Ladies and gentlemen, welcome to the Business Brew.
I'm your host, Bill Brewster. This episode features Jeff
Collins of Cloverlay. Cloverlay is a firm that targets
the fundamental value of tangible and intangible assets.
They are a private equity firm that buys assets.
This is my, my words, not theirs.
They buy assets and try to create uncorrelated outcomes in
private markets. And you know, I mean, I, I was
approached to feature Jeff and part of me was like, why would I
do this on primarily a, a public markets podcast?
And the reason is the podcast isn't supposed to just be
primarily public markets. That's kind of what it's
happened into and I think Jeff has an interesting approach.
It seems to me he's looking for assets at times when others are
really not interested in them. And then as the momentum in the
market builds, they look to exit.
Now that's again my words, not theirs.
And you will hear it in the conversation how he approaches
his investments. I will link to their firm in the
show notes. And you know you can make make
your own decision as to whether or not how I frame this is
correct. But Long story short, I thought
it was a a good conversation and a solid addition to the show.
So here it is. And as always, none of this is
financial advice. Everything in this program is
for entertainment purposes only. Do your own due diligence and
please consult your financial advisor before making investment
decisions. Enjoy the show.
All right. Ladies and gentlemen, welcome to
the Business Brew. As always, I'm your host, Bill
Brewster. Thrilled to be joined by Jeff
Collins today of Cloverley. Cloverley what?
What's the official firm title? I apologize.
Cloverley All right. That's it.
There you go. Keep it simple.
Well, that's fair. I, I, I went blank there.
So anyway, how's everything going?
Last time we were talking, you were going to a small golf
course in Georgia. If I don't if I recall.
Correctly. Sadly that is true.
Sadly my host cancelled on me the day before.
How brutal. And so that trip never happened
and very little golf has happened the entire spring.
So brutal. Probably a good thing that I
didn't go. Yeah, well, I don't think it's
ever a good thing not to go there.
Oh well, well. Hopefully next year, right?
It would have been fun, yeah. You make yourself an egg
sandwich at home. I just took care of myself and
came to the office and did my thing, you know all.
Right. Well, the.
Usual the boring. Not quite the same.
No, not at all. So do you want to set the the
context of who you are and what the firm does to kind of let
people know what they're listening to and then we'll get
into the conversation if that works?
Sure. And and thanks again for for
having me on. I appreciate the audience and
and I've been following what you've been doing for a while
and so it's a pleasure to be involved.
So I'm Jeff Collins, I'm the founder and managing partner of
Cloverlea. We're based here outside of
Philadelphia. We are 1.6 billion under
management, 18 people all focused exclusively on investing
in esoteric niche private assets.
And when we say assets, we don't mean operating businesses, we
mean assets tangible or intangible that fall between the
cracks of the typical definitions of buyout, venture
growth, infrastructure, real estate.
And therefore, our commercial license is to provide family
offices, high net worth investors and institutional
investors access to private assets that are absent from
their current private portfolios.
It's a collection of niches. There's a lot of ground to
cover. There are fun stories behind
everything we've done and everything we haven't done.
And it's just a very difficult part of the world for most
institutions to digest on their own.
And so we are an resource extension for them to expand
their private portfolio and invest in a very predictable,
very uncorrelated way. It kind of doesn't matter what's
happening elsewhere in the world.
Our assets perform in a very, very predictable way due to the
nature of the assets and the structure that we use and how we
invest. So how when I hear that, my
first thought is, isn't everything kind of beta to a
certain extent, right? So how how do you have the the
performance be so uncorrelated like in AI?
Guess that's the question. Yeah.
I mean it's the initial screen when anything comes across our
desks is what are the embedded correlations in the following
opportunity. Have you ever looked at weather
futures? What are weather futures
correlated to? What about insurance related
strategies and structures that are dependent solely on the
weather? Not the S&P, not credit markets.
OK. Intellectual property and things
where you can not just buy but grow Global resilient licensing
and royalty streams forever and ever.
What are those correlated to? Because it's contractual, you
are getting paid. So we look for everything has
some kind of correlation. And so as we build portfolios,
you'll see 12 or 15 different investments inside any of our
portfolios. They have nothing to do with
each other and collectively they behave in a very uncorrelated
way despite any embedded small correlation they may have.
We don't invest in 0 beta private equity trades.
That doesn't really exist. There's always a correlation to
something. But the portfolio management
challenge and what we think we've done with good success is
to manage the collection of betas in a very, very
responsible way and provide investors with exposure that is
incredibly difficult or impossible to access themselves
or elsewhere, frankly. All right, that that makes some
sense to me because so one thing on your on your website and I
apologize if I mess this up I don't have it in front of me,
but I believe that there is like sports is it team rights or is
it sports rights? There's something that is that's
involved in sports. And when I was looking at it, I
was thinking, OK, well, in a sense that's kind of like
correlated to global liquidity. If sort of one of my ways I
think about sports teams is kind of like just a trophy asset.
So it's kind of like correlated with the wealth effect
especially. I don't know.
Anyway, that's kind of what I was thinking, but it's, it
sounds like the way that you're approaching it.
And what you're telling me is that may be that that particular
asset may have a correlation to one thing that I'm thinking
about. But when you put the the
portfolio together, it's a collection of private assets
that are largely uncorrelated. Is that?
Fair Sports is a helpful example and representative of a decent
percentage of of the portfolios we've assembled over the last 10
years, which was a point in time opportunity that we have since
moved on from. And the point in time and part
of our responsibility given our mandate and what we hold out to
investors is to invest in the big four sports in 2020 when all
the stadiums are empty and closed.
That was a unique point in time with a massive Tam with 0
institutional dollars in it. Now, what are the meteor rights?
Which are the vast majority of any franchise's revenue?
What are meteor rights correlated to?
NBC credit will take that all day and also benefit from all of
the ancillary assets around a franchise.
Sometimes it's an owned stadium. You can do things with the
stadium. You know, sometimes it's
adjacent real estate for available for development,
commercial, residential. You can do a lot of things
around a franchise that's been built in the right way.
And so with an operating partner, we were able to invest
in MLB in the earliest days, invest in NBA in the earliest
days, NHL in the earliest days. Just saying. 2020 the earliest.
Days 20 in 2020. Yeah, right.
And then Fast forward five years and your listeners should take a
very close look at any of the four NFL funds that are being
raised right now because it's early days in the NFL.
But we have exposure to two of the three first NFL deals and
we're probably done because it's an, it's a the capital is
coming. The asset or collection of
assets inside any franchise demonstrate the the profile of
return that we're looking for, which is long term resilient.
Now European soccer is a very, very different equation.
The rules of the road, who's allowed to buy, how you can
capitalize, mini club, it's it's wild out there.
And we've looked at a lot and we've done exactly 0 and then a
lot of start up leagues. We don't believe that there's an
infinite number of $500 million contracts that ESPN is giving to
all these upstart sports. So as it relates to sports, we
focused on the core of the core in a completely unique asset
that 0 institutional investors on planet Earth had exposure to,
and we did that in 2020 and moved on.
So why, why do you get the call there?
Why don't? Why aren't they calling like
Blackstone and then that instance?
You can speak with some of the other investors in the space
about how the league selected their approved partners because
it's an incredibly complicated, almost a government style.
Like in terms of regulation, you can't bend the leagues to your
will because of the size of your checkbook.
You will play by their rules. And so the earliest days in BIG4
sports, they selected the best purpose built partners and then
slowly but surely have opened the gates to allow other
institutional capital to come in in the right way.
But first mover advantage in that space was a very, very real
thing. If you we look at valuations
five years later, it's a pretty compelling story.
There are a number of other segments that we've invested in
where not necessarily first mover advantage, but being well
ahead of the institutional wave of capital that comes in like we
were investors and a unique profile of data center and also
in data center adjacent hard assets like dark fiber, things
like that. Ten years ago.
Data centers, there's a massive tailwind behind data centers.
There is no shortage of capital coming to the data center space
today and everything that touches it.
Our job was to have done it in 2015 and 16, not in 2025 because
our investors can do it themselves now.
Now there are very, very responsible hands and you know,
a long list of responsible hands.
That's a, that's a playground we don't really like to mess around
with. We'd rather be in front when the
assets are misunderstood, the processes are opaque, pricing is
also opaque. And so if you understand the
actual asset you are buying and you understand what you might be
able to do with it, that's a very interesting entry point
when everything is frothy and everyone is paying attention.
Despite this, or maybe because of this massive tailwind, it's
still an interesting thesis. But that's not the Clover lay
mandate. We're not momentum investors.
You won't, you won't find us investing in AI.
There are things around AI that might be relevant, but we're
not. We're not growth investors.
We're a very boring, uncorrelated March to an
interesting return. That's it.
So are you, I mean like I don't have the exact institutional
style boxes or classification. So I'm, I'm going to mess up
specifics here, but perhaps I'm I'm directionally accurate, if
not precise. So it sounds OK.
So it sounds to me like you're early in a sort of the capital
flow of an asset class is at least one way you target to get
returns. Is that fair or no?
Yeah. I mean, that's fair.
Not always. We're not always trying to look
around the corner and, you know, shine up our crystal balls.
That's been the case in a few situations.
But our prototypical deal is we are galvanizing the acquisition
of truly unique assets in an era where we can do something with
those assets to create an asymmetric return.
And a lot of investors don't believe that asymmetric returns
exist. But we would argue that when
you're buying an asset, not a business whose EBITDA can go to
zero and people start stealing their computers, but an asset,
tangible or intangible with no leverage and then reposition
that asset based on what is happening in the world.
Over the course of four or five or six years, you've contained
your downside because you bought a thing that has a value.
But if the world behaves in a certain set of ways that we
believe is possible, you absolutely have exposure to the
right hand tail of equity that is an asymmetric return.
They're just really hard to find and if to turn over a lot of
rocks, drill a lot of dry holes to make your 5 or 6 investments
per year in truly interesting assets.
I mean, we, we've, we've dug a lot of dry holes and ended up
spending tons of time in a number of segments and never
found it actionable. But were it to become
actionable, we have an 80% running head start because we
live in these spaces all the time.
There are other sort of proactive searches that resulted
in investments and it's things like it's sort of a corollary to
the non performing loan world specific to Brazil given some
changes that have happened in the regulatory framework in
Brazil in the last decade or so. Brazil's judicial system is
absolutely first world. And so when you're talking about
legal assets, it is an investable country.
Now, there are a lot of things in Brazil that are still a bit
spicier and more sort of on the emerging market side.
But there's a particular financial asset, intangible
asset, where it is factoring claims to the federal government
after the payment has been put into the federal budget 2 years
from now. And it can't be changed.
But the problem is the claimant could really use the cash right
now. Yeah, that makes sense.
And so if you have a purpose built partner on the ground that
understands the market and you understand the market, that was
a point in time trade that now is resident in a lot of credit
funds and returns have collapsed from 2 times money to a levered
9% return. We see that happen a lot.
So that would be an example of sort of being at the front end.
But there are there are a lot of instances where we spend a lot
of time and just can't ever get there.
But everything is worth the time because the world changes.
And every three years it's a brand new world and things that
used to be boring for 10 plus years suddenly has something
interesting happening and we see it regularly and that's why we
have so much ground to cover and a big enough team to do it.
Every three years seems like an extended time in the in this day
and age, it's like every 12 months.
A new world every three weeks? Exactly.
That's interesting. How do you how do you come about
C band? What happened there?
So C band is the C band and C band related are the 3rd and 4th
wireless spectrum auctions that we've participated in.
Going back to my history and several of our histories at
Morgan Stanley Investment Management, we in a group called
Alternative Investment Partners, AIP.
We were large early investors in a number of different corners of
telecom infrastructure writ broad like cell phone tower roll
ups in 2001, not 2023 cable around the world, a number of
other pockets. And one of the things we spent a
lot of time on were these episodic FCC run wireless
spectrum options in the United States.
And we love the asset. And it's a, it's a really
interesting sort of game theory case study where you look at the
participants of the auction. The auction has incredibly
strict rules. That's something that we like a
lot. And why is that?
You have. What's up?
Why do you like the rules being so?
Because it keeps the tourist investors out.
That makes sense. Because you cannot violate the
rules. I mean, the penalties are like
unbelievably bad. And so you have a playing field
that's populated by Verizon, AT&T and the largest in the
world, and a handful of $100 million private vehicles.
So you've got speed boats that in theory can outmaneuver the
oil tankers. And the rules of the auction
favor the little guy. And every auction sequentially
the auctions have gotten more and more favorable to the little
guy if you can satisfy some very, very strict rules.
And so we participated after setting up Clover Lane, we
participated in 600 megahertz 600.
For people that haven't spent that much time in wireless
spectrum, I always use the example.
If you you start a conference call with no video from your
bathroom in the morning, and then you get dressed and then
you get in your car and you drive to your office and you
park and then you get in the elevator.
And then you come up and then you sit down at your desk.
Then you hang up your call. Your call probably used six or
seven different bands of spectrum at different times
during that call. So there's a there's a use case
for all different kinds of spectrum. 600 happens to travel
over extremely long distances and penetrate buildings very,
very well. Yeah, but it doesn't carry that
much data. Yeah, it's a little slower.
The second auction we participated in at Cloverlea was
millimeter wave, which is the exact opposite of 600 which is
it carries all the data. But it doesn't go through
anything. It only travels 100 yards, so
what's the use case for that? Wireless to the home right now,
but eventually autonomous drive. Yeah, you have to have
millimeter wave for autonomous driving to actually be a thing
where all eight cars at a stoplight can function.
It has to use millimeter wave. So C band was sort of the
natural corollary. We skipped one in the middle,
but C band is the everybody knows the backbone of of 5G and
because of the rules of the auction.
You know, Google or Comcast or AT&T can't.
They're not allowed to just show up and outspend everyone and buy
the country. They're limited in what they're
able to buy and wear, which means the speed boats are able
to think very strategically with a value lens to say, where do I
want to be focused? We can let the big guys beat
each other up in Boston, Chicago and New York and for pennies,
but to really fractions of pennies per megahertz pop per
person. Basically, we can buy college
towns, we can buy army bases. So we cover the map.
Step one for the incumbents is you must have key markets.
That's clear. So we stay out of the
incumbent's way, but they also need to have cities 40 through
150 eventually. And so that's the way Spectrum
is played out over time. And it's been a very fruitful
exercise for us. There are no more options
scheduled despite recent headlines, no more options
scheduled for the next 5 years. It's a really, really involved
process. So we own an incredibly scarce
asset. It's real estate in the sky.
And whoever you pay your mobile bill to, they have to either own
or lease our spectrum. They don't have another option.
So we own the core asset upon which very large industries are
built that they can't own yet or they can't know.
How how regulated is the pricing on that that you can lease it
out to? Pricing, it's not regulated,
it's bilateral. And so but it's a fairly known
market. Like you sort of know where you
are. There are a lot of comps given
your demographic, whatever your zip code is that you own, it's
not really a zip code, but it's basically a zip code.
And so there's there's a known market.
And so the question becomes how well did you buy it and what is
your operating partners relationship with the eventual
owners or lessees of what you now own.
That's how you turn an intangible asset with a very
clear value into the right hand tail of equity is navigating
that that transaction dynamic over a period of five years, six
years. How many people own that like
the spectrum in a given zip code?
In the zip code, well, every zip code has all the different bands
and the different bands have different owners.
And so it's it's sort of a, a patchwork.
If you look at a map of the United States, it is a patchwork
of different owners. And eventually the biggest
owners get bigger and bigger and bigger.
And they buy all of the spectrum because they need it, they must
have it, and they would rather own it than lease it whenever
they can afford it and whenever the government allows them to.
So it's a, it's an interesting, as I said, sort of game theory
study of who behaves in what way.
Where does value lie? If it lies or I can choose to
buy nothing. Wow.
So truly is, you know, you start at 9:00 AM.
The second round starts at 11 AM and the third round starts at 2.
And so you have to have all your chips on the table at all times,
otherwise you lose your chips that you acquired through the
very rigorous sort of screening and qualification process.
And so it's a, it's a fascinating, fascinating
dynamic. And we've looked at it in other
countries, they run their auctions in a different way,
mostly favoring sort of the national carrier or carriers and
just saying this is the easy way to do it.
Let's just do that. And probably a shortage of
private capital, but we need the rules.
We need to understand the rules and not just show up in Finland
and attempt to compete against an incumbent when you know, the
FCC equivalent in Finland doesn't want little guys to own
spectrum in the United States, they do.
That's why it's been an opportunity for us.
How does the auction? Does the highest price end up
winning or is it? The highest price at the end of
the day, and what you'll find is that you become the winning bid
and nobody else out bids you because they're taking their
chips to another zip code somewhere else.
And so it becomes over time, and the auctions will last six
months. At the long end, what you'll
find is you know what you own slowly but surely in the back
half of the auction. And then you'll see some
interesting behavior in the last minutes.
But typically you kind of know what all of the participants are
going to do. And for context specifically in
600 and this is imminently findable through the FCC
website, I believe there were 35 approved bidders in that
particular auction and it was everything from us up to AT&T
and Verizon and the and the other big ones.
Interesting. That's neat.
What what got you into dark fiber?
I would assume when you were buying dark fiber that was not a
very loved asset class. It would, I mean when we
invested in dark fiber, it was the very, very earliest days of
the predictable rise of data center as its own asset class.
Yeah, what are we talking like 2015?
20/15/2016. And I mean like Zao still had a
ton of trouble through that time.
Well, Zao Zao's an interesting example and one that we were
very, very familiar with in our in our old days where Zao's dark
fiber and the other fiber, the lit fiber that they owned were
mostly centered around cell phone towers as opposed to data
centers. Not that's not a global comment,
but it's a generalization the evolution of the data center
market and how much capital was coming in.
The easiest first port of call for real estate funds or
developers that would go on to become publicly traded reeds.
The easiest port of call was the pejorative phrase in the spaces
building a cold box in Nevada and hoping to sign up lessees
OK, because they need to be in Nevada and I hope I can find
them. That was sort of version why?
Do they have to be in Nevada? Well, Nevada is sort of a node
between Phoenix and the West Coast and you need a lot of
nodes to connect everything. And that gets to our dark fiber,
which our dark, dark fiber investment, which was being in
and around the competitive nature of data centers and the
behavior and the nature of the participants.
We saw that they were focused on the boxes and the boxes have to
talk to each other. And so if that's data centers,
one point O creeping into two point O, which is when the hyper
scalers came in and said you will build it looking like this
and I am 100% of your capacity. You just got a great deal.
So you don't have a cold box you're hoping to fill.
It's you're building the box for the hyper scaler.
That's the beginning of two point O dark fiber.
One point O was really, I mean it was an infrastructure slash
venture investment. It was municipality by
municipality approval to dig holes to put APVC pipe in the
ground beside the road with dark fiber in it.
And the dark fiber is critical. I mean, the, the parallel for,
for people that haven't spent time in the in in the space is
when you leave home and go to the airport, sometimes it takes
you 20 minutes, but if it's rush hour, it takes you an hour.
That's lit fiber. It's shared.
Sometimes it's busy, sometimes it's fast.
Security is good, but not perfect.
Dark fiber is your own lane on the highway 24 hours a day,
every single day. And so as you creep into data
center 2 point O in 2016, the hyperscalers were demanding dark
fiber and not very many people could provide dark fiber.
And so we said, OK, looks like data centers are or the capital
coming to data centers the way sort of like the way we did it
initially is crowding us out and it's time to move on.
But what are the 2nd and 3rd order investment opportunities
around this secular trend that are still assets that we can own
that have been underdeveloped, under exploited or can be
repositioned? Can we do something interesting
in this space? And so we ended up having a very
successful dark fiber investment, mostly in Northern
Virginia, almost all on the East Coast.
Just the interconnectivity to allow all of these new data
centers to speak to each other, you have to have that.
And the big providers of capital didn't understand necessarily
the dark fiber world and the level of priority for their next
new customer. They demanded dark fiber and the
provider of the data center didn't have any.
And then they turned us because we had it.
So what happened? I mean, if if you go back to 99
right, people were just laying fiber sort of speculatively I I
believe right is where. There's a lot of fiber to the
home back then because data centers weren't really a Bing at
the time. I mean, there were some, but it
wasn't, it was really fiber. It was more like cable,
honestly. It was how can I, how can I get
fast transmission into a hub like, you know, Dallas so that I
can then serve the last mile? That's where a lot of the local
sort of cable businesses got tripped up.
Others were very, very successful at doing so because
of their footprint is how do I actually get to the house?
Like, I got the fast stuff almost to the house.
It's so expensive to get it to the house.
Yeah, go back to spectrum. Now you can have a telephone
pole that shoots spectrum from the very fast dark fiber to the
homes in a one mile radius. Yeah, no one knew that that was
possible in 1999, but it's definitely possible today.
So you bought the dark fiber that you bought was already in
the ground. Obviously, you didn't lay it.
Yeah, yeah. It was the that was the
infrastructure slash venture stage where it probably looked
like and ended up being very successful investment from the
guys that we that we purchased it from.
But it was probably underwritten to a venture like return and it
ended up being a very, very solid buyout like return with a
lot of infrastructure like work. And So what we ended up
purchasing was critical infrastructure operating at 9%
capacity. And so our job from that point
forward with our operating partner was how do you fill the
pipe? What's the right skill set?
What's the right operating partner who is able to fill the
pipe through existing relationships, not just being a
financial buyer or something that looks like a utility today,
like older dark fiber, that's a utility.
It's very attractive utility, but it's not growing.
It's just incredibly predictable and nothing's ever going to go
wrong with it. But you won't make three times
money investing in dark fiber, existing dark fiber.
And so mapping the opportunity with the skill set that we think
is required to reposition and improve that actual asset was,
you know, primary to our underwriting and how we view the
space because there there's dark fiber in a lot of places.
And so you can, if you want to torture the spectrum analogy,
you know, you can do it in rural areas of the United States and
hope that Kansas City grows to the West in your favor or the
north or whatever it is. Or you can buy the center of the
universe in data centers in Northern Virginia before people
show up. That's what we end up doing.
Yeah, well, the thought process makes sense.
That's interesting. So I don't mean to like belabor
this, but so like basically when you own dark fiber, you've got a
pipe and then well, there's like call it 100 strands that go
through it and 9 released up, but then you had to go figure
out the other 91. Right, lease them up on 10 or 12
or 15 year leases to those hyper scale tenants who who demand
their own lane on the highway. But important to say, we're not
margins telecom investors, but. No, I know.
I just. It's a perfect example of an
incredibly large industry built upon core assets that AT&T
doesn't necessarily own, but they must use.
So who owns those assets? Well, you're, you're also being
a little pigeonholed by me as an interviewer because I am pretty
interested in telecom. I've, I've, I've followed it for
a while, but you know, when it gets into the nitty gritty of
infrastructure, I don't really understand.
Like I can't talk about which routes are the best routes to
own, right, but I do, I do like telecom quite a bit.
It's. Fascinating.
So that's interesting, man. So how you started out, you said
at Morgan Stanley? Morgan Stanley Investment
Management, I joined Morgan Stanley in 2001.
That was about a year after our group and it's diagonally across
the street. So I was on the Zooms.
I find myself pointing over my shoulder.
It's over there. They have an amazing business
and it's run by my dear friend Neil Markel and they continue to
do a great job. But and it was this collection
of niche uncorrelated assets. We also did buyouts.
We also did venture. We did, we did kind of
everything on a global basis. And so the reason to to step out
and set up Cloverleigh was to have a purpose built firm to
provide institutional investors and family offices direct access
to a responsible portfolio of these assets that they don't
own. Because sometimes people ask
what our competition is for capital.
The competition is someone saying in 2025, never heard of
pharmaceutical royalty funds before.
That seems like a resilient uncorrelated return.
I guess I'll invest in the $3 billion pharmaceutical royalty
one that's sitting on my desk. So like a laser shot into one
particular asset that has the attributes of what we do.
But if you look at the collection of things that we do,
we would argue that that's more responsible exposure.
If lack of correlation and return are your two objectives,
A portfolio approach is the right approach.
And so that's how we've designed the firm.
And we only do one thing like we don't have a credit fund, we
don't have an Evergreen fund. We have 18 people focus solely
on the main event, looking for the most interesting things that
we can do in the world and are moving forward and excited about
what's happening for the rest of the year.
So you brought up the pharmaceutical royalties.
Are you looking at like biotech royalties too?
I mean, we, we see a lot, but that's a, I mean after music
publishing rights, it's probably the most heavily trafficked
really interesting asset that we love that we'll never again get
there on price. But we want to see all of it.
We want to make sure nothing has changed.
And there have been a few I mentioned earlier, there have
been a few asset segments where the world did change
specifically like litigation finance.
Like we litigation finance is a really boring, incredibly
competitive cottage industry for a really long time, which is
weird is like lots and lots of $100 million funds fighting over
the same $15 million deals in complex commercial.
Litigation finance was basically like small guy sues big guy for
stealing their trademark basically.
And big guy says, well, I'll just out lawyer you and get a
lower settlement. But then when there's ostensibly
a check backing the little guy, you have more weight and improve
the value of your settlement. We've never invested in complex
commercial but and so a lot of people stop paying attention to
litigation finance, but it's fascinating, very, very dynamic
place globally, not just in the United States.
And a couple of different things happened in litigation that we
have acted on. So the kiss of death to all of
those, you know, first generation litigation finance
groups that did a very, very good job.
The kiss of death was duration. And the time to resolution in
these cases, yeah, almost across the board, outstripped even the
most conservative estimates of how long it was going to take to
adjudicate and settle or adjudicate and receive a reward.
And so you've got this enormous cottage and industry with
virtually no realizations so. Interesting.
That's an existential crisis for those firms because they can't
raise Fund 3. Yeah, everybody wants their
money back before they're committing.
Yeah, no doubt, no doubt. So the first innovation was
direct secondaries in litigation finance, not buying LP interests
in old funds, buying the cases from the original fund owners.
Show me your portfolio. I'll take those six, I'll pay
you a fair price. But I just collapsed my whole
period in a huge, huge way. And the fund wants to do it
because then they can return capital.
They can return capital and then Fund 3 actually has a chance to
get off the ground and they're getting a fair price because
they've made progress over the last six or seven or nine years.
But that was an innovation. And then the second was
regulatory in nature. And again, we don't invest in
anticipation of regulatory changes, but we love rules.
And there is a like shockingly almost seismic regulatory change
in the state of Arizona coming up on three years ago, not quite
where for the first time in U.S. history, institutional investors
are allowed with very, very strict rules to participate
directly in the economics of a law firm.
Not a case. How large is the US legal
industry? Yeah, it's pretty big.
And until 2 1/2 years ago, it was 100% owned by individuals
who had passed a State Bar exam. That is inefficient and so yeah.
It's kind of wild, yeah. Like Sidley should be a publicly
traded company. Or well, but there are a lot of
rules. I mean, sort of like pro sports,
like the league. In this case, the bar will say,
well, you can't just we're not gonna have like a roll up of
dentist offices. Yeah, you know, that's not what
we're doing with financial owners making.
Yeah, financial owners making all legal decisions.
So it's very, very similar to the big four US sports where
you're constrained by the percentage that you can own.
You're severely constrained in terms of the influence you can
have. You are not operating this
business. You're not allowed to because we
didn't pass VAR exit. But if you do your work and you
understand the entirety of the opportunity set around the
people that you can partner with and what you would like your
approach to this newly actionable asset, intangible
asset to be, that's a pretty interesting uncorrelated return.
And so we were alongside a well known Midwestern endowment.
We were either the 1st or the second, I would argue the first
of course, but either the 1st or the 2nd institutional investor
to participate directly in the economics of the law firm.
That's pretty interesting. Roll forward two years, we've
seen, I don't know, 30-5 different opportunities in the
same space at pricing that we don't care about.
So we've moved on. However, it's a really
interesting and complementary asset that lots of institutional
investors should take a look at, but you kind of wish you had
taken a look at it three years ago, not this summer.
Again, getting just understanding the niches and
understanding the way things might change and being a bit
ahead of the curve sometimes if if we're lucky.
So how? I mean, how do you try to stay
ahead of the curve? Like when your brain thinks
about assets you want to own, what are you trying to think
like 7 to 10 years out and how the hell do you predict that
kind of thing? Yeah, the crystal ball, there's
not a lot of prediction and I want to, I want to be very, very
clear about that. We invest when trends have
started, but not everything we do is a trend.
Sometimes they're just point in time private trades that the
pricing doesn't make sense and we know this is going to last
for 18 months and it's not going to be interesting again.
So an example of that, would it be like an asset that is not
cash flowing currently but clearly has intrinsic value and
you can buy it at a huge discount to replacement cost.
And you say, look, I got two ways out here and I'm in.
So most of the point in time investments that we've made need
to be self liquidating in some. Way.
How interesting. So that we're not, again, we're
not buying companies. So we're not buying something
for $0.50 and hoping to sell it for $1.10.
We're buying something for $0.60 and receiving $1.10 or $1.20 and
then we disappear because there's no asset left because it
resolved itself, right. So like run off portfolios, non
performing loans we haven't done in a long time, but that's a
very like sort of Hallmark case study globally of that return
profile. There are, you know, there's a
recent years investment that we made in ERC claims.
So this is part of the CARES Act.
The owner of a business who qualifies according to rules,
once again across a number of rules in the middle of COVID,
did you not fire your employees? Did you can continue to pay them
the way they've been paid before And then a number of other
metrics. You are entitled to a tax credit
directly from the IRS. And not very many businesses
knew that because a lot of businesses don't have a CFOA lot
of business don't even have a controller and they weren't
aware of this program. And so there's a long, long
storyline around what's what's transpired since since 2020
inside the ERC program. But there's an opportunity again
to effect you have a purpose built machine that factors IRS
credit risk in exchange for a very high teens or even low 20.
See what you do in there though? You're playing with the time.
The IRS could take forever and so you need to understand, you
have to understand the time to resolution.
You have to. And if it's a question mark, all
of a sudden you're 18% IRR becomes a 5.
Yeah. OK.
So if something had like a a hard statute of limitations for
three years or something, you would say, OK, well that I could
bank. I know statute of limitations is
not what I'm that's not the appropriate term.
Yeah, neither. Of us are lawyers.
Yeah, well, I did go to law school, but yeah, I I realize
there's like a there's a hard time that it must be resolved by
and that you could say, OK, well then I could back into that's my
worst case scenario here, right. Yeah.
And then how you think about that kind of thing in this
specific case? I mean, I was telling you a lot
of it was quantitative analysis and understanding time to
resolution for previous claims because it's imminently
discoverable. And also what kinds of claims,
what does the government settle first?
Do they settle the $90,000,000 claims or the $200,000 claims?
Oh, what do they settle? The answer ended up being in the
middle. Interesting.
And so sort of single digit million claims, legitimate
companies with 100 or 200 employees with ACFO filed the
right way. Those are the claims that got
paid quickest. And so at the lower end of the
market there was probably problems with filing and
problems with qualification because of the people that were
filling out the paperwork. At the higher end of the market,
even the IRS doesn't really want to stroke a $90,000,000 check,
right. Those are sort of let that one
sit for a while. And So what we found through the
data was a sweet spot of the kinds of claims that you can buy
and you own, you're not sharing like you own it.
And the time to resolution on those was significantly
collapsed versus the rest of the market of claims.
But even those were not years. It was a year or a little.
You eventually get paid, but people get tired of waiting.
It's like Brazil and Predatorios.
I know I'm getting my money in two years, but I could really
use that cash that is not in my budget.
I just found out that I have a right to it.
I would like a percentage of that cash today and I will
transact with Clover Lace Group to get that cash today.
And it's a, it's a great resolution to an onerous highly
regimented process, but not is not very fun for anyone to
process. But if you build a machine
solely focused on doing that thing, it becomes less onerous
and you can buy very well and make an interesting return and
then go away because ERC opportunities over later this
year probably. Yeah.
Well, that makes sense. Plus you're providing the
business liquidity and to the extent they have uses for the
capital, they can put it to work rather than sitting there and
waiting. Exactly.
At the time they're not getting any interest, you're just
sitting around waiting for money.
Yeah, you want to open a new branch now or in 18 months?
Yeah. Huh.
That's interesting. That's cool.
What else are you digging around?
Well, you can't. You can't tell the competition.
Well, what are what are some fun stories?
I'm not going to talk about the pipeline.
I'm going to talk about the things that are no longer
interesting. What's it?
What's What's a crappy outcome? You had a.
Crappy outcome we had. So one of the very first deals
we did, and this is going to sound wild, was a Greenfield
cacao plantation in Colombia. OK, All right.
So it had to be cacao based on prior experience and permanent
crops that we had at Morgan Stanley, and it had to be
Colombia because of the incredibly deep relationships we
have inside the government and the pension funds and everything
in Colombia. We had this thing surrounded.
If it had been Peru, we'd have been like, this is probably
interesting, we're never going to get there.
The answer is no. And we like to give early Nos
and not just hang around the hoop and be annoying.
So we did cacao, it worked. So if you think about what we
did there, the actual asset at entry was levered.
Cattle land, cattle land, cattle land.
There are no cacao plantations in Colombia.
Biggest cacao markets in the world are Western Africa,
fraught child labor, middle men like really bad and Southeast
Asia that's basically fully planted.
If you go latitudinally around the globe, you go over Colombia.
Oh, and by the way, it's a 2 day steam from your largest market
in the world, the United States. There should be a cacao economy
in Colombia. There wasn't, wasn't anything of
significance at all. And so the idea was, or the
thesis was, we own cattle land on an unlevered basis.
If we get everything wrong, our partners terrible.
There is flood, there is, there is blight.
We're selling unlevered cattle land for $0.87 on the dollar.
So dimension your downside. And then look at the business
case and say what could possibly happen when these trees are 5
feet tall? What if you get things
completely right or mostly right?
Who cares? What's the exit?
Are we operating this forever or are there acquirers?
That was the thrust of our work because we don't have mud on our
boots, but we know lots and lots and lots of people that have mud
on their boots. And so we felt very comfortable
making the commitment. And the reason this was sort of
an underperformer versus expectations for us is we had
new capital come in from sort of an ESG focused fund out of
Europe or not even a fund. I mean, I guess it's a fund an
ESG operator out of Europe. And shortly thereafter we
thought we had a path. Shortly thereafter, one of the
largest confectionery companies in the world and everyone has
probably eaten their candy in the last week came in and said I
would like to be a 40% owner of this.
And our new partner who had control because of the size of
them coming in after us, well after us, they were able to
steer it towards the large global strategic.
And this large global strategic is not in the business of
selling plantations. And so we had no choice but to
put our hands in the air and say we love where this is going.
The wrong collection of parties is at the table now.
We would like to be taken out. And so an amazing platform,
especially given what happened to Cacao plan, what could have
been a three or 4X. We walked away for exactly the
right reasons at 1.3 and we said this is no longer appropriate
for our kind of capital. We're not in the business of
crossing our fingers and hoping the global strategic acts in a
way that works for us. We don't control our own
destiny. So it's time for us to be gone.
So that's, that's one I would, I would point to.
You know, it happens on occasion, not terribly
frequently because we are usually controlling our own
destiny. But that was one where you you
couldn't say no because saying no would be the wrong thing.
Like we don't want to partner with you because of the price,
but we need to exit at that premature price.
That was the right decision. That's a good crappy outcome.
I was, you know. Hopeless, I mean, it could have
been so good or maybe cacao prices would have cratered like
once you we always like to say we'd like to build the utility,
not buy the utility. And so when the global strategic
start viewing you as a utility and they're paying a utility
price, that means you're not able to be nimble anymore and
it's time it's time to get it's time to move on.
But yeah, that was a frustrating one.
But anyway, at the end of the day, it was it was a perfectly
fine result. And that's how a lot of our you
know, the when the underwriting that doesn't pan out ends up in
a ho hum 1.31.4 That's we love that return profile.
Like if if those are the ones you're really frustrated about,
like this took way too long. And thanks for the positive
return. That's a good result as opposed
to. You don't want to go backwards.
Sort of a venture like portfolio where you have home runs and a
bunch of zeros. That's a that's a tough way to
operate as a as a an investment firm.
So in a fund, if you have 10 investments, how many do you
have a negative return on? I know I don't.
Can you even talk about this? Am I asking?
Probably can't, but the answer is very, very low just because
of the the transaction profile that I was describing.
Like we own a thing that we can sell.
And so inside any portfolio, they're probably more like 12 to
15 instead of 10. So there's pretty good
diversification. And again, each of those
investments are in different segments and have nothing to do
with each other. And so the reason or the
rationale behind the portfolio architecture is really making a
series of conviction bets. Not just throwing cards across
the table and hoping a couple hit, but rather making
conviction bets, but also being responsible as a fiduciary and
saying no one or two deals can kill this fund.
I need to be more diversified than that because our investors
given they were looking for a very predictable uncorrelated
private market strategy means nothing should be able to put a
hole in it even if one doesn't work out.
So that's and that's how things have played out and there, there
have been surprises to the upside and the downside.
But the middle of the bell curve is why we remain in business and
and raising money because the middle of the bell curve is
incredibly compelling to a lot of institutions and family
offices. How big were you when you
started? How big were we?
Yeah, like assets. Yeah.
Like how do you get your start? You come out of Morgan Stanley.
Oh, it's $0.00. Yeah, somebody had to give you
your first dollars, right? Yes.
So we are first think of our soon to be more than 1.6
billion, but that's the filing number that I have to use until
June or July. Think of our 1.6 billion as a
series of $200 million vehicles. So the very first one was the
family office, West Coast family office of the Silicon Valley
entrepreneur that we'd known for very, very, very long time.
And he was very forward thinking and confident about the future
of his business when he was a pretty rich guy, 100% on paper.
We were having conversations about what it looks like when he
has $4 billion and for relationship reasons and because
he's a fantastic guy. We had those conversations with
him. We left Morgan Stanley.
He had no idea we were leaving. And when we were allowed to talk
to him, we told him what we were doing and we became 100% of his
private exposure. Nice.
Because he has Equity Beta covered.
Thank you very much. Courtesy of the main event.
Yeah, give me the long dated uncorrelated stuff.
So that was the first vehicle, but we didn't have it when we
launched. We had we had a PowerPoint with
like an idea. How was that?
That must have been stressful. Terrifying.
Ask my. Ask my wife.
Yeah, Yeah. No, it was, I mean, it was it
was a big leap, but we stuck to it.
And we really haven't changed much about what we do or how we
think about the world or the people that we talk to since
inception, sort of kept our heads down.
And if it's, you know, if this isn't a $30 billion business
someday, that's OK. We really, we look at awesome,
interesting things every single day.
I was supposed to go to today until my son's final youth
soccer match ever before he goes to college was rescheduled.
I was supposed to go to sort of close by local gaming facility
like slots. Like the place smells like
smoke. That's $1.00 drink.
That's that kind of place. We've been around gaming for 20
years. We understand the gaming, We
have a deep, deep network in gaming.
And this was one of the assets related to a portfolio that
we're looking at, but not owning the portfolio of casinos, but
rather doing something with sort of the owner of the of the
casinos to enable him to grow. So, so I have a soccer game
followed by local gaming, followed by, you know, ERC
claims and then, you know, a board meeting for the Care Bears
tomorrow there. You go.
It's pretty cool. We own the intellectual property
of the Care Bears. I remember the Care Bears stare.
Oh, yeah, and we get, we get heated, heated in the board
calls about Hello Kitty because they're, they're awesome.
They're number one in our category.
We want to eat their lunch, but they're so good.
We're trying to trying to figure out how to outmaneuver Hello
Kitty. Real board meetings.
Yeah. That's tough.
I mean, that's tough. You kind of, yeah, you got to be
like complimentary, I would think.
Yeah, no has. Bluey encroached on your stuff.
Bluey's. Bluey's the best IP in the
world. Bluey's good.
I don't actually know off the top of my head who owns Bluey
because it's one of the strategics.
It's not independently owned. Most it's not.
Like part of the Australia or whoever like produced it.
Most, I mean, it's probably the network, mostly the network that
produced it where they just said I'll take that and I'll give you
a check. Inventor of Bluey, Yeah.
And then I'll take it from here. The vast majority of of content
on the intellectual property side is either owned by
Strategics. That's most of it.
They have giant portfolios of different brands like the Care
Bears or families where they accidentally ended up with some
IP that worked and all of a sudden it becomes a somewhat or
very meaningful part of their broader business that they
almost accidentally owned. And there's almost nothing in
the middle. There's no private equity
running around rolling up things that look like the Care Bears
because it doesn't exist. It's tiny and venture like.
And we think we can grow it and make it awesome and everyone
will know it. Or it's, you know, Batman.
Yeah. And Warner Brothers owns Batman
and they're doing amazing things with Batman.
The the middle is where we had been looking for sort of legacy,
incredibly well known, resilient brands that you can do something
with what parts of the world don't know about the Care Bears,
but by all the Hello Kitty stuff, what's the right team to
go find those regions? How do you grow that royalty
stream? Because you know you have a
royalty stream like that's, that's the entry point.
What can you do with the Royalty stream without actually
manufacturing the T-shirts or the backpacks or producing the
movie? Yeah.
You own the intellectual property.
All of those people pay you forever.
It's a really interesting asset. Yeah, Yeah.
I don't know the answer. If I if I come across it, I'll
pitch you on it. Yeah, let me know, let me know.
We want to see, we've seen a lot of interesting things in content
and most of it's most of it's on the venture E growth side.
Like we've we've broke, we've used AI to break down this
market and these are the components of successful brands
and we have one that nobody knows about that fits all of
those criteria. So pre money valuation of 30
million or like as soon as you say pre money, it's not, it's
not for us. That's not what we do.
What I mean, what do you do as, as an owner or something I've
been thinking about like what happens if people are using that
VO3 to start making Care Bears do untoward things?
What do you, you know, how do you protect that in this world
of potential content proliferation?
It's an expenditure and it's everything from protecting the
brand from those kinds of things.
You spend money doing that. And it's a very, very high, high
level of focus all the way down to Etsy.
Like I love Etsy, I bought stuff off of Etsy and none of it is
licensed. And sadly we own the Care Bears
now. So you can't, you can't do that
anymore. And so it's a that's part of the
blocking and tackling around an iconic but neglected piece of
intellectual property. Like how do you play defense?
And also how do you play offense?
And in a lot of cases, the prior owner wasn't doing either one.
They just suddenly had this ATM machine that sent them money all
the time. And they're like, this is
amazing. I didn't plan on this.
I'll just leave it. But there are things you can do
with that Intellectual property and defense is certainly one of
them. Yeah, I would think so.
I would think it's going to be a more interesting conversation
over time rather than less. I think there will be more
proliferation of that kind of thing.
Yeah, I mean it's and this touches the intellectual
property content side, It touches music publishing rights,
it touches printed publishing rights, how AI is governed and
how the owner of content is compensated when it shows up on
your computer screen and then you use it.
That answer is not resolved and we're not going to try to figure
it out. But we are watching very, very
closely about how it's sort of like in the earliest days of
like the Apple Store, right? You can, you'd finally buy a
song and not an album online and someone just decided that the
price is $0.99. Like there wasn't a lot of math
behind it. It was.
Yeah, it's under a buck. This will work.
And then the recorded music protocol was applied to $0.99.
Then you go to Spotify that completely.
It required a completely different construct to
compensate the owners of the content because a fraction of
$0.99 is different than a fraction of a fraction of a
fraction of a fraction of 2 billion plays.
And I don't need to report how many plays it had.
So watching these secular trends and understanding what the rules
are and what the assets are and determining points of entry to
say this is now actionable. We can actually do something
with this. You know, on the on the music
side, we've, we've done some things in music, but not in
music catalogs because of all the capital that's coming.
We took in a different approach with a partner on the ground
that has never done anything but this and we are creating,
purchasing, creating royalty streams out of all of the other
revenue that touches an artist other than their catalog.
So the catalog is like your mortgage.
Like if you feel like getting 18 quotes for a new mortgage, you
can have that in an hour. If I feel like selling my
fantastic original music collection, if it is actually
fantastic or even decent, I can get 18 bids in like 2 weeks.
You know, You know who to call. Everybody is starved for assets,
but the touring, the merch, the social, all of the revenue
streams, the perfume agreement, what is it, 7% of revenue on
something I have no control over?
Or am I manufacturing and owning the perfume with my name on it?
That's different. And so our approach to music was
to look at the other sources of revenue that are lumpy, episodic
checks that end up adding up to a gigantic number for a lot of
these artists and saying, is there a way to professionalize
this and make it look more like a royalty stream?
So that's been our approach. And let other people you know
buy The Rolling Stones and and Bruce Springsteen.
Huh, that's cool. I like that.
I like it's a different way of thinking.
It's been an enjoyable conversation for me.
I hope it has been for you. No, it's great.
I appreciate it. Happy to be involved.
You ask good questions and second questions and 3rd
questions and we end up talking about telecom and now we sound
like a telecom investor. That's that's the way it goes
because we just like talking about this stuff.
I think wholesale like I have not had a bunch of tag lines and
like don't forget Clover late does this.
We love talking about it because what we do is really
interesting. The assets we buy are really,
really interesting. The reason we have the business
is we think they're interesting additions to institutional and
family office portfolios. And so our job is to be
missionaries and tell that story because it's not intuitive to
everyone. It doesn't fit for all programs.
We think it's complementary to most, but if you're a bucket
filler like we're not eligible. But if you're thinking in a
holistic way about all of your private exposure and the way
things behave over time, portfolios we assemble are
pretty complimentary and we think perform in a in a really
interesting way between private credit and private equity.
Who should How should people get in touch with you?
I think you can go through our website or our LinkedIn easily
accessible and we have a person charged with turning those
inbounds around really, really quickly.
So it won't end up in the ether for sure.
But that's probably the most reliable way, rather than giving
somebody's e-mail address and getting getting pounded and not
being able to respond in a in a timely way.
Makes sense. All right, Well, cool.
Well, thank you for coming on. I appreciate it I've I've had a
good time getting to know you and this is like I said it was
an enjoyable conversation. I hope it was for you as well.
It was great. Thanks so much for having me.
I really appreciate it and best of luck to you the rest of the
summer. Hope you get some golf in and.
That won't be a. Problem.
Who knows, maybe, maybe we play up here or down there at some
point. Would love to in the summer I'd
rather play up there and in the winter you can come down here
sounds. Good.
All right, have a good one. All right, have a great one.
See you. Bye.
None. Music.