct co-investment or indirect, and the need to have private equity in your portfolio to try to juice returns a little bit in this low interest rate environment, how much private equity is typical today, or should be typical in a balanced portfolio? And what sort of a max percentage of a portfolio that you would recommend the average client? Obviously, every client is different and I want to paint it with two broad strokes, but within a high net worth individuals portfolio, let's say what's the max percentage of private equity? And what's the role in the portfolio of that private equity allocation?

Chris Toomey: (27:00)
No, I think that's a very good question. And as I think you hit on every client's different and every client situation is different. And so when we're talking to our clients, we've got a general consensus within our investment committee with regards to, if we had a clean slate and we had no variables to worry about what would that model portfolio look like? And variably though, our clients don't have a clean slate. They own businesses, they have their own direct investments, they have their own return and risk parameters. And for that reason, we have to take those things into consideration when we're looking at how we build a portfolio for them, and making sure that we don't have outsized risks within one area of the portfolio, and not providing the type of balance that you need.

Chris Toomey: (27:51)
I think when you think about private equity, I think you need to think about it as a commitment. Because it takes a long time to put that money to work. It takes a long time for that money to get harvested. And you want to diversify against what we call vintage year risk. And so there's certain vintages, where there were great opportunities and you got great returns and there are certain years or certain vintages where the opportunities were not as great. And so what I would say is, is that broad-based private equity right now, is not an area that we think is very attractive. There's about a $2.2 trillion of cash sitting on private equity balance sheets, waiting to get put to work. And the market is still, if you look at it from a valuation standpoint, pretty highly valued.

Chris Toomey: (28:44)
Now we've got the flip side of that, of interest rates being relatively low. So financing these deals becomes a little bit more attractive. In addition to that, as Anthony mentioned before, a lot of this performance has been concentrated into a couple of areas in the tech space. But if you look at the S&P right now about the average stock, I think is down about eight to 10%, so there are opportunities out there. And so what I would say is, is within this kind of period, we would say the opportunity in private equity is probably below average. And so we wouldn't necessarily be aggressively allocating broadly to private equity funds. But we would maintain that commitment. And so that can be anywhere from 5% of a liquid portfolio to as much as in some cases, 30 or 40%.

Chris Toomey: (29:39)
If you take into some of clients who have direct businesses, where they own a private business, that can be North of 50%. And so what I would say is, is it's all about making the right blend and taking advantage of the opportunities that are there. What I would say is actually a place that we think is actually even more interesting is owning a publicly listed alternative managers. So if you look at that, those alternative managers have the benefit of sitting on $2.2 trillion worth of cash. We're in a period which might be one of the greatest opportunities that we've seen in distressed investing in alcohol time. Many of these companies are growing at over 15% and have a dividend yield more than the S&P 500. So, what we would probably be doing is investing in less private equity funds and probably investing alongside them and owning their own stock.

John Darsie: (30:39)
That's an interesting way to look at it. Pivoting to real estate for a moment. A lot of what we've talked about with COVID is that it's accelerated trends that were already in place in terms of digital work, things of that nature, but there's also been some situations where it's reverse trends that were in place in particular with urban real estate and especially urban commercial real estate. What's your view on the real estate market? What are areas that you think are beaten down that might be a good place for opportunistic asset allocation? In general, how do you teach clients to access the real estate market? And what's your view of this space as a whole, in terms of what segments of the market are attractive and unattractive?

Chris Toomey: (31:21)
Yeah, we think real estate is actually a very attractive place to be invested right now. Outside of what you read about constantly in the press about, the issues that New York is having in San Francisco and some of the other large money center areas, that were probably expensive going into COVID. And then as you mentioned, are now dealing with some of these new trends with versus to work from home and remote working. But I think if we look at it right now, right now we're building less homes on an annualized basis than the 1950s, and the population's increased about 62%.

Chris Toomey: (32:00)
We're in a situation where, three month inventory is increased over six months. It's the highest level since 1963. So there's no inventory, we're not building as many houses and you're in a situation where millennials are leaving the home and looking to move into a new house or new apartment and mortgage rates are at all time lows. So it's a very attractive opportunity for multifamily housing. We also, we're seeing migration of people from the North and to the South, and aren't enough office buildings in those locations. And so what we're typically also seeing is some real opportunity in office in the right locations. Now broadly speaking office is going to have some issues, particularly, in the Northeast and in some areas of California.

Chris Toomey: (32:57)
But we also see some opportunities in office particularly in the South. We also like triple net lease opportunities. And so there are a variety of opportunities outside of your own home, outside of owning a publicly traded REIT, where you can get diversified exposure into some of those markets in a thoughtful way. Where you're in a situation where even with COVID, rental collections and lease collections are at average or above average collections. And so you've got high quality assets, you've got good cash flows. In many cases, you also might have a situation where you also have certain tax benefits built into that. So we're not accountants, we're not tax experts, but there are some benefits for taxable investors owning real estate and depending on what type of vehicle you owe.

John Darsie: (33:55)
So your team services are wide constituency of high net worth clients, individuals, institutions, what are some new trends that you're seeing among potentially next generation, high net worth investors in terms of what they're looking for from their investments? So the question I believe is leading towards it. Do you see more of a tilt towards things like ESG and impact? And how do you quantify those when you're building a portfolio for an investor?

Chris Toomey: (34:23)
Yeah, look, I think ESG has been around for decades. I just think people probably haven't talked about it. And I think, the millennials have really made it a key point with regards to how they invest that it's not just about profits, it's about what these companies are doing to make the world a better place. And what you're seeing is, is I think with COVID and people be more thoughtful with regards to how their money's being managed, it again, is accelerating these trends. And what we're also seeing is more and more opportunities to take advantage of these ESG mandates.

Chris Toomey: (34:59)
And I don't know for a fact that this is true, but if you look at value indexes, they've been underperforming, growth indexes for some time, there is a larger proportion of energy and materials and value indexes, and there is not a lot of value in material investments in ESG mandates. And so, that could be one of the reasons why you're seeing a little bit more of a divergence between growth and value.

John Darsie: (35:30)
Yes, the chicken and the egg. Which one is it? Is it the fact that demand fell off a cliff while supply, obviously with the OPEX situation deteriorated for markets? Or is it what you're talking about?

Chris Toomey: (35:41)
And it very well could be both. It could be a situation where, we came out of the global financial crisis where markets have done well, it's been probably one of the weakest economic recoveries out of a big pullback, like we've seen. So you don't have that tremendous amount of demand for energy that you had going into it. And you're not in a situation where you're having a hard time finding supply. And so that's definitely got to be a weight with regards to energy companies, but I think ESG is also going to have an effect on that, on the energy and materials side, but also on the industrial side. And just in general companies broadly speaking. I think it also is seen with reverts to a real focus in, on some of these newer growth companies.

Chris Toomey: (36:29)
You're seeing what we call the next Fang. We put out a report a couple months ago, about 25 names, about $155 billion worth of market cap growing at over 10% peg ratios, less than two. And since the markets bottom, we're actually the next fangs are actually outperforming the fangs. And I think part of this is the fact that there's more opportunity there. A lot of these technologies, a lot of these opportunities are getting pulled forward, and people are looking to take advantage of that.

John Darsie: (37:07)
Last question, before we let you go, you're affiliated with Morgan Stanley, a great firm, and I know we have a lot of high net worth individuals within the SALT community who tuned into these talks. If somebody was a free agent out there right now, a high net worth individual or an institution, and they're shopping around for a financial advisor, why would they want to work with a group affiliated with a firm like Morgan Stanley with its resources and its depth of knowledge, make your pitch to a perspective client?

Chris Toomey: (37:35)
Well, thank you. This is what I do every day. [crosstalk 00:37:39]

John Darsie: (37:39)
You're pretty good at.

Chris Toomey: (37:41)
We're a $7 billion, wealth management team. We basically could do whatever we want. We could go independent, we could go work for another bank. We've made a conscious decision to do what's the best thing for our clients, which is work at Morgan Stanley. From a technology spend around cybersecurity and just making things easier for our clients, to the amount of a scale that we have built into our business, to our partnerships, with reverts, to third-party asset management companies, the product that's available to us. And most importantly, just being able to do the business that we do and provide the advice that we provide. During the COVID crisis, operating from 30,000 feet was not going to work.

Chris Toomey: (38:31)
You really needed to look at what was going on at ground level from things as nuanced is, on the run treasuries versus off the run treasuries to what's going on in the securitized credit market, to what's going on with reverse to margin loans and margin reserve requirements. And so being a part of an investment bank that has a strong capital markets influence, is providing us information with reverse to what's going on, on the ground level, and then having the deep relationships with some of the greatest investors, the world is known, provides us kind of that top down and bottom up information flow that really provides customized solutions for our clients.

John Darsie: (39:16)
Well, I'm sold, but I want to leave you a final word before-

Anthony Scaramucci: (39:20)
That was a ridiculously easy question. What you should ask them is who's going to win the next election? That's what you should ask. Okay. That was a ridiculously easy question, but you don't have to answer that to me. I'm sure there's Morgan Stanley compliance that would be putting you in a bad spot. We appreciate you coming on-

Chris Toomey: (39:38)
I [crosstalk 00:39:39] question for you Antony.

Anthony Scaramucci: (39:40)
You go ahead.

Chris Toomey: (39:42)
All right. So this all conference takes place in Las Vegas, Nevada in May, will there be a SALT conference in May of this coming year?

Anthony Scaramucci: (39:59)
No, probably not unfortunately. I don't see how we could do that given the guidelines and what we know from the World Economic Forum and the Milken Institute and so forth. Could we have an event in September? I think so. I think that's possible. I'll turn it back to John Darsi and he could be more declarative about it. The number one thing for us Chris, is we want to make sure everybody's safe and healthy. And so that's a priori. I don't think we can get that done by May. If I thought we could, we certainly would have it in May. John, do you want to add anything to that?

John Darsie: (40:35)
Yeah, just reiterating what Anthony said, the public health guidance that we've gotten is that the first half of 2021 is going to be challenging for large in-person gatherings. And we love doing the SALT Talks series, has been great to stretch the content out over the course of several months, as opposed to jamming it into three days in Las Vegas, even though Las Vegas might be a little bit more fun than Anthony is sitting at home in his cargo shorts and his blazer.

John Darsie: (40:57)
But we're anticipating doing another in-person gathering, likely in the second half of 2021, we have a few tricks up our sleeve and we'll make that announcement probably in the next couple of months about what that event is going to look like. But for the time being, we're engaged in the virtual events and content the way everybody else is. And it's been a learning experience for everybody and we've really enjoyed all the conversations we've been able to have, including with you.

Chris Toomey: (41:23)
I appreciate the opportunity. I look forward to seeing you guys in Vegas sooner rather than later.

John Darsie: (41:29)
Absolutely.

Anthony Scaramucci: (41:30)
You well Chris. See you soon.

Chris Toomey: (41:32)
Thank you [crosstalk 00:41:32].

Anthony Scaramucci: (41:32)
Great job. All right, all the best.

Matt Salloway: AR, VR & Artificial Intelligence | SALT Talks #71

“We want to be able to invest in companies that can change the world.“

Matt Salloway is an international business executive, venture capitalist, investor and attorney. He serves as the Chief Executive Officer of GSI Ventures, a top 50 Global Family Office, with a focus on venture capital and portfolio market expansion into the MENA region.

GSI Ventures stands for Growth, Sustainability, and Integrity – pillars that drive the firm’s investment philosophy. GSI deploys capital through a diversified investment approach across a variety of cross-border asset classes, while serving as a reliable partner that seeks to make sustainable and impactful allocations. His strategy also looks to the US for next-generation technology, where it can be grown and subsequently introduced to GSI Ventures’ home country of the Kingdom of Saudi Arabia. This is in lock step with Saudi Vision 2030, a strategic framework to reduce the Kingdom’s dependence on oil and diversify its economy.

Matt is also the Co-Founder and Managing Partner of SIP Global Partners (“SIP”), an independent, cross-border venture capital firm anchored by a top global corporate. Based in Japan, the US, and the Middle East, SIP targets market-expansion and value-add investments in high-growth US technology startups. It invests primarily in US companies driving the "Global Connected Economy" in sectors such as AR/VR/XR, artificial intelligence, machine learning, edge computing, digital media, network infrastructure (5G) and enterprise software. Matt is also a film producer.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Matt Salloway

Chief Executive Officer

GSI Ventures

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Rachel Pether: (00:08)
Hi everyone and welcome back to SALT Talks. I'm Rachel Pether. I'm a senior advisor to SkyBridge Capital, a global alternative investments firm, as well as being the emcee for SALT, a thought leadership forum and networking platform that encompasses business, finance and politics. SALT Talks is a series of digital interviews where we speak to some of the world's foremost investors, creators and thinkers. And just as we do at our global SALT events, which, unfortunately, we haven't been able to do this year, we aim to empower really big important ideas and provide our audience a window into the mind of subject matter experts.

Rachel Pether: (00:47)
Today, I'm very excited to be welcoming Matt Salloway to SALT Talks. Matt's the CEO of GSI Ventures, which is a top 50 Global Family Office that focuses on venture capital and business development or company expansion into the MENA region. He's also the co-founder and managing partner of SIP Global Partners, an international venture firm with offices in New York and Tokyo. Previously, Matt was the founder and managing partner of Salloway Law Group, an international law firm based in Manhattan, and he's also worked as a consultant with McKinsey and a research associate at Harvard Business School. And if that's not enough, Matt is also a successful film producer, with some of his credits including The Butler, starring Oprah Winfrey and Forest Whitaker; The Ides of March, starring George Clooney and Ryan Gosling; and The War With Grandpa, which actually opens in the U.S. this week, starring Robert DeNiro.

Rachel Pether: (01:44)
Just a quick reminder. If you have any questions for Matt during today's session, just enter them in the Q&A box on your Zoom screen. And with that, Matt, welcome to SALT Talks.

Matt Salloway: (01:55)
Thank you, Rachel. It's a pleasure to be here and so thankful for the opportunity.

Rachel Pether: (02:01)
No, we're very happy that you're joining us today. And we have so many subjects that we could go into, because you do wear a number of hats, but I'd really like to start with GSI Ventures, which is the Family Office that you run for a prominent Saudi. So, maybe you could tell me a bit about your journey and what took you to the Kingdom originally.

Matt Salloway: (02:24)
Sure, I'd be happy to. Just as background, I grew up in Boston, so spent most of my life there before moving to New York, where I've been living for about 16 years. Again, as you mentioned, trained as an attorney and then now got into what I am doing. And GSI is really a single family office that's focused on managing the assets and the affairs for this family. GSI stands for Growth, Sustainability and Integrity. Those are our core pillars and values that we live by. For me, getting into Saudi Arabia was sort of a very fortuitous experience. I was an attorney before, as I mentioned, and I started at a firm called O'Melveny & Myers, where I was working... Mostly corporate law, doing private equity and mergers and acquisitions, venture capital.

Matt Salloway: (03:21)
In 2004, when I started, it was really one of the most active times in the private equity market, with leveraged buyouts. I was representing companies like Apollo and JP Morgan Partners, and it was really great training ground. But for me, I really wanted to get into counseling, advising, guiding, really serving as a personal advisor that could help clients meet their goals. And being at a large firm was great training for me, but it wasn't necessarily where I wanted to spend the rest of my career. So, I ended up launching my own law firm, which I've now transitioned into doing the Family Office, but the law firm was really focused on helping high net worths, international families, companies, meet their goals.

Matt Salloway: (04:07)
And I actually had a great-uncle who was a very successful prominent lawyer in a small town in the United States and I used to hear stories about how he really added so much value to the lives of his clients and I wanted to replicate that. That was sort of the same type of thing that I wanted to do, and obviously New York City is a much, much larger, bigger place than a small town, but I wanted to provide that same type of guidance and counsel and I was fortunate to start working with clients in that world and started representing a lot of international families, and one of which still with today. A wonderful family, very humble, very sophisticated, but shares the same values, and I was just excited to get that opportunity to start working together.

Rachel Pether: (04:58)
So, let's take that acronym that you just mentioned, GSI. The growth, the sustainability and the integrity. What does that actually mean in practice? So, what types of investments are you looking at? And maybe you can also talk about the growth aspect, particularly in Saudi Arabia.

Matt Salloway: (05:16)
Sure. So, we started the Family Office in 2016. So, we've been evolving, as has the world been, and especially in Saudi, you see a lot of the changes that are occurring. But primarily, the goal of the Family Office is to manage the affairs of the family, to have the right portfolio allocation focused on capital growth, obviously capital preservation, and having the right diversification strategy, because as you may know, a lot of families in the Middle East and even internationally sometimes do get very concentrated in one part of the world or one asset class, and being fortunate to be based in the United States, a lot of our focus and my focus is helping to find the right opportunities globally and especially in the States and Europe, where we can really diversify the portfolio.

Matt Salloway: (06:06)
So, growth, sustainability are the core pillars of the Family Office. So, growth obviously is a very clear path and most Family Offices share that same vision. They want to make sure that the capital is going in the right direction. A lot of families get bogged down in spending patterns and also, again, concentration in areas that may be too [inaudible 00:06:30] liquid or not provide the right balance, and as we see in the economy, things change. It can change very quickly and you need to make sure you have the right balance in place.

Matt Salloway: (06:39)
Sustainability, integrity are also very core pillars. Integrity, I'll start with first. That's just a foundational aspect of how we do business, the people we want to work with, really sort of the way we want to have that reputation of being the right partners and the right investors. Sustainability is important as a long term goal. We've done some... Although we're mostly focused on our portfolio and our... Growing sort of that, those buckets, we're also focused on impact investing and we've participated in a... Couple years ago, a class at Harvard that brought together some of the largest international families in the world with two professors there, and we've wanted to be somewhat of a catalyst for that philosophy in the region, telling people that it is important to consider ways that you can use your resources to do good for the world and make a difference. It's not all about the bottom line. Although that is very important, it's nice to have some buckets where you can have impact on your society and the global marketplace, as try to do at GSI.

Rachel Pether: (07:53)
I'd love to come back to that point on impact later, and also sort of weave that into the work that you're doing on the film side. But you mention the concentrated portfolios, and one thing I've noticed in the Middle East is there is a huge home bias here, right? So, a lot of people are investing in the region. And I know that part of your mandate is also to bring companies to the Middle East, so how do you balance that between sort of the diversified portfolio but also not having so much of a home bias? How do you manage those two pieces?

Matt Salloway: (08:26)
Yeah, it's a great question. I think the way that we look at our investing is somewhat of a strategic. So, when we invest into technology, and specifically in the United States, we look for ways that we can take that technology as a strategic partner and grow it into the region. So, there's somewhat of a... It's, in a way, a great way to improve our investment chances because we have great infrastructure in the region, and to be able to take an investment that we think is best in class and then introduce it into a country like Saudi Arabia, which is a difficult market to penetrate unless you have on-the-ground resources, and be able to bring the best in class technology into the country, which is very much aligned with what they're trying to do in Vision 2030, which I know we'll probably talk about a little later.

Matt Salloway: (09:19)
But we want to be able to invest in companies that can change the world, and that's been a big focus of GSI. It's been a big focus of SIP, of investing in the next generation of world class transformational technology. And that technology is not only a good investment, but it also can improve the economy of the countries that we're trying to grow in. It can add jobs. It can improve the quality of life. It can make a real difference in the region, and that's how we see ourselves as somewhat of a strategic partner, where we're not necessarily overlooking the home country where we want to have a lot of influence and connectivity. But it also is a way that we can diversify our investing and get access to best in class technology because there's also an interest in growing those companies globally.

Rachel Pether: (10:16)
You mention SIP, which is one of the other hats that you wear, SIP Global Partners, and that's tied to the Japanese institutions. What do you see happening with Japan with regards to technology and are you bringing some of those into Saudi Arabia as well?

Matt Salloway: (10:34)
Sure. So, SIP was founded about a year ago to specifically address what we saw was the opportunity in Japan. Now, historically, Japan has been a leader in innovation and technology. In the 1970s, 1980s, I remember as a kid having the Panasonic television, the Sony Walkmans, these very sleekly designed and the hardware was really innovative. That has changed over time in Japan and you really haven't seen significant amount of innovation coming out of Japan in the last 20 to 25 years. So, why is that? I mean, it's hard to understand because Japan is the third largest economy. Japan has a very sophisticated workforce. Japan has just as much intellectual property as other countries. It's a stable democracy. So, why are they not innovating at the same extent? [inaudible 00:11:36] Excuse me.

Matt Salloway: (11:36)
And the reason, at least in what I've heard and what I've seen, spending a lot of time there, is that, first of all, there's a culture that's somewhat risk-averse and it's better to not fail than to succeed, in a sense. I mean, that's somewhat of a underpinning philosophy. I personally, as an American, have lived by the Teddy Roosevelt, who used to say, "Far better is it to dare mighty things even though checkered by failure than to dwell in the perpetual twilight that knows not victory or defeat." That's how a lot of Americans live. We'll take risks. And a lot of other countries too. But Japan is a little bit more risk-averse.

Matt Salloway: (12:17)
So, all that being said, that is starting to change and evolve in a positive way. So, I'll give you just a couple of statistics. There's a university called Keio University in Japan which was the university that gave the country the most entrepreneurs. So, if you were going to go into a start-up, you normally would graduate from Keio, not the University of Tokyo. So, I think 10, 15 years ago, 30% of the entrepreneurs were coming out of Keio and maybe 2% were coming out of University of Tokyo in that realm. That has actually switched in recent years. So now, University of Tokyo is producing a lot more entrepreneurs that are going into start-up companies.

Matt Salloway: (13:03)
So, as that's starting to shift and as you're starting to see more money being put into venture capital domestically in Japan, there is starting to be more of a focus on innovation and technology. Part of that is focused on the essential need for them to innovate because of the aging problem. Japan has, I think... The median age is 48 years old. It's the second oldest demographic in the world. As the country continues to age, there is going to be an impact on the economy. So, there is a real need for the country to start innovation and that's where we believe there's an opportunity for us to come in as SIP.

Matt Salloway: (13:49)
We are an independent venture capital cross-border technology company. Japan has mostly corporate venture capital investors. Fifty percent of the money that's going into Japanese technology is coming from CVC, corporate venture capitals, in Japan. So, as an independent venture fund, which we are, we believe that there's a strong opportunity to bring best in class technology, which the country's hungry for, which the country needs, from other places like where we're based in the United States, into the country where we have a very strong infrastructure and connectivity.

Matt Salloway: (14:26)
So, that's a bit long-winded, but a bit about our thesis into Japan, where the opportunity is, how things are now starting to evolve. And we're very excited about what we're doing there and the future of Japan's growth and innovation.

Rachel Pether: (14:43)
Yeah, that's really interesting points that you made on the demographic side as well, because I guess when you look to the decades when they were strong, the seventies, the eighties, the nineties, the median age was much lower then. So, I wonder if that sort of plays into the cultural aspect as well. But it sounds like, from what you're saying, you are now seeing a new wave of entrepreneurs that aren't so scared about failing.

Matt Salloway: (15:08)
Yeah. [crosstalk 00:15:09] It's changing slowly and I would caution... Even though [inaudible 00:15:13] again, my opinions. But as COVID has come in unexpectedly, it may slow a bit, but we are seeing people leaving and going into start-ups because in Japan, it was very accepted to just go to a large corporate and spend your entire career there. It was very stable. It's prestigious. It's safe. So, you go and you work for a conglomerate and you spend your career there. But now, it's becoming more accepted and you're seeing a lot of changes that are happening. Slowly, but it's occurring.

Rachel Pether: (15:46)
Yeah. They were the sort of ultimate salary man, wasn't it?

Matt Salloway: (15:51)
Yes.

Rachel Pether: (15:52)
Your job for life kind of aspect. I also wanted to... Talked about Saudi and Japan and maybe go a bit deeper into geopolitics. We actually had... I don't know if you saw the SALT Talk. We had Dr. Kai-Fu Lee on a previous SALT Talk and he was talking about artificial intelligence and how China and the U.S. were the clear front-runners in terms of an aggregate score, which is research plus implementation plus monetization. How do you see the tensions...? You know, you're on the ground in the U.S. How do you see the tensions between America and China as it relates to AI? And I guess that's part of the broader question about how geopolitics sort of intersects with venture capital?

Matt Salloway: (16:39)
Yeah. It's a great question and we see it every day playing out with news flashes and... I guess let me take the geopolitical question. The way that we see it is really there's a bifurcation in the world in terms of how countries are making alliances. And they're not necessarily strict formal alliances. They're more loose. But if you want to look at it... And I'm giving generalizations here... Look at it from a broad perspective, you've got China, Russia, Iran, Pakistan, all sort of on one side of the world. And then you've got... And again, broad generalizations. You've got the United States, Japan, Saudi Arabia, Europe, Israel. You've got sort of this sort of loose affiliation and that sort of relates to inward and outward investment flows, intellectual property, transfers and exchanges, knowledge transfers. It really relates to a lot of various aspects of business and collaboration.

Matt Salloway: (17:47)
So, I think, number one, with China and seeing what's happened with Firma and the changes... I mean, we've seen, statistically, tremendous change from the United States investing in China. I think... Again, I'm trying to recall numbers, but I think it was 20 billion was invested a number of years ago into China. Now, it was five billion most recently. And same with Chinese investment into United States has really, has had to decrease. So, there's now opportunities for other people and other players to step up. Number one, we see Japan as a very interesting country that could fill some of that gap. And again, that's why we're very bullish and very involved in Japan, so Japan can now start investing more into the United States. There's also the opportunity for the U.S. to invest into Japan. Again, very large... Third largest economy. Very stable country in terms of government, democracy. Very, sort of, sophisticated workforce.

Matt Salloway: (18:50)
The other thing I would mention is Israel. And with the Abraham Accords, which was a recent piece of agreement between the United... I'm sorry. Between Israel and the United Arab Emirates, where you are, Rachel, as well as Bahrain. I think it's a tremendous opportunity for growth in the Middle East. Israel, just taking a step back, is really the size of New Jersey. So, it's a small, small country. It has nine million people. It's 72 years old. It's a relatively young country, but statistically, per capita, it has the most venture capital technology and start-ups in the world and we've seen some tremendous technologies come out of Israel. You've seen Waze, the navigation technology. There's a mobile [inaudible 00:19:47], the recent huge acquisition that happened for autonomous driving. There's a company called PillCam, which is a medical technology, which you take the pill and it can video your diagnostics for health care. EXO, there's an exoskeleton company which can help people without limbs walk.

Matt Salloway: (20:12)
There's... And just, historically speaking, as a side note, instant messaging came out of Israel. The zip drive, the SanDisk zip drives came out of Israel. Operating systems for Microsoft. So, it's a really tremendous place, and I think having now this collaboration together between countries will be significant for the future of development of the venture capital ecosystem.

Rachel Pether: (20:40)
And so, when you're looking at some of these cross-border transactions, particularly bringing some of the verticals into Saudi Arabia, what are some of the top three verticals that you're looking at in terms of inward and into Saudi?

Matt Salloway: (20:55)
So, I guess let me... I don't know, again, in terms of the viewers, if they know a lot about Saudi Arabia, and I didn't speak about it and I'd love to give a little context to answer that question. So, Saudi Arabia has historically... There's... To give people a little background on Vision 2030, which was created a number of years ago, which was focused on finding ways to diversify the kingdom away from oil assets, to make sure the economy could sustain. So, Vision 2030 had all these reforms and goals, some very aspirational, but tremendous plan for the country and the future. As part of that, we're seeing a lot of the impact of those plans and goals and government support.

Matt Salloway: (21:52)
So, I want to talk, I think, about two areas that I see as being the most areas of... Which answers this question in terms of verticals, of growth in Saudi Arabia. I think the first is technology venture capital and the second is entertainment and tourism. I'm generalizing and grouping these together. But if you look at venture capital and technology... So, Saudi Arabia was never... In recent years, was not a start-up hub, but it's starting to become a start-up hub. In recent years, it's become the number three most active economy in MENA in terms of venture capital investing and technology, behind the Emirates and Egypt. So, it's starting to see a little bit more growth trajectory in that area, and that's interesting because Saudi Arabia is the largest economy in the Middle East and it has, I think, 70% of the population is under the age of 30 or 35. So, very young demographic. People that are very technologically advanced and with the government really supporting technology and entrepreneurs.

Matt Salloway: (23:14)
PIF created the large... One of the largest [inaudible 00:23:17] funds, [inaudible 00:23:18] that's putting close to a billion dollars or over a billion dollars, I think, into local, regional start-ups. The Saudi Venture Capital Company, SVC, was created with $750 million to invest into the region. So, there's a lot of government assistance that's being helped and pushed to encourage start-ups and technology and we're seeing the results. So, I think in 2020, there was 95 million invested in Saudi start-ups, which, with COVID and some of the just world events, that's incredible. That's the largest ever, a tremendous increase. I think in 2015 it was seven million. So, you see a really big shift.

Matt Salloway: (24:03)
In terms of the industries in technology and venture capital that we're seeing, I'd say there's a few. The first is e-commerce. That's been a very active area. A company called Jahez, which is a grocery delivery company... They recently had one of their largest rounds, this year. I think it was around $36 million, or they've raised 36 million for the company. Another company and area that we're seeing growth in Saudi is education technology. There's a company called Noon, which is... Noon Academy, which raised $13 million recently, which is a online educational company. There's a lot with financial technology, e-payments and digital payments and e-wallets, those types of things, that the country is focusing on. Cybersecurity is another area that the country is focusing on.

Matt Salloway: (24:58)
So, those are some of the areas in technology and venture capital. We as a venture capital firm are also a beneficiary of some of the government initiatives. The government set up, through SAGIA, which is the Saudi Arabia General Investment Authority, a venture initiative where it's trying to attract the best global venture funds into Saudi Arabia, and we recently were granted, as part of that program, to get a license and be involved. So, technology, venture capital, those areas are really growing significantly.

Matt Salloway: (25:35)
The other area, very quickly, is the entertainment and tourism. So, I'm sure... I don't know if most of the viewers have been to Saudi, but historically, it was very hard. You had to get the right visa. Even myself, I had to have a special visa. They created a system where 49 countries around the world can now visit Saudi Arabia as a tourist for 90 days. And you can get this very easily and quickly online. So, there's a real focus on bringing people into the country.

Matt Salloway: (26:06)
On the other side, there's a focus on keeping people in the country. And Saudi Arabians... Having worked with families there for the last 10 years, people travel. A lot of the country spends time in Europe and the United States and Dubai, so they spend a lot of money elsewhere. The government is focused on trying to keep the people in Saudi longer during the year and spend more money, spend more of their earnings in the actual country. So, there's been a huge focus on tourism and entertainment. As examples, the country opened movie theaters. Thirty-five year moratorium was on movie theaters in the country. Now there's movie theaters. There's now live music. When I was there, there were live music concerts. The WWE signed a 10-year deal with the government, so they're bringing in very well-known players. Formula One was there recently. They're building a live music hall. So, there's a tremendous amount of progress, I'd say, in that space.

Matt Salloway: (27:09)
One last point. Seasons, which is the sort of large malls and shopping areas that have been created all across the country, are a result of the government and getting people... And I've been to the Seasons a few times. Bringing the best restaurants, the best stores, into the country and subsidized significantly by the government. But you walk around and people are very happy they're able to get some of the food and products that they used to get in Europe and the United States. They can now get it in Saudi. So, it's a really exciting time and there's a lot of change and progress.

Rachel Pether: (27:46)
No, I completely agree. I've only been going there for a couple of years, but on every successive trip, you notice at least 4,000 things that have changed from the last time. Conveniently, you talk about opening movie theaters, which is a very nice segue way to another piece that I want to talk to you about. We've had a lot of audience questions come in as well, so I'll go to those in a minute. But I want to pivot from the use of technology to do good to looking at film and how that can positively affect society. I did mention, but I'm going to mention again, that you have some pretty impressive movie credits on The Butler, The Ides of March and The War With Grandpa.

Rachel Pether: (28:27)
So, what led to your interest in film, because this seems to me quite separate from the Family Office [inaudible 00:28:34] things. So, I'd love to know more about what brought that into your life.

Matt Salloway: (28:39)
Sure. So, for me, film has always been a tremendous vehicle and medium to inspire people, to educate them, to change the world, in a sense, in some small ways. So, I've always been very passionate about film. In some ways, it's like venture capital from an investment perspective and looking at investment structures. And being a lawyer, when I started my firm, I was doing a lot in film in terms of distribution, film finance, representing people in the business. But it's a really incredible area to influence society. And as an example, The Butler, which we made with Forest Whitaker and Oprah Winfrey, was a true story about a butler who served for seven presidents in the United States. And the story is really a journey through the civil rights movement, culminating with Barack Obama becoming president.

Matt Salloway: (29:38)
And my mother... A lot of what I do has also been influenced by my family, and my mother was quite involved in the civil rights movement in the United States. My parents are also very involved in philanthropy. My grandmother started a nonprofit in the 1950s with some other women in Boston, helping mentally ill, homeless people, battered women. My parents actually now run that same organization in their retirement, all volunteer. So, I was raised with some of those values of wanting to have impact and make a difference, and that's part of what drives me. It drives me, obviously, in the Family Office. It drives me in the venture fund and it drives me across the board in film. All of these are ways that we can make a difference. Obviously, still being successful as a business person and meeting our business goals, but having positive impact on the people, on the world, on a society that we're interacting with.

Matt Salloway: (30:37)
So, that's the way, for me, film has been really an amazing vehicle for that. We have a bunch of other projects that are coming out. In addition, War with Grandpa, as you said, is starting on Friday. It's coming out across the United States. It's a heartwarming family comedy with Robert DeNiro, Uma Thurman, Rob Riggle, Christopher Walken, Jane Seymour. It's directed by the SpongeBob creator. So, it's a really, really wonderful story that's based on children's book about a grandfather that moves back in with his daughter and her family, and he takes his grandson's room and they start a bit of a war against each other. And we're excited for that to be released.

Matt Salloway: (31:22)
We're also working on a film that's called Worth, which is the story of Ken Feinberg, who was the 9/11 special master and really had to determine the value of human life. He was entrusted by President Bush and Congress in awarding monies to 9/11 victims' families, and he had to go through the process of interacting with families to figure out what was the value of that human life that was lost, which was a tremendous... Tremendous story, which we hope to release next year on the 20th anniversary of 9/11. And then we're working on a couple other projects. One is the story of the first female White House journalist, Connie Lawn, as well as a sequel to Dances With Wolves that we're excited about.

Matt Salloway: (32:10)
So, again, very broad and diverse, but a nice balance of opportunities that really make a difference, hopefully, in the world.

Rachel Pether: (32:22)
That's fabulous, and I think The War With Grandpa, probably many people have experienced that during COVID, haven't they? I know I would say 50% of the people I know have moved back in with their parents or somehow the family's been consolidated again. So, I'm sure that will resonate with a lot of people.

Rachel Pether: (32:40)
We have had so many questions coming in from the audience, so I am going to address them now. Broadly, they sort of fall into film and venture capital, so I'll start with some of the venture capital focused questions. In your opinion, what makes a unicorn, given that you see these deals all over the world?

Matt Salloway: (32:59)
Yeah, it's a great question, and obviously the... It's the Holy Grail for what venture capitalists look for. I think I read a statistic that unicorns... Your chances of becoming a unicorn are... Out of five million start-up investments, three become unicorns. So, it's very, very competitive and obviously that's what we aspire to. I think there's a couple... There's probably two points I'd make. The first is I've always believed in timing being a huge part of life, of business, and I don't know if a lot of the viewers know Wayne Gretzky, but he was really one of the most famous professional hockey players, professional athletes. And he used to say that, "I skate to where the puck is going, not to where the puck has been." And I think that's a huge part of becoming a successful start-up, is knowing where technology is going and being able to follow your instincts and follow the data to make that decision.

Matt Salloway: (33:59)
I think the second part of that is... And I've created a silly acronym for the way I think about unicorns. It's an investment that I don't want to miss, M-I-S-S. And that stands for really four things. One, management. So, who are the people that are going to be driving this opportunity? For me, I've invested, as a fund and as a Family Office, in people that we have longstanding relationships with. One of our portfolio companies is someone I've known for 20 years and he's one of the most successful venture capitalists in the United States. But he knows how to start a company. He knows how to also bring it to fruition. It's not just about having a great idea. It's being able to execute. So, it's the management team.

Matt Salloway: (34:49)
"I" stands for integrity. We talked about this earlier, but it's all about your reputation. It's all about trusting the people you're investing in. There's so much that you are putting into as investors in private equity, hedge funds, venture capital. You're entrusting your resources to other people and we've seen a lot of people get burned. We've seen there are a lot of unethical and unscrupulous people, so you really have to do the best you can to trust who you're working with. And it's about that belief in who you're partnering with.

Matt Salloway: (35:26)
"S" and "S," the last two. "S" is sales. So, having the right sales strategy. You can have a phenomenal idea, but it doesn't mean that you're going to be able to sell it. And there's a lot of reasons how you sell. But you have to be passionate in the way you sell. You have to have the right people, the right connections, the right strategy. And then, the last thing is size, and I think you can have a great idea that you can sell, but it has to be sold to the right size, a sizeable market, in order for it to be a unicorn and to be profitable.

Matt Salloway: (35:57)
So, you have to have those, I think, those factors. Those are the four factors that I look for when I'm thinking about a unicorn.

Rachel Pether: (36:06)
Excellent. Thank you. I think that's the lawyer in you creating acronyms for everything, but it's good that you've got it in a structure. And we've got a question from Ken and I'm going to read out his name because he's such a great SALT Talk supporter, so thank you for your question, Ken Lustig. Matt, what are some of the ways that you help your portfolio companies develop opportunities for their products or technologies in Saudi Arabia? Can you give some tangible examples on that?

Matt Salloway: (36:35)
Sure. I think it ranges from a variety of alliances and partnerships. The first is the most basic, which is saying, "Look, you want to grow into Saudi. Let us give you some advice. Let us introduce you to the right people, the people that we think are knowledgeable in this space. Let us be a resource for you." Then it can get a little bit more active where we'll help set up an office and create a somewhat of a joint venture or partnership where we will help create the operations to manage this business. And again, it depends on the sectors, it depends... This is a broad answer, but our goal is to really open up access to a marketplace that is quite significant and also very difficult to get into. They're now changing and attracting a lot of foreign investment and people... It's becoming easier to do business in Saudi, but you still really need on the ground assistance.

Matt Salloway: (37:45)
And we see the same thing, obviously, in Japan. We see Japan as a springboard, also, to the rest of Asia. So, if a company can grow into Saudi, if it can grow into Japan, it can then also start growing into the rest of the region, which is also significant. And the same... Same is the case for the Middle East. There's a lot of opportunities throughout MENA for growth, depending on your technology company and product.

Rachel Pether: (38:15)
And you did touch on, before, the Abraham Accord and the relationships there between UAE and Bahrain. Do you think there's opportunities to look forward to there within Saudi as well, with some easing of diplomatic tensions? And how do you see that sort of Saudi/Israel partnership evolving?

Matt Salloway: (38:35)
Sure. I mean, it's... Look, this is only my personal perspective. I have no inside information. But it sounds, from what I've read and what I've seen, that there's a real growth in collaboration and it sounds like, hopefully, optimistically. For me, the more countries that can be allied and doing business together, the better it is for the entire world for us to grow the right kinds of technology. But from what I've heard... And I think there was an interview with one of the members of the royal family recently, talking about Israel and the technology. I read it online on one of the... It was Bloomberg or one of the other news outlets. So, I think that there's continuing to be a greater dialogue. Also, with Iran and some of the controversies and the complexity of the region, I think there's more reasons for countries to be closer in partnership and working together. So, I'm optimistic. I think it looks like there are other countries that are also in the region that might... Oman, that may follow as well. So, it's a really interesting story to watch.

Rachel Pether: (39:55)
Excellent. Thanks [inaudible 00:39:56] so much for that. And we've got a quick question on Japan as well. The way you're... When you're looking at the Japanese venture capital system, are you seeing it concentrated in certain areas, maybe such as automation? And if yes, could you give some specific examples of what you're seeing there?

Matt Salloway: (40:16)
Yeah. I mean, it's a really interesting question. I think there are a couple areas where there is a strong area of growth. Cybersecurity is one area where I think... Where we've actually had... My partners in Japan have brought companies, great technologies, into the region. Cybersecurity was also very important for the Olympics, which didn't happen, but the government was very focused on finding and creating best in class technology practices in the country. So, cyber's one area. I would say aging, digital. For the aging problem, there's a digital health care component. So, because you don't have enough people to care for the aging population demographic, there's a lot of advances that are happening in digital health which relates to AI, being able to create... I know that I read about some products that were helping care for the elderly, which there may be some automation in there, that are being developed.

Matt Salloway: (41:27)
So, I think the country is... It's still very strong in robotics. It's still very strong in automation, in infrastructure. The bullet train, obviously one of the most advanced technologies, which has been around for a while. But I think they're starting now to broaden and to get... To have interest in best in class technologies globally that are outside of their traditional scope, and that's where... Again, where we've come in as SIP. My two partners in Japan are... One of them has been in Japan for many, many years. He was the CEO of a start-up that became public. He was the first foreign hire in Netscape. His father was actually the first venture capitalist in Japan. He brought the LP system into Japan in the seventies and co-founded JAFCO, which is a very storied institution.

Matt Salloway: (42:21)
So, we have a lot of expertise on the ground there from a venture capital start-up perspective and we're also anchored by one of the largest corporates in Japan that wanted access to technology. So, with all of sort of our expertise there, we believe we're very poised to bring a lot of diversity and interests into this massive market.

Rachel Pether: (42:45)
Can you give me some examples of some of the portfolio companies that SIP has invested in to date?

Matt Salloway: (42:52)
Sure. So, we have four companies, three that we have officially announced and one we're announcing later this month. But we've tried to focus on early growth stage, Series A, Series B, companies that are globally focused, and we believe that we get access to a lot of these companies not only because I talked about integrity and our reputation and our capital, but because a lot of the founders want access to these massive markets. So, we're getting the best in class access to deal flow, to best in class technology.

Matt Salloway: (43:29)
So, the companies that we've invested in... One is a company called Croquet, which is a web infrastructure. It's an operating system, co-founded actually by Alan Kay, who was the father of the personal computer. He was Steve Jobs' mentor. And it's now being run by David Smith, the former CIO of Lockheed Martin. Company's fascinating. We were... We have a board seat. We're one of the first investors in this company now, in this version of the company. We also have an investment in a company called Parallel Wireless, which is a 5G technology co-founded by Steve Papa, who is a multi-unicorn founder. I actually met him when I was... That year I spent at Harvard Business School. Got to know Steve and have kept a relationship. He founded Endeca, which he sold to Oracle for over a billion dollars. He's one of the founders of Toast, another unicorn. Really fantastic venture capital investor and also operator.

Matt Salloway: (44:30)
We also are an investor in a company called Fable, which is a animation design tool which we're very excited about. And the fourth company, which we'll release more later this month, is an AR technology that was 300 times oversubscribed. It was a very competitive investment. We led that round and it's really by one of... Co-founded by one of the top gaming technologists in the world.

Rachel Pether: (45:03)
Incredible. And on the SIP and also, I guess, GSI as well, we've had a few questions coming in. I'm going to group them together. Sorry everybody. But we've had a few questions coming in on the co-investment and syndication and LP front. How do you normally structure your deals and how do you go about finding other LPs and co-investment club deal partners, etc.?

Matt Salloway: (45:28)
Well, we... You know, we look for... We have been blessed to really create a large... A very strong network of Family Offices and investors. Some strategic, some that are people who are operators or have access to strategic partnerships which are quite attractive. But we've been blessed, having built, I think, a strong reputation. As Warren Buffett likes to say, I think it takes 20 years to build a reputation and 20 seconds to ruin it, which we've... Number one, not only because it's the right thing to do, which is really what drives us being good partners, having integrity, being reliable... And it's why we've had such a great strong network and co-investment partners. But it's also about your reputation and once you lose that, that's all you really have.

Rachel Pether: (46:27)
Yeah. You've shared a number of really great quotes during this discussion, but that one from Buffett was definitely a good one. We are over time, but I really like this question, so I'm going to take an executive decision and ask it to you anyway. Are you ever going to make a science fiction movie and combine your knowledge of film production and technology? And if so, which science fiction movie would you want to remake?

Matt Salloway: (46:56)
Wow. That's a fantastic question. So, the answer is hopefully one day. I think some of the technologies that we're seeing could be quite relevant in the cinematic world. I would say that there's actually a film that we're currently developing which is a strong AI technology-based film, which is just completely fortuitous. But we're actually developing this film currently with two partners, and it's a fascinating story and it does leverage cutting edge technology. So, I think that this will be an area where I will marry sort of my knowledge and connectivity in the cutting edge technology to the filmmaking world.

Rachel Pether: (47:47)
Excellent. Well, thank you so much, Matt. It's been a pleasure speaking to you today. I knew it would be just as much fun as ever, so thanks so much for your time and sharing your insights with us.

Matt Salloway: (48:00)
Thank you, Rachel. It's been an honor to be with you and I'm so thankful for the opportunity.

Seke Ballard: Investing in the Cannabis Industry | SALT Talks #70

“If you can't get the loan to purchase that starter home, or if you can't get the working capital loan to grow your business, then your ability to grow wealth over time is undermined for that reason.”

Seke Ballard is the Founder & CEO of Good Tree Capital, a financial technology firm that grants loans to vetted, licensed cannabis companies. After graduating from the University of North Carolina, Seke spent two years as a Peace Corps Volunteer working with small businesses in the Republic of Georgia. After leaving the Peace Corps, Seke earned his MBA from Harvard University and subsequently spent years working for Procter & Gamble and Amazon. In 2015, Seke started Good Tree Capital, based upon his proprietary loan algorithm and with a goal of balancing available economic opportunities for qualified borrowers.

When Ballard’s father went to banks seeking a loan in order to expand his local logging business, he was rejected by every bank, not because of the business fundamentals but because of the color of his skin. This motivated a desire to develop a more equitable model of evaluating applicants to remove the biases that have existed. “The people who are ultimately declared to be credit worthy (using this new model), which are the people who ultimately receive the financing they start to look a lot more like society at large.”

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Seke Ballard

Founder & CEO

Good Tree Capital

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Joe Eletto: (00:07)
Hello everyone. Welcome back to SALT Talks. My name is Joe Eletto and I'm the Production Manager of SALT, which is a global thought leadership forum and networking platform encompassing finance, technology, and politics. SALT Talks is a series of digital interviews with the world's foremost investors, creators and thinkers. And just as we do at our Global SALT Conferences, we aim to both empower big, important ideas and provide our audience a window into the minds of subject matter experts.

Joe Eletto: (00:35)
And we're very excited today to welcome Seke Ballard to SALT Talks. Seke is the Founder & Chief Executive Officer of Good Tree Capital. A financial technology firm that grants loans to vetted, licensed cannabis companies. After graduating from the University of North Carolina, Seke spent two years as a Peace Corps volunteer. Working with small businesses in the Republic of Georgia. During his time in Georgia, Seke became passionate about the role of capital and the creation of wealth and economic development.

Joe Eletto: (01:03)
After leaving the peace Corps, Seke earned his MBA from Harvard University and subsequently spent years working for Procter & Gamble and Amazon. In 2015, Seke founded Good Tree Capital with a goal of balancing available economic opportunities for qualified borrowers. Moderating today's interview is Sarah Kunst, who actually just had her SALT Talk last week with Anthony. Sarah is the Managing Director of Cleo Capital. Sarah founded LA Dodgers backed Proday, and has served as a senior advisor at Bumble where she focused on their corporate VC arm Bumble Fund.

Joe Eletto: (01:38)
Sarah has been named a future innovator by Vanity Fair, Forbes Magazine 30 under 30 and a top 25 innovator in tech by Cool Hunting. She has been recognized for her work by Business insider as a 30 under 30 Woman in Tech and Top African-American in Tech & Pitchbook Top Black VC To Watch. She's also honored as a top woman in STEM, by Create & Cultivate and Marie Claire Magazine named her a Young Gun to watch. Marc Andreessen named her one of his 55 Unknown Rock Stars in Tech. If you have any questions for Seke during today's talk, please enter them in the Q&A box at the bottom of your video screen and now I will turn it over to Sarah to conduct today's interview.

Sarah Kunst: (02:18)
Thank you. Thanks Joe. I'm so excited to be back here and to be talking with Seke about all things, wealth creation, debt, the economy, and my favorite coping mechanism besides wine during COVID, weed. So, with that Seke, why don't you, we just heard your background which is amazing, but why don't you kind of give it to us in your own words, how you ended up starting your company?

Seke Ballard: (02:46)
Absolutely. I'm a product of rural North Carolina. My hometown has a population of 800 people, and I came from a huge family. And I always looked up to my sister who was kind of a boss when we were growing up. She was MVP of her high school basketball team three years in a row which is crazy to me. It's like you come on as a freshmen and then sophomore year you're just beating on all these people. And while she's doing that, she also graduated valedictorian. So it's like what's not to love. And so, she went to Governor's School, I went to Governor's School, she went to University of North Carolina, I went to University of North Carolina, and that's pretty much where our paths diverged. From there as Joe mentioned in the introduction I joined the Peace Corps and the Republic of Georgia.

Seke Ballard: (03:45)
And for those who are as geographically challenged as I am, Georgia's sandwiched between Russia and Turkey with the Black Sea to the West. And I was stationed in this place called Batumi. Which I might get beat up for this analogy but Batumi is like the Miami of the former Soviet Union. Which is pretty cool place to be. And while I was there, I convinced the organization that I was working in to do this idea that I pitched them that was really a rip from something that I learned in college the Carolina Challenge but we called it the Batumi Challenge. And really what we did was we went out into the community and we prospect it for great companies.

Seke Ballard: (04:37)
So we were in the bazaars talking about entrepreneurs and really getting a sense of who the highest potential companies were and then we gave the money. And when we saw that money come back to us, it really sparked this curiosity around. What does it mean to find the most efficient, most profitable destinations for capital? Deploy that capital and then see the wealth that's created at the place where you've deployed it as well as when it's returned to the investor.

Seke Ballard: (05:13)
And so we ended up scaling that to Armenia and Azerbaijan but I was really interested in how I scale it to be much larger than that. Because to me this is one of the fundamentals of capitalism. And so to answer that question and lots of other questions, I went to Harvard to earn my MBA and it was a phenomenal experience. And really taught me how to structure my thinkings around these systems that are in place to suss out where those best opportunities are both on the debt side and the equity side. And after about five years in Corporate America most recently at Amazon I started my company. And yeah, I guess I would say the rest is history from there.

Sarah Kunst: (06:09)
I love it. So tell me the Miami of the former USSR. The mind really actually boggles at that one. Intresting, no more questions about that one later. Amazing background wild backstory I actually, fun fact right after this, am sitting in and doing a HBS Harvard Business School class around VC and PE and the lack of diversity. And so, I will be in your old stomping grounds virtually soon.

Sarah Kunst: (06:47)
But can we talk a little bit about just the fundamental importance Of enroll like access to capital as a means of wealth creation, economic growth, the way that we buy nice things, like why does money matter? Tell a bunch of people who probably like me are totally money obsessed.

Seke Ballard: (07:07)
Right. I mean, it's the lifeblood. It really is. When money freezes up economies collapsed. We saw that during the great recession and the way I structure it in my mind, you've got capital up here and one column of that is debt, and the other column of that is equity. My corner of the sandbox what I've spent the last five years of my life really working on is on the debt side of the equation.

Seke Ballard: (07:32)
But when I think about the fundamental sort of any efficiencies in terms of how capital is deployed, I think the same fundamental problems exist in both except they manifest themselves in different ways. I'll touch on equity really quickly before we go to debt. One of the most interesting statistics I've heard is around where capital goes in equity. So you got private equity under that, you've got venture capital firms, you've got these investment banks, that they represent a pretty diverse source of capital. But if we narrow in on one part of that which is venture capital, this is your world so I know a whole lot less about it. But if we narrow in on venture capital, 98% of all the billions sloshing around in venture capital go to men. Which to me is really interesting because what it says is-

Sarah Kunst: (08:26)
Sorry. Just clarifying a point, but what color are those men?

Seke Ballard: (08:31)
They are white men.

Sarah Kunst: (08:32)
Just say that.

Seke Ballard: (08:36)
Yeah. And I was going to touch on that. But when I think about it what it really says that the inverse of that is you've got 10 companies in front of you. And instead of reviewing all 10 of those companies you're really myopically focused on half of them and really missing the opportunities that the other half might present to you. And then if you put that to the side, another really awe-inspiring statistic is that 80-90% of all returns in venture capital accrue to the top 20 firms. There must be hundreds maybe thousands of venture capital firms, family offices out there. Half of them, they ought to return more than one X what their limited partners invested with them. And so what that tells me is that the existing model is clearly not serving investors.

Seke Ballard: (09:28)
And to me, it almost represents a breach of their fiduciary responsibility to their limited partners that they've really taken this siloed approach to investing rather than expanding the aperture of deal flow to really taking in half the population which is women taking in 30% of the population which is people of color to your earlier point. And maybe, just maybe when you look at everybody you might make your LP some money. And so, I am really encouraged by the constellation of venture capital firms such as, Cleo Capital, such as Harlem Capital, such as Backstage Capital. That's really trying to serve this underserved market. And my hope is that one day you all are eating these bigger guys lunch. But yeah, I really see the fundamental problem existing in both debt and equity and I love what's going on in equity and I'm sort of working in my corner of the sandbox to figure this problem out on the debt side as well.

Sarah Kunst: (10:35)
Awesome. And so, talk to us a little bit about ... we think we have a general idea of how it's working in private markets, venture PE, you give money to more diverse managers and they invest in more diverse companies, and that's sort of the flywheel public markets with the push towards more diverse boards and more diverse company leadership. That's also starting to happen. But debt feels like, and that sort of trickles down into hedge funds as well or up hopefully, but debt is like this other area.

Sarah Kunst: (11:11)
So what does debt kind of currently look like? And what are some of the ways broadly maybe, and then we'll zoom in a little bit more to you specifically. But what are some of the ways broadly that change can happen using debt capital, both everything from individual loans, all the way up to the big huge providers of debt. How does that start to change? And what does that look like right now?

Seke Ballard: (11:35)
So I'll answer this question with an experience. Back in 2015, and this was actually the catalyst to me starting my business. A guy named Dylan Roof, went into Mother Emanuel AME in Charleston, South Carolina, and sat for Bible Study for an hour before opening fire on the nine people who were in attendance killing them all. My mother's side of the family, they traced their roots to Charleston. So this is pretty close to home for us. And so my dad thought it'd be a good idea if we took a road trip to pay our respects to the victims and during the drive, I guess I would say just grounded by the gravity of the moment the question that I asked him was, "How did we end up here?" To me it felt very regressive, it felt as a country we were taking steps backward not forward.

Seke Ballard: (12:32)
And his answer to that was really interesting. He said, "Seeking any marginalized group of people in America, can't as a matter of pragmatism, expect to sustain social and political advances, unless those social and political advances are built on a firm economic footing." And he used his own sort of experience and as a case in point. So when I was a kid he owned a logging company and people would pay him to clear commercial residential property, he take that lumber sell it to the local paper mill, and he had your quintessential American, small business, very successful. And he wanted to expand outside of North Carolina to surrounding States but in order to do that, he had to modernize his equipment. And so he went to all these banks in the area applying for loans to modernize his equipment, and he was rejected by every single bank for every single loan.

Seke Ballard: (13:32)
And his hypothesis was that this didn't have anything to do with the merit of his business but instead of had everything that you want the color of the skin. And it's very well known that there are two primary ways of building wealth in America. It's either through home ownership or enterprise, small business ownership. If you can't get the loan to purchase that starter home, or if you can't get the working capital loan to grow your business, then your ability to grow wealth over time is undermined for that reason. And so I went back to Seattle, I was employed at Amazon at the time. And I did some research and found that he's exactly right.

Seke Ballard: (14:12)
The federal reserve bank of Boston has some pretty excellent analysis on this question but if I go into a bank Sarah, and a white guy goes into a bank and we are exactly the same from a balance sheet perspective. So same assets, same cash, same money coming in, same debt levels, we're literally the same person on paper. We were only controlling for my race. If we apply for a small business loan, I'm two point seven times more likely to be rejected for that loan.

Seke Ballard: (14:42)
And if I'm fortunate enough to be approved for that loan, I'm going to pay on average 180 basis points more interest. And this is true not just for small business lending, it's true for mortgages, personal loans, car loans, and it's also true for women to a slightly lower degree. And so the root cause of this problem which gets at the heart of what we do, the root cause of this problem is that when my dad, or when Sally goes into that bank to apply for the loan they're sitting across the table from a loan officer who's bringing to that encounter all of his conscious and subconscious biases.

Seke Ballard: (15:17)
So they're not just looking at my dad on paper and evaluating from based on that. They're also judging the way he speaks English or the way he dresses because he looks like a trucker. And then they make decisions based off of subjective information that really has no bearing on whether that person my father, or the woman sitting across the table from them are going to service the loan.

Seke Ballard: (15:39)
And so our critical insight was what happens when you remove the human from the equation and you replace that human, that loan officer with a model that is evaluating credit worthiness based exclusively on observable financial and operating performance data about the company. And then once you use this data to make the decision then really the playing field levels out a lot. And the people who are ultimately declared to be credit worthy, which are the people who ultimately receive the financing they start to look a lot more like society at large. And so my work for the last five years has really been built around building that capability and evaluating credit worthiness and then deploying that capability specifically in cannabis for now.

Sarah Kunst: (16:35)
Cool. Kind of reminds me of in Pretty Woman, where Julia Roberts goes back in and it's like, "Do you work on commission? Big mistake."

Seke Ballard: (16:41)
Big mistake.

Sarah Kunst: (16:46)
That's the reality. Judging people based on what they look like before you know. It's not even the content of their character let's be real, it's the content of their pocket books. You really want to make sure who has money and this is a totally different world. But even in the tech world, the average tech billionaire Jeff Bezos before the blow-up did not look like he was about to be the richest man in the world Right? Big mistake. So you never know who those people are.

Sarah Kunst: (17:14)
So, let's talk a little bit about the current state of banking. It feels like the banking world has just absolutely, I feel I'm having flashbacks since 2008 like level craziness. Like Wells Fargo seems they can't go more than three seconds with a new CEO before everything hits the fan again, I don't know what they did in the past life, but their karma is nasty.

Seke Ballard: (17:45)
They're are criminals. I always believe that.

Sarah Kunst: (17:46)
Okay, that's what they did in their past life. It's not just that, bank closures, litigation, walk us through what in the world is happening in banking right now?

Seke Ballard: (17:57)
Yeah. So I think about banking from a macro perspective. And it is one of those industries that's really ripe for disruption and a big part of why I think it's ripe for disruption is because their operating models really rely heavily on these extensive network of brick and mortar branches that are full of humans that are staffing it. Whether those humans are tellers or whether those humans are loan officers seeing people like my father and Sally. And I think what's going on is that they're struggling to adapt to how modern consumers consume financial services. I was with a borrower in Massachusetts, and we had to go into Wells Fargo in rural Central Massachusetts. And I sat there for maybe three, four hours and didn't see a single person coming into the bank the entire time I was there.

Seke Ballard: (19:00)
And obviously I'm projecting this experience generally but to me that was the canary in the coal mine. It saying, "If banks don't adapt and bring technology as sort of central to how they deliver their financial services, I don't believe they're going to survive in the long-term." And personally my view is that technology is the answer to what I view as systemic bias and the provision of financial services. And specifically what I do is really focused on the debt side of the equation. And so if you've got these massive banks like, Chase, Bank of America, Wells Fargo, all the way down to your regional local banks, Coastal Carolina Bank of North Carolina, I think you're seeing varying degrees of this struggle to adapt. And so, my view is that similar to on the venture capital side, I mentioned backstage capital, I mentioned Cleo.

Seke Ballard: (20:02)
I see the same thing happening on the debt side of the equation as well. we've got companies like; LendingClub, Funding Circle, that are really bringing technology to bear to create this digitally native experience for their customers. LendingClub, up to very recently was only a lender. They recently acquired a bank. So they've obviously got ambitions to be able to provide a broader array of financial services to people but do it in a way that is central digital and driven by technology. And so macro-level this to me seems to be a trend that is unavoidable and those who are building those technological models today, I think are going to be the ones who are providing the majority of financial services to clients in the future.

Sarah Kunst: (20:52)
Yeah. That I totally agree with you. So the last point I we'll touch on with the traditional banking piece, you always telling me the story in our prep call and I was sitting once with the household name billionaire who's a massive land [inaudible 00:21:11] billionaire pledged the whole thing. And somehow they'd grown up in the South, like in the 60's and somehow the topic of redlining came up. And they looked at me and said, "Sarah, what's redlining?" And I basically had an out of body experience because I was like, you have a 1,000 people who work for you they like tell you about issues. And so just in case we have any other billionaires in the audience who might need a quick refresher talk to us a little bit about, you touched on this earlier home ownership. But redlining, what is it? What does it mean and what has it meant for wealth creation particularly around racial lines?

Seke Ballard: (21:47)
Absolutely. So I am joining you all from the South side of Chicago. I live in Bronzeville and Chicago was one of the epicenters across the nation for redlining. And what it meant here was that you would have banks providers of capital literally draw red lines around majority black communities. And within those red lines they wouldn't make loans. And this is at a time when the federal government is providing all kinds of backing to banks to encourage the creation of the middle-class. And so when you had these communities that were as a matter of policy, both public policy and lending policies at banks across the nation as being excluded from where they would target their investments, then what you started to see was a sort of a cynical cycle.

Seke Ballard: (22:45)
These communities weren't able to get the financing that they needed. Then that meant that their property values went down, it meant that they weren't able to build and sustain their businesses over time. And so if you just sort of play this out over the long-term what you start to see are failing communities. What we start to see is a lack of investment in human potential. And it's driven by racism rather than by anything related to merit at all. And so I think that was a strategic error on the part of the country. I thought it was and I continue to think it's a strategic area on the part of finance years still to this day.

Seke Ballard: (23:35)
Apple as an example is under investigation by the state of New York for charging equally qualified women, higher interest rates and approving them for less and loans than quiet comparable ment. And this is, their credit card is backed by Goldman Sachs and so this is one of the most technologically sophisticated companies on the planet, partnering with one of the most prominent banks on the planet and they can't get it right. And so you just have this sense that this is one of those enduring legacies of red lining and our general approach to the provision of financial services. And if we don't correct for it then I just view it as a massive loss of human potential to be completely Frank.

Sarah Kunst: (24:30)
A massive loss of money as well. Let's be honest about what we care about here. Remind me and we're going to go into a product discussion, but remind me a little bit of we were talking about this. This summer, I watched it was called Mrs. America or whatever it's a Netflix show about Phylis Schlafly, and [inaudible 00:24:52] and good show if you're bored watch it but more importantly, more relevantly, I was shocked to hear that until like the 60s or 70s it didn't matter how rich you are as a woman. You could literally be the heir to every fortune or the heiress, and you couldn't buy your own house or you couldn't get credit cards in your own name. So walk us through a little bit of that just to like really square the circle of how deeply, deeply F some of this history has been in the very recent past. And then we'll kind of move through where we think we're going and what you guys are doing to fix it.

Seke Ballard: (25:26)
Absolutely. This to me is again one of the macro things that just doesn't make sense. Women are half the population and there was a time in history when the role of a woman had a fence around it and that fence was really the household. And so to me what that's communicating to half of the potential workforces we don't want to use you at all. It's like leaving half your starting team on the bench it just doesn't make sense. And so, you referenced that it was a time when women couldn't get credit cards in their own name, it was a time when they couldn't use capital to purchase homes or whatever sorts of assets they were interested in purchasing. And so I think as we've evolved in the right direction, not fast enough to where you have more capital going to certain demographics of people, we're able to see that human potential really start to contribute both to the micro economy in their families, in their communities and bubbles all the way up to the macro economy.

Seke Ballard: (26:31)
When women started entering the workforce, you saw this massive boon in GDP. Wonder where that came from. Well, it came from us not ignoring half of our workforce. And so, you mentioned this earlier this is a money problem. It's less about let's be diverse, it's less about let's give people a hand up, it's more about doing your job, it's more about generating returns for your shareholders and your limited partners. And so yeah. I'm again, I'm encouraged by where things are going. Never have we been in a moment in American history, I don't think where we've had more permission to think big about where things can go from here.

Seke Ballard: (27:20)
COVID was basically a wrecking ball to the economy, it was a wrecking ball to people's day-to-day lives and when we rebuild from that, we don't have to do it the way we used to it can be done in a way that's very different. And when you've got all these banks that are provisioning billions for losses in their loan portfolio, yeah. That opportunity is really there.

Sarah Kunst: (27:42)
I love it. It reminds me of in the immortal words of the very controversial Kanye West, "I'm racist and that I only liked green faces." Like what we're talking about is, diversity, gender, all these things. But what it all rolls up into is when you're only focused on investing in 30% of the population, that means you're leaving 70% of the profits on the table. And I don't know about you, but that's a lot of money to not have in my pocket because yachts do not buy themselves.

Seke Ballard: (28:10)
Right

Sarah Kunst: (28:11)
So I agree. So here's the problem you diagnosed it brilliantly and very, very thoroughly. So what is Good Tree Capital's role in fixing all of this? I always fix my life. What are you doing? How are you fixing it?

Seke Ballard: (28:27)
Not on my watch. I mentioned I had this experience with my father and I go back to Seattle do all of this research. And when I come to this realization of how the market is structured, I sit down with some data scientist developer colleagues of mine, and the question that I pose to them was, "How can we accurately evaluate credit worthiness without using the factors that typically biased decision-making that have no predictive quality?" And so we spent about a year and a half answering that question. We started by filing a foyer with a Small Business Administration and asked them for records on every loan that they'd backed since the year 2000. And that produced about 1.2 million records that they sent us on a CD-ROM thank you, SBA.

Seke Ballard: (29:25)
And we enriched that data and fed it through what's called a random forest regressive analysis. And what that told us was of the over 450 factors in any given loan profile, these are the factors that are most predictive and determining whether someone is likely to default a loan and not just what those factors are, but what is their relative importance to each other? What is the weighting of each one? And once you understand that across all factors you can build a mathematical equation an algorithm. And that's what we did. And when we tested it all those years back, we learned that we could with 98.2% accuracy determine whether someone is likely to default on a loan. And so my view really at that point was that we built a bazooka and the question was, where do we aim it?

Seke Ballard: (30:18)
The initial approach was to sell this to banks. I thought to myself I've got this amazing capability it's innovating on the bulk of your business model, it's more accurate which is really important. But it's also faster and cheaper to scale. So I just thought it would be a win-win for all parties involved. But I was meeting with these banking executives here in Chicago, primarily, and really what I was trying to sell them was sort of in one ear out the other glass over eyes I just didn't find a whole lot of luck. And so my view was I was sort of at a fork in the road. I could continue trying to sell these very conservative banks. You have this long sales cycle, or I could do something different. And to me cannabis represented a really interesting opportunity unto itself.

Seke Ballard: (31:11)
It is an industry if you look nationwide across all the people who've gone through the very sort of tedious process of acquiring a license from their State, 80% of those operators who touch the plant don't have bank accounts. Which to me is insane. Billions and billions of dollars 80% of that is a sloshing around in the economy in a way that's not really trackable. And so if you think about it, if you don't have a bank account that means you also don't have access to things banks provide such as loans. And so I thought if we put our model to work in the cannabis industry, not only are we in a market that is largely underserved, so it's a ton of white space because banks are on the sideline. But cannabis represented that sort of intersectionality of the access to capital and the ability to build wealth as a result of that access to capital.

Seke Ballard: (32:06)
Let me just give you one short anecdote. If you think about the people who born the brunt of cannabis prohibition, the people who've been locked up for having a dime bag, they have a felony on their name, now they can't get a job or a house. You think about that group of people historically and then you think about the other group of people who own the licenses nationwide there's virtually no overlap between the two it's like 4% overlap actually between the two. And really what this is it's a big problem of access to capital because it's an expensive industry to be in. And so my view was if we use our technology to evaluate the most credit worthy entrepreneurs and businesses in the cannabis space, then we can provide these talented entrepreneurs who are looked over by everybody else with the ability to really grow and scale their businesses and prosper in this industry.

Seke Ballard: (32:58)
And therefore take a larger chunk of what will be a massive wealth creation for this country. Think about it, think about where alcohol was prior to prohibition and where it is now that's cannabis today and we're still in day one. So I just think it's a really critical period. And we've seen with our portfolio companies just how that wealth creation mechanism works. One of my borrowers in Massachusetts, again in Massachusetts just had a big, we're about to have a big grand opening. And it's just a signal of what is possible when you really reimagine and rethink how you evaluate credit worthiness and where capital goes.

Sarah Kunst: (33:39)
Absolutely. And before we jump into some questions, if you haven't dropped questions into the Q&A please, please do. Because we'll have a few minutes for those. But talk a little bit, you touched on this when you mentioned the guys who were in jail for dime bags. And I think for a lot of people it's a little bit hard to wrap your head around sort of how targeted the war on drugs was. And it wasn't so much a war on drugs as it was on like hippies and then just sort of flat out black people. The stark comparison that most of us have heard of although we've been, I off the top of my head, can't recall it maybe you can, is sort of the difference between the sentencing guidelines for crack versus Cocaine, which like is any good child of the 80's knows they're the same drug.

Seke Ballard: (34:29)
Yeah. Absolutely. You're hitting the nail on the head. It became a really big strategy under Nixon. He wanted to attack his two biggest enemies and his two biggest enemies were hippies and black people in his own mind. And in order to do that he thought let me crack down on cannabis, let me focus enforcement and communities of color. And so what you ended up with was really a sort of a reality nationwide where although African-Americans consume roughly the same, slightly lower on average cannabis than white people, African-Americans nationwide are four times more likely to be arrested for it. And then once arrested for it more likely to be convicted and sentenced to longer sentences. The same basic dynamic is true for crack Cocaine and Cocaine where the sentencing guidelines pre-Obama was 20 X.

Seke Ballard: (35:35)
If you were caught using coke and you know coke is a rich man's drug. If you're caught using coke which is the same exact chemically drug as crack Cocaine, you're going to get one 20th, the sentence as the person who gets caught with crack Cocaine. And so you see these kinds of imbalances and how the laws are enforced where the laws are enforced, and then what downstream impacts that has on the ability of these communities to become self-sustaining, to become economically vibrant. Again it just feels like we're shooting ourselves in the foot with these poor policy decisions.

Sarah Kunst: (36:16)
Yeah. This was not an endorsement of doing the Cocaine or crack Cocaine. We're just pointing out the disparities.

Seke Ballard: (36:21)
Exactly.

Sarah Kunst: (36:23)
And then Joe, do you want to conduct the questions?

Joe Eletto: (36:27)
Absolutely. [crosstalk 00:36:27].

Sarah Kunst: (36:30)
And then Joe do you want to jump in with some of the questions?

Joe Eletto: (36:33)
Yeah. For sure and I just wanted to again, not endorsing crack Cocaine just kidding. So we've been doing a series of cannabis talks with a partner ETF mg. And in those conversations I've been learning tremendous amount. But one of the things that came up that you started talking about was procuring a licenses for dispensary's the costs going into actually setting up one of these businesses. And the fact that the majority of them are owned by a very small amount of businesses and people. Could you elaborate a little bit more on that? And then how you see if the companies that I guess we don't need to name, but everyone knows who they are in the cannabis space. How you either work with them to get those licenses back or work with local legislatures to make sure that more licenses are able to be procured.

Seke Ballard: (37:17)
Right. So, I'll use Illinois as an example. So under the medical legalization bill that passed seven years ago I think, you had to have $2 million in Escrow if you wanted to pursue a cultivation license and you had to have half a million dollars in Escrow if you wanted to pursue a dispenser. My first question is who the hell has that kind of money? Apart from the top 1% of Illinoisans? I mean who has that kind of liquid capital? And so this is the State erecting a barrier for broad-based participation in the industry. But if you put the State aside there's sort of inherent cost to pursuing the license and standing your business irrespective of what the State does. Particularly in the application process you've got consultants, you've got lawyers, you've got security experts that are literally charging people six figures just to be able to put together an application.

Seke Ballard: (38:21)
And then once you put together that application, you've got to demonstrate that you have real estate where you're going to operate the business and often these States take anywhere from 12 to 18 months to make a decision. So you can have money going out for real estate that you've leased or purchased with nothing coming in, you shelled out six figures for all the consultants you needed to put the application together, and then you might be told no, you don't get a license. So if you're the guy on the street who's selling the dime bag and you look at that equation it just doesn't make any sense to you. But if you're some wealthy tycoon and you've got money to waste then yeah, you're going to throw some money behind trying to get a license. And so in my opinion not only do you have the structural costs you have the cost that States often erect that create really immense barriers for people's participation.

Seke Ballard: (39:16)
The way we've tried to solve this problem is both through policy advocacy as well as putting our money where our mouth are. So from a policy perspective in Illinois when Pritzker was running for governor, he made it very clear that he wanted Illinois to be the most equity centric market in the nation. Which is another way of saying he wants the people who can historically borne the brunt of prohibition to be the main benefactors of the wealth that's being created in the industry. And so when I heard this I immediately reached out to the legislators who were writing the bill. And my goal was really three part. It was one, to reduce to the earthiest extent possible, the State erected cost to enter the industry, to increase state financing of these equity licensees, and to also create an environment that is favorable for investors or banks who want to provide capital to the same crop a crop of licensees.

Seke Ballard: (40:21)
And so we had a ton of success in our advocacy at the state level. And even though Illinois and passing and executing it's bill has had some hiccups along the way. I think the trajectory is probably more successful than any state in the country in terms of creating a context that allows broad-based participation and the cannabis industry that reflects the diversity, either racial or gender diversity in the State.

Joe Eletto: (40:52)
So then and something I'll leave the conversation on it so you can dive into it as far as you like or not, but we're less than a month out from the election. What would it change in the presidency? What would a Biden presidency mean for your company's ability to operate on a more national level? In that we're talking about Illinois, we're talking State by State. Governor Cuomo, has said that he wants cannabis legalization to come in the next session for the state. But what would it mean for you to operate on a federal level and what are you sort of looking for in a new administration and for specifically for cannabis?

Seke Ballard: (41:31)
So there are two hypotheticals here either Trump wins or Biden wins. If I think about the experience of the industry under Trump's administration, it's been muddy. I think that's probably the best word to use. So coming out of the Obama administration, we had what was called the Cole memo. And this was the justice and treasury department saying, "Hey banks, if you want to capitalize this industry, provide any services. This industry just follow these principles and we won't come after you." Was essentially the message of it. Trump comes into office, Jeff sessions spends his first year in the office honoring this and then January of the second year he does an about face and he says we no longer care about that. So it kind of muddied the waters in terms of how we think about what rules to follow in order to provide services to the industry.

Seke Ballard: (42:23)
But at the same time, this is a bi-partisan industry. If you look at the SAFE Act, the SAFE Banking Act was just passed the house. It passed with overwhelming bi-partisan support. It currently has overwhelming bi-partisan support in the Senate but it's stuck in committee right now because COVID. Because there's lots of other things that are sort of happening and really taking the time and sucking all the oxygen out of the room. So it's not as though this is a starkly partisan issue where Democrats feel one way and Republicans feel another way. I just think the barrage of things that we have to deal with on a day-to-day basis whether, yeah. I want you to go on to that, that we deal on a day-to-day basis as really distracting lawmakers and the executive branch from doing their job. Under a Biden administration, I expect things would be clarified quite a bit.

Seke Ballard: (43:24)
The reason I expect things to be clarified quite a bit is because the SAFE Banking Act is championed primarily by Democrats. Even though it's got bi-partisan support, really the main sponsors and champions of the bill are on the democratic side. Joe Biden's VP Kamala, she is a co-sponsor of the Moore Act which is not just thinking about how do we increase access to financial services for the Cannabis industry. But how do we create restorative justice for those people who have criminal records for the dime bag while at the same time you got all these other people who are making billions of dollars now the industry is legal. And so the fact that she is a co-sponsor on this to me says that this is an administration that is interested in normalizing this industry, getting out of the way of the industry so that it can thrive.

Joe Eletto: (44:20)
Well Seke and Sarah, this is been fantastic. I sat back for one point just listened to the whole thing and it just, I'm going to listen back to this. There's a wealth of information here and I can't wait to share it with the rest of the SALT community. So again want to say thank you Sarah for moderating, Seke, thank you so much for joining us today. Obviously I missed the memo on having a first name with an S, but I'll figure it out. But again, thanks so much.

Jason Cummins: Outlook on the Economy, Politics & Markets | SALT Talks #69

“In a crisis, when you need to do something, divided government is bad, because you're not able to come to an agreement on the various priorities for the country.”

Jason Cummins is the Head of Research and Chief US Economist. In his role, he develops the firm's outlook for the economy, politics and markets, advises the traders on portfolio management, and manages the global research team. Jason serves as a trustee on the boards of The Brookings Institution (executive committee) and The Peterson Institute for International Economics (executive committee), and is a member of the Investment Committee of Swarthmore College. He was Chairman of the US Treasury Borrowing Advisory Committee, a government-appointed panel that advises on debt management, market structure, and financial developments. Formerly, Jason was a Senior Economist at the Federal Reserve Board, where he led the macro forecasting team.

Despite existing election laws, much of the process in the United States depends on candidates’ and campaigns’ willingness to abide by norms and customs. President Trump’s habit of challenging and/or breaking norms and customs was only heightened during an election that required implementing large scale vote-by-mail infrastructure. Experts knew this would cause a significant delay in results, offering Trump an opportunity to raise accusations of election fraud.

A Biden administration with unified Democratic control of congress will be highly beneficial in passing legislation to address the pandemic-born crisis. A Biden victory in 2020 has the chance to mark a major political pendulum swing that reverses the legislative priority away from financial capital and towards labor. The presidential elections of 1932 (pro-labor) and 1980 (pro-capital) represent the two previous political inflection points.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Jason Cummins

Head, Research & Chief U.S. Economist

Brevan Howard

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello everyone, welcome back to SALT Talks. My name is John Darsie, I'm the managing director of SALT, which is a global fall leadership forum at the intersection of finance, technology, and public policy. And it's great to be back in SkyBridge HQ today, here in midtown Manhattan. We're slowly starting to get back to normal. But SALT Talks are a digital interview series that we launched during this work from home period, and it's been sort of a blessing in disguise, because we've had a lot of fun doing this digital talks. And they're interviews with the world's foremost investors, creators, and thinkers.

John Darsie: (00:38)
And what we're really trying to do is replicate the experience that we provide at our global SALT Conference series, which unfortunately we had to cancel our Las Vegas conference in May. But what we're trying to do is both empower big important ideas that we think are shaping the future, as well as provide our audience a window into the mind of subject matter experts.

John Darsie: (00:57)
And we're very excited today to welcome Jason Cummins to SALT Talks. Jason is the head of research and the chief US economist at Brevan Howard. In his role at the firm he develops their outlook for the economy, politics, and markets, and advises the traders on portfolio management and manages the global research team. He also serves as a trustee on the boards of the Brookings Institution, the executive committee. And the Peterson Institute for International Economics. He's also on the executive committee there. And he's a member of the investment committee of Swarthmore College.

John Darsie: (01:31)
He was previously the chairman of the US Treasury Borrowing Advisory Committee, which is a government appointed panel that advises on debt management, market structure, and financial developments. Previous to that, Jason was a senior economist at the Federal Reserve Board, where he lead the macro forecasting team. He began his career as an assistant professor of economics at NYU, and he also taught at Harvard University.

John Darsie: (01:55)
Reminder, if you have any questions for Jason during today's talk you can enter them in the Q&A box at the bottom of your video screen on Zoom. And hosting today's talk is SkyBridge co-chief investment officer, partner, and senior portfolio manager, Troy Gayeski. And Troy, I'll turn it over to you for the interview.

Troy Gayeski: (02:14)
Yeah, thanks so much John. And thanks everybody for joining us for another very enlightening SALT Talks. And Jason, it's such an honor to have you on today's episode here. You have such a rich history, not only in capital markets, but academia, and other areas. Could you take us through the progress in your career and how you got to where you are today, and how passionate you are still about the work you do day in and day out?

Jason Cummins: (02:41)
Thanks. I really appreciate it. And thank you for having me on. It's a pleasure. I'm broadcasting here from Phoenix. And actually, we ended up in Phoenix because we wanted to be able to send our kids to school in-person full time. So, we had to move around the country and make some adjustments just like a lot of people. But I grew up on the west coast, and I mention that because of my background that's related to one of the things that we're going to talk about today, which is, I grew up in a very political family.

Jason Cummins: (03:07)
My uncle was the congressional representative from the fourth district of Oregon, my dad was an anti-Vietnam war activist. And so from a very early age I was exposed to everything from kind of passive, by osmosis, politics of having pictures of Eugene McCarthy on the wall with campaign posters, to really crazy discussions when we were having our Sunday dinners about politics.

Jason Cummins: (03:32)
So we'll talk some about politics today, but my interest in it goes all the way back from when I was a young kid. I went to Swarthmore College, as you mentioned. I'm on the investment committee there. And one of the things that maybe doesn't come out so well in the bio is, two strains of our kind of investment and commitment are, one, at Brevan Howard we take public service very seriously. So I spend a lot of time on the boards of Brookings, and at Peterson Institute for International Economics, as well as giving back to Swarthmore, because we feel that's a really important role for the firm that comes all the way from the top, where Alan's engagement is really second to none in terms of founding a center at Imperial of excellence and finance to his excellent work with some Jewish charities.

Jason Cummins: (04:23)
And so we all try and invest in that. And I'd also say, a key thing that comes out there that you didn't mention about my background is that I really take, not an academic approach to markets, but we have a background in really, academic training, and studying economics and finance. So I got a PhD at Columbia under Glenn Hubbard and Kevin Hassett, both of them were chief economists for Republican presidents, W, and then this president.

Jason Cummins: (04:49)
And then I went down to NYU as a professor. And so I met a lot of the people who were involved in the public policy discussion now when I was just a junior faculty member. And I've continued on with them over time, and overlap with them in these various public service areas, and professionally as well. But the strain of my career has moved increasingly towards markets, as I started when I was a professor, then I went to the Central Bank, where I learned really the art of teamwork, as well as forecasting and what goes on in Central banks, and then going with Alan to build my own team here at Brevan.

Jason Cummins: (05:20)
And I like to joke, we're now in our 17th year of my leadership here. I was the first employee outside of London. First employee in the US. And we had a run where we've enjoyed the ups and downs of the industry, and had our own ups and downs as a firm, but we really feel like this is a good environment for macro, and it's a great time for our firm as well. We think about it as kind of Brevan Howard 2.0 as we've launched more initiatives under Aron Landy, who's our new CEO's leadership.

Troy Gayeski: (05:54)
Yeah, that's a great background on your success, and all the success that Brevan Howard's had. We all had a really tough time watching that debate last night. I mean, it was such a disaster. But that being said, obviously politics, the upcoming election is a huge driver of markets right now. And so, when you guys are trying to model out various scenarios, what do you think the most likely outcome is in terms of the way the government is split post-election?

Jason Cummins: (06:23)
So, if you analyze this race with your left brain, your analytical side of your brain, and there's a lot of that kind of content you see coming out of FiveThirtyEight and other kinds of election watchers, it's really never been a particularly close race. Biden has led from start to the middle, he has a lead right now that is bigger than any lead since Bill Clinton's two elections. And so if you're just looking at the numbers, we wouldn't even really be having this conversation. We'd be talking about what Biden's policy initiatives were.

Jason Cummins: (06:53)
But we're in anything but a normal environment. And I think the key thing to understand is, because the country... And the Electoral College favors the states that appeal that Trump voters, it's more likely that Trump has a possibility. So Biden has to get up there and win the popular by two, three, four percentage points to kind of be odds on in the Electoral College. And then if you're talking about a seven point lead that he has now, you'd say, "Well, you're just kind of one polling error away from the president being able to pull it back in."

Jason Cummins: (07:24)
So you can see a way in which this race becomes more interesting, even if you're being quiet left-brained about it. But I think that misses some important new features of this election. Really, actually, unique ones. And what's happened is, because of the pandemic, we're going to be suffering, and some people enjoying, new methods of voting, which are going to necessarily make it almost impossible to adjudicate this race on the timeline that people have grown used to.

Jason Cummins: (07:50)
And what I mean by that is, you take a state like Michigan. You're going to be allowed to do mail-in ballots, and mail in-ballots will be in transit, and have a safe harbor, all the way up to the 17th of November. And so you're talking about, if there's, well certainly any kind of dispute, but any kind of closeness in that race, it's going to be case that you won't be able to call in Michigan for weeks after the election. And Michigan's not unique. The same is true for in transit ballots in North Carolina, in Pennsylvania, in Wisconsin, recently just over the last few days Ohio carved out a safe harbor this.

Jason Cummins: (08:26)
So it's a unique election in that regard, which makes it so that it's very hard to call. I think the thing that then combines with that is a couple other features. Which is that, there are going to be a huge number of legal challenges because of all this new methods of voting. It really is the case that the balloting methods are pretty complicated and prone to, I think mistakes, I don't see a lot of malfeasance out there. And then the president also is someone who, for good or for ill, is a breaker of norms and customs. And what people do not have a strong enough appreciation of, although they're beginning to understand it from a now, pretty well know, Atlantic article that was circulated last week about the potential of our disputed election.

Jason Cummins: (09:07)
What people really don't understand is that there's election law in the United States, and then a lot of elections are really governed by norms and customs. We do not have a good way to adjudicate contested elections. And I challenge anyone to go and read the governing law of this, which is called the Electoral Count Act from 1887, which followed the disputed 1876 election, which was one of the most contested in US history. You can't figure out how to deal a situation like this, and so we face a very real prospect of seeing things that we've never seen before.

Jason Cummins: (09:42)
And the prior kind of templates that a lot of investor use, I just don't think are particularly useful. I don't think this race is like 2016. I think the 2016 template does more to distort than inform this race. And I don't think the disputed elected in 2000 before Gore and W was a particularly good example of what could happen here either, except in one regard, it was the case that Florida's legislature under Jeb Bush's governorship was ready to send a slate of electors in favor of W in that election, in the event the Supreme Court stopped the [inaudible 00:10:16], which allowed Florida to certify Bush electors.

Jason Cummins: (10:21)
But the state of Florida was willing to send out electors without really the count being known. That is an important precedent to understand, because the state of Pennsylvania legislature is already talking about if they perceive that there's fraud, that they'll send out their own slate of electors, and in which case, it's very hard to figure out who has won the election, because again, we've governed this on norms and customs. Al Gore was gracious enough to concede. In other cases, Nixon in some ways was gracious enough to concede.

Jason Cummins: (10:51)
And so, as a consequence, we predict, as a baseline, a disputed election. I think it's more than a 50% chance that we won't know the winner of this election for a week, or potentially some weeks after. And you saw that alluded to. You started out your question with what happened in the debate last night. There are a number of markers that the president laid down in an otherwise quite uneven, and aggressive, and kind of self-indulging, but a performance where he explained what his thought pattern which is, dispute the election, try and draw it out, get it in to hopefully the Senate later on, and there's parts of the Electoral Count Act which suggest that Vice President Pence can decide among these electors.

Jason Cummins: (11:29)
It's a very, very complicated situation. But I think on election night you normally go into election night thinking there is 0% odds for dispute. And then as information accumulates you might raise those odds, like in the 2000 election. The way I'm thinking about going into this election is I start out at 100% chance that it's disputed, because that's the way this president is, and I'm going to winnow down those odds by watching, for example, Florida. Florida doesn't have the mail-in ballot problem, in the sense that they get all their mail-in ballots before November 3rd, they count them in advance, they come out really quick, and Florida is a mess in a lot of ways, but one thing they do well is, they get quick counts out.

Jason Cummins: (12:07)
And so the race could be over by 11:00 PM if Florida goes strongly in favor of Biden. But if it's the case that the president wins, you're going to then go to these other tipping point states like Pennsylvania, Wisconsin, and so on, that are ripe for disruption. You won't even know the count. And just to give you future casting of this, the networks are not going to call an election unless they're absolutely sure that one side is winning. And so if the president wins Florida, and you go to Pennsylvania, and it's a complicated race, and you're worried about the blue shift, and the fact that there are ballots in transit, you haven't even counted yet, Fox News, for certain, is not going to call this election.

Jason Cummins: (12:47)
And then you get into this complicated dynamic of the president's surrogates, going out and saying it was an election where they threw the ballots in the creek, and Fox News says he can't decide this. We need to have different electors. And then you're going to end up in a potential constitutional crisis.

Troy Gayeski: (13:01)
Definitely don't want to upset Karl Rove. I don't know if you remember, the 2012 election where he got pretty worked up that they called it, in his mind, early for Obama, when really, Romney had no chance. Well obviously, you're calling for election chaos. But getting through that, let's assume that there is a resolution, and we all know that this is going to lead to market volatility, we can get into that in a second.

Troy Gayeski: (13:26)
But based on the information you have, would you be comfortable with putting a probability on a Biden victory versus a Trump victory? Or are you just not comfortable doing that?

Jason Cummins: (13:35)
So I'll throw out a few probabilities and then I'll pick up on something implicit in your question, which is, for a lot of your investors, they don't trade the way we do. We're going to monetize a lot of risk premium in this interregnum period, between January 20th and November 3rd. This is a great opportunity for us. But for a lot of your viewers, they have longer horizons. And they're not going to be concerned about this kind of 60 days of potential volatility. So I want to pick up on the idea of what's going to happen when you actually have the next president?

Jason Cummins: (14:03)
When it comes to the probabilities, I would give it about a two-thirds probability, maybe you could walk me down a little bit after last night's debate, because the president was so singularly unsuccessful in kind of attracting undecided voters. But I would say that there's probably around a two-thirds chance that our baseline is right, that there's disputed election. That doesn't mean that there's a one third chance that Biden wins. I think it's still the lion's share of odds are on a Biden win.

Jason Cummins: (14:30)
So it as high as FiveThirtyEight's, 80%? Is it as high as The Economist's estimate, which is over 80%? I think it's over two-thirds. And I'm willing to go that far. I think where I differ in the odds is, if you're over two-thirds on a Biden win on the presidency you really should be much more higher odds on the Senate flipping Democrat. Because the airs are correlated. It's not the... in a big Biden win that Daines's lead in Montana is going to be maintained. It's probably the case that he pulls Bullock over the line.

Jason Cummins: (15:02)
It's probably the case that even Lindsey Graham has a tough race. Tillis probably loses by a couple points if Biden's winning by seven. So I would say, the odds of Biden are above two-thirds. And then the Senate is much more likely if he does win. So then you jump to, there will be a new president on January 20th. And I think you got to keep a couple major themes in mind.

Jason Cummins: (15:25)
In the event of settled but still divided government, i.e. Trump with a Democratic house, or Biden with a Republican senate, in that situation I think you need to flip around Wall Street's normal aphorism of divided government is good. In a crisis, when you need to do something, divided government is bad, because you're not able to come to an agreement on the various priorities for the country. So you can argue about whether you're in favor of tax cuts, or tax increases, more spending, or less spending.

Jason Cummins: (15:54)
But in this kind of crisis we face now, we will have put off, at least until January 20th, any fiscal deal. We'll need to be doing more in terms of unemployment insurance, state and local support, liability reform, all these sorts of things. And if you're in gridlock, that's bad. So I think Wall Street's normal go to of, divided government is good because government is going to stay out of Wall Street's way, that is not right. You actually need... And something I think we'll talk about later on, just kind of market psychology, one of the main legs that this market stands on is fiscal policy activism.

Jason Cummins: (16:27)
And if that's drawn into question come January, whenever this new government is seated, I think that's enormously bad for markets. The other thing I'd say is just, on our odds on scenario, we have dispute, plus a Biden sweep as our odds on scenario. In that kind of situation, I also think you need to take a more kind of Cinemascope perspective about what the change to Biden is. In my view, this election could be as momentous as the 1932 election and the 1980 election. And I cite those two elections, not because they ushered in famous leaders, although I'll mention that in a moment.

Jason Cummins: (17:08)
But those elections were punctuated changes in American politics where you began to swing the pendulum from, in the first instance in '32, an incredibly favorable environment for capital in favor of labor. And that pendulum continued to swing even through the Nixon years, and it began to swing back under Reagan. The Reagan Revolution was essentially swinging that pendulum back from favoring labor, through the Great Society, and the New Deal, back to favoring capital.

Jason Cummins: (17:39)
And even though we've had two two-term Democratic presidents since 1980, it's the case that this kind of move in favor of capital, financial capital, physical capital, and tangible capital, has really been almost interrupted in this whole period. Clinton was basically Wall Street friendly. Obama had Obamacare, which is an important asterisk to my point. But for six years, he wasn't able to legislate his agenda. And for two of those years he was worried about getting the economy back on its feet.

Jason Cummins: (18:06)
So you've had an environment where what investors need to remind themselves of is a very, very special situation, capital broadly, sees in this current market environment. It's almost unique in American history, how favorable we are to financial, physical, and intangible capital. And if Biden's elected, the first and second derivative of that are going to change, in every dimension. Regulation, personnel, legislation. And so I think these kind of more narrow focus, you take a guy like Kostin at Goldman Sachs doing his earnings analysis for the SMP under a Biden.

Jason Cummins: (18:42)
I think it's oh so very narrow, and misses the big picture, that this is a time in history where you're going to be able to call the trough and the labor share of income on a Biden sweep, and that's going to go up. I don't know quite what the slope of this is going to be, but it's definitely going up. And he's guaranteed it. It's been in front of your face Troy. He went to Pennsylvania and said, the era of shareholder capitalism is over. Amazon shouldn't pay zero tax. It's right there for people to look at, but Wall Street, as it does oftentimes, as it tries to figure out a narrative which will rationalize them the risk taking that it's already doing.

Jason Cummins: (19:16)
And that's why Brevan Howard does well in punctuated times, because that kind of ends up in a Wile E. Coyote moment sometimes. And I'm not saying the Wile E. Coyote moment is as soon as we figure out that there's a Biden sweep, but people are eventually going to figure out some pretty simple arithmetic which is, you cannot grow the economy fast enough to make up for as a corporation, the corporate tax going from 21 to 28 percent. It's just simple arithmetic. You can write it out on a little sheet here.

Jason Cummins: (19:43)
You grow your business an extra two percent, or four percent, but your tax rate went up by seven percentage points. That's not bullish for earnings, right? It's bullish for the people who are enjoying the benefits of that fiscal expansion. And those people are going to be primarily served by these kind of broader, in some ways, soft focused, but broader goals of inclusion, and Green New Deal, and all kinds of things. But those may be valid for a lot of people in terms of their politics. But I don't see why they're going to tell me that it's going to be good for growth. That's where I diverge from the-

Troy Gayeski: (20:19)
Yeah, Jason, no, I mean, first of all, you make so many good points. And I wanted to let you talk, because you expanded upon them so well. The first, I mean, it also amazes how do people think Biden can win with the Republicans can hold the Senate. Because that makes no sense at all when you look at the electoral map, for reasons you highlighted, particular Tillis. But secondarily, along the lines, from what you're saying, we completely agree, a Biden Dem sweep is good for the real economy, in terms of more massive fiscal stimulus, but medium to longer term it's obviously less friendly to equity markets because of corporate tax rates going higher, capital gains, tax rates going higher, etc.

Troy Gayeski: (20:57)
So first of all, you clearly, sounds like you agree with that assessment, right? Good for the real economy, but less good for financial markets?

Jason Cummins: (21:05)
I agree with that. I would just emphasize Troy, a point in there that some people may miss which is, there are definitely different timescales here, I think that there's going to be a bullish response. I think it could end up with a blow off top where you test prior peaks, and equity and risk. But I think, over the medium term, as you say, and economists are a little fuzzy about what the medium term is. Sometimes it's a one year, sometimes it's five years. It needs to be elastic enough so that I don't have to admit that I'm wrong.

Troy Gayeski: (21:29)
So no one can hold you accountable for messing up.

Jason Cummins: (21:35)
Exactly. But I am making the point that, beyond these kinds of movements and sentiment, and the shifts that will be necessary to kind of change around some people's portfolios to take advantage and hedge against some of the risks, I do want to point out that it's just going to be a less friendly environment for capital.

Jason Cummins: (21:49)
I'll give you examples on each one of those. Just very quickly. On physical capital, this sweep would make it so that the taxation of physical capital, in terms of depreciation and incentives and so on, is higher. It will be less attractive to invest in machinery and software. On financial capital, Biden has a plan to tax capital gains at ordinary income. Not good. Ron Wyden who will be head of Senate finance has a plan to tax capital gains on accrual.

Jason Cummins: (22:18)
So all the internet bros will have to sell their Google stock at the end of the year to pay tax. And then finally, on intangible capital, which is primarily pharma and tech, Biden has a plan to regulate those. And so in each major sleeve of capital, he has specific plans to push the pendulum back. And so I just think it's naïve, it lacks an understanding of history and what these forces are doing.

Jason Cummins: (22:47)
And the Biden team, you need to remember, the Biden team, or the Biden regulars, but the Biden team are a core of movement Obama people who want to get stuff done, and are frustrated that Obama had six years where he couldn't get anything done. These are movement, not super-liberals, but these are movement people who want to get things done. And this idea that he is going to sit around and be Sleepy Joe.

Jason Cummins: (23:13)
I just think, remember, FDR was thought of as an amiable playboy. People didn't take him seriously. Ronald Reagan starred in movies with chimpanzees. There was always this picture in people's minds of this cardboard caricature of what they were. FDR was one of the most effective presidents in US history. Ronald Reagan, one of the most effective presidents in US history. This idea that you just have in your mind, like, "Oh, it's Sleepy Joe, he won't get stuff done." It misses the point that sometimes it's, the person rises to the occasion, and the administration, certainly, around him, I think will rise to the occasion as well.

Troy Gayeski: (23:49)
Gotcha. Gotcha. Well that's very informative. And clearly, we all expect volatility around the contested election that you think is a higher probability than most. Now, let me take it one step further. And again, we'll put the medium term out here, just to give us some wiggle room, right? But, one of the theories behind a Biden victory Dem sweep, clearly more deficit spending, more fiscal stimulus, not only in the short term, but larger deficits in the longer term.

Troy Gayeski: (24:17)
And many have said this could lead to a material decline in the dollar, which right as the time they were saying that, obviously the dollar strengthened a lot last week, just to give people a little bit of pain for their efforts, which we always get a kick out of. But in any event, is that one of the potential outcomes from a Biden victory? Because the much higher propensity of even more elevated long term deficit spending? Or is that still an overblown kind of macro trade of the day talking point?

Jason Cummins: (24:49)
So, I am naturally a contrarian, but in this case I strongly support the kind of consensus view that a Biden sweep is bad for the dollar. And let me just go through some of the mechanics of why, so at least I'll sound smart while I'm telling you that I agree with everyone else.

Jason Cummins: (25:05)
Normally, when you do a lot of fiscal spending it pushes up interest rates, it's good for the currency. Normally you might think, "Well, the government's doing a lot, it might be putting in investments into areas that'll promote productivity later on." Also good for the currency. So higher rates, higher productivity. This could be potentially good for a kind of strong dollar trade. I think it misses the moment, again, in this situation.

Jason Cummins: (25:29)
The Fed's going to guarantee that interest rates are low. I'm not going for this kind of more journalistic screaming headline of, the Fed's going to do MMT or quasi-MMT, I think that doesn't understand what the Fed is actually doing. But, they are going to keep rates low, in which case, the benefits that you would normally get, as an investor in the currency, from a fiscal expansion, aren't there. And in fact, you then think about what the fiscal expansion's going to do, I have no problem with the social justice goals, I can argue for it, I can argue against it, I don't want to get into that area.

Jason Cummins: (26:04)
But I think it is indubitable that what you're doing in this situation is, that Biden has a plan to tax higher productivity areas of the economy and redistribute it to lower productivity areas in the economy. So now I've just undone the two reasons why fiscal expansion would be good for the dollar. We're actually going to have lower rates. And the likelihood is they're probably not going to be productivity enhancing. We're taking money from the kind of most innovative businesses and giving it to things that are lower valued projects, almost by definition, because they aren't being done.

Jason Cummins: (26:37)
So I think, just in the kind of more advanced textbook understanding of exchange rates, you'd see that this is bad for the dollar, the dollar goes down. But I want to give a more kind of convincing balance sheet style example which is, we run a giant deficit. And it's actually getting bigger now, after we've gone through some of the pandemic dynamics. We run a giant deficit. And so you just have to ask yourself. If you were a foreign investor financing this deficit, what is the landscape you're facing going forward? It's a very much change macro landscape.

Jason Cummins: (27:10)
One, the Fed is guaranteeing you that on the risk side of your investments, you're going to have pretty low excess returns. I mean, everything is pretty rich, so it's not the case that investing in stocks has extraordinary expected returns going forward. And the Fed is kind of guaranteed that those returns are low going forward, but he's also guaranteed you that you don't make that much money. Maybe a bit on a relative basis, because there are so many negative rates around the world. But you don't make that much money on US fixed income either.

Jason Cummins: (27:37)
So the Fed has made it so international investors now are being invited to finance yawning, historically unprecedented outside of war, fiscal deficits, where on both sides of fixed income and risk, they're guaranteed low expected returns. This is not a very sexy proposition if you're thinking about financing the US. So what has to adjust? The relative price of US-ness against other countries. And that is the currency.

Jason Cummins: (28:04)
And so I think that the Fed wouldn't even really blink an eye on a 10% broad orderly decline in the dollar. I think they don't even really start paying attention to it if it declined 20%, because that's kind of still within the range that we've seen, certainly in this century, but even within the last ten years. And I think-

Troy Gayeski: (28:23)
I think it looks, so much of what they do Jason, is to encourage looser financial conditions, right? So they would actually be very happy with a 10% deprecation, right? In order to loosen financial conditions further, no?

Jason Cummins: (28:35)
They would be delighted. And let me also give you some texture, which is that, people got used to thinking about Trump being a mercantilist, and him wanting the dollar lower. Let me tell you, Elizabeth Warren, should she be Treasury Secretary, or just generally influential in the administration, has a much more aggressive plan for dollar depreciation than the president did. She actually has a plan. You can go look at it on the Peterson website, it's authored by Fred Bergsten and Joe Gagnon.

Jason Cummins: (29:00)
And they say all the right things about how they're going to negotiate, almost in a [inaudible 00:29:04] way, to make sure that the dollar isn't too strong. But they have specific taxes on foreign investors to make sure that the dollar goes down. And Elizabeth Warren's smart enough to have a plan, and two of the best in the business to develop it for her should they want to try and push the dollar down, they would.

Jason Cummins: (29:22)
I think that's a little outside of their policy comfort zone. But I think you have to remember, the economic side of the Biden team is relatively less developed. He does have Jared Bernstein and some people around him for a long time. But when it comes to the key leadership for Biden, it's really from the foreign policy side. Tony Blinken, Sherman, these folks who have been with him for a long time, really care more about the foreign policy aspect of things.

Jason Cummins: (29:49)
It could very well be the case that economic policy is driven by the next Treasury Secretary, whoever she is. And in that case, I think you really have to open up your mind for, the possibility at least, of active currency management. And certainly-

Troy Gayeski: (30:01)
And so Jason, along those lines-

Jason Cummins: (30:03)
[crosstalk 00:30:03] let it go down benignly.

Troy Gayeski: (30:05)
Yeah. Along those lines, one of the debates people always have when they want to be sure with the dollar is versus what, because kind of everything else is garbage. China's obviously, currency's been strengthening recently. But they'd prefer to keep it low, right? And will pull out many tools to do so. So is that logic lead one to gold and digital currencies as a better place to play the dollar short? Or are you not that dogmatic about it?

Jason Cummins: (30:29)
So I think these small markets are definitely going to enjoy a lot of renewed interest. You already saw that, some of our traders were quite involved in those trades. I think they are exciting, once you get the position... What's happened lately is, as people realize there are more risks, you've just had to mop of the consensus positions. I think that actually leaves it cleaner to get into some of those trades that you're talking about, Troy.

Jason Cummins: (30:53)
But the world cannot go into Bitcoin and gold. It has to ultimately go into other meaningful asset classes. And those are going to have to be the Euro and the OMR. We can't do all of our adjustment against Bitcoin, silver, and Canada. It just doesn't work, okay? It doesn't work. So these are small, proxied, uniques, idiosyncratic markets. The big moves are going to have to come against the big players. And so despite all of the problems that Europe has, it has a current account surplus, it's doing serviceably well, not withstanding the recent setbacks of the pandemic.

Jason Cummins: (31:29)
And the main one is China. China's interest rates are higher than Brazil as I'm sure you pointed out to some of your investors. And it's nice that they don't want to let their currency appreciate, but what choice do they have ultimately?

Troy Gayeski: (31:42)
Yeah, it's gravity, right? It's gravity.

Jason Cummins: (31:44)
Gravity.

Troy Gayeski: (31:44)
Has reached a high. Yep, yep, yep. Well, that's great colors. So you think they'll be broader weakness versus the major trading counter parties as well as some of the alternative currencies. At least over the medium term.

Jason Cummins: (31:56)
I think that some of the-

Troy Gayeski: (31:56)
We'll just stick with the medium term.

Jason Cummins: (31:59)
I think for some of the macro traders who are more prone to hyperbole, even than myself, they've gotten excited about the same things. And I can see exactly why, which is, you can see a 20% move in the dollar and no one really blink an eye. I mean, we already had one in 2014 into '15 that we could reverse. And that take you outside the boundary. So it's just that sometimes people have a failure of imagination. It's much like our outperformance around COVID. People thought it was going to slice two-tenths from global GDP as we were saying otherwise.

Jason Cummins: (32:34)
And in this situation, as well, you have something that is a pendulum shift election, and people are talking about, "Oh, it might slice 10% off the SMP, and nothing's really going to change." I just don't look at that.

Troy Gayeski: (32:46)
Yeah. It is amazing how few people can do math in that corporate tax adjustment. And you didn't even mention the fact that look, the deductions are gone, right? So that's going to be a really 28% effective tax rate, right? It's not going to be 30% plus with 21% effective.

Jason Cummins: (33:05)
[crosstalk 00:33:05].

Troy Gayeski: (33:05)
But anyway, moving on, you talked about the four-legged stool, supporting markets recently. And could you give a little bit of color on those and where you see the progress? Whether it's the potential for a vaccine, or whether it's the abundant monetary policy support we've had so far? And then, which one of those legs do you expect to break first?

Jason Cummins: (33:28)
So, in our view, markets stand on four legs, making a stool for the markets that's quite sturdy. Optimism about the vax, which I mentioned. Active and dovish monetary policy, really extraordinary, but now broken for a time, fiscal policy. And then finally, positive data surprise. The fact the economy's growing, and it's growing better than we thought. Like a stool, you can lose one of those legs. So periodically, you'll have a narrative where you lose one of the legs. So-

Troy Gayeski: (33:58)
Like fiscal recently.

Jason Cummins: (34:01)
Exactly. Like fiscal recently. People thought the Fed was going to do a ton in August, he kind of last some of that in September. The stool was a little wobbly. If you lose two of these things you got a real problem. So we're coming into a very dangerous time. If you don't have fiscal for a while, and one of these vaccines causes someone to have ADE, and anybody who's following vax should know what ADE is. It's essentially your body's rejection of the vax.

Jason Cummins: (34:28)
And it's not unprecedented either. They did a cat study in a corona vaccine once where all the cats kind of died. So it can happen. And you saw with the Jenner vax that this is a possibility, we can end up with setbacks. You have no fiscal and a vax setback, it's like a trapdoor for the market.

Jason Cummins: (34:44)
Similarly, if the data rolls over and you don't have monetary policy for whatever reason then that's a big problem. There are just some combinations of things that are well within the data generating process that can be pretty unpleasant. And the biggest one I'm worried about is, we'll know probably by the end of the day whether a fiscal deal could possibly come together, but should they vote and get out of town, you're in this period of time into Q1 where there's no fiscal, people are literally starving. I mean, I have great empathy for the kind of economic challenges that people are facing.

Jason Cummins: (35:16)
And then if the perception is that the economy's rolling over, or the vax is a late-2021 story, then I think your risk taking is definitely under some degree of siege.

Troy Gayeski: (35:32)
Well, not to mention the contested election, which you think is an above 50% probability outcome, right? So, perhaps Florida will go Biden, that'll go away. But clearly if it doesn't and it ends up in Pennsylvania it's going to be a complete mess. So we don't have that much time yet, and given your expertise on the Fed, we wanted to discuss that with you.

Troy Gayeski: (35:50)
And at least, we've historically seen substantially continuity in Fed policy from president to president. Is that your expectation this time? And could you see any curveballs come out of the Fed in the near term that markets are under appreciating?

Jason Cummins: (36:05)
So there are two things to understand about this Fed. And this'll sound a little glib, but it's important to understand. JPow likes to be liked. And so he's not an academic, he's not even a technocrat, he hearkens back to a Greenspanian tradition where the Fed is working within the government.

Jason Cummins: (36:24)
I worked for Greenspan and he always said, "We're one government." And that was something that was, not put on hold, obviously Ben and Janet were very involved in dealing with the rest of the government, especially through the crisis. But their perspective was always a very academic one.

Jason Cummins: (36:40)
Jay's perspective is a practical one. And so he wants to work with the government to do whatever. And so he's opened up the possibility for the Fed to intervene in all kinds of markets, a marker I'll come back to in just a moment.

Jason Cummins: (36:52)
But the other thing to understand is that people have a very kind of monochromatic view about the Fed. They just say, "Are they dovish or not?" They just look at things on the distribution of hawk and doves. And it misses the key feature of this Fed. Jay Powell is just as dovish or more dovish than Janet, and Ben, and even Greenspan would have been. But the point is, there's another axis, draw yourself a Y-axis where they're all dovish out here in the right on the X-axis.

Jason Cummins: (37:16)
He is a guy on the dimension of discretion versus rules, or kind of a more academic approach to policy, commitments and so on, he is a guy who believes that discretion is optimal. Again, his favorite Fed chair was Greenspan. Greenspan, I was with him all the time about this, he always knew where the exit doors were and he was never going to foreclose any of them.

Jason Cummins: (37:35)
The academic approach to monetary policy, some of which I contributed, is the opposite. It is Odysseus, tying himself to the mast to make sure that you know, and everybody else knows, that everybody else knows, that they're going to be dovish according to a rule for five years. Jay doesn't believe any of that. And I can't emphasize how important that is.

Jason Cummins: (37:54)
Because he believes discretion is optimal, he is always going to kind of keep this powder dry, react quickly. He'll do the dovish thing, but he's not going to do the kinds of things that the market does. And I'll give you a few specific examples of how you could've understood the last few months based on that. People thought, "Oh, he'll do negative rates." He doesn't believe in any of that. He thinks it's nuts.

Troy Gayeski: (38:16)
Yeah, well that's a political loser. I mean, that's never going to happen unless-

Jason Cummins: (38:23)
[crosstalk 00:38:23].

Troy Gayeski: (38:23)
... every other thing is [crosstalk 00:38:23].

Jason Cummins: (38:23)
It's a zero probability event.

Troy Gayeski: (38:23)
Yes.

Jason Cummins: (38:24)
Yield curve control, no way. Not unless things got crazy out of him, because it ties his hands. Now, economists think it's good to tie your hands, because of the credible commitment. Jay doesn't believe that. He thinks that tying your hands ties your hands. And that's objectively bad.

Jason Cummins: (38:41)
So you need to understand that he always thinks that discretion is optimal. And that's why the next disappointment for the market is going to be, people think that the next thing they do is, they're going to ramp up QoE. They're not going to ramp up QoE, because there's not support for it. Practically minded people don't see the need to QoE. Economists think you should do more QoE, but he doesn't.

Jason Cummins: (39:01)
And so, understanding this discretion versus rule dimensionality to him, I think is really important. The other thing you need to understand about this Fed, it's always the case that the Fed will open some possibility, and then the next Fed chair. Or some Fed chair subsequent, will walk the Fed through it authoritatively.

Jason Cummins: (39:19)
So it's certainly the case that Jay did intervene authoritatively in credit markets, and munis to a lesser extent, and main street, and so on. The thing you need to keep in mind, and this is truly is a medium term point, because it comes around to the next Fed chair, who will come in February 2021. The next Fed chair is going to see that Jay intervened in every market and broke every taboo, and say, "Oh, well I can do that too."

Jason Cummins: (39:46)
Jay committed the original sin in credit markets. He committed the original sin in munis, in buying Illinois and MTA. He committed the original sin in backstopping main street. And you can sort of all-

Troy Gayeski: (39:58)
Illinois's got good credits Jason? Come on man.

Jason Cummins: (40:02)
Full faith in credit. No, so but that's exactly the point, we're all laughing about this, but you have a Fed chair, the next Fed chair who cares more about social justice goals, Wall Street's going to get a big shock, because the Fed balance sheet... Ben Bernanke did some QoE, then he did some more QoE. Then Jay comes along and does the biggest QoE in history, just as that progression work, where you opened the possibility and then somebody else did it big, the same thing is going to happen in pursuit of social justice goals.

Jason Cummins: (40:30)
So Wall Street is used to the Fed balance sheet being Wall Street's backstop. What I'm telling you in clean English is, in the future, under the next Fed chair, that balance sheet will be in service of broader goals. It's already right there in the statement of principles, where they've expanded their notion of what full employment is, to be more inclusive.

Jason Cummins: (40:50)
So, as an example, LA Unified, a bankrupt school district, will have to issue bonds. The Fed's going to buy them in 2025. And this is another thing that I think is important for the dollar trade, which maybe other people don't talk about, so maybe I'll add one bit to a pretty standard macro narrative, which is that, the rest of the world is going to hate it. The Fed expanding its balance sheet to buy distressed public debt for social justice goals is not the placard you want to put on your reserve currency.

Troy Gayeski: (41:19)
The Germans won't approve of that? Is that what you're getting at, yeah?

Jason Cummins: (41:23)
The Chinese are not going to think it's very clever that they're buying US paper that's being used to bail out LA Unified.

Troy Gayeski: (41:31)
Well said Jason. It's really interesting, along those lines, some folks took it as a disappointment that the Fed wasn't more explicit in inflation targeting recently. But the recent meeting, they came out and said, "Hey, guys, we're not hiking until 2023 at the soonest." And basically we're not doing it until we get back to a labor market that's equal to or better than what we saw in '19.

Troy Gayeski: (41:58)
At the same time, they ratcheted up their growth forecasts substantially, because as you highlighted before, the economy never contracted as much as people feared. It's already arguably back to 96, 96.5 cents in the dollar. So wasn't that a very bullish statement on the real economy? Meaning that, we're going to have ample Fed support for a long, long time, even though things aren't really nearly as bad as people feared?

Troy Gayeski: (42:26)
Let's ignore the market, because then you get into evaluations and money supply. But focused directly on the real economy. Wasn't that an incredibly bullish announcement for the real economy?

Jason Cummins: (42:35)
So this is where I push back on you, and I'll try to use some casual-

Troy Gayeski: (42:38)
Oh feel free, yeah, yeah, yeah.

Jason Cummins: (42:39)
I'll try to use some casual examples. Commitment matters. They made no commitments, they made cheap talk commitments which are subject to revision later on. So I [inaudible 00:42:51] invite the conversation. Many of us on this call are married. Suppose I went to my spouse and said, "We don't really need to be married, we don't need that commitment, because I just promise you in five years things are going to be fine, don't worry about it. Let's not be married."

Jason Cummins: (43:05)
Everyone on the call realized that's cuckoo. Nobody believes that, because you have to make the commitment. And you make the commitment in front of everybody else to know that it's credible. The Fed made no commitment. It's a soft focus commitment of intentions. So when people tried to nail down the Jell-O in the press conference of what Jay was saying he's like, "There's no formulaic rule. I'm not going to tell you how much we overshoot."

Jason Cummins: (43:32)
There's nothing of Bernanke in what he said. Bernanke spent much of his research time after he was chair developing systems, and rules, and commitments to make the Fed more credible and more dovish, more robustly dovish, to reset inflation expectations. He had this temporarily lookback rule on price level targeting.

Jason Cummins: (43:57)
Jay doesn't believe any of that. So that's not happening. So this commitment is about as good as my commitment that I'm going to go lose 20 pounds. You're like, "Yeah, you probably will." But unless I see the gym membership and you going every day I don't believe it.

Jason Cummins: (44:12)
So I believe that he's a good guy, he's an amazing public servant, he's probably one of the best Fed chairs ever, if not the best Fed chair in dealing with the politics of the place. But when it comes to the canon of what he believes in, what investors don't understand is, they think there's this uninterrupted arc from Bernanke, Yellen, to Powell. There's a huge discontinuity because he believes discretion is optimal, and Bernanke and Yellen, even though they're dovish, do not. They believe you have to commit to some rules in order to get better outcomes.

Jason Cummins: (44:43)
And he's not committing to anything. He's just saying, "Don't worry, rates will be zero for a while." And in that regard-

Troy Gayeski: (44:48)
So that goes back to your Y-axis argument, right? Where, okay, even though they said it and you and I can look at it and say, "Hey, maybe we'll be back to a similar labor market at the end of 2022." So since he didn't give a firm commitment, right? And he has the Y-axis of discretion, it could hike at 2022, right? It's a possibility. Whereas, if they firmly committed-

Jason Cummins: (45:12)
I'm actually more downbeat on the economy than, certainly the consensus, but they could. And the fact that I know that they could means that that commitment lacks as much credibility as if you tied yourself to the mast like Odysseus, and had the crew put in the earplugs. So I think it's a really important distinction.

Jason Cummins: (45:31)
It seems like a technical one, but a lot of the reason why you see so many frustrated Wall Street analysts, the Dave Zerboses, the [inaudible 00:45:39], etc, is that they've misjudged the man. They keep looking for him to behave like the economists that they love, who are going to Bernanke style stuff, or Japanese style commitments and so on. There's no there there when it comes to Jay. He doesn't believe in any of that, not-

Troy Gayeski: (45:56)
Jason, come on man, you love Zerbos, you love Zerbos, I know you do.

Jason Cummins: (46:00)
I love Dave, I love Dave. He has enormous [crosstalk 00:46:02]-

Troy Gayeski: (46:02)
[crosstalk 00:46:02].

Jason Cummins: (46:02)
... at the moment.

Troy Gayeski: (46:03)
Jason, it's been fascinating having this discussion with you today, and obviously your intellect shines through, as well as your ability to frame complex problems and articulate them incredibly concisely. But, we're going to turn it over to my colleague and partner John Darsie to wrap things up. We want to thank you everyone for being on the line and tuning in for latest SALT Talks, thank you so much.

Jason Cummins: (46:26)
Sure.

John Darsie: (46:26)
And I could let you guys go on for another two hours I think, and it would be rich and great content. And we're sort of in SALT overtime here, but I'm not going to cut this one short because I think it's fascinating. We have a couple audience questions, and a couple follow-ups from our agenda as well.

John Darsie: (46:40)
So I think what's unique about you, Jason, is that you have the academic side of monetary policy and economics down, but you're also a practitioner, you're on two investment committees at Swarthmore, and at the Brookings Institute. So I want you to distill everything that you're talking about, from an economic perspective. You talked a little bit about the dollar, and some relative value trades there, but what should investors be doing right now? Maybe talk about the average high net worth investor. How should they be positioning their portfolio based on some of the economic factors that you've talked about?

Jason Cummins: (47:13)
So I'm going to try and punctuate a couple of the points I've made into some simple investment advice for what it's worth. But at least this is the way I think about when I put on my public service hat and I'm sitting on those investment committees as Brookings and at Swarthmore. I'm really operating with two things in mind.

Jason Cummins: (47:30)
The first principle is, stay as far away from the Fed as possible. The Fed is going to destroy excess returns in those markets where they choose to intervene or they're likely to spill over and intervene further still on. So I want to avoid the Fed, because the Fed is the enemy of alpha.

Jason Cummins: (47:48)
An example of that, as an example, I saw a wonderful profile of Thoma Bravo in the Wall Street Journal the other day, which is a company that does software private equity, they have super low duration, because they get into the companies and get out within five years. That's a great business to be in. That is orthogonal to what the Fed's doing. That's as far away from the Fed as possible, it's in a specific industry, it's PE, and it has low duration.

Jason Cummins: (48:18)
So that's a specific example of staying far away from the Fed. If you are going into the standard kind of carry style investments, you're getting stepped on by the Fed. So those are not as attractive investments.

Jason Cummins: (48:28)
The second thing is that, I again, just think it's naïve to think that this macro landscape, because it's been relatively quiescent coming out of the pandemic part of the crisis is going to remain the same. There are all kinds of things that are changing in the policy sphere, and we're doing all kinds of things in order to try and... It's not a very sophisticated way to say it, but basically what we're doing is, we're mortgaging a lot of our policy credibility in fiscal and in monetary policy.

Jason Cummins: (48:54)
And eventually, like anything, we sometimes trade off these big discontinuities, but investors should be aware that we're moving into a very different environment when it comes to the macro, because we're living on borrowed time, when it comes to our policy credibility. And that centrally goes to the dollar.

Jason Cummins: (49:14)
I also saw, I don't know what your time constraint is, but I saw on the Q&A one thing that I could use to expand on a comment.

John Darsie: (49:20)
Yeah, that'd be great.

Jason Cummins: (49:21)
Okay. So I saw someone asked about consumer confidence. And I just want to expand on that point to explain why our perspective about the economy maybe is different from some perspectives that you're used to. Especially on Wall Street, and many of the prominent forecasting houses, they have a very financial conditions index-centric view of the economy. Basically, if stocks and housing go up in wealth, then the economy is going to do well.

Jason Cummins: (49:47)
So I'm an empiricist, ultimately, and I kind of... Not a hedgehog, more of a fox. I believe in the toolbox kit to thinking about economics, and finance, and markets. So I go into the toolbox, pick the right tool, and go ahead. One of the things we've observed over the last decade is that the linkage, the beta if you will, between wealth and those financial conditions indexes, and the real economy, is broken.

Jason Cummins: (50:10)
So if there's one reason to understand why we think that consumer confidence, which is levitated by the improvement in the stock market, in the housing market, and so on, is not so well translating, over time, into real growth. Is that that relationship broke, around about the middle of the last cycle. And you can appreciate that by noticing that consumer spending in the last cycle was slowing down as wealth was even kind of hitting a further gear up.

Jason Cummins: (50:37)
And we think the same thing's going to happen this time. There are lots of reasons why. Income inequality, different betas about spending for different kinds of households, is what I mean there. People don't believe that the wealth is real, they think that they could run into another crisis, so they're more conservative, they build up bigger buffer stocks of savings.

Jason Cummins: (50:54)
But I think it's just important to understand our background perspective of the economy is really pretty different from some others, because we think this kind of Wall Street to main street linkage, which did work before the 2008 period. Just hasn't been in the data for a long time.

John Darsie: (51:12)
Well Jason, we're going to leave it there. I think there's so much to talk about with you. I think, let's plan to have you on after the election, hopefully maybe two weeks after the election, once we know the outcome. Hence, your prediction that we're going to have some level of uncertainty after November 3rd. But we have a growing relationship with Brevan Howard, have a lot of respect for the firm and for you. So we look forward to hopefully having you on in the future. And hopefully back at one of our in-person SALT conferences in the future as well, once things get a little bit back to normal.

Jason Cummins: (51:39)
I'd be delighted. And hearkening back to my professorial experience, in advance of our meeting after the election, I encourage everyone, as homework, to read the Electoral Count Act. If they can figure it out.

Troy Gayeski: (51:52)
Jason, I'm going to get right on that as soon as I get off this call. But wanted to thank you again for all your intellect, it's been fascinating speaking with you.

Ryan Williams: How Fintech is Changing the Way People Invest in Real Estate | SALT Talks #68

“I’ve always chosen to see problems and challenges as opportunities.“

Ryan Williams founded the technology-enabled investment platform Cadre in 2014. Cadre is an online marketplace that provides institutions and individuals access to previously inaccessible quality real estate and alternative investment opportunities. As Chief Executive Officer of Cadre, Ryan has raised more than $130mm of corporate capital backed by investors such as Goldman Sachs, Andreessen Horowitz, Ford Foundation, Khosla Ventures, Thrive Capital, General Catalyst, and others.

A true entrepreneur, Ryan is not a “conventional founder or CEO.” Many people take the first step from recognizing a problem to identifying a solution, but most fall off when trying to bring their idea to life. Ryan applied this philosophy to his first company, where he worked with embroiderers in his area to buy products at a fraction of the area’s established retailers.

At the time of filming, Cadre Cash had just been launched. Investors on Cadre’s real estate investment platform can earn an annualized 3% reward on their cash, 4x higher than leading banks and 60x the national average. “This is all part of our mission to provide more individual investors with greater access to financial products that drive their futures forward.”

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Ryan Williams

Co-Founder & CEO

Cadre

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

John Darsie: (00:07)
Hello, and good morning 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 public policy. SALT Talks are a digital interview series that we started during this work from home period with the world's foremost investors, creators and thinkers. And our guest today combines all those aspects into one, into a fascinating startup that's really democratizing access to investment opportunities that have typically only been available to institutional investors. More really trying to do during this SALT Talk series is replicate the experience that we provided at our global conference series, the SALT Conference, and that is to provide our audience a window into the minds of subject matter experts, as well as to provide a platform for what we think are big ideas that are shaping the future. And today we're very pleased to welcome Ryan Williams to SALT Talks.

John Darsie: (01:01)
Ryan is the co-founder and CEO of Cadre which is a technology platform providing individual investors with access to the kind of commercial real estate investment opportunities that were previously only available to institutional style investors. The company currently owns and manages about a $3 billion portfolio of properties. And today Cadre has delivered a net IRR of better than 18% on its portfolio realizations. It's a very unique company and Ryan is a unique founder. He grew up in Baton Rouge, Louisiana, and he began his entrepreneurial career at the tender age of 14 when he founded a sports apparel company that he later sold. He worked his way through Harvard and during his senior year at Harvard when the financial crisis hit, Ryan started a company that invested in single-family distress properties, mainly in the Southeast. Like I said, his company acquired more than 500 properties mainly in the Southeast United States.

John Darsie: (01:55)
And as a part of building that business, he caught the attention of some of the major investment firms on Wall Street. And he joined the Telecom group at Goldman Sachs before moving on to the private equity real estate division of Blackstone. He then launched Cadre in 2014 and has built it into one of the leading real estate technology startups today. He is about the same age as me. So I'm feeling very unaccomplished right about now. At 32 years old, Ryan has won widespread recognition as one of America's most promising young CEOs. Appearing on the cover of Forbes Magazine last year. He's described his self in the past as reticent to talk publicly about his experience as a black tech founder, but in the wake of the George Floyd incident this summer and subsequent protests that followed that, he's emerged as a strong voice for economic and social justice.

John Darsie: (02:42)
A reminder, if you have any questions for Ryan during today's SALT Talk, you can enter them in the Q and A box at the bottom of your video screen. And hosting today's interview is Anthony Scaramucci, who is the founder and managing partner of SkyBridge Capital, a global alternative investment firm. He's also the chairman of SALT and another quick anecdote that I'm sure they might get into during this conference, the chairman of the investment committee at Cadre, Mike Fascitelli, once had the privilege at Goldman Sachs of firing Anthony. So I'm sure Ryan and Anthony can have a fun conversation about that, but with that I'm going to turn it over to Anthony for the interview.

Anthony Scaramucci: (03:14)
Ryan, you see you're missing the sibling rivalry that's going on in here. Okay, so you had to just bring up the fact that Mike fired me. So at least the good news is when John Kelly fired me from the White House, Ryan, I was prepared for it because I had been fired once before.

Ryan Williams: (03:31)
There you go, good training.

Anthony Scaramucci: (03:33)
And this is a learning lesson that everybody out there, when you're getting fired by somebody build a friendship. Mike's one of my best friends. It turns out that General Kelly and I have become very close as well. But I want to go to you Ryan, you had an amazing career. I had the chance to see you speak at the Forbes 30, Under 30 up in Boston a few years ago. Obviously you've spoken at our conference, but I haven't asked you this question, and I'm very curious about this because you are the classic entrepreneur and something happens in your childhood where the light bulb goes off and you're like, "I'm going to run my own business. I'm going to build my own enterprise." And I want you to tell us when that was, where it was, when did that moment happen for you?

Ryan Williams: (04:15)
Yeah. Thank you Anthony for having me, I'm really excited to spend some more time talking about myself, but also about our business and what we've been up to. You're right. I thought a lot about what drives me, thought a lot about when I kind of got on that entrepreneurial flywheel so to speak, and kind of going back to my childhood, I didn't really grow up around a lot of money or frankly had a lot of role models in the business world that would provide a clear path to building my own business but I think what it was, was I've always chosen to see problems and challenges as opportunities.

Ryan Williams: (04:57)
And I was fortunate that I had a family that definitely encouraged me to think about the what if and having this mentality of questioning the status quo, asking why not. And so I think as a kid, I brought that mentality to a lot of things. It probably bothered my family when I was really young. But as I grew a little bit older, I started thinking about these personal pain points and challenges that I experienced and faced. And that's when that natural entrepreneurial streak began emerging. And the first business I ended up starting it started with that question, why can't we change this situation? And the situation there was I didn't have a lot of money growing up. I played sports. I didn't want to pay an exorbitant amount of money to buy a Nike or an Adidas headband and wristband when people still wore those things. And so I said, "Why can't I find a cheaper product that-"

Anthony Scaramucci: (05:58)
Ryan, some of us are still waring those things. I just want to point that out to you. Okay. Go easy on the old folks here, go ahead.

Ryan Williams: (06:04)
... it'll come back Anthony at some point. Yeah. I mean, everything does, right? But what I said is, "I want to figure out a way where I can identify a lower cost product and actually have something that represents me." And a lot of people I think do take that leap from, okay, here's an issue to all right, how do I change this issue? Not a lot of people take that next step forward to how do I bring that to life? And I think that's for me, that was the first time where I said, "All right, I actually want to make this happen. I want to implement something different. I want to change the status quo." So I ended up going and speaking to a bunch of different embroiderers in the area. I went to effectively a version of the [inaudible 00:06:48] district like they have up here in the city and I was able to buy these products 10%, 20% of what the retail stores were charging and initially just for myself, eventually I started creating custom headbands and wristbands for teammates and friends.

Ryan Williams: (07:06)
Grew that business pretty significantly, won a bunch of awards, was able to exit that company. And that gave me the confidence when I then was fortunate enough to get to Harvard. And again, with Harvard, I was told by a guidance counselor, "No shot." And again, I said, "Why not?" I was fortunate to be accepted. And when I got there, that was like a playground of resources. It was a playground of opportunities. And I wouldn't have been able to launch the real estate business I started in 2008 when again, I noticed there were all these foreclosed homes up and down at my best friend and roommate street in Atlanta and said, "Why can't I invest in these areas and stabilize these communities." But I wouldn't have been able to get to that point had I not, when I was younger, acknowledged that I had this mentality of looking at challenges as opportunities, but then taking the step, building the confidence, building that muscle and I think, again, the essence of entrepreneurship is about how you view the world and then being willing to take risks.

Ryan Williams: (08:10)
I mean, you've done it in your career, Anthony as well. And I think as you build that muscle of risk-taking and fearlessness, it kind of builds on itself. And I'm fortunate again to be in a position now where we're running the leading real estate tech platform for individual investors. I'm not a conventional founder CEO but I built up a lot of that resiliency from an early age.

Anthony Scaramucci: (08:39)
Well, I mean, I think it's attributed to you, but I think that there's a resilience that you need to get to where you are. And there's also a level of projection that you need as well, which we try to teach people that are aspiring entrepreneurs, that you have to believe in yourself. And I have a 21 year old son in the music industry, so you got to act 31 men. You can't act 21. Get your brain on 31. And so I really appreciate what you're doing and I admire you. Talk about Cadre for a second. Let's give the high concept. Let's pretend that people with us today don't know Cadre, which is a phenomenal company, and I want to get them to know it, give us the elevator pitch on Cadre?

Ryan Williams: (09:24)
Sure. Yeah. Cadre was founded almost six years ago and I founded it really to lower the barriers of entry to institutional real estate. Commercial real estate is one of the most important asset classes to own to build long-term wealth, but it's also one of the most opaque, expensive and a liquid asset classes as well. And what I saw was that, from my time at Blackstone, there was just so much wealth being created, but being created for equity, sovereign wealth funds. Nothing wrong with sovereigns, we love sovereigns, but it was a very small subset of our global economy. And most individuals were just significantly under allocated. Had no idea how to get into alternatives. And I believe from my own personal experience as never being anywhere near this asset class growing up, that I was uniquely equipped to build a platform and a model that would unlock access to institutional real estate, allow more people to invest with transparency, efficiency and the quiddity.

Ryan Williams: (10:28)
And so that's what I decided to do with Cadre. Through technology we've been able to create a platform where individual investors can go online and invest in an individual real estate asset, not this building or multi-family property or a portfolio of real estate investments. And so in summary what we're doing is making real estate investments more accessible through a pretty frictionless technology interface [inaudible 00:10:54] investment platform that prides ourselves on our bedding process and we're allowing thousands of individuals and institutions to be able to invest in real estate with the click of a button. And we think this is the future of how people will be accessing real estate and other alternatives. And the goal is to make alternatives less alternative.

Anthony Scaramucci: (11:13)
So Charles Schwab has this advertisement that talks about stock slices, where for $5 you can buy a little bit of Amazon and a little bit of Facebook and so forth. Is cadre a little bit like that? Like let's say I had $5,000 and I wanted to sort of own a sliver of commercial real estate, is that something I can do through Cadre?

Ryan Williams: (11:32)
Yeah, same concept. So, effectively what we do is we allow people to, if they want to pick and choose thousands of dollars, they can invest in an individual asset or a millions. And we've had people, Goldman Sachs put it in more than 250 million into their own portfolio of real estate. But you can pick, or... And this is what we recommend to folks, you can invest in a diversified manner because the reality is like the equity markets, most individuals shouldn't be picking and choosing. And I think you've seen that with a lot of the recent market volatility. And so we allow people to basically build a custom curated portfolio of real estate that we diversify at Cadre. We got Mike as our chairman of our investment committee, Allen Smith, our president who was formerly president CEO of Four Seasons and Prudential, Dan Rosenbloom at acquisitions [inaudible 00:12:23] in Chicago.

Ryan Williams: (12:24)
So we have that in-house team, that's doing the bedding, the underwriting, we have a backstop. So, we've raised a couple 100 million dollars and it's been reported that it's the [Soros 00:12:33] Fund that's given us that backstop. And that allows us to guarantee the funding of deals and then investors can get access. And really Anthony it's like 10 to 15 properties. Geography diversification, asset class diversification, operator diversification. And we want to make investing in diversified real estate as simple, straightforward, and frictionless as investing in a portfolio of stocks or an ETF.

Anthony Scaramucci: (13:01)
So, it's a brilliant idea. And the good news is you've got all the technology now and the resources to apply this idea to the marketplace, but tell us about the post COVID situation, what's your view of the real estate market in a post COVID-19 environment and how has the pandemic affected investment opportunities?

Ryan Williams: (13:24)
Yeah, it's a great question. And we don't proport to have the answers to everything we can only speak from our experience and what we're seeing and data frankly as well. I think the first point is we spent a better part of the last call it six months, very focused on our portfolio of real estate. So we own more than three billion real estate around the country, more than 15 markets around the country, primarily multi-family. So a lot of workforce housing, some affordable, a few class A assets. That's the bulk of what we own. And then it's office, a little hotel and then some development as well, in kind of that order. And we needed to make sure that everything we owned was performing well, and we didn't have any issues on debt.

Ryan Williams: (14:16)
We didn't have any issues with working capital at the properties and that we had good collections. And we're not declaring victory yet, but we are saying that we've been pretty pleased with how resilient our portfolio has been. Our multi-families North of 95% occupancy offices around that same level. Even our hotels are starting to bounce back. And I say that to say, it's incredibly important when you're investing that you're doing so in a prudent manner, in a diversified manner, you have a great team just like in the stock market. A good management team can drive out performance in real estate as well. And I think that's something that's paid off for us to date. So as we came to this conclusion that our portfolio is performing well, we're delivering cashflow to our investors yield, et cetera. We said, "All right, let's start looking forward because we all know that in these periods of dislocation, some of the most compelling opportunities can emerge, some of the most unique investments can emerge, and where do we think those opportunities will be?"

Ryan Williams: (15:17)
And so what we've aligned on, and we announced a few days ago is we're launching a new real estate portfolio investment opportunity for folks who logged on to cadre.com. We're focused on building a diversified portfolio into asset classes we think will be winners. And we're staying away from the asset classes we think will be losers. So where do we think they're going to be winners? First from an asset class perspective, multi-family we've seen it with our own portfolio rates are at an all time low, people are always going to need somewhere to stay. A lot of people aren't really willing to pay the cost to move, and to find other opportunities. So they're renewing at all time high rates. And I think the other reality is just cap rates are continuing to compress in the space, in the right markets.

Ryan Williams: (16:09)
The second asset class we liked that we think will be relatively defensive, is industrial. And this was happening pre COVID, but eCommerce has accelerated in light of COVID. The growth in industrial, as more people need warehouse, space, logistics, et cetera and so we're going to be focused on some industrial assets as well. And then finally we like select niche office. And this might be a little bit contrarian just given what you hear in the news and read, but the reality is that there are office markets, especially suburban office markets that are seeing increased occupancy. A lot of people are setting up satellite shops and for instance, the Greenwich Connecticut's of the world, which we're in many ways markets that were deteriorating pre COVID. And there's some niche strategies in office like life sciences, where there's tremendous tailwinds, that we're also focused on. We're staying away from retail.

Ryan Williams: (17:04)
We're staying away from central business district office investments, [inaudible 00:17:08], New York city. And we're staying away from full service hotels that really require and rely on travel. And so that's how we see the market playing out. In terms of timeline for recovery, it's going to vary based off of the course of this virus. Our government's collective will in addressing this quickly, and then distributing vaccines [inaudible 00:17:32], but we're not expecting for instance in a hotel, any kind of meaningful recovery until 2022 timeframe at the earliest. And in retail I think it's still a falling knife. And so you got to be really selective. There are winners in real estate despite what you hear in terms of just the distress, a lot of that's in those losing kind of asset classes we focused on.

Ryan Williams: (17:57)
And then the other big dimension is markets. We developed something called a Cadre 15, which is a data science driven proprietary market ranking system of the top 15 markets in the country as of last week. These are markets where we think there's unique growth, unique affordability and through quantitative... And so in qualitative analysis, we've identified these markets. They're markets like Phoenix, Dallas, Houston, Nashville, Atlanta, Charlotte, Tampa, Orlando. Markets where there's, again, a unique combination of population growth, job growth. We even can look at millennial inflow and outflow, and that's how we invest, the asset class we think are winners and the top growth markets.

Anthony Scaramucci: (18:37)
Well, I'm glad you mentioned Charlotte, because if John Dorsey keeps picking on me Ryan, you're going to help me find a house for him in Charlotte. We're going to move him back.

Ryan Williams: (18:46)
You got it, count us in.

Anthony Scaramucci: (18:48)
I beg you. I need you to be the help on that. He picks on me, Ryan.

Ryan Williams: (18:53)
So I heard in the intro. Yeah, [crosstalk 00:18:55].

Anthony Scaramucci: (18:55)
[crosstalk 00:18:55] unbelievable. Let me go to Cadre Cash for a second.

Ryan Williams: (18:59)
Sure.

Anthony Scaramucci: (19:00)
Because I think is an amazing thing, it's an account that earns interest well in excess of the traditional banks, explain to people how you're doing that, explain the safety around that and why this is another exciting asset class and even low interest rate environment?

Ryan Williams: (19:18)
Yeah. We launched Cadre Cash a few days ago. I'd say it's probably our most significant product to date given this current low yield, low growth, high volatility market. And I think all three of those trends are going to be in play for the foreseeable future, especially with the guidance we've gotten from the fed on rates. And so we decided-

Anthony Scaramucci: (19:41)
And what yields are you getting for people?

Ryan Williams: (19:43)
... yeah, so we're providing investors in FBIC insured 3% reward on their cash, which is more than 60 times the national APY. We're providing investors as well with access to a real estate investment portfolio that they can participate in as well. So the idea was when you invest with Cadre, when you sign up, you become a user on our platform, you automatically become eligible for this 3% reward savings account where you're able to earn that 3% on the cash that you say you're going to invest in the real estate on our platform, but also we basically give you a credit for whatever that kind of total commitment amount is. So an example is you come to the platform, you say, "Look, I want to get a portfolio where I invest across 10 assets, and I put $50,000 into a growth oriented, defensive real estate?"

Ryan Williams: (20:40)
We'll say, "Great, got it." We'll open a Cadre Cash account for you. You deposit that $50,000, start earning 3% on that $50,000. As we fund from that account into your real estate portfolio, you can then add more cash to get back to your initial $50,000 balance. And we want it to go out with a 3% rate because we just felt like today given where rates are, and frankly given just the overall alternatives for folks, it's hard to get yield, it's hard to get that kind of return without taking a lot of outsize risk in volatility. And that was really our focus was to ensure that investors got that return on their capital at a time when people need it more than ever while also getting access to a defensive portfolio that's a hedge in many ways to the equity market volatility.

Ryan Williams: (21:31)
And so we've seen tremendous demand for the products. People can sign up, it is a limited time offering, it's cadre.com\cash. And we're excited about what it will mean for people's financial future. That's what we're always anchored on. How do we let more people have access to quality investments that will drive their futures forward? So it's really powerful product and one we think we'll actually expand our reach even further for more individuals.

Anthony Scaramucci: (21:59)
Well, congratulations on that. Just say it again, it's Cadre Cash...

Ryan Williams: (22:04)
Cadre.com\cash-

Anthony Scaramucci: (22:07)
... com\cash.

Ryan Williams: (22:08)
... that's right.

Anthony Scaramucci: (22:09)
Cadre.com\cash for people that are interested. Before I turn it over to John who's got... We've had a tremendous audience participation in lots of questions, I want to talk about the George Floyd incident for a second, because as an African-American black entrepreneur, you've got diversity issues, social issues, economic justice, you're reticent to do that. And I admire that by the way, because you're basically just want to be a person like Dr. King said, you want to be judged by the content of your character and not the color of your skin, but yet we do have this racial tension in our society and the George Floyd incident and other incidents for those men. Other tragic incidents has caused you to speak out a little bit. So I just wonder if you could tell us about the tipping point there and what advice do you have for people in terms of thinking about these issues and how can we work together to improve our society?

Ryan Williams: (23:05)
Yeah, no, thank you for asking Anthony and yeah, you're right. Again, it's been a challenging time. You have this dynamic where the kind of COVID pandemic has just laid bare some really ugly realities for many people in our country and reckoning and acknowledging that it's painful. And so for me, I've navigated my own personal challenges. I can empathize with a lot of the pain and frustration that you see, and you hear, and I just felt like I had an obligation as an African-American founder and CEO to do what I can to help personalize some of what people are seeing and hearing, especially folks and the bubbles that I kind of exist in today and then bubbles being real estate and technology to relatively homogenous industries.

Ryan Williams: (24:11)
And so, as you mentioned, I was a lot more willing to be outspoken, but not just with problems, but with ideas and solutions as well. And I think that's what it's really going to take now that everyone has seen what they've seen on TV, everyone saw George Floyd's life be taken from him. Everyone saw subsequent anger and frustration on all sides. And I think now the idea is like, "Okay, what do we do to build a more perfect union?" And I think we all can start with our own home, so to speak, our own organizations, our own networks. And I think for us at Cadre what we said is, "Look, let's start with our organization." We want to build a more inclusive organization. Right now more than 50% of our management team are women or people of color, that's great.

Ryan Williams: (25:09)
Let's make sure that throughout the whole organization we have a representative company. And I think a lot of the commitments on the company side are great. We need more diversity but what I would do is I would push companies to think about what they can do with their platforms, with their networks, with their ecosystems, with their resources. For me and for Cadre, what I've realized is we have a platform with the mission of expanding access, leveling the playing field, allowing more people to invest in an asset class that's been pretty inaccessible to date and we can use that platform and we can use that mission to extend an increased access opportunity for more people especially those who have been underserved.

Ryan Williams: (26:05)
And so what we've done at Cadre is said, "Okay, let's go above and beyond using our platform. Let's think about how do we create a more inclusive form of capitalism that sustainable because what we're seeing right now in this world is not sustainable and let's focused on driving capital into underserved communities. Let's focus on ensuring that our ecosystem is inclusive and representative as possible." And so what we've specifically said is we're making some from explicit commitments, one, we are going to do everything in our power to ensure that the operating partners that we work with in our real estate investments are more diverse. So we've made commitments at least 10%. We want to be closer to 20% of the operating partners we work with being underrepresented minorities.

Ryan Williams: (26:55)
Anthony, I think you could probably count on two hands and number of let's just say black operators in real estate that have invested more than 50 million of equity. I can only think of four, frankly, right now. Needless to say, there are hundreds, if not, thousands of others who have done that. And we think, again, there's opportunities to be heard in markets that are underserved with partners who haven't been backed and capitalized.

Ryan Williams: (27:20)
But that's one thing uniquely leverage our platform. The second is let's be more open working with minority depository institutions, MDIs. We've heard about how under capitalized, a lot of these communities banks are, and by the way, these community banks don't just serve black and Latino communities. I mean, these are communities that socioeconomically are disadvantaged. And so I think that if you can help include some of these banks that have been left on the outside looking in, in transactions, deposits as well which is great, and people have talked about that, but transactions really where you can create a multiplier effect on capital, then you're going to help again, elevate the least among us and reduce a lot of the pain economically we're seeing today.

Ryan Williams: (28:09)
And so we said, "We're going to commit to a threshold for all of our go-forward deals to work with minority depository institutions that have been under capitalized and underserved." And then I think the final thing for us is really about building coalitions. I was pleased to work with John Stein, founder, CEO of Betterment, and a handful of around 45, 50 FinTech companies on the FinTech equity coalition that was announced about a month ago or so, where it's not just one company, it's not just me and Ryan, and as a CEO, co-founder Cadre, it's, let's build an alliance of other companies with similar missions from all walks of life to ensure that this is as impactful as possible, and that we reach as many people as possible and that we're helping promote greater equality of opportunity.

Ryan Williams: (29:00)
And I think with those collective efforts, a lot of good will come. A lot of change will come, but I would just say it doesn't need to be a monumental action that you take in order to have impact. It can be as simple as having a conversation, acknowledging you don't know where to get started. For instance, if you want to increase your pipeline from a diversity perspective. Because what we're seeing again, it's not sustainable. And just the final point I would make is I do... And I'm optimistic about this, I do believe there's a real opportunity for investors to do well financially and to do good as well. For a long we've had these different buckets of returns.

Ryan Williams: (29:44)
You've got your financial IRR in kind of your impact oriented return threshold. And our view is we're at a point as you know where our country's never been more divided, our world's increasingly divided, the haves and the have-nots have never been further apart and it's not sustainable right now. And it's not good for anybody to kind of look the other way and ignore the pain that's being surfaced from those who haven't had access to opportunity. And so I think as a platform, as a leader, my obligation is to make sure that one, we're executing on our business plan, but we're thinking more holistically about all the stakeholders that co-exists in our world and those stakeholders are increasingly community. And so as we look to diversify and focus on positive societal change, vis-a-vis our investments, I think there will be this cycle where society, and at least among us are elevated and have greater access to opportunity, communities and neighborhoods around the country especially those underserved become more prosperous.

Ryan Williams: (31:00)
And the long-term effects, the long-term returns in IRRs of this will be significantly greater because there'll be less volatility, there'll be less unrest, there will be less turbulence and more stability and more equity. And I think that's all that folks are looking for is, "Give me a shot, let me compete. Give me more of a level playing field." And companies today can no longer ignore those, please. You know, the cries that we're hearing have to awaken us, we can't keep hitting snooze, and I am optimistic for what it's worth that there's a lot of collective will especially in the private sector to drive great enduring change that's sustainable.

Anthony Scaramucci: (31:45)
Well, I think it's beautiful and very well said. And I what I appreciate more than just what you're saying, or the actions that you're taking, it's an incentive for all of us, Ryan. I'm going to turn it over to John who's got a series of questions for you from our audience, but thank you for joining us today.

Ryan Williams: (32:04)
Thank you, Anthony. I really appreciate it.

John Darsie: (32:06)
And Ryan, I thought your last answer was very well said, and I want to build on that a little bit. There's really two forms of racism that exists. There's the overt in your face type of racism, and then there sort of the nimbyism not in my backyard type of attitude that you see in a lot of major cities and even left leaning cities that are generally thought of as more receptive to minorities. You talked a little bit earlier about affordable housing and about how you think you can do well and do good with a variety of different investments today. We've had other guests on previously people like Steve Case, people like Mark Cuban of [inaudible 00:32:40] talking about how they think affordable housing is a tremendous investment opportunity that also happens to have an impact component built into it. What's your view on affordable housing in general, and how can we... There's a real dearth of quality housing around major cities, how do we fix that, and what do you think of it from an investment perspective?

Ryan Williams: (32:59)
Yeah, no, Greg, great question. Great point. First, it's no one can argue that we have a shortage of affordable housing in our country today. So there's a clear macro case for increasing the supply of affordable. You can't say the same thing for other asset classes. You can't say the same thing for office, especially in some of the larger markets. Can't say the same thing for hotel, especially full service. Definitely can't say the same thing for retail. So I think the first point is, there's definitely a mismatch in some asymmetry between supply and demand for affordable housing. So you check that box, okay, macro investment theme can make sense. The next question really is, what of the right markets to be investing in affordable housing and how do you bring together the public and private sectors in those markets to ensure that there's? Again, more inclusive capitalism, that there's positive revitalization of communities, not gentrification happening with a little pocket of affordable housing.

Ryan Williams: (34:05)
And I do think that there is an increasing focus from investors LPs, allocators on that very dynamic and they're willing. And increasingly we hear it because we have investors reach out to us and recently in particular, we hear it from investors that they're willing to think differently about the business plans, the return profiles within reason of course, and the [inaudible 00:34:32] periods. And so I think if you can identify high growth markets, affordable markets, create partnerships between private public sectors, which sounds a lot easier than it actually is, I actually think that there's almost this arbitrage opportunity from an investing standpoint, just because affordable housing has been under invested historically, but there has to be the right incentives. Again, from a public private perspective, I think we've seen that there are a lot of programs where the spirit of the program is good, but the actual execution is not.

Ryan Williams: (35:07)
And I attribute that again to not having the right balance between the private sort of incentives and the public incentives. The other thing I would just say is that there are definitely a lot of operating partners, sponsors, developers that I've spoken with, that if the capital was there, they would be building and developing affordable housing at scale. And so I also think there's an untapped operating partner pool, and management team pool, especially among more diverse operators and managers who really know the communities and allowing the affordable housing will be developed. So I think if you can create almost this kind of investment lifecycle where at every single point you're ensuring that the stakeholders are aligned with the mission, they have the right incentives and you're picking the right markets, the macro story here makes sense.

Ryan Williams: (36:03)
At Cadre, we've done a little bit of affordable housing. We've done a lot in workforce housing but we're increasingly focused on affordable housing, finding opportunities that we think fit within the markets we're focused on, and working to structure partnerships, public, private, but I definitely think it's one of those asset classes in the scheme of everything going on, it would be defensive, could actually drive outsize returns because of the dearth of capital in the space today and also can clearly do good.

John Darsie: (36:33)
Have you thought about... You talked about different programs that have existed from a public policy perspective that have sometimes failed in their mission despite having a good spirit within the legislation. Have you thought about what type of incentives from a public policy perspective would drive the type of investment that you'd like to see in underserved communities?

Ryan Williams: (36:54)
Yeah. I've thought a bit about it. What I would say is that to me there's a lot of different ways you can skin the cat and there's a lot of different ways that you could incentivize developers, sponsors and investors. And we've seen a lot of it. Look at the Opportunity Zone Program in terms of capital gains being deferred and then ultimately subset a part of that being eliminated. We've seen different tax credits. So the economics of it, I'm not as focused on because I think that's relatively straight forward. I think the bigger issue is there's not... I haven't seen in really many cases a sustained and ongoing set of incentives, checks and balances. What I mean is let's take the, Opportunity Zone Program.

Ryan Williams: (37:46)
You put the capital in, as an investor you're now able to defer gains, and then on any appreciation above your initial basis, you can eliminate those gains. But that's like a one and done deal. Now with the developer, the operator, they've got to abide by the whole periods, et cetera. What if there were ongoing incentives based off of things like community impact, right? You could figure out some kind of metric based off of diversity of the tenant base, based off of the turnover in the properties themselves. So that you're thinking about this in more of a longterm way, not a one-time, let me see if I can benefit economically and then make sure that I get my money 10 years from now.

Ryan Williams: (38:37)
And I think that that's been missing in a lot of recent policy, a lot of recent structures, is how do you create almost these different tiers of incentives above and beyond the initial that align with the long-term development and inclusion of these communities. And I think if folks could come with some ideas related to, how do we ensure that the missions of these programs are kind of delivered over the course of the whole period, not just one time upfront and you move on, then there would be greater accountability and there would be greater alignment with actually ensuring that positive societal impact and inclusion is delivered. And there are models, and there are examples that I've seen where, you're changing for instance in a shopping center tenant base, right?

Ryan Williams: (39:30)
You're taking out in, for instance, in my hometown of Baton Rouge, I was speaking with a local official there recently about swapping out a liquor store in a retail strip center for a Starbucks or a Whole Foods and the kind of change that that would create almost even in the mentality of many of these communities in terms of what the access is, and that's something that those kinds of changes where you're repositioning, but still including the community and the progress and development, aren't hard to do. You just need the right incentives, you need the right accountability, and you need a long-term orientation on making sure that every year, every month, these communities, these investments are bringing forth the intended mission and that all the stakeholders, public, private and otherwise are aligned on an ongoing basis, not just one time.

John Darsie: (40:26)
So, one last question, before we let you go, you started Cadre and you democratize primary access to real estate, but you've also more recently developed a robust secondary market on the Cadre platform for real estate. One of the things that discourages people from investing in real estate in the first place is the illiquidity factor. Why do you think it's important for healthy financial markets in this case, a healthy secondary market for commercial real estate, why is that important for the development of that market and what type of positive impact does that have on returns, and just outcomes in communities?

Ryan Williams: (40:59)
Yeah. First thing, I guess I have to take a step back, when I started Cadre I said, "Why are so many individuals under allocated to alternatives and to real estate?" And there were two reasons I believed, one was a lack of efficient, low fee access. And the second was a lack of liquidity. On the low fee efficient access, we created a technology interface with the great institutional investing team so people can log on with the click of a button, pay significantly lower fees than traditional real estate PE firms. And we've delivered on that. We've executed on that. The liquidity dimension was a lot more challenging, but I also thought if we could crack that code on building a secondary market, we would give more individuals confidence and comfort in investing in real estate, because they knew if there are market dislocations, like we saw 10, 12 years ago or things like we're seeing recently with COVID, they'd have the optionality to get out.

Ryan Williams: (41:56)
They want to be prone to market swings about the ability to get liquidity. For individuals it's a lot more important in many ways to then institutions because they don't have the same balance sheets, the same assets. And so we spent the better part of the first three years just working on legal regulatory and making sure that we could actually provide fractional liquidity for investors in both properties and in portfolios to the extent they wanted to sell. We spent the first few years testing the concept, building prototypes, spending some time with folks who would serve as backstops, almost market makers, and about two and a half years ago we formally launched our secondary marketplace successfully. And the idea is we want individuals on a quarterly basis to be able to sell at more efficient pricing levels than the real estate secondaries funds charge, right? Where you're getting massive discounts because there's no symmetry of information. Buyers and sellers don't have the same information.

Ryan Williams: (42:55)
So you're basically baking in some kind of opacity discount into your investing. And I think many ways we've delivered on that, we've closed hundreds of trades on our secondary marketplace for hundreds of individual investors, pricing generally been within a few 100 basis points of the latest third-party valuation, and I think as a result, we've given people just an extra degree of comfort that if they need, these aren't people kind of high-frequency trading or otherwise, they can get out without the pain associated with a real estate, private equity funds, illiquidity dimension, and I think what's exciting is you can see a world where we take this proprietary first ever direct secondary market for real estate and apply it to other assets, other real estate holdings, other alternatives over time.

Ryan Williams: (43:46)
So let's say there's an office landlord in New York, great building, but they've been struggling. Tenant base is not coming back anytime soon, there's a lot of headwinds in terms of the cost of reopen. They need some level of liquidity. They need to sell a 20% interest in their building of their asset. Well, we've built secondary marketplace that connects owners and operators and their holdings to thousands of investors around the world. And we can effectively start unlocking liquidity and real estate assets and making it a more liquid asset class than it is today. And I think what the outcome will be is there'll be more people comfortable with dipping their toe and getting involved in this space, more institutions comfortable to the extent there are major market corrections. And ultimately I believe change the paradigm in real estate from one of opacity and illiquidity to transparency and liquidity, which I think is better for everybody.

John Darsie: (44:47)
Yeah, and as you talked about, there's no shortage of developers who have identified great projects in terms of things like affordable housing, but there's a lack of capital. If you can create a robust secondary market, it makes more people more comfortable putting capital into the space and it just drives capital in general.

Ryan Williams: (45:03)
Absolutely.

John Darsie: (45:05)
Well, Ryan, thanks so much for joining us. It's been a fascinating conversation. I might have to log onto cadre.com here in a few minutes and put some money to work, but it's a fascinating concept. Congratulations on building a great business. The tremendous team you've put together and all the impact you're having in communities as well. Anthony, you have a final word.

Anthony Scaramucci: (45:23)
Oh wow. I'm going to be looking for a house in Charlotte, Ryan, so I'm expecting you to help me. Okay-

Ryan Williams: (45:28)
I'm there for you. You tell me where.

John Darsie: (45:31)
[crosstalk 00:45:31].

Anthony Scaramucci: (45:32)
[crosstalk 00:45:32] SALT Talk, you know what I mean?

John Darsie: (45:34)
Do you have any retirement communities in your portfolio, Ryan, that we could find Anthony a home that he can [crosstalk 00:45:39] his later years?

Anthony Scaramucci: (45:42)
It's relentless Ryan. Okay. Next week, Ryan Williams will be joining me as the co-host of SALT Talks on a going forward basis. [crosstalk 00:45:52] John will be reporting-

John Darsie: (45:52)
God willing, he'd do way better than me, that's for sure.

Anthony Scaramucci: (45:54)
... on assignment from Charlotte, North Carolina. Ryan, thanks very much.

Ryan Williams: (45:59)
Thank you both.

Anthony Scaramucci: (46:00)
[crosstalk 00:46:00] terrific. We look forward to following your career. We hope you'll come back and of course, love to have you at one of our live events.

Ryan Williams: (46:06)
And wait for it. Thank you both, [crosstalk 00:46:08] appreciate it [crosstalk 00:46:09].

Russell Read: Transformative Technologies & Infrastructure | SALT Talks #67

“The Middle East is not just a source of capital, but it can be a destination as well. And that's really in terms of big ideas, I think the transformation we're going to be seeing in this side of the world…is going to be coming onto their radar screen in a big way.”

Russell Read is Group Managing Partner for the C Change Group of investment funds, companies, and advisors, dedicated to materially transforming the production, distribution, and consumption of natural resources around the globe. In addition, Dr. Read serves as Senior Advisor to MSCI with respect to crafting solutions for the global asset owner community. Prior to C Change, he was Chief Investment Officer (CIO) of the Alaska Permanent Fund Corporation, the Gulf Investment Corporation (GIC), and the California Public Employees’ Retirement System (CalPERS).

The Middle East has long been off the radar of investors, but that is changing a rapid way. The potential stems from more than just the sovereign wealth funds, but also in large part due to its geographical centrality to the emerging world. It is set to play a major role as both a source of capital and as a destination. “I look at UAE and Abu Dhabi as the financial and logistical center for an emerging region.”

Sovereign wealth funds have come a long way in the last ten years. A big shift occurred as result of the 2008 financial crisis where sovereign wealth funds provided tremendous support to the financial system and the global financial capital markets.

LISTEN AND SUBSCRIBE

Spotify | Amazon | Google | Stitcher

SPEAKER

Russell Read

Group Managing Partner

C Change Group

FULL BIO

MODERATOR

Anthony Scaramucci

Founder & Managing Partner

SkyBridge

FULL BIO

EPISODE TRANSCRIPT

Rachel Pether: (00:07)
Hi everyone, and welcome back to SALT Talks. My name is Rachel Pether. I'm a senior advisor at SkyBridge Capital, a global alternative investment firm, as well as being the MC for SALT, a thought leadership forum and networking platform that encompasses business, finance, and politics. SALT Talks as a series of digital interviews with the world's foremost investors, creators and thinkers. Just as we do at our global SALT events, we aim to empower really big, important ideas and provide our audience a window into the mind of subject matter experts. Today, I'm very excited that we have a subject matter expert with us, Dr. Russell Read.

Rachel Pether: (00:49)
Russell is the group managing partner for the C Change Group of investment funds, companies and advisors dedicated to transforming the production, distribution, and consumption of natural resources around the globe. Russell also serves as a senior advisor to MSCI. Prior to C Change, Russell has been the CIO of not one but three major asset owners, the Alaska Permanent Fund Corporation, the Gulf Investment Corporation, and CalPERS. He served as chairman of the investors' committee of the president's working group on financial markets under treasury secretary Henry Paulson, and he's also been recognized by Institutional Investor as one of the world's most effective chief executives. Dr. Read has multiple degrees, and he received both his masters in economics and doctorate in political economy from Stanford University, Russell, welcome to SALT Talks.

Dr. Russel Read: (01:45)
Great to be here, Rachel.

Rachel Pether: (01:48)
Now this conversation could go in so many different directions, because I know you have experience in sovereign wealth funds, pension funds, natural resources, sustainability, but I'm going to try and focus on institutional asset owners today. Before I do that, perhaps you could just tell me a bit more about your personal background, and how you ended up back here in the Middle East.

Dr. Russel Read: (02:12)
So the Middle East is a particularly important place, but not for the reasons that many people think. Of course, when the investment community thinks of the Middle East, they oftentimes think of the sovereign wealth funds. And that's certainly part of the story, but what they don't think about is the geography and the centrality of the Middle East. And in particular, the way I look at it is UAE and Abu Dhabi as the financial and logistical center for an emerging region. And that emerging region that people don't really think about we call MEASA region, the Middle East, Africa, Southern Asia. And it's encompasses about half of the world's humanity. So this is interesting, because it's half the world's humanity, it's a disproportionate amount of its growth. It's the major consumption story for the world. And yet it's really off the radar screens for institutional investors.

Dr. Russel Read: (03:22)
So the Middle East is not just a source of capital, but it can be a destination as well. And that's really in terms of big ideas, I think the transformation we're going to be seeing in part is that this side of the world that investors have really shied away from, oftentimes for good reasons, is going to be coming onto their radar screen in a big way.

Rachel Pether: (03:48)
Although I must admit your background doesn't look like you're in the Middle East, but we know the truth. You've had the luxury of working with both an established pension fund, CalPERS and also one of the world's most respected sovereign wealth funds, the Alaska Permanent Fund. Before we go deeper and to their asset allocation, perhaps you could talk a bit about some of the key differences in approach between the two.

Dr. Russel Read: (04:15)
So sovereign funds and pension funds share some real similarities, but there are also some real key differences that people don't necessarily realize. One of them is linked to the nature of sovereign wealth funds themselves. And that is they are artifacts of national wealth, or in the US are state sovereign wealth funds, but that gives them a different status. For instance, when it comes to currencies, an agreement that was reached just a few years ago was that sovereign wealth funds would generally be treated as the same as the monetary authority of that country when it came to foreign currency conversion. So this is important. For instance, if you think of China, the way that currencies work an institutional investor has some work to do to repatriate their investments to their currency out of China. But that's not the case with a sovereign wealth fund.

Dr. Russel Read: (05:25)
So sovereign wealth fund has the currency convertibility of the monetary authority of that country. So they generally can convert currencies, for instance in a place like China, at all times and on shore. This is a very different set of circumstances. It also generally relates to the access to fixed income markets, to local fixed income markets, besides the structural feature of being a sovereign fund associated with the monetary authority, there's also a difference in the liabilities. Of course, all too often when it comes to investment funds, the investment teams think about their investments, but they don't necessarily focus on what they're investing for. This has happens all too often. But the liability difference is pretty dramatic. And with sovereign funds, they can have very, very longterm liabilities or obligations eventually to the state. Generally the sovereign wealth funds are more global in their character. They are longer term in their character. So in general, the asset liability management problem does not bite nearly as closely.

Dr. Russel Read: (06:52)
So the sovereign wealth funds have really come of age, particularly in the last 10 years. There was also a very important change I should mention that occurred before the global financial crisis versus after the global financial crisis. And in many ways, before the global financial crisis, there was a sort of a suspicion about sovereign wealth funds, and would they be good actors? Would they be positive in terms of their contribution to the international capital markets? Or would they be sort of a tool of statecraft? So there was real concern about this, particularly from the United States.

Dr. Russel Read: (07:38)
And so that was before the global financial crisis. Global financial crisis hits, and opinions changed completely. What happened in the global financial crisis is that the sovereign wealth funds were an unambiguous source of stability in the financial system and the global financial capital markets. And that was unexpected. So they went from being viewed with suspicion to being absolutely critical to the health of the global financial system. So I would say that the acceptance of sovereign wealth funds globally as sort of the investment partners of choice, that has really taken root. So for doing international partnerships, for being welcomed by host countries and by the financial community, sovereign wealth funds are now in a wonderful position. Even better, I think, than the standing of most pension funds.

Rachel Pether: (08:47)
I think that's a great point that you raise about perceptions. I know in the global financial crisis, they really came in as your most white knights, didn't they? Particularly with some of the banks, we saw that with the Middle East, we saw that with Barclays and Citi taking on a lot of Middle East money to help them through the crisis. Do you think that sovereign wealth funds are considered smart money in the world of investing? It's okay to just have capital, but do you think they're also seen as savvy investors? And maybe you could talk about that from a perception point of view as well.

Dr. Russel Read: (09:23)
Well, I think they are viewed as smart money. Now, there is a range of sovereign wealth funds, of course. The largest sovereign wealth funds have taken a very interesting role that's quite different than what exists among pension funds. Pension funds are largely allocators. They do some direct investments depending on the size and nature of the pension fund, but they're allocators first. Sovereign wealth funds, particularly the largest sovereign wealth funds, have become direct investors in a very significant way. Now that's true among the largest sovereign wealth funds, but it's very significant. They are significant direct investors, as some of the largest investment management firms are.

Dr. Russel Read: (10:13)
So that role from being what they used to be, they used to be largely allocators like the pension funds, but that has changed. The role of the sovereign fund and the largest of the pension funds to become co-investors, direct investors, changes the dynamic fundamentally with the investment management community.

Dr. Russel Read: (10:37)
And it's not just about the management of fees, it's that the sovereign wealth funds can add significant teams and they become potentially excellent partners for some strategic investments in areas like infrastructure, for instance, that require significant amounts of capital.

Rachel Pether: (10:58)
So in line with that smart money angle, and certainly one thing that we're seeing the sovereign wealth fund community has been this huge push towards partnerships, and often with other sovereign wealth funds. Where are you seeing some of the greatest innovations in that space? Because the two that I'm thinking of actually both involved the Alaska Permanent Fund. So perhaps you could talk us through an example of a transaction or a deal that you worked on there.

Dr. Russel Read: (11:25)
So one of the biggest transformations and points of enthusiasm, I think is that the shift from being an allocator to being a direct investor and co-investor has another potentiality that's really promising. And we pursued these from an Alaskan perspective. And that is that we can retain, the sovereign funds and other pensions can not just be allocators among investment managers, but they can take a more proactive role. They can have a thematic approach, where they interview and hire investment managers to conduct certain mandates.

Dr. Russel Read: (12:11)
We did this in two significant ways from Alaska. One was we partnered with other pools of capital from in the Middle East and in Europe and in Asia to form what's called capital constellation. Capital constellation is intended to take talented, promising private equity teams and give them their foundational mandates, and also take a strategic stake in their in their enterprises. So instead of... The idea is that it would catalyze and accelerate the success of those private equity investment teams. And we wanted to participate also in the strategic benefits of being an owner with that.

Dr. Russel Read: (13:08)
So we pooled our capital together. Note the difference, we weren't just being sold to. We engaged the investment management community as a collection of funds, that we were not going to manage those strategic investments directly, but we were going to pool our capital together and act in a concerted way. I think historically, that was really quite different. Namely, the asset owners did not act in concert. So I think the ability for asset owners to increasingly want to work together, and not necessarily look to dis intermediate the investment management community, but to direct them into the themes, into the geographies that are of most interest to them. So that's a very different role, and we find that the investment management community has really welcomed that type of engagement.

Dr. Russel Read: (14:08)
Second thing that we did is we launched into an engagement for related to equities in the markets comprised of the MEASA country. So Middle East, Africa and Southern Asia. This was something that we were looking to take advantage of in terms of the fast growth in these economies. So again, we were leading sort of the charge about inclusion, which countries could be investible, which stocks could be investible within those markets. And it was a way that we saw of capturing the high growth of those countries. You know, we have an interesting challenge, which is that global growth and this is abstracting from the current COVID crisis, but absent that in general, worldwide growth has been reasonably good. But the interesting part is that the growth is shifting, and the growth is shifting from sort of the OECD markets to, particularly to the MEASA region. So there's this question, if growth is shifting to these other parts of the world, how do we capture those returns? Because if you don't make the adaptation, you face the prospect of considerably lower long-term returns in your established markets.

Rachel Pether: (15:48)
There's so many parts to what you just said that I'd like to pick up on. So the first piece that you raised, the capital constellation, and you spoke about being an active investor, this obviously leads into ESG because you can have more of a say in the companies that you're investing in. How do you see that playing out in the asset owner community? Because I know CalPERS, for example, has been very proactive on this front. Is this something that you've seen a shift towards more, more of this activism?

Dr. Russel Read: (16:24)
It is. And I think the ESG lens is one of the most important changes, really over a very recent period, and that recent periods over the past, say 24 months. And I want to contrast with a difference that I saw. There was a nascent ESG investment effort prior to the global financial crisis in '08, '09. And what happened there is that the global financial crisis acted to defer interest in ESG investing. There was a kind of a view that the house is on fire in institutional plans, and we have other fish to fry. So ESG considerations will come later.

Dr. Russel Read: (17:22)
Now what we've had, including with the COVID crisis, is the opposite reaction. It is not that the initiatives related to environmental, social, and governance investing have diminished, they've actually increased in importance. So it's been a fundamentally different response. And we see this as a real opportunity. And it's an opportunity that is also aligned with a challenge. And that challenge is related to the utilization of natural resources. And it's related to some real environmental challenges. Of course, we hear about global warming. That is not the only challenge that is out there. The global plastics problem looms as a very large problem as well. Chronic shortages of water. And from an investment standpoint, this creates an opportunity. In fact, without galvanizing capital into attractive investment opportunities, those ESG problems will not be solved.

Rachel Pether: (18:31)
And Russell, who was leading that charge pre-financial crisis on the ESG front? Was that being driven from a regulatory perspective, or was it being spearheaded by the sovereign funds themselves?

Dr. Russel Read: (18:43)
I think pensions and sovereigns together have both played a disproportionately important role. The rise of ESG investing has been even relatively recent in terms of being done at scale. But the first manifestation of this really at scale is with existing publicly traded equities. So the idea that has appealed to many funds is, for instance, having perhaps a portfolio of stocks, a large portfolio of stocks that has the same risk and return factors as a market cap weighted index, except with a lower carbon footprint. That's sort of an example. If you wanted to have the essential performance of market cap weighted indexes, but wanted to have less a footprint, then you could manifest that in your stock portfolio. I think the bigger challenge is, and what will ultimately be more important, will be the private markets.

Dr. Russel Read: (19:52)
The private markets is where institutional investors can actually lead to direct transformation in the global consumption story, in the global natural resources story, and in the global environmental story. So that is looming as a very big opportunity, and it's one in which the emerging markets, particularly the MEASA region, loom disproportionately large. MEASA region accounts for almost a hundred percent of the prospective population growth of the planet over the course of the coming decades. So 60% of that would be in Africa. So along with that population growth is the consumption growth story. So we have a challenge, because we have a region that is going to account for a disproportionate amount of some of the most compelling potential investment themes. And it's sort of off the radar screen of our traditional investment community.

Rachel Pether: (21:03)
I'd love to pick up more on some of the points that you talk about with regards to the growth and consumption story. And you also spoke about projects being investible. So if you just hone in on the G part of that ESG equation and the governance, how do you approach the lack of transparency or the perceived lack of transparency in some of these emerging markets, where it can be difficult to access data in some cases?

Dr. Russel Read: (21:33)
So this is a big issue but it's an issue which the solving of it becomes part of the attractiveness of the market. So what do you have in the emerging markets in general? Governance is a challenge, but some of the most promising companies in the world actually are born out of the emerging markets. We think of Saudi Aramco as an example in which governance can actually be quite good on a corporate level. But what we see is the important role of the public markets. So the public markets themselves instill a discipline and transparency. If you're going to be publicly traded, in order to be credible with global investors, you have to be transparent. You have to be auditable. And so the inclusion of enterprises in the global capital markets is inherently a disciplining tool. So we've seen a dramatic improvement in governance as the countries and as the companies become part of the capital markets.

Dr. Russel Read: (23:02)
We also see the importance of transitions from private market investments to public market investments. Why are public market investments interesting? In part also because they provide a path to liquidity. So if you're investing in a place like Africa in the private markets, which can be very promising, we need to be able to think of an exit or find an exit path. And this is even more important in the emerging markets than it is in the OECD, where you also have to think about what your exit is going to be when it comes to the private markets. But unlike the OECD, in the emerging markets, you cannot necessarily count on a strategic exit. You have to be able to see a path in general toward becoming publicly traded. So there are some very important features here.

Dr. Russel Read: (24:00)
There was a choice that Aramco had between listing in London, listing in New York, and they ended up listing in Saudi Arabia. And this was an important choice, because it also signaled something very fundamentally different, that it wasn't that you had the list in a major market to be credible. You can actually list in your local market, and that that would be helpful for the development of your local and regional economies. So I think that that choice of Saudi Aramco, that list in Saudi Arabia was a particularly important signal to the emerging markets in general.

Rachel Pether: (24:46)
It was almost like saying, "Yes, we are good enough," in some ways, wasn't it? Like, "Yes, we are just as good as a New York Stock Exchange or a London Stock Exchange."

Dr. Russel Read: (24:56)
If they chose a different path, if they had listed in London or New York first, it would have given a very different signal, not just to Saudi Arabia, but across the emerging markets, that to emerging companies, if that you had to list, you would have... It would have sent a signal that if you want to be taken seriously as an investment to the global capital markets, you have to list in London or New York or Hong Kong. So I believe that that was a pivotal decision, not just for Aramco, but for the emerging markets.

Rachel Pether: (25:32)
And you talk about just picking up a little bit more on the investible side of the equation, we've discussed the transparency piece, but with regards to the MEASA region, and you're talking about these large asset owners that need to deploy multi-millions of dollars, are there actually projects of scale for them in the private markets? And particularly ones that actually incorporate all of these ESG factors?

Dr. Russel Read: (25:58)
So this is one of the important challenges. From a big picture perspective, is there the need for capital in places like Africa? And of course the answer is yes. However, and the however is an important thing, the number and scale of bankable projects is limited. Does Africa need a trillion dollars in infrastructure investment? Sure it does. Are there a trillion dollars of investible bankable projects? Not in the near term. So how do we bridge this gap? How do we create, how do we help with establishing a pathway toward bankable projects? And here there are some important lessons about what are sort of the key needs and opportunities. And we're seeing some of the answers with, for instance, the digital economy, that Africa is proving to be an excellent source of growth for the digital economy.

Dr. Russel Read: (27:08)
So if you go to a place like Kenya, it's surprising how ubiquitous are smartphones and how advanced the applications are, in many ways have skipped traditional infrastructure development. Kenya is a middle income country by global standards. It is not a poor country by world bank standards anymore. And you can of see a different development path. I think that the infrastructure needs associated with energy and communications are leading the path toward bankable projects. And those are proving to be pretty straightforward from a governance perspective as well. So I think in addition to that, logistics, the African logistics problem looms as a very, very interesting opportunity. Along with that will be the role of distributed energy. Africa will not have an established grid system such as we have in North America and in Europe, they won't want to do it. Given how vast the continent is, it is going to require a distributed energy system. And that's a pretty exciting opportunity as well for new technology.

Dr. Russel Read: (28:29)
So what we have is we have many great technologies being born out of places like Silicon Valley and MIT and in Europe and Australia, but some of the best applications and scalability of these technologies won't be in places like the United States, it'll be in places like the MEASA region. India is kind of a great case in point. What's the the incremental energy need in India? It's a lot greater than any place in Europe or North America.

Rachel Pether: (29:04)
Yeah, that's a great point, all technology has to solve a need or a gap, and I guess the need or the gap is typically much larger when you look at these emerging markets. You can make so much more of an impact with such a small change in the lifestyle or the technology.

Dr. Russel Read: (29:27)
And I think what it leads to also is that those sorts of investments, many of the infrastructure investments in North America or in Europe, can be commoditized in a that it limits or puts a ceiling on what the potential returns are. That is different than in a high growth region like the MEASA region. So commoditized returns can convey a low degree of risk, but also a low degree of potential return. And I think the growth prospects of capturing infrastructure opportunities in the emerging markets, particularly in the MEASA region, are one of the great things we're going to be seeing.

Rachel Pether: (30:16)
Fantastic. Thanks, Russell. And we've had a number of questions coming in from the audience, and broadly you can group these into the MEASA region and ESG. So I'll just start with one of the ESG questions. First from the Tesco pension fund, he asked to what extent do we all have the same dreams and objectives around ESG, but because of inconsistent approaches, we're not pulling in the same direction?

Dr. Russel Read: (30:43)
Well, it's a perfectly good insight. What we're absolutely seeing is that institutional investors have become much more sensitized to ESG concerns, but they have very different conceptions of what that means, and it can be vastly different. Now, that being said, there are a few big themes that are reasonably consistent among many of those investors. Clearly climate change is one of the big themes. So that is one where there's a critical mass of institutional investors that can pursue not only a configuration of public market stock portfolio investments, but also private market investments. Some of the other themes that are emerging, and they don't have to... They can make a big difference without having to scoop up the majority of investors. And I think for instance, take a look at smart cities and consumption related opportunities in Africa, how Africa now accounts for about a trillion dollars in consumer purchases. A trillion dollar consumer sector is actually meaningful. It's one of the great opportunities. And that is where a critical mass of investors doesn't have to be the majority of investors.

Dr. Russel Read: (32:27)
So I think that there will be for investors, institutional investors that can identify and develop the bankable opportunities in these high growth regions, that is going to be the antidote to potentially slower growth in the OECD.

Rachel Pether: (32:44)
That's actually a really great segue into another question that's come in on China's role in the MEASA region. Obviously, China is moving through with the One Belt One Road and the new Silk Road. This will lead to indebtedness of many countries in the MEASA region. How are you seeing that playing out, particularly because many of the investments are on the infrastructure front? Maybe you could give your views on the One Belt One Road initiative.

Dr. Russel Read: (33:15)
Well, my view is that overall, this is a positive. It's not without its issues, as you point out, there is a level of indebtedness with a number of the African countries, which has led a number of those countries to become cautious. But I view it in a completely healthy way. Is Africa in general better off because of the commitments from China? Unambiguously, yes, it is. If they did not have those investment commitments from China, the economic growth prospects of the continent would not be the same as they are today. And it's probably reached a pretty healthy state, namely, African countries are now being much more judicious about the types of capital and conditions under which they accept investment. So they need investment, want investment, and China has been unambiguously helpful, but they are no longer simply accepting investments with lots of strings attached without doing their own due diligence. So I think it's actually reached a very healthy state. And so this is a pretty exciting part of the story, but China has been an important piece in this whole puzzle.

Rachel Pether: (34:44)
Is China included in your MEASA strategy, or is that, that's outward you're looking at more of the high growth, younger demographic countries in the region?

Dr. Russel Read: (34:55)
When we look at the MEASA region as an investible geography, we think of it as everything but China and the Belt and Road initiative. And in many ways, it's what people historically have thought about related to the emerging markets. China is no longer a high population growth country. It's likely to be declining in population. Interestingly enough, today China, India, and Africa have the same population. They each have 1.4 billion people. This is a very interesting crossroads. However, the future of those three geographies, China, India, and Africa is going to be quite different. China will have a declining population, whereas India will be increasing to a projected 1.75 billion at its peak. Africa is expected to have a population by the end of the century of 4.3 billion people. So this is a very different trajectory from having the same population base as today.

Dr. Russel Read: (36:12)
And so some of the things that we like to think about with the emerging markets are high population growth, are high economic growth, high consumption growth. Growth is what we like to think about related to the emerging markets. And that's not necessarily what we think about with China. We think about that with the MEASA region.

Rachel Pether: (36:33)
We actually had a guest on SALT Talks last week from the Hong Kong Monetary Association. He made the comment that China will grow old before it becomes rich. So I guess that plays into your growth story.

Rachel Pether: (36:46)
And we have one final question to finish on. You speak very passionately about collaboration and this partnership approach. And when you're looking at some of the infrastructure needs in Africa, many of them are actually Pan-Africa. So if you're particularly looking at physical infrastructure like roads and train tracks and things like that, what would be your advice to the African nations in terms of collaborating with each other on these projects? What would be some of your, I guess, key rationales for collaborating together?

Dr. Russel Read: (37:31)
So I think you're exactly right that the collaboration among African economies is likely to be particularly important. And it's not just trade zones, it's logistics. When I think of some of the great challenges in Africa to creating bankable, investible projects, oftentimes they fall short because of logistics. You're going to have countries with high populations with something on the order of a single major road. And so how is the logistics problem going to be solved? And then part the logistics problem is going to be linked to energy and the digital economy. And I think that's going to be an interesting thing, that the logistics problem in Africa is likely to be solved different than how it was solved in North America and in Europe. So I think the digital economy is shaping up to be an important force in actually helping to solve logistics issues. It doesn't mean you won't still need more traditional roads and other sorts of things, but the optimization of the logistics, I think, is something that crosses borders and requires cooperation among the countries.

Dr. Russel Read: (38:55)
And there's a big benefit to it. You can see it particularly in sectors such as agriculture, where throughout much of the Sub-Sahara, 30 to 50% of crops rot in the fields. That is an informational problem along with a logistics problem, and both can be solved in part through better technology.

Rachel Pether: (39:18)
Fabulous. Well, thanks, Russell. I mean, it's been a pleasure speaking to you as always, really appreciate you giving your time and covering so many topics. I thank you so much for joining us today.

Dr. Russel Read: (39:29)
Thank you, Rachel.