Videos

Canyon Partners’ Josh Friedman Talks Non Investment Grade Debt

At the 2019 Fink Investing Conference, Professor Tony Bernardo conversed with Josh Friedman, Co-Founder, Co-Chairman and Co-Chief Executive Officer of Canyon Partners, LLC.

Josh Friedman non investment grade debt
Image source: YouTube Video Screenshot

Josh Friedman Talks Non Investment Grade Debt At the 2019 Fink Investing Conference

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q1 hedge fund letters, conference, scoops etc

Transcript

Why don't you get us started by talking about your career in investment management and a little bit about Canyon partners.

It's a big topic Tony. So I kind of found my way into this career by mistake. I was I was sort of a science geek in college. I was a physics major and I thought I would end up running a tech company such as they were back in 1976 when I graduated from college in Boston and there were all these electronics and signal processing companies and computer companies and the like. Out on Route 128. And that's really what I thought I'd do I thought I'd go to business school and law school and then end up running a company or maybe starting a company. And from the time I was a kid my dad had said you have to have your own company you have to have your own company. My dad had not gone to college. He was in World War 2 and he was in a machine shop and then was a mechanical engineer but without a college degree but he always said you have to have your own company. And so I kind of took that to heart but on the way through law school and business school I got recruited by Goldman Sachs which seemed to be the job that everybody wanted and I was a good student so I figured I'd better better try that for a while and at least I'll learn something about how to buy a company.

So I was in the merger department Goldman for a couple of years and then I got a knock on the door from Mike Milken at Drexel at the behest of my old law school roommate law school and business school roommate a guy named Mitch Julius Mitch was a bankruptcy lawyer first. When we graduated we were roommates and classmates in law school and he didn't like practicing bankruptcy law very much so he quit and he ended up working for Drexel buying bankrupt securities and he had said to Mike hey if you need somebody doing whatever you should call Josh. So I got recruited to Drexel became a partner in the high yield group I was at the time I guess about twenty eight years old and I was in capital markets. So is completely different from everyday. I had absolutely no idea what I was doing but nobody did. We were figuring it out and kind of making it up because the great beauty of what Mike Milken created out here was a new capital market altogether which was a trading market for non investment grade debt. Prior to that time the only debt that wasn't rated investment grade was debt that started investment grade and got downgraded.

So there was no such thing as a as a leveraged buyout with non investment grade debt. If you if you were a leveraged buyout you either financed yourself with the banks or you went to insurance companies. So I did that for a few years then of course. And I think was my father's voice in the back of my mind that caused me to leave an otherwise very good career at Goldman Sachs to go to Drexel because I was I was right on the partnership track. I'd been hired by guy who was slated to be running the firm and as Mitch says he totally screwed up my career so. So he did that and then I came out and that was all great until Drexel blew up. I remember coming into the office one day and John Kissel who was running the department I don't know if he's ever spoken here but John's fantastic. He said Well we're having this liquidity issue and liquidity we didn't know what he was saying but it did not sound good. And there's a guy named Joe Pa. who is the head of research who said he got up next with these meetings at 5:00 a.m. every day and Joe says the good news is we just sent out thirty six hundred invitations to the bond conference in April says the bad news is I think we're having it at my house. And so. And so by Monday Drexel was gone. And so so Mitch and I decided to start a firm I'd already been thinking about it for months. So we kind of knew who we wanted to have and what we wanted to do. The fact is that it was a it was it was kind of a poor idea we didn't have a good business plan. But we didn't know our way around the bond market.

We met with George Soros and Stan Robert Mueller who offered to give us a bunch of capital. He wanted us to pay to accept only half fees and also give him the trading tickets every night so they could see what we're doing and I remember saying to Mr. Soros you know we buy what we want to do is we need capital to buy distressed debt. Would you explain what this hedge fund thing is that you have this macro fund. And Stanley said we buy we buy super liquid instruments betting on global macroeconomic events you know currencies interest rates exchange rates things like that commodities very very leveraged but very liquid. And if they move a little bit against us then we can sell and we try to have a little more insight than the next guy on these things. And we're very strict about our loss controls and so forth. And Mitch said that's interesting we buy relatively illiquid paper where there's a very bad market and we don't use any leverage. We're betting on very micro events around a very complicated process. And if the price drops we buy more of it.