The transcript from this week’s, MiB: Robert Koenigsberger, Gramercy Funds Management, is below.
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ANNOUNCER: This is Masters in Business with Barry Ritholtz on Bloomberg Radio.
BARRY RITHOLTZ, HOST, MASTERS IN BUSINESS: This week on the podcast, I have an extra special guest. His name is Robert Koenigsberger, and he has a fascinating career in emerging market, opportunistic and distressed debt investing. He started at a small boutique before going to Merrill Lynch and Lehman Brothers, and ultimately launching his own shop called Gramercy Funds Management.
If you’re interested in what it’s like investing in emerging market debt, how that part of the investment firm has changed over the decades as the world itself has changed. He began in South America and Latin America, before investing in places like Russia and China and Turkey. Fortunately for them, they were out of Russia long before the most recent invasion of Ukraine happened.
It’s just a fascinating conversation about looking at the world from both bottoms up and top-down, as well as thinking about what valuations are like, how likely are macro events, the impact you’re getting not just the return on capital, but as famously said in fixed income, a return of your capital. It really is a very, very different approach than what we think of as typical equity investing. And it not only has the advantages of there being inefficiencies, so there’s the potential to generate alpha, but if you do it right, it’s pretty non-correlated with probably the rest of your portfolio. I found it fascinating, and I think you will also.
So with no further ado, my interview with Gramercy Funds Management’s Robert Koenigsberger.
Let’s talk a little bit about your background, you get an MBA in Wharton, and then a master’s in international studies and Latin America. Your graduate thesis was on the origins and implications of the Latin American debt crises. It seems like you were built to trade distressed EM debt.
ROBERT KOENIGSBERGER, FOUNDER, CHIEF INVESTMENT OFFICER, MANAGING PARTNER. GRAMERCY: Built in and lucky, quite frankly, you know, actually go back to undergrad where I did political science and history of Latin America, and I was asked to do a similar thesis on — or to do a thesis. And my parents told me I had to find a job at the same time. And so I tried to put the thesis and the job search together. And the only issue in Latin America, which was my major back in ’86, ‘87 was the Latin American debt crisis.
KOENIGSBERGER: So I did my study on that, and I got fortunate enough to meet a gentleman who had been the Finance Minister of Peru. He’d been the head of Wells Fargo International. He lent it, he borrowed it, he defaulted on it, and he had this great boutique out in California. So I feel really fortunate to have spent 35 years doing the same thing in emerging markets. And you know, the gentleman I worked with was just a great professional.
RITHOLTZ: So late ‘80s, early ‘90s, you’re a VP for an advisory firm that leads some sovereign debt restructurings and transactions in both South America and Central America. Tell us what that experience was like during that period.
KOENIGSBERGER: Emerging markets in the late ‘80s was very different than the emerging markets of 2022. I think it’s fair to say it was a bit of the Wild West. You know, go back — the entire — you know, it was the lost decade, right? The 1980s was the lost decade in Latin America. Mexico defaults in ’8. Virtually, the entire region is in default by the end of the decade. So what it was like was, you know, putting Humpty Dumpty back together again, and dealing with countries that had defaulted debt and taking them through what’s now known as the Brady debt restructuring. And having these bonds that nobody really understood, come out of it. And that, quite frankly, was the beginning of the of the asset class.
And I remember, you know, even like we were doing — you’d have countries that with shared borders that couldn’t talk to each other, that one or the other, and you could get in the middle and do some sort of debt swap, or a buyback or what have you. And so one of my fond memories was, like, Guatemala, I think it was a 1989 and I didn’t know what FX was. I didn’t know what letters of credit were, and I had to go get a letter of credit. I had to go to Guatemala, I had to present it. And then we did a buyback, but we got paid in quetzales, which was the local currency. And so my job for basically two weeks was to get up, go sell as much FX or buy as many dollars as I could, and then go back to the hotel and sit by the pool.
RITHOLTZ: That’s not a bad gig.
KOENIGSBERGER: No. It was great.
RITHOLTZ: So you go from that onto Mother Merrill for three years, where you traded distressed EM. Then you’re a VP at Lehman Brothers, and this was late ‘90s, not the Lehman Brothers we kind of are familiar with from the financial crisis. What was it like at those big shops, Merrill Lynch and Lehman Brothers, doing distressed EM debt?
KOENIGSBERGER: Sure. I mean, first of all, they were great experiences because, you know, I started at a very small boutique environment. And again, I’m Political Science and History major prior to graduate school, so that I actually get experienced in finance. To lead the bank’s efforts in investing in sovereign debt restructurings and to bring our clients along was a great experience. And I got to learn a lot about how markets function or not. And I got to get his feel for Wall Street politics, which I found out really weren’t for me and all the conflicts of interest that one finds in Wall Street.
RITHOLTZ: You mentioned earlier that the late ‘80s, early ‘90s were very different than the state of EM debt today. How has the industry changed? How is EM distressed debt today different than it was 30 years ago?
KOENIGSBERGER: So distressed is different, and EM is different. You know, I’d start with —
RITHOLTZ: Break it down.
KOENIGSBERGER: — you know, when I got to Merrill in 1995, and you looked at the trade blotter of who you were trading with, it was basically banks trading with each other. And every so often, a client would come by. So there was a tremendous amount of proprietary trading, you know, hedge funds in the back book, a little bit of a front book. So I would characterize it as bit of a bizarre and less of a market because, you know, when I was at Merrill and I would call JPMorgan and I would sell something to them. And they would call Chase, and they would call Lehman, and it was just this roundabout and the market would drop 5 points or what have you. So —
RITHOLTZ: Musical chairs, the last one holding got stuck with it.
KOENIGSBERGER: Yeah. And so, you know, tended to have a — create a lot of volatility, you know, if everyone wanted to buy or sell the same thing at the same time. Today, the market is massively larger. You know, it was predominantly a sovereign market back then. Now, it’s sovereign, quasi-sovereign U.S. dollar, local corporates, high yield, et cetera.
RITHOLTZ: What’s quasi-sovereign?
RITHOLTZ: Like state versus national or something?
KOENIGSBERGER: Yeah. So usually — and I usually talk about quasi-sovereign and sovereign adjacent.
KOENIGSBERGER: So sovereign is just the debt obligation of the country.
KOENIGSBERGER: Quasi-sovereign is typically an entity owned by the state that issue —
RITHOLTZ: Like a GSE or anything like that.
KOENIGSBERGER: Yeah, like, take Pemex in Mexico as opposed to Mexico, right?
RITHOLTZ: Got it.
KOENIGSBERGER: And then sovereign adjacent are interesting as well, because they’re not explicitly owned by the state, but they’re so important that there’s some sort of nexus between the sovereign and that corporate. But you know, today, the markets — you know, think about now, there is a buy side, ETFs, ‘40 Acts. The buy side is so much larger than the street. It used to be just the street. Street had a lot of balance sheet.
Today, if you take emerging market corporates as an example, there’s — go back 5 years, 10 years, emerging market corporates are 5 times larger today than they were back then. Go back right after 2008, every bank made markets. Every bank had balance sheet. Today, you have less banks, less balance sheet, less market-making, and a really big buy side. So you have inelastic supply when people want to buy. Like, if you have $1, there’ll be someone in emerging markets that wants to issue a bond and take that dollar from you. But when there’s outflows, you don’t have inelastic demand, and that’s where you tend to get this volatility and dislocations that we’ve seen.
RITHOLTZ: So let me stick with sovereign adjacent. In the U.S., as we learned during the financial crisis, the government-sponsored enterprises like Fannie Mae and Freddie Mac, and by extension, Sallie Mae, you go down the whole list of these things, the U.S. government’s Full Faith and Credit, even though it wasn’t obligated to these publicly-traded quasi private entities, the U.S. government still ended up standing behind them for systemic reasons. So that’s here in the United States. Do you have similar situations in Latin America and elsewhere? Or is it just country by country? It’s all completely different.
KOENIGSBERGER: First of all, let’s unpack that. And emerging market is not this homogeneous asset class. So almost anything you and I could talk about, it would be different. You know, there’d be dispersion of factors. But when you think about, you know, bailouts of corporates, sovereign adjacent or what have you, we’ve certainly seen it in emerging markets. And I would say the most — you know, the greatest example right now is in China property, if you’ve seen what’s going on there. So —
KOENIGSBERGER: So it started as a crisis for Evergrande, right? And I think the Chinese government wanted to kind of isolate Evergrande and then insulate the rest of the sector. And now, what we’ve seen is that it contaminated — you know, the Evergrande just poured over to even the best names like the Country Garden or what have you. And so right after the party congress, we’ve just seen massive amounts of aid. I would argue that what we’re witnessing today is the TARP Program in China for the property sector. And you can see, you know, assets have gone. We were buying performing bonds at 8 cents on the dollar —
KOENIGSBERGER: — that you had to pay for a crude, right, which is a weird concept to —
RITHOLTZ: To pay for a crude?
KOENIGSBERGER: Yeah. So it’s a crude interest. So maybe it’s got 4 points of interest on an 8 cent bond, that typically when something trades at 8, people don’t think it’s going to keep paying. And then once the program came out, this Chinese TARP, if you will, all of a sudden 8 cent bonds were trading at 32. This morning, they’re like 60.
KOENIGSBERGER: Just on this bailout notion.
RITHOLTZ: How do we get me some of those? That sounds very attractive.
KOENIGSBERGER: And we’ll talk later.
RITHOLTZ: So I was going to ask you what trades or deals stand out as especially memorable, that seems to be fairly recent, memorable. Anything from the Wild West days that sticks out as — I mean, I love the idea of just going out and buying dollars and then sit in poolside for the rest of the day —
KOENIGSBERGER: It was fun.
RITHOLTZ: — drinking, you know, margaritas or whatever they the local drink was. What else really stands out?
KOENIGSBERGER: You know, if I go back to the late ‘80s or early ‘90s, and you know, you’re asking about distressed then versus distressed today. You know, I think one of the most interesting things in distressed is when people are throwing away the keys, you want to be there to catch them. And I remember one time in — I think was ‘89 or ’90, we’re right at the end of the, you know, the lost decade in emerging markets and all the banks are basically — not all the banks, but a few the banks were like just getting out of Latin America. And one of them —
RITHOLTZ: Just get me out. That’s it, full capitulation.
KOENIGSBERGER: That’s right. So one example that was a lot of fun, I think, was ‘89 or ’90. Bank of America decided they wanted to sell their branch in Lima, Peru, and the price tag was a million dollars. I’m like 25 years old. My boss, this gentleman I mentioned had been the Finance Minister of Peru was like, I need you to go down to Peru and take a look at the bank, do due diligence, right, 25 years old. So I don’t know if you’ve ever been to Lima, but in —
KOENIGSBERGER: — the center of Lima, in San Isidro, there was a retorno, like a roundabout, and one big tower. And the top of the tower says Bank of America. We didn’t have cell phones or what have you. So I got to run back to the hotel and I said, you know, Carlos, is the building included? He said yes. I said it’s got to be worth a million bucks.
KOENIGSBERGER: Right? So we paid a million dollars for that in 1990, made $3 million trading FX before we sold it. And it was sold for $50 million three years later.
KOENIGSBERGER: And that became the beginning of one of the largest groups in Peru today. And so fast forward after graduate school, I’m having lunch with a friend from school. And Eric says — he’s working for Bank of America, and I said, Eric, well, what are you guys doing? Oh, we’re thinking of opening a branch in Lima, Peru.
RITHOLTZ: Oh, I have a building for you.
KOENIGSBERGER: Yeah. And another one really quickly, you know, Russia has been so much in the news these days.
KOENIGSBERGER: And I remember the Wild Wild West in Russia was the Yeltsin era, the ‘90s, the era of default. And I remember going there with a group of investors in — I think it was June of 1999. Their defaulted debt was trading at 6 cents. And we go into this conference room at Vnesheconombank, which was the obligor, or the export-import Bank of Russia. And this trader walks in and he’s completely disheveled, and he goes, I want to know who’s buying back my debt. You guys are getting in my way. I’m trying to buy back my debt, greatest buy signal that any of us have seen.
KOENIGSBERGER: The problem is we don’t have cell phones, right? So it’s a race back to the hotel to see who can call their trading desk fast enough to buy Russia. And if you look on your Bloomberg screen today, on that day, the asset went from 6 cents to 12 cents —
RITHOLTZ: Wow. Doubled.
KOENIGSBERGER: — just on this meeting. Yeah.
RITHOLTZ: That’s amazing. I love this quote of yours, which now I understand much better, “I’ve been doing emerging markets since before they emerged.”
KOENIGSBERGER: Yeah. I mean, you know, that’s oftentimes what I talk with clients about because, you know, if you go back to the 1980s, it was — I wouldn’t call it an asset class. It was a bunch of bank loans in default. It was submerging at that time, right? And it was on — I guess you impolitely called the Third World debt crisis, lesser developed country debt crisis. But no one was thinking about putting an index around —
KOENIGSBERGER: — a bunch of defaulted bonds. So I was fortunate enough to be there as we transformed defaulted loans to performing bonds. And then when JPMorgan made the index in 1980, pardon me, 1992, I think that was really the beginning of emerging markets debt as an asset class.
RITHOLTZ: Quite fascinating. So let’s talk a little bit about Gramercy, what led you from big shops to launching your own firm? And were you always international debt focused?
KOENIGSBERGER: Yeah, a few things. I mean, I started in a boutique environment, and I never really thought that I was going to stay on Wall Street for a long period of time. I always wanted to do something entrepreneurial. Obviously, I wanted to stay invested and have a career in emerging market debt. But — so you know, the factors behind starting Gramercy were a few.
One, you know, I mentioned conflict of interest on Wall Street. And when you are going through a sovereign debt restructuring, that’s just a negotiation. I’m sitting there representing the bank, and I’m sitting across from the senior debt negotiator from the Russian Federation, or wherever it may be. And I remember at the banks, you know, on my sides would be someone from investment banking, someone from corporate relations, and so I’m just pushing to get the bank and our clients paid. And these guys are thinking about the next —
KOENIGSBERGER: — the next trade in Russia or whatever it may be. So one is, you know, I really wanted to have a conflict-free, mission-driven firm. And our mission is really simple. All we do is focus on an investment management. We want to focus on the well-being of our clients, our portfolio investments in their communities, and our team members. That’s it. And that’s hard to do in a big, big shop on Wall Street.
You know, obviously, eat what you kill. I wanted a meritocracy. And Wall Street is, quite frankly, anything but a meritocracy because of all the politics and what have you. I remember the day I made up my mind to start Gramercy was at the end of the ‘97 bonus year, early ‘98. Now go back to Lehman, they almost blew up in Mexico in 1995.
KOENIGSBERGER: We were basically — I went to work there right after that. We had no aspirations for P&L in 1996, very little aspirations so I just don’t lose money, right. That was emerging market debt for Lehman and —
RITHOLTZ: So what is it? Just a service for the banks and clients that wanted exposure?
KOENIGSBERGER: Yeah. And don’t take a lot of risk and make a lot of money, supposedly, right? And so I go into ’97, my book, the restructuring book has a $5 million, what do you call it, budget, then they raised it to 10, then they raised it to 30, and then they raised it to 40. So I walked into my bonus discussion in January or February of 1998 and it starts with, well, we almost made it, right? So they were trying to — try to basically say, since you didn’t get to the 40, you know, you should expect to get paid very well.
So I said, well, wait a minute, just stop right here. This conversation is over. I’ll come back tomorrow. You put a different number on the piece of paper, and that was the moment that I decided I wanted to start the firm. And, you know, we’re purely there for our clients. And if our clients do well, we do well. And that’s all that matters.
RITHOLTZ: I have heard variations of that precise story. I’ve experienced that precise story over and over again. Sometimes the short-sightedness of upper management on Wall Street is shocking. You just see all of these super profitable firms with the most successful traders. I am genuinely shocked when people say, yeah, then it’s just not worth it.
KOENIGSBERGER: I’ll tell you another story. I remember when I left Merrill Lynch, so Fed started raising rates in ’94. We’ve got the tequila crisis in Mexico. And I resigned, and my boss is Venezuelan and the big boss is Cuban. And the Venezuelan said, well, you got to go talk to the Cuban. And so they start talking in Spanish in front of me. And they go —
RITHOLTZ: Are you bilingual at all?
KOENIGSBERGER: I’m bilingual, but they didn’t know that.
RITHOLTZ: But they don’t know that.
KOENIGSBERGER: I speak a little Turkish too. My wife is Turkish as well. But — so I go upstairs and meet with the big boss and they start chatting in Spanish. And they go, you know, you told me that there were no other jobs out there, that we didn’t have to pay this price. Right? So then he turns to me goes, Robert, you know, what can I tell you? And I answered him back in Spanish, I said I just heard everything. Thank you very much.
RITHOLTZ: By the way, how can you do emerging market debt? I mean, I know everybody everywhere more or less speaks English. But isn’t it an enormous advantage to be able to speak in the local language?
KOENIGSBERGER: Absolutely. First of all, I mean, a lot of places we go, English isn’t necessarily spoken well, even at the most senior levels of government. So to be able to speak, seek information, persuade others in their language is very helpful. I’m not going to say I do it as well in Spanish as I do in English. But that’s very helpful too.
You know, emerging market is all about assessing people, right? So we have to think about credit risk like everybody else. But at the end of the day, emerging markets risk is about credit culture, people, how do they behave in times of duress in the past, predict how they’re going to behave in the future. It’s helpful to be able to assess that prediction in that language.
RITHOLTZ: So on the equity side, some people say you don’t really need boots on the ground in emerging markets. I don’t know how true that is, but it really sounds like it’s not true on the debt or credit side, especially a distressed circumstance.
KOENIGSBERGER: Now, I mean, boots on the ground are essential, and I would say both internal boots and external boots, right. So we have our own people. We have our own platforms. We have offices in Argentina, and Turkey, and Mexico and what have you. And those people are really important for sourcing deals, doing due diligence on deals, doing due diligence on people. You know, quite frankly, one of our biggest strengths is on our website. It’s all the relationships we’ve had for 35 years with people in different countries that can give you good information on people.
You know, I remember a story in Thailand a few years ago. We were getting ready to buy the debt of a country — of a company that had come out of debt restructuring. And you know, our research guys did their work. The traders did the work. We liked the value. We liked the entry point. Well, then we went up to our network, external lawyer who had sat in the debt restructuring conversations, and the lawyer says to me, Robert, before you invest, let me tell you what the debt restructuring look like. I said, great. So it was a patriarch, former military guy, had the discussions at his house, not a law firm. You were escorted into the conference room through three levels of security.
RITHOLTZ: Really? Wow.
KOENIGSBERGER: And the gentleman starts the negotiations. He goes, let’s have a toast. Here’s to my wealth and to your health. You just have to have people on the ground to pick. That’s just bad.
RITHOLTZ: And now, is that a local custom, or is that a subtle threat? What is that?
KOENIGSBERGER: I mean, I think it was a subtle threat. And again, you know, I wouldn’t —
RITHOLTZ: Or not so subtle.
KOENIGSBERGER: I wouldn’t make that blanket statement, you know, throughout emerging markets. But quite frankly, you know, when I see some kid in their 20s or 30s, start a business. And you know, there are three or four people around their Bloomberg screens, and they don’t have the internal analysts and they don’t have the external network, I don’t know how they think they can do it.
RITHOLTZ: That’s really quite fascinating. You mentioned your shop, you have offices around the world, right? What countries do you have offices at?
KOENIGSBERGER: So we’re based in Greenwich, Connecticut. We have offices in Latin America, in Mexico, Peru, Argentina. We have a lending platform, an office in Turkey, Brazil, done some stuff in Africa as well through a lending platform. And you know, getting back to the local presence, having a platform, having your own team in the market, you know, has all the obvious benefits. But also, it gives you the ability to get depth and breadth. And you know, our business, particularly our private credit business, where we’re doing asset-backed lending in the country. And I remember a friend who does domestic private credit told me once, you know, Robert, it’s just as easy to do a $400 million loan as a $40 million loan.
And so what we’re trying to do with these platforms is get depth and breadth in the different regions. So if I go to Mexico, for example, where we’re lending to the suppliers to Pemex, people who lay pipes, people who build the platforms, if you do it on a one-off basis, you can’t really scale it. But if you have a platform of dedicated people to that and the controls, it gives you the ability to depth and breadth in Mexico to look at other industries, now maybe we can look at real estate, but also think about the same industry in a place like Colombia, or whatever it may be.
RITHOLTZ: So I think I know the answer to this, but I have to ask, you are long-only. And I would imagine there are all sorts of opportunities on the short side where you can see something, starting to circle the drain and make a bet to the downside. I have to ask, why long-only when there’s so many opportunities on the downside?
KOENIGSBERGER: Yeah. And let me clarify, so we have four major strategy groups within the firm. One of them is long-only, and we do, you know, four subsets there. The other is alternatives, where we can do long, short, alpha shorts, what have you. The third one is what we call capital solutions, or private credit, or asset-backed lending. And the last one is special situations. So I agree with you, sometimes, you know, in long-only, the only way you can express a negative view is to not have any exposure.
RITHOLTZ: Sit on your hands, right?
KOENIGSBERGER: But when we start thinking about our alternative group, we can think about relative value, we can think about long/short. We can think about doing things with derivatives that give you kind of, you know, a call on the left tail, so to speak.
KOENIGSBERGER: So is that more of a hedge or — what I’m hearing is three of your four strategies seem to be primarily long and one strategy has that opportunity to go short if you want, or debt on the downside?
KOENIGSBERGER: So our special situations group, we do a lot of litigation finance.
RITHOLTZ: Oh, really?
KOENIGSBERGER: So — and in litigation finance, you know, the most difficult thing to predict is the outcome of the litigation.
KOENIGSBERGER: Right? Well, we can actually hedge that. We can actually buy insurance, right? There’s insurance companies that will, you know, offer you insurance for maybe, you know, if it’s a $800 million claim, and you can buy insurance for $10 million to insure the $10 million litigation, and it costs you $3 million, that’s pretty good asymmetry in terms of —
KOENIGSBERGER: — you know, if you lose, you lose the three. But if you win, you’re in for $800 million.
KOENIGSBERGER: So we use hedging and —
RITHOLTZ: But that’s not the same as, you know, just I’m making a directional bet that country X’s debt is going to get cut in half.
KOENIGSBERGER: That’s right. And look, there’s two different ways to do it. In long-only, and it’s risky to do it long-only, right? And so it seems like long-only is the less risky. You know, you’re going up against an index. And oftentimes, these indices have very risky proxies in them. I mean, let’s talk about Russia and Ukraine issue, right?
KOENIGSBERGER: So we — you know, we had the good fortune to have no Russia or no Ukraine in February of 2022. Our analysts walked in January and said, I think there’s a 50% chance that there’ll be some sort of invasion, and the assets will drop a little. Like, well, Petra, you got the first part right. But if there’s an invasion with the capital lie or small lie, Ukraine has gone from 80 to 20, and Russia has gone from par to 50. That’s great. We missed it. February 24th, we’re out. But it stayed in an index for two months.
KOENIGSBERGER: And so what are the riskiest things we had to do is sit there and watch Russian debt trade up and down while we have zero exposure. So even though, you know, you can’t short it, when you don’t own an index, you actually — it’s not riskless, right? In our alternatives, you know, more traditional hedge funds, to your point, we can do alpha shorts. We can say and look, we were long protection against Russia in February 24th. That was an alpha bet for us. It was like, you know what, we think Russia has asymmetric downside and we can express that in that vehicle.
RITHOLTZ: And I assume that that worked out pretty well.
KOENIGSBERGER: It worked out pretty well.
RITHOLTZ: So let’s stick with Russia for a second. You know, I looked out and have no idea what the endgame is here. Can Putin ride this out? Can Russia survive with Putin? And when will that country become investable again? It seems like they’re not, they haven’t been for a while before the invasion. It’s hard to imagine anyone wanting to put up a lot of risk capital with them.
KOENIGSBERGER: Yeah. I think you need to look back at the past, the last time there was regime change in Russia to be able to triage that. And what I mean is Yeltsin, or pardon me, Putin has been around for so long, right? Then you got to go back to the Yeltsin era, and I’ve read and heard so many times that, you know, if Putin just leaves, everything will be fine, right? But I have no idea what’s behind Putin and Russia.
KOENIGSBERGER: And I remember being in Russia in the late ‘90s and you know, I would get a call in the middle of the night, say, Yeltsin is in the hospital, and you’d have to triage which hospital. One was for cardiac, for heart attack, and the other one was he was just drunk —
KOENIGSBERGER: — in a sanatorium. And it made a big difference. And it mattered because none of us knew what would happen if Yeltsin passed, right? And so I’ll take that to today, it’s like, you know, if Putin weren’t here tomorrow, I can’t tell you what the politics look like there. And also, how is Russia going to be treated on the other side of this? Right? Is it going to be treated like Germany after World War I or Germany after World War II?
KOENIGSBERGER: Right? You know, will it be embraced and that, you know, Putin was a bad guy who led good people astray, and let’s have some sort of reconstruction of Ukraine and Russia?
KOENIGSBERGER: Or is it going to be more like Germany after World War I where that’s still a pariah state?
RITHOLTZ: Really quite fascinating. Let’s talk a little bit about the state of EM today. Valuations, at least on the equity side, they’re the cheapest we’ve seen in a couple of decades. What do you see when you’re looking at the debt and credit side of emerging markets?
KOENIGSBERGER: Something similar, and you know, I think what we have observed, and again, we’re all credit not equity, but over the past 25 years that we’ve been together for a team, there’s been 11 major dislocations in emerging markets.
RITHOLTZ: Around the world, different countries, 11 times?
KOENIGSBERGER: Yeah. And I wouldn’t even call them systemic like we’ve seen today. And they all have kind of looked the same, which is peak-to-trough, it’s taken about five months. They drop about 20%, 22%. Eight months later, it’s up like 27%. And 12 to 24 months later, it’s up 30% to 50%.
KOENIGSBERGER: So with that kind of top-down historical framework, it’s easy to see that there’s cheap valuations in emerging markets. But you know, we also have to think about where we came from, you know, like really low interest rates, lull liquidity, what have you.
KOENIGSBERGER: So we also have to prove out with the portfolios that we build, that the same types of expected returns are there. And you know, one of the beautiful things about fixed income versus equity is we have contractual coupons. And so if you can pick good credits that pay their coupons, that roll down the curve to par, the mathematics work, right? That’s why after these big dislocations, if you can pick a subset of credit that has coupon, will keep paying, and roll down the curve towards par, then you’re going to get these types of extraordinary returns. And I think we’re in that type of environment today.
Now, of course, there’s a lot of volatility and I think one needs to be, you know, respectful of that volatility today. But, you know, I continue to think that the expected returns in the destination weren’t what may be a bumpy journey.
RITHOLTZ: So given those sorts of numbers, the pullbacks, recoveries, what sort of correlations are there with other types of debt, be it performing or distressed equities and other asset classes? It sounds like this is a fairly non-correlated group of investments.
KOENIGSBERGER: Yeah. And I think you can create lack of correlation, dependent about how you construct the portfolio. I mean, I think if you pick one return stream in emerging markets and stick with that return stream, you’re going to find a lot more correlation to markets.
KOENIGSBERGER: What I really like is on top of these four return streams that we have, we kind of have a multi-asset, dynamic asset allocation process. And that’s where you’re able to create alpha and that’s where you’re able to have really low correlation to the markets. And you know, one day markets are at all-time highs, so not that interesting to want to buy CUSIPs or public debt at that point.
KOENIGSBERGER: And then you have a 22% dislocation. Relative value has changed. Now, most folks don’t have the governance, don’t have the staff, et cetera, to be able to make the — I’m going to sell A and buy B. I remember like 2020, during COVID, and you know, we wrote at Gramercy that we expected there could be a dislocation in the fourth quarter of 2019. Markets are really tightly wound, and people should batten down the hatches. But get ready for the dislocation because when it comes, that’s when the extraordinary opportunities come.
So we call everyone in March and April. So remember, we talked about this. We didn’t know what was going to break the camel’s back.
KOENIGSBERGER: But it’s broken. And these — we expect a — we aren’t sure if it’s going to be a V-shaped recovery, a W-shaped recovery. But we believe there’ll be a strong recovery. And we would talk to our clients and prospects, and I’d say, well, let’s see, it’s March or April. I might be able to get you into the October board meeting. Right? And so that’s —
RITHOLTZ: Sorry, we don’t have that time for you. I need an answer by 5:00.
KOENIGSBERGER: So that’s what — with our multi-asset strategy, we wanted to solve for that problem, which is — I call it a governance problem. You know, asset allocation I think in emerging markets, one, being dynamic isn’t just convenient, it’s necessary. And that’s how you create the lack of correlation, and that’s how you create alpha.
RITHOLTZ: Really quite interesting. So where are we in the present emerging market cycle? There seems to be lots of different cycles in the space. Should we be optimistic about EM here, or should we be worrying about EM here?
KOENIGSBERGER: Look, I think we are cautiously optimistic and we’ve had that call for a few months. I would probably say after a 10% rally that we’ve had over the last five, six weeks, maybe a little more cautious, but still optimistic in the medium term. The reason that, you know, we have this optimism goes back to the mathematics after these dislocations, right. And this isn’t a blanket statement about all emerging market debt. But if you can pick good — and just like stocks, right, if you pick — if you can pick stocks well, you can significantly outperform an index.
And you know, if I showed you a chart of the dispersion of the returns within the JPMorgan Emerging Market Bond Index, you wouldn’t believe it. I mean, things down 15, things up 15. Oil and gas on one hand, and you know, importers of energy on another hand. So we’re cautiously optimistic. We see good returns in the medium term. One has to think about how do you protect capital after a long run like this. So we’re raising a little bit of cash here, thinking about hedge overlays and what have you. But, you know, we’re somewhere closer to the bottom of the cycle than the top.
RITHOLTZ: The next question is a bit obvious. We’ve seen a big uptick in rates here in the U.S. and around the world. How do you look at EM based on how the central banks of the developing world are postured?
KOENIGSBERGER: Look, I mean, I think that’s an important question because I think historically, you know, when developed markets get sick, developing markets have gotten to the hospital. And I think that’s a big part of — you know, I would say what’s happened to emerging markets in 2022 has been predominantly an exogenous shock coming from raising rates around the world.
That’s hasn’t always been the case in emerging markets. You know, we have things called the tequila crisis, and the vodka crisis, and the caipirinha crisis, and the tango crisis. Those were endogenous crises created within emerging markets. But this one was — you know, it’s been about higher rates, less liquidity in markets. So that being said, you know, I think the Fed has been signaling slower pause on rates. When we think about local rates in emerging markets, you know, we felt that once the dollar strength went away, that it might be a good time to start leaning into local rates within emerging markets.
You know, we saw — we were looking for three things. You know, we have a top-down every month, and we said, if the 2s go to 450, if 10s go to 4, and the dollar DXY goes to 115, that’s a pretty good place to think about boarding the flight. So check on 450, check on 4, and we hit 114 in three quarters —
RITHOLTZ: Pretty close.
KOENIGSBERGER: — about six weeks ago. So you know, I think over the past couple months, that just kind of add duration, even though rates were still predicted. And particularly low dollar price investment grade securities where you get a lot of convexity, that if you get a snapback like we had seen in rates, that you get to enjoy that ride back up.
RITHOLTZ: Some people have been looking at the strong dollar of the past two quarters is just a wrecking ball, wreaking havoc everywhere. How do you put the strength of King Dollar into context? And I could share some interesting stories about some of the crazy things I’ve seen on my side of the street. How does it impact emerging markets when the dollar is as just, you know, as powerful as it’s been this year?
KOENIGSBERGER: Yeah. And again, within emerging markets, I think it’s a dispersion of responses based upon where you are. But I think, you know, generally, higher rates, stronger dollar has been a headwind for emerging markets. You know, interestingly, emerging markets have had a lot less wiggle room than the Fed and the ECB and what have you. So quite frankly, whether it’s Brazil or Colombia, what have you, they were kind of ahead of the curve in terms of raising rates. And I think that’s what made us bottoms-up a bit more constructive on emerging market currencies once the dollar peaked. And again, I think perhaps we saw that at 114 in three quarters, you know, might go back to 110 on DXY or what have you.
RITHOLTZ: DXY being?
KOENIGSBERGER: Sorry. The U.S. Dollar Index.
RITHOLTZ: Got you.
KOENIGSBERGER: And you know, we were talking about potential vacations in Europe in the summer, or what have you. And I think, you know, with the euro at par and 100 earlier this year —
RITHOLTZ: It’s wild.
KOENIGSBERGER: — it’s pretty good time to prepare the hotel.
RITHOLTZ: Yeah, absolutely. So let’s talk about some specific countries. We already discussed Russia. How do you look at places in South America like Argentina and Venezuela, both of which seem to have a crisis almost on a regular schedule?
KOENIGSBERGER: Yeah. I mean, let’s start with Argentina, and that is a country that has been quite cyclical, and the returns have been quite cyclical as well. You know, for us, we’ve looked at Argentina much more on an opportunistic basis as opposed to somewhere that you want to be all the time. You know, if you go back, when we started our business in 1998, ‘99, Argentina was 18% of the index. And we were talking earlier about —
KOENIGSBERGER: — about how risky indices can be, right? So JPMorgan wanted to step 18% of our portfolio in Russia, or pardon me, in Argentina, right before it defaulted. Fast forward today, you know, we have an election coming up in Argentina in October of 2023. We just had a passing of the baton from Martin Guzman to Sergio Massa. I think Massa is market-friendly enough. I think he’s done — you know, what he needs to do with the IMF, and we expect that Massa will be able to stabilize the markets before they start to climb the wall worried going into the presidential elections in October 2023. So with, you know, assets trading at 20 cents —
KOENIGSBERGER: — performing assets, now they perform with very low coupons, but they’re performing. I can’t really imagine a debt restructuring scenario in the next regime that’s worth 20 cents. I can imagine trading less than because of illiquidity and air pockets of dislocation. But we’re starting to focus more on — we think there’s a light at the end of the tunnel. We think that’s perhaps a change of regime and new government that comes in with markedly more market-friendly policies that the market will like.
RITHOLTZ: And Venezuela?
KOENIGSBERGER: Yeah. Venezuela is more complicated. You know, first of all, it’s under restrictions today, right? So U.S. Treasury, the OFAC restrictions. So Venezuela is more of a theoretical conversation. Now, we were talking about Russia and Ukraine before, you know, it’s interesting to note that Chevron is back pumping oil. That’s a direct connection to Russia invading Ukraine. And I think it was within days, if not weeks, that the U.S. State Department was already in Caracas after the Russians had invaded.
RITHOLTZ: Meaning we’re out looking for oil wherever we can get it to offset curtailing Russian exports around the world?
KOENIGSBERGER: Yeah. I mean, think about two images that came out. The first one was the fist bump with Biden and MBS, and then it was John Kerry shaking hands with Maduro. Right? So look, Venezuela has a lot of oil capacity. You know, I think at their peak, they were doing 3 million barrels a day. They are probably average 2.4 million barrels a day during the Chavez era. Today, they’re like 700,000 barrels. They could probably ease (ph) that.
RITHOLTZ: That’s all? That’s unbelievable.
KOENIGSBERGER: That’s it. Well, you know, the bad news is they haven’t had the CapEx. The good news is all the assets still under the ground. So, you know, I think there’s a possibility of a thawing (ph). You know, hopefully, they’ll take the path of moving towards a more democratic regime in the upcoming elections. And I think the U.S. could live with a regime where the Chavistas win, the current government, if it’s perceived to be democratic or at least more democratic. And we’ve seen that historically in Latin America, you know, where people that were ostracized that came in back through the democratic process were able to run.
RITHOLTZ: So I tried desperately to avoid being a macro tourist. But it sounds like, man, if there’s ever a country that has immense upside, talk about asymmetrical risks, what would it take to make Venezuela really investable and for them to become a little more integrated into the global economy? They’re potentially such a success story if they could get out of their own ways.
KOENIGSBERGER: Yeah. Remember, go back to the 1970s, the Concorde used to fly to Caracas —
KOENIGSBERGER: — just to put it in perspective. And I think you’re right, I mean, they had the largest proven oil reserves in the world.
RITHOLTZ: Not the largest outside of the Middle East? The largest bar none.
KOENIGSBERGER: In the world. Yeah.
KOENIGSBERGER: So more than Saudi Arabia. So now we know that, you know, Saudi Aramco has done an IPO. It’s worth a trillion dollars. You know, could Petabase [ph] or Venny [ph] Aramco be worth a quarter of a billion dollars?
KOENIGSBERGER: It could be. A quarter of a billion dollars will go long ways to being able to create CapEx.
RITHOLTZ: Quarter of a billion quarter or quarter of a trillion?
KOENIGSBERGER: Quarter of a trillion. Excuse me.
KOENIGSBERGER: Quarter of a trillion. So there’s a lot of potential there. And hopefully, you know, the — Chevron is the first step towards a thawing of relations between Venezuela and the West, the U.S. and that they will have the ability to buy. It reminds me of Iraq, quite frankly. So before the Marines invaded Iraq, they were doing about a million barrels a day of production. Today, they’re doing 5 million.
KOENIGSBERGER: Their GDP was $25 billion a year. It’s $250 billion a year.
RITHOLTZ: 10x, that’s just amazing.
KOENIGSBERGER: And we can’t say that it’s because it was such a politically stable place. Right? So you know, we could imagine at Venezuela on the other side, where the 700,000 barrels goes back to point —
KOENIGSBERGER: — 23.
KOENIGSBERGER: And that would make a difference today. It would make a difference not only to the market, but quite frankly, the Venezuelan people who have suffered immensely under this administration and under the current contract (ph).
RITHOLTZ: So let’s talk a little bit about China. How do you approach China? I look at equity there, it’s essentially flat since the early 1990s. If you’re an outsider, it seems like the Chinese Central Party has taken all those gains for themselves. Is China investable? How do you even approach a country like that?
KOENIGSBERGER: So I think when we think about investability, one has to think about price, right, initial conditions. And so I’ll start with, historically, in China, for a long period of time, we’ve been massively underweight or no exposure because it’s been asymmetric in your face. And what I mean by that is we’re debt investors, right? So debt is a contract, right? And the contracts that Chinese companies had in the offshore was basically a piece of paper, no assets, and you had to rely upon the good faith and the willingness and ability of this corporate to pay you, and then to pay you. So first to make a dividend offshore and maybe get China to approve that dividend, and then to pay you. So —
RITHOLTZ: That sounds like a terrible setup for investment.
KOENIGSBERGER: It is. Yeah. So for a debt investor thinking about China at par, China corporate at par made no sense to us. Now, China property has gone from par, the homebuilders to — we talked about 8 cents, 10 cents, 5 cents. So now, you start to think about option value. And when I look at the China property sector today, it reminds me of a lot of emerging market corporates and sovereigns historically, where one has to tease out — distressed isn’t something that’s just cheaper than it used to be. It’s cheap relative to an outcome that we think that we can catalyze.
So when we look at an 8 cent security, we’re not hearing from the company, we’re not going to pay you, and we’re not seeing insolvency. We’re seeing Bambi syndrome. We’re seeing people —
RITHOLTZ: Bambi Syndrome?
KOENIGSBERGER: People frozen in the headlight.
RITHOLTZ: Oh, got you.
KOENIGSBERGER: And I remember one CFO in China, we’re talking, I remember they’re locked down, right. And so this poor CFO is doing the conference call in his bathroom and the screensaver is his shower screen, right. And so what you’re seeing is someone who doesn’t know how to do a debt restructuring. And I’ll just, you know, go back to, like, I remember Argentina 2009 and meeting with the Finance Minister who not only didn’t know, finance, but didn’t know how to do a debt restructuring.
So when we look at China property at 5, 8, 10 cents today, and we see these people who are expressing willingness to restructure, but a lack of understanding of how to do it, the option value seems pretty cheap.
RITHOLTZ: That’s really quite intriguing. We talked earlier about Russia. I’ve always looked askance at Russia because there is no respect for private property, for contract rights, for rule of law. Do you have the same challenges in China, or are they a little more westernized in terms of if you cut a deal, they will honor it?
KOENIGSBERGER: Look, I mean, I don’t want to in large generalities or stereotypes, but I think we saw the Chinese government plank as it relates to the most important sector, the property sector. And prior to the party congress, you know, if you read the risk in China was that they were going to take it all. The government, you know, they were just going to like, say, if we get you to the offshore bondholders, what have you, but I think they blinked, right? This is 25% of the GDP of the country.
KOENIGSBERGER: Right? So to just think that you can have a Lehman moment and just, you know, let them go.
RITHOLTZ: What the hell.
KOENIGSBERGER: They tried that with Evergrande, quite frankly. Like, let’s just isolate —
RITHOLTZ: And it didn’t work.
KOENIGSBERGER: It didn’t work. So I think it’s a lot less risky today than it was eight weeks ago because we’ve seen the new government, that third, Xi has come in. And we’ve seen that they kind of blinked as it related to this and there’s just massive support going into that sector. So does that mean I want to buy a par security in China anytime soon? No. But do we get more comfortable at 10, 15, 20 cents with a Chinese TARP, and CFOs and CEOs telling us that they want to restructure, they just want to extend, they don’t want to wipe us out, they don’t want to equitize, they don’t want to toss the keys? I think it’s a pretty good bet.
RITHOLTZ: What do you make at the — we’re recording this in the beginning of December. What do you make of the changes in the COVID policy over there? And what might that mean for their economy and their debt issues?
KOENIGSBERGER: Yeah. I mean, so there’s a social element to that response, which is, you know, you can see that the population has been fed up. I mean, I go back to, you know, my kids thought three months have been locked up in the house in the second quarter of 2020 was the worst thing ever happened. I mean, this has been going on China for nearly three years. So you have large numbers of people that have been very unhappy.
And I’m not surprised, again, to see after the party congress, them tuck or pivot, which is everybody’s favorite word these days, and start to open up the economy. I’ll take that back to, you know, I think that’s going to create more — what happened here, right, we had the big closure, and then we had the reopening. And the reopening was slow and spotty. And now, we’re seeing that the demands are there and we’re having difficulty with supply side. I would expect something similar in China, but I think demand for housing is going to be there. The support is there, and that’s a major part of their economy.
RITHOLTZ: Really quite fascinating. So let’s talk a little bit about market efficiency and debt. It seems that EM is more complicated, less transparent, less efficient than developed markets. Is that part of the source from whence alpha is derived?
KOENIGSBERGER: Yeah, for sure. I mean, I think the information asymmetry means that if you can organize yourselves in order to be able to capture information, and again, that’s outside the firm and inside the firm. You know, we talked a little bit about having platforms that can suck up that information from the regions. But also the way that we are organized as an investment team, four different strategy groups, all collaborating, all meeting every morning, all sitting on an investment committee, sharing like what’s going on in public debt matters to private debt.
You know, we talked about Venezuela earlier. Like, what are special situations team knows about litigation, litigation finance in Venezuela and OFAC restrictions was helping our long-only emerging market debt team think about what it meant for Russia, when those things came on. So a lot of opportunities in the way that we’re organized to be able to create alpha.
You know, the other way to pick — to really create alpha and take advantage of the information asymmetry is through the dynamic asset allocation that we talked about. You know, my pet peeve is an investor who picks a return stream for 10 years. And you mentioned before that, you know, in equities, you could argue the Chinese equities, whatever it may be, that, you know, maybe it’s been lackluster returns. Well, if you stick with something, whether it trades at 150 or 200, you’re just going to get the average, you know. But if you’re able to move around between value and relative value, I think there’s a way to take advantage of the information asymmetry and create alpha.
RITHOLTZ: One of the things I’ve always wondered about the difference between emerging market and frontier markets, at first, do you look at frontier markets? And second, how do you really distinguish between the two?
KOENIGSBERGER: We really try and put the labels aside, and frontier market is a bit more of an equity label than a debt label to begin with. That being said, I would say that, you know, most any country that was frontier, we have invested in, traded and traveled at some point in our careers. And things often go from frontier to emerging markets, sometimes they go back. We’re much more interested in kind of the bottoms-up analysis and what it means. But, you know, Bulgaria was frontier in ’93, ’94. It became investment grade shortly thereafter. Poland was, you know, same thing, it was frontier. So for us in the debt side, it doesn’t really matter. Some frontiers have a lot of debt; some don’t have any debt.
RITHOLTZ: How do you think about China? Are they still an emerging market, or have they emerged?
KOENIGSBERGER: Again, I think it depends on how you define emerging markets. You know, in the textbook, you know, per capita GDP, it’s certainly still classified as an emerging market country.
RITHOLTZ: Second largest economy in the world, are they really an emerging market anymore?
KOENIGSBERGER: Exactly. And again, it depends on whether you’re talking about from a political economic perspective, from a GDP perspective. But, you know, it’s certainly hard to just compare it to all other emerging markets. And as you know, on the equity side, not only is it — you know, it’s such a big component of the Emerging Market Index, right? It’s like when you buy —
KOENIGSBERGER: When you buy the EM equity index, you’re basically buying China and a few others. I’m not sure that makes a lot of sense going forward.
RITHOLTZ: No, I couldn’t agree more. Let’s talk a little bit about your team. The chairman of Gramercy s the former CEO of PIMCO, Mohamed El-Erian. What’s it like to work with him every day? How did he end up as Chairman of Gramercy?
KOENIGSBERGER: Look, it’s been phenomenal. Mohamed started with us as an investor first. And as he got to know us, he kind of leaned in and met the team. And we had a conversation about him helping us think about how do we institutionalize the top-down? How do we — you know, we’ve been very much a bottoms-up stock-picking shop and credit, if you will, credit-picking shop. And we wanted to make sure that we had a good institutional framework.
And quite frankly, myself as the CIO, I lack the confidence to go to other portfolio managers and say, look, my view is so strong and so right that you should get out of that country or what have you. So now, with, you know, Mohamed moved from an investor to an investor that was an advisor, he helped us really institutionalize the top-down. And then when COVID hit, he realized, you know what, I can have a real impact on the business. I don’t have to be there every day —
KOENIGSBERGER: — right, in person. I can be there every day on Zoom. And so he’s with us most every morning on our daily call. We have this top-down call, and —
RITHOLTZ: Full credit to him, he’s been a whole lot more right than wrong on everything from emerging markets to inflation, to rates. He seems to be on a hot streak these days.
KOENIGSBERGER: Look, he is a brilliant top-down decoder. He’s an investor, right? A lot of economists can talk to talk, but they can’t necessarily walk to walk when it comes —
RITHOLTZ: They’re academicians not — they’re not putting money at risk.
KOENIGSBERGER: So he’s brilliant as a top-down decoder. He understands the investment implications of what he’s just decoded, and he shares a passion for emerging markets with us. So it’s a perfect fit. And to your point, he was well ahead of the curve on COVID. Like, I didn’t know what — he said to me one day, like, you know, this is a sudden stop and you can’t have a sudden start.
RITHOLTZ: Dead on.
KOENIGSBERGER: I never really thought about that, right?
KOENIGSBERGER: What are the implications of a sudden stop and a slow start? Supply bottlenecks, right?
RITHOLTZ: Still waiting for semiconductors to get to new cars, so people couldn’t —
RITHOLTZ: — order something and not wait 18 months.
KOENIGSBERGER: Yeah. And you know, I think he’s well ahead of the curve on inflation, right. And so it’s been great. He’s given us a lot of confidence on the top-down. You know, what I think differentiates us is we can take the top-down, and he has really helped us institutionalize and marry it with our strong bottoms-up and be able to differentiate. And you know, lastly, he’s just become a great friend.
RITHOLTZ: Yeah, he’s really a fascinating, charming gentleman. I’m a big fan. Before I get to my favorite questions, let me throw a curveball at you a little bit. Tell us about Turkey. What’s your relationship to the country? How often are you there?
KOENIGSBERGER: So Turkey is a place — my wife is Turkish. We’ve been married for almost 30 years now, so I’ve been traveling to Turkey for that long. My daughters both speak Turkish. So we spent a lot of time there in the summers. And so, you know, it’s —
RITHOLTZ: Wait. In the summers, you mean every summer for the past 30 years?
KOENIGSBERGER: Pretty much every summer for the last 30 years. We wanted our daughters to learn Turkish, so we got an apartment there. Every summer, we love going to the beach down there, down — and Bodrum is like beautiful water.
RITHOLTZ: Is that the Mediterranean or the Asian?
KOENIGSBERGER: It’s on the Aegean side.
RITHOLTZ: So that’s spectacular over there.
KOENIGSBERGER: Beautiful water, beautiful — and great people, great hospitality, awesome food. So you know, really enjoyed it.
RITHOLTZ: Sign me up. Wow.
KOENIGSBERGER: And you know, it’s become an important part of our business over the years too, because I spent so much time there. Although I’m a Latin Americanist by training, I’ve become very comfortable in Turkey as well.
RITHOLTZ: Really very interesting. Let’s jump to our favorite questions that we ask all our guests. And I’m going to have to retire this question one of these days, now that we’re mostly reopened, but during the lockdown, tell us what you were doing to stay entertained? What were you streaming when we were all stuck in the house?
KOENIGSBERGER: So we were just talking about Turkey. And Netflix happens to have a great catalogue of Turkish shows.
RITHOLTZ: Really? So they’re in Turkish with English subtitles, really, really good plots and drama and what have you. So it gave me the ability to learn Turkish language, but also learn Turkish culture, and be really entertained in the process.
RITHOLTZ: Give us the name of the show.
KOENIGSBERGER: One of them that I just finished is called Atiye in Turkish —
KOENIGSBERGER: — which means the gift. And it has a bit of — I think about 24 episodes and it’s about kind of archaeology in Turkey and really fascinating, really good actors, really good scripts, and really good cinematography.
RITHOLTZ: Sounds interesting. Tell us about some of your early mentors who helped shape your career.
KOENIGSBERGER: So in terms of mentors, I mentioned my first boss Carlos Rodriguez-Pastor, the boutique I worked with in California.
RITHOLTZ: What was the name of the boutique?
KOENIGSBERGER: CRP Associates, for his initials. And I was very fortunate to work with Carlos. It was a very small boutique, spent a lot of time with him on a one-on-one basis. He had a great mind. He understood the intersection of politics and markets. You know, English was a second language, but I think he taught me English in terms of written English and Business English and what have you.
And I’d say the other one, quite frankly, was my stepfather who was a pilot for United Airlines for 35 years. And you know, he had this checklist mentality, which looks a lot like risk management, right? Like, always thinking about what can go wrong and how to avoid the catastrophic mistake and the non-recoverable mistake. And so I put those two together and say they were great mentors.
RITHOLTZ: I love the idea of checklists. It’s pilots and surgeons want to make sure that there aren’t these silly little errors. It’s avoiding mistake is more important than hitting the bullseye.
KOENIGSBERGER: And maybe pilots more than surgeons because they’re on a plane.
RITHOLTZ: That’s a difference of pilot. When a surgeon loses a patient, they’re sad. When a pilot loses a plane, he’s dead.
RITHOLTZ: So it’s a very different thing. Tell us about some of your favorite books. What are you reading right now?
KOENIGSBERGER: I mean, back to Turkey, you know, we’ve got an election coming up in Turkey this year as well. So I’ve been doing some reading on Turkey and one in particular, it’s a book called Turkey Under Erdogan. And it kind of just gives you a sense of what Turkey has been like over the last 20 years with Erdogan and maybe think about some of the factors that might influence the potential regime change in Turkey later this year.
RITHOLTZ: And what are the odds of that regime change happening?
KOENIGSBERGER: You know, they change every day. And we all know that polls aren’t as reliable as they —
KOENIGSBERGER: — never were. But when I was in Turkey this summer, I would have told you that the odds for him winning were quite low. And that’s because if he spoke with — you know, there’s a bit of a misery index, you know, older, retired people that were getting squeezed by high inflation and the currency devaluation, but then also young kids, right, that just felt kind of hopeless. And so when I left there in August, I’m like, it’s going to be really difficult for him to win.
RITHOLTZ: And now?
KOENIGSBERGER: We were there — you know, I had a team there two weeks ago. You know, their call, it’s like 50/50.
KOENIGSBERGER: And I think, you know, there’s a real dispersion of outcomes that could come from whether he stays or goes, how he stays, how he goes. So it’s been interesting to read on that. And then, of course, I like to David Rubenstein books, the interviews, you know, with the investors and leadership.
RITHOLTZ: Yeah. He’s a fascinating guy as well. So those are the two books you just finished most recently?
RITHOLTZ: What sort of advice would you give to a recent college grad who is interested in a career in emerging markets, opportunistic or distressed debt?
KOENIGSBERGER: What’s funny in the post-COVID era, I would start with saying that presence matters, and that they should go to the office. And there’s a lot of young kids who, you know, just think they’re as efficient at home, as productive at home. But they forget that, you know, God invented trading desk for a reason. There are open architectures. There’s information flowing, and it’s great training and great mentorship. So one, I’d say go to the office.
And two, I would say, you know, try and make your career more linear and fashion, and logical. I see a lot of young kids today, it’s like, well, I’m going to try investment banking, and I’m going to try tech, you know, whatever is hot. But if you’re really interested in emerging markets, or whatever it may be, then stick to it and evolve around that asset class, but don’t hop around.
And the last thing I’d say with young kids today is we don’t really care where your degree is from. We don’t care about pedigree. We care about who you are, what you’ve done, and how you complement the team. You don’t have to emulate the team. You can be different. And with diversity comes, you know, better outcomes. So don’t just try and be like everybody else.
RITHOLTZ: And our final question, what do you know about the world of emerging markets, distressed debt, and investing today that you wish you knew 30 years or so ago, when you were really first getting your legs on to you?
KOENIGSBERGER: So when I left Lehman in early 1998, you know, when you started in investment management in emerging market debt, you know, it was basically you did a hedge fund and you did a credit hedge fund, and that’s what we did. You know, if I could go back to 1999 today, when we started Gramercy, I think real long and hard about maybe we want to do private equity structures as opposed to hedge fund structures, have long -locked capital as opposed to short-locked capital, and be able to think about multiples of capital over the long period as opposed to volatility and IRR in the short run.
RITHOLTZ: Meaning force the clients to be longer term investors than —
KOENIGSBERGER: Yeah. And I don’t want to use force, but partner with the clients in vehicles that are more — you know, over the years, even in our credit vehicles, we’re having longer-locked vehicles that allows one, you know, if you’re going to make an asset-backed loan and capital solutions, you can’t give 90-day liquidity, right?
KOENIGSBERGER: So it’s got to be more like a quasi-PE structure, where you make a loan, you have three years to make the loan. You have three years to get it back, and then return the capital in six or seven years. That makes a lot more sense than, you know, how do you build a portfolio not knowing whether that portfolio is going to still be with you in 30 days.
KOENIGSBERGER: That’s challenging.
RITHOLTZ: Hey, it ain’t called the illiquidity premium for nothing, right? The whole idea of tying up capital for X number of years means the short term either gates or liquidity demands aren’t relevant to the investment thesis.
KOENIGSBERGER: But, you know, the illiquidity premium in emerging market debt, it’s a really important concept because I see CIOs, pension funds, whatever it may be, and they’re like, we’re going to be 3%, 6% emerging market debt forever. That’s our asset allocation. But they stick in liquid in quotations “T plus 3,” you know, get your money back in three days. And I’ll go back to the Mexico example. You know, a year ago, you could get 3% for a security for Pemex, or we could lend to Pemex supplier at 15%.
KOENIGSBERGER: And it wasn’t that illiquid, it was 9 to 12 months. So if you’re going to be there for 10, why not pick up that extra 1,000-plus basis points?
RITHOLTZ: That sounds like it’s worth it. Thank you, Robert, for being so generous with your time. We have been speaking with Robert Koenigsberger. He is the chief investment officer and managing partner at Gramercy Funds Management.
If you enjoy this conversation, well, be sure to check out any of our prior 450 interviews. You can find those at iTunes, Spotify, YouTube, wherever you get your favorite podcasts from. Sign up for my daily reads at ritholtz.com. You can follow me on Twitter @ritholtz. I would be remiss if I did not thank the crack team that helps put these conversations together each week. Justin Milner is my audio engineer. Paris Wald is my producer. Sean Russo is my head of Research. Atika Valbrun is my project manager.
I’m Barry Ritholtz. You’ve been listening to Masters in Business on Bloomberg Radio.