E139: How HIG Went from $75 Million to $67 Billion AUM

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You've been at HIG for sixteen years, and the
firm has really grown through your tenure.

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Tell me about how HIG has grown over the
sixteen years that you've been there.

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HIG is a platform.

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Starting in 1993, '70 '5 million first fund,
very strong performance.

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Fast forward to today, 67,000,000,000 in assets
under management, 19 offices, over 500 investor

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professionals.

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And in addition to private equity, a fully
developed alternative credit platform with both

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stress debt and direct lending, a real estate
effort, an infrastructure effort, and a growth

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equity effort, and all of those in US, Europe,
and Latin America.

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HIG has really grown from a small private
equity fund decades ago to a $68,000,000,000

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behemoth today.

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How did HIG grow?

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First and foremost, performance.

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And so very strong performance, especially in
the flagship equity product, top decile for a

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number of years.

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Really, really strong investor demand that
allowed the firm to say, okay.

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We can raise more capital.

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Investors are asking us to manage more money,
but we don't wanna lose our discipline.

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We don't wanna grow out of our space.

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How do we accomplish that?

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We need to grow geographically.

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We need to grow into adjacencies, and so that's
what they did.

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They really grew grew laterally into these
strategies and then geographically first into

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Europe and then second in Latin America.

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So your co head of HIG's distress strategy,
what is distressed debt?

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Good question.

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The traditional definition of distressed debt
is debt with a yield a thousand basis points or

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more greater than the reference treasury.

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So what do I mean by that?

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For a five year corporate bond, if the five
year US treasury is yielding 4%, that corporate

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bond would need to have a yield of 14%, ten
percentage points, a thousand basis points

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greater than the treasury in order to be
considered distressed.

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That's the benchmark that people use to
distinguish between that debts that's

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distressed and that's that's not.

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That's where people draw the line, which might
ask you to beg the question, why would debt

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have such a high yield?

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It's really in in in yields that start to
approach what you would expect to see for total

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returns on equity securities.

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The reason for that is a perception of the
probability of default and an impairment of

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recovery.

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So is this debt gonna pay interest for the full
life of it?

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Maybe maybe not.

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The borrower's a little shaky.

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Is value gonna be sufficient to cause this debt
to be repaid in full at par in cash on or

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before the maturity date?

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Maybe, maybe not.

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The borrower's a little shaky.

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And so that increased perception of risk, that
increased probability of default is what causes

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debt to trade at these very high yields.

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I'm very intrigued.

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You said the perception of risk on an HIG
portfolio.

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How much of the portfolio are you expecting to
go to zero?

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How much to pay back?

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And tell me about how you construct a portfolio
around that.

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Yeah.

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It's a good question.

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We have a pretty specific and distinct approach
to investing.

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And so our hit rate is very high.

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And when we do take losses, they tend to be
fairly light.

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You know, very rarely, I mean, maybe once or
twice in in in my sixteen years here, maybe

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less, have we lost all our money.

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We focus on first lien debt, so top of the
capital structure, first in line in the

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waterfall to get paid off.

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We focus on debt that we think is maybe outside
of enter outside of debt capacity, but inside

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the total enterprise value of the borrower.

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And so while there's some equity risk to it, we
think the totality of the enterprise value is

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sufficient to cover our debt.

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Our model is much more focused on the safest,
least risky, top of the capital structure, and

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try to buy things inside of enterprise value.

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Just to simplify that, you might have a company
that's worth 500,000,000 and has a hundred

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million in debt.

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You're not nowhere near kind of the
$500,000,000 in equity value.

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So even if the company goes down equity value,
you're still you're still gonna get paid back.

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Exactly right.

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And so prototypical capital structure, if it's
a healthy stable business, debt capacity might

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be 60 to 70% of total enterprise value.

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Well, look, the face amount of the first lien
debt that we're looking to buy constitutes 90%

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of the enterprise value.

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We've got a 10% equity cushion beyond the face
amount of the debt, and we're purchasing it for

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something significantly less than that.

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But if we're buying it at, say, 80¢, portion of
our cost in a certainly a portion of our claim

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is in the equity part of the capital structure,
that junior tranche.

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And being first lien debt, who's senior to you
and who is subordinated to you?

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In almost every case, no one will be senior to
you.

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You're top of the capital structure.

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You're first in line.

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Even bank?

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The bank is typically that first lien debt, and
so bank debt is where we focus.

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Then you're gonna have, most times, junior debt
being a second lien piece of paper, an

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unsecured piece of paper.

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Maybe it's converts, maybe it's mezz, what have
you, and then the equity tranche.

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So let's take a step back.

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How do you source your opportunities?

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Sourcing is is important, and distressed is a
funny asset class.

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For private equity and direct lending, the
company is a party to the transaction.

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They're supportive of it.

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They've hired a banker.

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The banker markets the transaction.

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Stressed debt is not bad at all.

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First off, the company's in trouble.

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Second off, they're not a party to the
transaction.

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When you're buying debt, you're buying debt
from an existing lender.

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The company is exterior to that.

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They, in many cases, don't even know it's
happened.

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There's no banker out there marketing it, and,
you know, they say success has a thousand

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fathers and failure has none.

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Not a lot of people out there actively
marketing distressed situations.

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If anything, they're trying to cover it up or
hide it, and they're certainly not bragging

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about it.

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And so you've gotta do a little bit of work to
go find distressed situations.

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And so we really focus on three venues.

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The first, and this maybe is overly simplistic,
is we keep an eye on underperforming companies.

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We focus on the lever businesses.

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They tend to be sponsored around, and then we
keep an eye on both companies that are

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underperforming as well as sectors that are
facing headwinds.

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Because if you have a population of private
equity owned companies with heavy debt loads in

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the sector that they're in is facing headwinds,
whatever it might be, some subset of those are

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likely to become distressed.

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So that's a good place for us to go spend time.

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Secondly, there's a community of turnaround
consultants, restructuring bankers, and

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bankruptcy lawyers.

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It's a fairly small community at a certain
level.

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We all know each other.

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We all see each other in cases time and again.

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We've got some very deep and long standing
relationships with those people.

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We have good two way flow of information and
ideas and perspectives.

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And then lastly and maybe most importantly,
look, HIG is a large company.

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We own we have a large number of portfolio
companies.

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We have an even larger number of companies
we've owned in the past.

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And so we spend a lot of time talking to those
management teams, talking to the banker

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relationships, talking to the the the c suite.

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Who in your industry is doing well?

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Who's doing poorly?

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Who maybe is a good company that made a
mistake, entered into a bad contract, or did a

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bad acquisition?

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Well, how about your customers and how about
your vendors?

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Who of those are are struggling or where should
we be focused?

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And then when we find an opportunity, we'll
work with those teams to really understand it

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at a granular kind of ground level talking to
an operating team that oftentimes is in that

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industry.

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And so the the the HIG platform, the portfolio,
and all the expertise and experience that we

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have is is the third area we focus on for
sourcing and and probably the most important.

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Let's say that you talk to the management teams
at HIG and they've highlighted a couple

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companies.

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What do you do next?

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From there, we're gonna go look at the lender
base.

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We're gonna get information either from the
lenders or other sources, understand the

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financial picture.

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And what we look for is either the existence or
the expectation of a dynamic to develop that we

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would expect to cause lenders to sell debt to
us, ultimately, at a discount.

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That's key.

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Ultimately, we buy debt at a discount.

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In order to do that, someone has to be willing
to sell it to us.

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And so you have to find those those situations
and circumstances, where those conditions exist

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or you can reasonably expect them to exist.

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And so we spend a lot of time on that.

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That's heavy modeling and heavy diligence.

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You know, because the companies aren't a party
to the transaction, we can't just call up the

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CFO and ask them a hundred questions.

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They don't have a data room available for us.

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There's a real element of detective work or
investigative journalism to what we do to build

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a body of facts to be able to derive an
investment decision from an investment thesis.

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Once we've done that, we'll either reach out to
lenders usually through an intermediary or if

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we're right in the way the situation's
developing, frankly, they're reaching out to

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us, and then we'll start to negotiate to
purchase debt.

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You have this almost paradoxical situation
where you're trying to build relationships

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through distressed sales.

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It's almost a paradox.

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Right?

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You think of distressed sales as, you know,
very zero sum situations, but you've built this

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ecosystem of relationships of repeat business.

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How do you manage the needs of the immediate
transaction with the overall relationships?

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You're right.

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And and and one of the aspects of what we do is
we almost never own all the debt, and we own a

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portion of the of the credit facility.

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And so when you're when you're talking to
borrowers, when you're going through whatever

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process you may or may not be going through,
you're working with other lenders.

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It's a cooperative process.

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It's usually a committee.

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You need to work together because you all own
the same debt to get to the best answer for for

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all of you.

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And by the way, you didn't choose to work
together.

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We just bought in.

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We oftentimes, we don't know who else holds it
until, lenders are organized.

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It's a little bit like a surprise party.

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We're in your dark room.

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You don't know who the other guests are until
someone turns the lights on, and then you look

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around and say, oh, you're at this party too.

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But it's a small world.

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The way we manage it is just try to be
forthright and say, here's what we're doing.

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Here's why we're doing it.

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Here's why we think it's the right thing to do.

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It's a small world, and it's a long life.

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And so, you know, I I started my career at
Morgan Stanley, and one of the old sayings

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there was doing first class business in a first
class way.

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You don't queue too far from that.

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You're gonna be okay.

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Just doing things in a forthright manner.

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You have a unique product in that.

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You have nice kind of teens return, but there's
obviously it's not very tax efficient.

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Does that impact your LP base?

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Is it mostly kind of a nontaxable LP base?

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It is.

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And, you know, if you look at our our return
stream, broadly speaking, about 50% of it is

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from interest income and about 50% of it is
from capital appreciation.

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And so you're right.

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It's not the most tax efficient way to invest.

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We do Our LP base does gravitate towards tax
exempts, not a %, but it does go that way.

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Conversely, some taxable investors, family
offices, high net worth, even though it's less

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tax efficient, seem to really value the current
income component of our strategy.

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And so that offsets it a little bit, but, yes,
we do have a maybe higher than average tax

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exempt concentration in our LP base.

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You guys make a thesis and see if you're on
track.

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How do you create the discipline to make sure
that you're not revising what your thesis was,

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and how do you institutionalize that in your
process?

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Thank you for listening.

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This is creep as a thing.

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00:11:52,745 --> 00:11:56,764
And, yes, it is human nature to retrospectively
wanna be right.

230
00:11:56,904 --> 00:11:59,644
And so we what we do is we do it
quantitatively.

231
00:12:00,179 --> 00:12:04,820
And so for every investment we make, we have, a
three statement projection model.

232
00:12:04,820 --> 00:12:06,820
It goes into the investment committee deck.

233
00:12:06,820 --> 00:12:08,179
We then take that model.

234
00:12:08,179 --> 00:12:09,080
It's done quarterly.

235
00:12:09,379 --> 00:12:14,295
In each subsequent quarter, we compare the
company's financial report with their actually

236
00:12:14,295 --> 00:12:17,835
did to what we thought they did at that time on
a quantitative basis.

237
00:12:18,455 --> 00:12:25,014
And so by just doing it with data and hard
numbers based on what we originally thought, we

238
00:12:25,014 --> 00:12:28,315
get a, a very clear yardstick on how they're
performing.

239
00:12:28,750 --> 00:12:30,269
And so that's what we do.

240
00:12:30,269 --> 00:12:35,790
That's our discipline to prevent ourselves from
from kinda recasting the thesis as, subsequent

241
00:12:35,790 --> 00:12:36,610
events unfold.

242
00:12:36,830 --> 00:12:41,090
You've been in this asset class for twenty
seven years, sixteen of those at HIG.

243
00:12:41,684 --> 00:12:45,144
What are the characteristics that make somebody
great at distressed debt?

244
00:12:47,605 --> 00:12:48,345
Good question.

245
00:12:49,205 --> 00:12:50,585
I'd say two things.

246
00:12:51,764 --> 00:12:55,205
One is and this is gonna sound counterintuitive
maybe.

247
00:12:55,205 --> 00:12:56,745
You need to be a little bit of an optimist.

248
00:12:57,419 --> 00:12:58,940
Every distress situation is bad.

249
00:12:58,940 --> 00:12:59,259
Right?

250
00:12:59,259 --> 00:13:01,500
It's it's it's it's not called everything's
great.

251
00:13:01,500 --> 00:13:02,860
It's called distress for a reason.

252
00:13:02,860 --> 00:13:04,320
There's gonna be some problems.

253
00:13:04,779 --> 00:13:09,259
And you have to be kind of in a level headed
way able to to look at those problems,

254
00:13:09,259 --> 00:13:13,565
acknowledge them, but also see beyond them to
the potential or see beyond them to other

255
00:13:13,565 --> 00:13:14,605
pockets of value.

256
00:13:14,764 --> 00:13:17,024
And so it takes a certain level of positivity.

257
00:13:17,084 --> 00:13:20,365
It's very easy to look at a bad situation and
say that's bad.

258
00:13:20,365 --> 00:13:22,065
I don't wanna touch it and move on.

259
00:13:22,605 --> 00:13:25,289
But no one gets paid to be a professional deal
assassin.

260
00:13:25,370 --> 00:13:25,529
Right?

261
00:13:25,529 --> 00:13:28,509
No one no one's interested in someone who only
kills deals.

262
00:13:29,370 --> 00:13:35,449
We're, hired to invest our LPs money, and so we
need to find opportunities to invest.

263
00:13:35,449 --> 00:13:39,424
And that takes a certain level of creativity,
takes a certain level of optimism.

264
00:13:39,644 --> 00:13:44,304
And then the second characteristic I would
point to that that I think is pretty important,

265
00:13:44,924 --> 00:13:50,225
besides the basics of of kind of intellect and
rigor and discipline and all that is curiosity.

266
00:13:51,004 --> 00:13:55,649
And so you have to be curious as to, okay, why
is this business the way it is?

267
00:13:55,649 --> 00:13:58,370
And why did they do that thing that turned out
to be not so good?

268
00:13:58,370 --> 00:13:59,889
And what is the reason that this happened?

269
00:13:59,889 --> 00:14:05,250
And and so just that desire to to just that
middling itch to go figure something out.

270
00:14:05,250 --> 00:14:06,289
Like, why is it this way?

271
00:14:06,289 --> 00:14:08,610
And and it might appear obvious, but maybe it's
not obvious.

272
00:14:08,610 --> 00:14:13,065
And I don't quite understand this, so I gotta
keep pressing because it's bugging me.

273
00:14:13,065 --> 00:14:15,225
People outside the industry or maybe new to the
industry will say, well, I'm looking for good

274
00:14:15,225 --> 00:14:17,004
businesses with bad balance sheets.

275
00:14:17,144 --> 00:14:17,305
Okay.

276
00:14:17,305 --> 00:14:18,024
That's a myth.

277
00:14:18,024 --> 00:14:22,425
Like, that debt was put there for a reason, and
it was it was it was incurred based on a set of

278
00:14:22,425 --> 00:14:24,570
representations and promises that weren't met.

279
00:14:24,809 --> 00:14:26,250
And so why did that happen?

280
00:14:26,250 --> 00:14:26,490
Right?

281
00:14:26,490 --> 00:14:28,110
Why was someone wrong here?

282
00:14:28,490 --> 00:14:33,370
It's too much debt just doesn't magically
appear on an otherwise good and stable and

283
00:14:33,370 --> 00:14:34,090
growing business.

284
00:14:34,090 --> 00:14:35,129
It's there for a reason.

285
00:14:35,129 --> 00:14:39,070
Understand why, and now you're on your path to
making a good debt investment.

286
00:14:39,475 --> 00:14:41,875
It's a mix of right brain and left brain
thinking.

287
00:14:41,875 --> 00:14:42,695
I think so.

288
00:14:43,154 --> 00:14:44,695
So talk about your portfolio.

289
00:14:44,835 --> 00:14:49,075
So how do you make sure that your portfolio is
diversified, and what factors go into your

290
00:14:49,075 --> 00:14:49,975
portfolio construction?

291
00:14:50,195 --> 00:14:53,095
We spend a good amount of time thinking about
portfolio construction.

292
00:14:53,950 --> 00:14:57,809
And so diversification is famously the free
lunch in portfolio construction.

293
00:14:57,870 --> 00:15:00,190
We we avail ourselves of it as everyone else
does.

294
00:15:00,190 --> 00:15:05,470
We have 40 to 60 investments at any one time in
a fully ramped portfolio with an average

295
00:15:05,470 --> 00:15:12,274
position size of about 2%, with an upper bound
in the mid to high single digits, call it 7%,

296
00:15:12,274 --> 00:15:14,434
and very few of our investments even approach
that.

297
00:15:14,434 --> 00:15:14,835
And so

298
00:15:14,995 --> 00:15:18,115
No matter how bullish you are, you have that 7%
cap.

299
00:15:18,115 --> 00:15:18,615
Correct.

300
00:15:18,675 --> 00:15:18,995
Correct.

301
00:15:18,995 --> 00:15:22,320
And you're just never gonna see us, exceed it.

302
00:15:22,480 --> 00:15:25,460
Even if I wanted to, others in the firm would
stop me, and I don't want to.

303
00:15:25,839 --> 00:15:29,860
We have pretty tight risk controls, and we
really prize diversification, and we'd never

304
00:15:30,399 --> 00:15:32,339
never ever move away from it.

305
00:15:32,399 --> 00:15:33,440
So that's table stakes.

306
00:15:33,440 --> 00:15:34,159
That's easy.

307
00:15:34,159 --> 00:15:37,955
We industry we diversify by company I just
described by industry.

308
00:15:37,955 --> 00:15:44,034
What's maybe not as obvious, but I think
important and especially in our asset class is

309
00:15:44,034 --> 00:15:46,134
diversification by causal factor.

310
00:15:46,914 --> 00:15:48,934
And so maybe I'll by example.

311
00:15:49,539 --> 00:15:54,419
In 02/2015 '16, in the energy sector, the oil
patch in The US rolled over.

312
00:15:54,419 --> 00:15:59,240
Supply demand imbalance, energy prices fell,
profitability of energy related firms fell,

313
00:15:59,460 --> 00:16:01,220
sponsors have been very active in that.

314
00:16:01,220 --> 00:16:05,294
Energy is a good place to borrow money, and
have been a good place to lend money for a long

315
00:16:05,294 --> 00:16:05,794
time.

316
00:16:06,014 --> 00:16:11,695
And so in 02/2016 in particular, the the the
addressable universe of distressed and

317
00:16:11,695 --> 00:16:14,595
opportunities was disproportionately weighted
towards energy.

318
00:16:15,054 --> 00:16:19,429
And so when you look at energy companies, they
fall into broadly four buckets.

319
00:16:19,490 --> 00:16:22,789
You've got upstream, which is natural
resources, stuff in the ground.

320
00:16:23,009 --> 00:16:25,669
You've got downstream, which is refining and
pipelines.

321
00:16:26,929 --> 00:16:30,529
You've got service businesses, that can be
fracking businesses.

322
00:16:30,529 --> 00:16:31,649
It can be water businesses.

323
00:16:31,649 --> 00:16:36,164
It could be staffing businesses that help
support both the construction of wells and then

324
00:16:36,164 --> 00:16:38,065
the getting the product out of the ground.

325
00:16:38,204 --> 00:16:42,284
And then you've got manufacturing businesses
where perhaps a disproportionate of their end

326
00:16:42,284 --> 00:16:43,664
markets are energy related.

327
00:16:44,044 --> 00:16:49,070
And so in 02/2016, you've got four different,
quote, unquote, industries there.

328
00:16:49,289 --> 00:16:55,289
Well, if you made six to eight investments in
each of those four industries amongst companies

329
00:16:55,289 --> 00:16:59,049
that were active in that space and distressed
at that time, you would say, okay.

330
00:16:59,049 --> 00:17:03,304
I've got 24 companies, and they're diversified
across four different industries.

331
00:17:03,304 --> 00:17:04,984
That's a pretty diversified portfolio.

332
00:17:04,984 --> 00:17:06,605
I feel decent about my risk.

333
00:17:07,384 --> 00:17:10,984
And then if natural gas went to a dollar, every
single one of those companies would be in

334
00:17:10,984 --> 00:17:11,384
trouble.

335
00:17:11,384 --> 00:17:15,680
And you'd find out that while you had, you
know, on paper diversification, you had a

336
00:17:15,680 --> 00:17:21,119
concentration of a % to this one causal factor,
which is the price of the natural resource and

337
00:17:21,119 --> 00:17:26,099
a correlation of risk in your portfolio, that
you really are unhappy about at that point.

338
00:17:26,319 --> 00:17:29,654
And so that's something that we look at pretty
closely and try to make sure.

339
00:17:29,654 --> 00:17:33,914
The reason it's important for our asset class
is because it's something I touched on earlier

340
00:17:34,055 --> 00:17:36,955
where the stress tends to rotate from sector to
sector.

341
00:17:37,095 --> 00:17:42,134
And so if you're deploying capital outside of a
credit crisis, maybe two or three industries

342
00:17:42,134 --> 00:17:46,529
are having a hard time at any given moment
because some macroeconomic factor is out of

343
00:17:46,529 --> 00:17:48,390
whack or something else happened.

344
00:17:48,609 --> 00:17:54,849
And so because of that dynamic, it's easy to
find that causal factor concentration because

345
00:17:54,849 --> 00:17:58,054
that's what caused these companies to become
distressed in the first place.

346
00:17:58,194 --> 00:18:00,674
And so you have to work pretty hard to avoid
it.

347
00:18:00,674 --> 00:18:05,634
And so that's something that we really spent
some time thinking about, and making sure we

348
00:18:05,634 --> 00:18:07,154
don't have access exposure to.

349
00:18:07,154 --> 00:18:09,119
You know, energy prices is an easy one.

350
00:18:09,200 --> 00:18:14,400
Interest rates is maybe even an easier one, but
things like wage inflation, are a little more

351
00:18:14,400 --> 00:18:18,079
pernicious, home building rates, mortgage
rates, what have you.

352
00:18:18,319 --> 00:18:20,799
There's a number that cut across where you say,
okay.

353
00:18:20,799 --> 00:18:24,900
I don't want too much exposure to that dynamic,
to that causal factor.

354
00:18:25,585 --> 00:18:28,544
What's interesting about that, a lot of people
don't even track that causal factor.

355
00:18:28,544 --> 00:18:32,644
It's not only important intuitively, it seems
like even more important than geographical

356
00:18:32,865 --> 00:18:33,365
concentration.

357
00:18:33,744 --> 00:18:37,524
If you have a widget factory in Ohio and you
also have a coal mine, that doesn't necessarily

358
00:18:37,585 --> 00:18:41,599
mean that you're not diversified if it's
completely different industries or if you have

359
00:18:41,599 --> 00:18:42,880
companies of the same stage.

360
00:18:42,880 --> 00:18:44,400
Also, it doesn't mean that you're not
diversified.

361
00:18:44,400 --> 00:18:45,779
They could be completely uncorrelated.

362
00:18:46,240 --> 00:18:46,799
Exactly right.

363
00:18:46,799 --> 00:18:51,440
If if if you're looking at a population of
companies that are providing a broad variety of

364
00:18:51,440 --> 00:18:56,785
services to cash flow negative VC funded
emerging tech companies, and there happens to

365
00:18:56,785 --> 00:19:00,384
be a chill in the air when it comes to VC
funding, you're gonna find out you've got a lot

366
00:19:00,384 --> 00:19:02,884
more correlation in your portfolio than you
first suspected.

367
00:19:03,744 --> 00:19:07,940
What do you wish you knew before starting
sixteen years ago at HIG?

368
00:19:08,480 --> 00:19:11,460
The financial services industry is evolving
rapidly.

369
00:19:11,839 --> 00:19:16,640
Reed Smith's team of over 200 financial
industry group lawyers helps clients navigate

370
00:19:16,640 --> 00:19:22,424
the complexities of the sector in an era marked
by technological advancements and AI.

371
00:19:22,424 --> 00:19:26,505
Reed Smith's lawyers have a deep understanding
of market dynamics, legal frameworks, and

372
00:19:26,505 --> 00:19:31,304
regulatory developments, and advise financial
institutions and technology companies on

373
00:19:31,304 --> 00:19:36,125
financing, lending, investment management,
restructuring, insolvency, and litigation.

374
00:19:38,159 --> 00:19:41,460
I'm not sure that I didn't know it, but I
probably believe it more strongly now.

375
00:19:41,679 --> 00:19:45,460
Just a laser like focus on the quality of the
business.

376
00:19:45,519 --> 00:19:50,640
I probably attach more importance to the
quality and stability of a management team than

377
00:19:50,640 --> 00:19:53,414
I did sixteen years ago when evaluating a
company.

378
00:19:53,414 --> 00:19:55,894
I've I've just found that that's an important
factor.

379
00:19:55,894 --> 00:20:00,775
There's no line for it in your spreadsheet, in
your financial model, but it's it's something

380
00:20:00,775 --> 00:20:05,095
that and so if you're looking at a distressed
company, one of the first questions I'm gonna

381
00:20:05,095 --> 00:20:08,555
ask is, what's been the recent turnover in the
management team?

382
00:20:08,690 --> 00:20:12,210
And if the CEO has exited in the last four
months, that business isn't doing well.

383
00:20:12,210 --> 00:20:13,569
I I don't care what's going on.

384
00:20:13,569 --> 00:20:17,890
You don't swap out your CEO unless you're in
somewhat desperate straits.

385
00:20:17,890 --> 00:20:19,730
That's an incredibly disruptive move.

386
00:20:19,730 --> 00:20:23,585
It puts you back on your timeline as a private
equity sponsor at least twelve to eighteen

387
00:20:23,585 --> 00:20:24,884
months, if not longer.

388
00:20:25,105 --> 00:20:28,325
It's something you do when you absolutely have
to, not if you want to.

389
00:20:28,384 --> 00:20:34,304
And so if you see a company that's undergoing
CEO or CFO turnover, you need to be fairly

390
00:20:34,304 --> 00:20:36,690
cautious in approaching that because things are
not good.

391
00:20:36,929 --> 00:20:41,329
And so that's a factor I probably didn't give
enough weight to earlier in my career that I

392
00:20:41,329 --> 00:20:43,509
that I I pay more attention to now.

393
00:20:43,569 --> 00:20:46,789
And really just a laser like focus on the
fundamentals.

394
00:20:46,849 --> 00:20:48,149
What are the unit economics?

395
00:20:48,210 --> 00:20:49,329
What's going on in the industry?

396
00:20:49,329 --> 00:20:50,690
What is the competitive position?

397
00:20:50,690 --> 00:20:52,069
What is the capital efficiency?

398
00:20:52,369 --> 00:20:58,164
I In some of the basics that everyone kind of,
espouses, but they're very, very important.

399
00:20:58,545 --> 00:21:02,065
What's something that you thought was important
sixteen years ago that's not that important

400
00:21:02,065 --> 00:21:02,565
today?

401
00:21:02,625 --> 00:21:07,105
Some of the the the the tricks and traps of the
bankruptcy process, if you're a a clever

402
00:21:07,105 --> 00:21:11,720
distressed investor, you can you can do some
neat kinda clever maneuvers inside of

403
00:21:11,720 --> 00:21:16,839
bankruptcy court to maybe position your debt a
little more, favorably or or try to squeeze out

404
00:21:16,839 --> 00:21:21,080
some other holders or slip a term in there or
or apply some capital at just the right moment

405
00:21:21,080 --> 00:21:22,059
to create an edge.

406
00:21:22,444 --> 00:21:23,724
And and and that feels good.

407
00:21:23,724 --> 00:21:27,105
It feels like you won there or you figured
something out that other people can't.

408
00:21:27,724 --> 00:21:32,144
But what I've learned over time is the
cleverness and the maneuvering in bankruptcy,

409
00:21:33,005 --> 00:21:37,319
in some cases is just rearranging deck chairs
on the Titanic, and the most important thing is

410
00:21:37,319 --> 00:21:39,259
that the business either has value or it
doesn't.

411
00:21:39,480 --> 00:21:43,880
And the cute little thing you did in bankruptcy
or the, you know, the the equipment pool claim

412
00:21:43,880 --> 00:21:48,380
that you picked up from insurance company at a
really attractive price, it's not important.

413
00:21:48,519 --> 00:21:52,974
What is important is this business is doing
well, and it's on a stable footing to emerge in

414
00:21:52,974 --> 00:21:56,115
bankruptcy and and grow in the future or it's
not.

415
00:21:56,494 --> 00:21:58,835
Get that part right, and you're gonna be fairly
happy.

416
00:21:58,974 --> 00:22:02,015
Get that part wrong, and it doesn't really
matter what you do in court.

417
00:22:02,015 --> 00:22:02,815
Man, I'm really curious.

418
00:22:02,815 --> 00:22:07,150
Over sixteen years, you're not only working on
deals, you're building a competency of working

419
00:22:07,150 --> 00:22:07,710
on deals.

420
00:22:07,710 --> 00:22:09,890
You're building your edge in the marketplace.

421
00:22:10,029 --> 00:22:14,750
What has compounded for you in sixteen years,
and what is basically just continuously start

422
00:22:14,750 --> 00:22:17,144
from zero every single time that you do it?

423
00:22:17,384 --> 00:22:18,424
Compounding is twofold.

424
00:22:18,424 --> 00:22:19,884
Relationships is number one.

425
00:22:20,585 --> 00:22:25,144
And so we've got a handful of restructuring
attorneys that, you know, some of whom I've

426
00:22:25,144 --> 00:22:26,924
worked with for over twenty years now.

427
00:22:27,144 --> 00:22:32,500
And so when we start on a new endeavor
together, we're already on second base.

428
00:22:32,500 --> 00:22:32,740
Right?

429
00:22:32,740 --> 00:22:36,340
I've got enough history with this individual,
and they have enough history with me that

430
00:22:36,340 --> 00:22:38,200
there's a lot of things that almost go
unspoken.

431
00:22:38,259 --> 00:22:41,859
We know right away how we're gonna approach
this, what we're gonna do, what we're not gonna

432
00:22:41,859 --> 00:22:42,259
do.

433
00:22:42,259 --> 00:22:46,825
If we're faced with a decision how we're gonna
handle it, how are we gonna treat, other

434
00:22:46,825 --> 00:22:50,125
stakeholders who maybe wanna work with us and
cooperate or not.

435
00:22:50,664 --> 00:22:52,444
So that's been something that's compounded.

436
00:22:52,984 --> 00:22:57,869
Another thing that's compounded and and really,
we've piggybacked off the growth of the firm.

437
00:22:58,029 --> 00:23:03,009
There's real scale benefits to, being part of a
larger alternatives firm.

438
00:23:03,230 --> 00:23:09,230
We just have access to a much deeper and wider
information net, you know, dataset than we

439
00:23:09,230 --> 00:23:10,450
would if we were independent.

440
00:23:10,509 --> 00:23:13,974
And so as the firm has grown, that advantage
has grown.

441
00:23:13,974 --> 00:23:15,434
So that's something that's scaled.

442
00:23:15,575 --> 00:23:19,174
We are getting better and better every year at
taking full advantage of it.

443
00:23:19,174 --> 00:23:23,494
We're a pretty networked firm and a very
collaborative firm, but we're also a big firm.

444
00:23:23,494 --> 00:23:28,490
And so getting to every single person who knows
every single thing that you wanna know can

445
00:23:28,490 --> 00:23:31,549
sometimes be a challenge, and we're getting
better at that.

446
00:23:31,609 --> 00:23:33,789
So those are two things I'd say that have
scaled.

447
00:23:33,849 --> 00:23:35,710
One thing that hasn't scaled is sourcing.

448
00:23:35,930 --> 00:23:40,089
I mean, every going and finding deals, you
know, every day is a new day, every day is a

449
00:23:40,089 --> 00:23:40,750
new challenge.

450
00:23:41,744 --> 00:23:45,585
Finding deals is is frankly not that hard in
our space.

451
00:23:45,585 --> 00:23:48,484
Finding good deals and good value, really is.

452
00:23:48,545 --> 00:23:52,545
What would you like our audience to know about
you, about HIG, or anything else you'd like to

453
00:23:52,545 --> 00:23:52,865
share?

454
00:23:52,865 --> 00:23:57,819
I think we have a pretty distinct identity as
one of, if not the preeminent alternatives

455
00:23:58,200 --> 00:24:00,220
firms in the small mid cap space.

456
00:24:00,839 --> 00:24:04,759
We've got a long standing culture of value
orientation and cash flow centric investing.

457
00:24:04,759 --> 00:24:09,419
We we gravitate towards complexity that goes
hand in hand with being a value investor.

458
00:24:10,515 --> 00:24:12,914
And we have a pretty distinct approach and
culture.

459
00:24:12,914 --> 00:24:16,355
At the end of twenty twenty three, and we got a
large number of our LPs together.

460
00:24:16,355 --> 00:24:17,234
It's very well attended.

461
00:24:17,234 --> 00:24:18,994
It was a great event, a lot of fun.

462
00:24:18,994 --> 00:24:22,755
And at that, each strategy presented to our
LPs.

463
00:24:22,755 --> 00:24:23,795
You know, here's who we are.

464
00:24:23,795 --> 00:24:24,934
Here's what we're doing.

465
00:24:25,610 --> 00:24:28,970
Here's what's going on in our market, and here
are some representative transactions to give

466
00:24:28,970 --> 00:24:29,529
you a flavor.

467
00:24:29,529 --> 00:24:32,509
And then we had a number of our portfolio
companies come present as well.

468
00:24:32,730 --> 00:24:37,309
And it was very well received by our investors,
but we did get a piece of constructive

469
00:24:37,369 --> 00:24:42,674
criticism, which is as each strategy presented,
they kept saying the same thing over and over

470
00:24:42,674 --> 00:24:46,434
again in terms of how they approached
investing, what they gravitated towards, small

471
00:24:46,434 --> 00:24:49,734
and mid cap, value oriented, cash flow centric,
seek out complexity.

472
00:24:50,194 --> 00:24:53,210
And by the end of the second day is the LPs
like, guys, time out.

473
00:24:53,210 --> 00:24:53,769
We got it.

474
00:24:53,769 --> 00:24:57,930
Like, you don't need to say this for the
twelfth time, and and it wasn't something that

475
00:24:57,930 --> 00:25:01,130
we did, with forethought.

476
00:25:01,130 --> 00:25:06,269
It's just a natural result of each funded
strategy putting together its own presentation

477
00:25:06,755 --> 00:25:11,475
and having this commonality of approach and
culture across strategies and geographies that

478
00:25:11,475 --> 00:25:13,955
made it a little more redundant than maybe we
wanted to.

479
00:25:13,955 --> 00:25:18,674
So it was kinda funny, but, also, it was a
little affirming that as the firm has grown,

480
00:25:18,674 --> 00:25:20,934
we've been able to keep that culture pretty
constant.

481
00:25:21,359 --> 00:25:25,140
Said another way, the opposite of small is
large and efficient.

482
00:25:25,519 --> 00:25:30,180
The opposite of value is growth, which, you
know, if you go back hundred years, value

483
00:25:30,319 --> 00:25:31,440
values outperform growth.

484
00:25:31,440 --> 00:25:33,920
The opposite of complexity is commoditized
trade.

485
00:25:33,920 --> 00:25:37,615
So it makes sense why these are sustainable
sources of competitive advantage.

486
00:25:37,615 --> 00:25:42,095
Well, Jackson, look forward to continuing the
conversation live, sitting down Boston or New

487
00:25:42,095 --> 00:25:43,214
York very, very soon.

488
00:25:43,214 --> 00:25:43,855
Thanks, David.

489
00:25:43,855 --> 00:25:44,538
Appreciate it.

490
00:25:45,338 --> 00:25:46,298
Thanks for listening.

491
00:25:46,298 --> 00:25:49,018
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492
00:25:49,018 --> 00:25:52,798
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493
00:25:52,858 --> 00:25:53,358
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494
00:25:53,738 --> 00:25:54,958
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