WSO Podcast | E194: Hedge Fund Partner - The Path from The Back Office (Part 2 of 2)

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In Part 2, we pick up from Part 1 and learn how WS is able to make an internal transition at his bulge bracket bank to get even closer to the actual trading, eventually becoming Vice President on the High Yield Credit desk before another sudden turn of events would leave him out of a job for 6 months. Find out how he ended up at an even better Bulge Bracket after a half-year hiatus, but this time in a research capacity and why he left after less than 2 years to finally join a hedge fund putting his ideas to work.

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WSO Podcast Episode 194 Transcripts:

Patrick (CEO of WSO): [00:00:06] Hello and welcome. I'm Patrick Curtis, your host and Chief Monkey. And this is the Wall Street Oasis podcast. Join me as I talk to some of the community's most successful and inspirational members to gain valuable insight into different career paths and life in general. Let's get to it. In part two, we pick up from part one and learn how WS is able to make an internal transition at this bulge bracket bank to get even closer to the actual trading, eventually becoming vice president on the high yield credit desk before another sudden turn of events will leave him out of the job for six months. Find out how he ended up at an even better bulge bracket after a half year hiatus, but this time in a research capacity. And why he left that for less than two years to finally join a hedge fund putting his ideas to work. Enjoy. 

WS_PWND: [00:01:00] So, you know, in my lunch breaks, I go down. I let myself onto the trading floor. And I basically, like, cornered him and asked them, hey, look, I'm really interested in cooking. Tell me more about it. Basically went down, got said, know a couple of times. There were a couple of times where he actually sat me down and talked to me for five, 10 minutes. I have to go back. But I kept this up for the better part of call it six months. Right. And that was that. I was that squeaky wheel that went in. I sent emails, I followed up with.

Patrick (CEO of WSO): [00:01:31] Like, why before we even go there? So I love I love the story of the hustle. But tell me, how did you know this was like a good place to be for you?

WS_PWND: [00:01:39] Because internally, through my current role at the time, one of my friends, one of the guys who worked in the internal credit department who I became came to become really good friends with. Yeah, he was telling me this guy is an all star. Like, go down and talk to him. He very well known. He covers the space and he's like, I rated number one like multiple years. Yeah. If you if you want a true investing role, this is the guy you need to talk to. And so, look, I trusted this guy and I told him, look, I will do anything I can. And so he told me, look, he can make an introduction, but it's better if I just go myself and just show how hungry, because that's how he is. Like, people on the desk are eat what you kill, right? Eat what you kill you go chase, you go hustle, be aggressive. They like that kind of personality. So that's what I that's what I did. And six months it took me six months of just emails and talking and conversation. And then one day I heard, Oh, this guy's leaving the bank. I'm like, oh, my God. I just my, my only contact there is is gone. But then I get an email from him later that day and he said he had copied me and what was to be the next head of the group. And he said, Hey, look, this guy's been keeping in touch with me over the last six months. He's really hungry. We're looking to hire a couple more people because we're building out the team, talk to this guy first because he's shown the most interest. So it paid off, right? The IRR on the six months. Yeah, that was pretty, pretty damn good.

Patrick (CEO of WSO): [00:03:16] Pretty damn good.

WS_PWND: [00:03:18] That's pretty damn good in my opinion.

Patrick (CEO of WSO): [00:03:19] So at that point at that point, the leverage loan structure and stuff that's more like that was kind of more of a front office gig. Right. Considered it or it was.

WS_PWND: [00:03:29] It was considered. Yeah, it was considered kind of front office because it depended on because the, the fees that you generated were your underwriting fees. Right. Whether it's committed or if you were.

Patrick (CEO of WSO): [00:03:40] Making a lot more than your first go around. Oh yeah. You're making like 140 or 30 all in or 106.

WS_PWND: [00:03:48] I mean, but this was this is a while.

Patrick (CEO of WSO):[00:03:50] I know this is still bad bonuses coming out of this.

WS_PWND: [00:03:54] Yeah, I was probably making about 130, 140. All in, I think.

Patrick (CEO of WSO): [00:04:00] Oh, great. Okay.

WS_PWND: [00:04:01] So, and I was an associate at the time and yeah, I mean, but the thing is it was considered a front office role but it wasn't paid like a for an office role because the fees for underwriting these loans went to capital markets markets, leveraged leveraged finance capital markets was an actual separate group. And so they pocketed the two, two and a half percent fees on the bonds and the loans. We got a sort of cut of that just because we helped out with the structuring and the legal fees and all that kind of stuff. So it was more of an office in nature? Yeah, it was kind of front office, so I knew I was entirely there. Yeah.

Patrick (CEO of WSO): [00:04:42] So was this next place? Front office.

WS_PWND: [00:04:45] This next place still at the same firm? Yeah, was, was definitely front office. So it was, I was a desk analyst eventually got the job because I interviewed, I got put sort of through the meat grinder and through multiple rounds, meeting people, case studies, everything just to make sure because I still had a pretty unconventional background, right? Yeah. Position your instruction. You weren't you did leveraged finance for about a year, but have you ever been on a trading floor before? Right. So.

Patrick (CEO of WSO): [00:05:14] This is this is your. This is you trying to get closer to actually making investment decisions.

WS_PWND: [00:05:19] Yeah.

Patrick (CEO of WSO): [00:05:19] Or at the not necessarily controlling, but at least giving advice on the markets or on a specific.

WS_PWND: [00:05:25] Market, correct? Yeah. So as a desk analyst, again, I mean this is post GFC and so.

Patrick (CEO of WSO): [00:05:31] Yeah, for the listeners to understand like yeah. What this meant. It'd be great to. Yeah. Can you tell what does a desk analyst do.

WS_PWND: [00:05:38] Yeah. So a desk analyst essentially you are typically broken up into different industries or by situation. So at this particular bank you have a team of ten, 15 people. There are pods and silos covering different industries. And your job was to essentially know every single name of that industry. You were expected to have a working model. You were expected to have regular conversations with management and also have sort of synthesizing all this information. You had to propose trade ideas, right? And you were the source of information for a lot of buy cycles. You were their point of contact in that. If somebody on the buy side, such as a hedge fund, they wanted to get up to speed really quickly on a name. They would call up their sell side counterpart, which is usually this analyst, and they would say, Hey, I'm looking at company X, Y, Z, my sales, your sales guy told me that you covered this name. Can you run me through the situation? Can you run me through some of the high level numbers? And it's your job to be able to have that at your fingertips and be able to do that because that's how you establish relationships. That's how you get the client to trade through your trader, and that's revenue for the firm, right? And so you had to be the first line of defense. You had to be the first line of information for for your clients. So these are really big clients like Lord Abbot, BlackRock, Oak Tree, Aurelius, you better know what you're talking about.

WS_PWND: [00:07:08] And so when I first started, obviously I was not having those conversations. I was shadowing my boss, who was the head of the group at the time he hired me. I was on every single phone call he was on with clients, so my job at the time was to get up the learning curve. And what that meant was, look, you've got to learn two different sectors. You have to learn industrials, you have to learn metals of mine, right? And this is right around when commodities crash in 2015, right? When like Freeport bonds went from like par to like $0.30. So, I mean, that is one of the major copper producers in the world. And you saw overnight copper prices tank, you saw iron ore prices tank all of the metals and mining names in the space, basically. Tank But to answer your question kind of full circle, the desk analyst is responsible for understanding the industry, understanding the trends within that industry, and also understanding specific metrics for relevant top of mind names. Right? So if you're covering tech, you would need to know in video, if you cover the media, you would need to know like I don't know, like AOL Time Warner at the time. Right. So on. Like, you have to be the point of contact for for the for the buy side.

Patrick (CEO of WSO): [00:08:26] Interesting. So you're you get this dream job, you're getting closer. You're sitting in all these phone calls. How fast are you getting up the learning curve? Or was it like, oh, my gosh, what I get myself into because there's such chaos. Given the time.

WS_PWND: [00:08:38] Well, you've seen that picture of the the dog sitting in the fire. This is a fine dog. Yeah, fine. This is fine dog. Yeah, it was it was like that for about six months. And it really was a fire drill because that's the first time you learn. And it's a scary process, but this is the first time you learn what earning seasons is entails. Right? And so you're when you're in an investing role that is plugged, that is live with the market, earnings become incredibly important because your trader is trading on information that is really relevant for that particular company or competitors within that space. And so your job, in addition to being on top of all your names and modeling and understanding and learning about the industry, you had to be essentially a news jockey. Your job was to pay attention to every single headline that could be material to your name or the competitor's names or affect with the space. And it is your job to let the trader know because. There's nothing more scary than a trader getting picked off because they didn't know the information. Right. And so what I mean by picked off or those probably don't know is let's just say that Google reported some headline that said they experienced a massive cyber hack and half of their database got hacked and compromised.

WS_PWND:[00:10:07] And your trader owns a bunch of Google bonds. And so if the market is as efficient as it is and it's pretty efficient, there will be traders who are going to be selling. Right. The bonds on this news because it's a it's a negative headline. And if you're not aware of that piece of news and you told your trader, I like Google, your trader is going to suddenly see, oh, these bonds are now being offered five points lower. Oh, that's a steal. I'm going to buy this. They get the step in front of that train. They get completely crushed because they didn't know this piece of news or something really positive happened. On the flip side, you know, they sold a bond that they should have held on to, right? They get picked off by the market. There's nothing more scary than a really angry trader coming at you because you didn't follow or be aware of the news. Right. And so that was the that was the fun and the scary part of the role. I mean, you actually saw and had you had a finger on the pulse of the market every single day. Right. And it's not just stuff that was going on your space or your names. It was the market itself. Right.

Patrick (CEO of WSO): [00:11:20] Because you had to be looking at headlines and thinking, is that going to is that going to hurt or help?

WS_PWND: [00:11:25] Exactly.

Patrick (CEO of WSO): [00:11:26] Mean my name's.

WS_PWND: [00:11:27] Yeah. And what you learned really quickly is that just dropping a headline into a chat room is not enough. What you needed to learn quickly and do well is what is the news? Digest it, what does it mean? And then lastly, the most important part is what does this do to our position? If you have to figure out really quickly is a positive or negative news, and if it's positive or negative news, what should you do right? Ignore by by the dip or by the fall or the drop? Or should we sell or get out? Right. So. But, but, but the thinking is that. Before the trader ever puts on the position you thought of, theoretically, theoretically, all these scenarios and all these risks. And if they happen, you have a contingency plan in place.

Patrick (CEO of WSO): [00:12:14] Were you just like on the phone all the time with traders all day?

WS_PWND: [00:12:18] Well, my trader sat two rows behind me.

Patrick (CEO of WSO): [00:12:20] So you're just like right there. He's screaming at you and you're telling I'm.

WS_PWND: [00:12:22] Like, You screaming at me? Well, at the time he's screaming at my boss because he was handling all the calls. But as you get more into the role and you understood like there is a there's a subtlety in terms of the news release, like a news isn't binary. It's like ten bad or zero good, right? Yeah. It's like it could be a seven on a scale of bad or two, on a scale of bad. And then you're your job is to say, okay, I've digested and processed this news. This means bonds are going to widen by 20 basis points or 25 basis points or 50 basis points, or it's going to cap out to 200 basis points. For some reason, you have to be able to communicate the news in a way that the trader is going to understand.

Patrick (CEO of WSO): [00:13:04] So the traders trading away, it sounds like flow and you're trying to give them a heads up of how why they need to make their their bids, not to get like lose money.

WS_PWND: [00:13:12] Yeah, exactly. Yeah. You're basically you're telling.

Patrick (CEO of WSO): [00:13:15] Them you're telling them, like, how crazy is this? Like, how uncertain is this?

WS_PWND: [00:13:20] You tell them the severity of the news, whether it's positive or negative, it's their job to manage the risk. Right. Because I mean, post greater financial crisis, we all know that prop trading like went away, supposedly going away, but. Your job as a as a broker dealer is that you're creating liquidity for the market. And so you're buying and selling constantly. And your trader cannot get caught offsides because they don't understand the risk or what's going on fully with that name. And so it's just so important for you to really know your name and know the drivers and know when a piece of news comes out that the first person you have to tell is the trader. So that got beat into submission into me the first couple of weeks, like Do Not Miss News. And I've seen it play out really badly with other people. So but you know, to a lot of people, just like it's really scary. But I loved it. I loved how crazy it was. People shouting at each other. You know, it is hard to concentrate on a trading floor because like the sales guys are always on phone calls all day. Yeah, the traders are like throwing a football. Sometimes they'll hit you like and you're there in this. That's like just chaos. Massive chaos and mayhem. And you're trying to read a 10-Q or a 10-K. You end up reading the same line ten times because you can't stop focusing on the guy behind you, the sales guy talking about his night out at like like a town.

WS_PWND: [00:14:49] Right. You know, I've read this line ten times. I have no idea. So you give up, you kind of just manage your workload. And after the market shuts down at 4:00, you're like, okay, now I'm going to get to sort of the work I actually was supposed to do during the day. Yeah, but I think I think in this role it was it's really important to understand that this was this is where I really formed my love and appreciation for credit. I know that equity equity markets are exciting. They have obviously juicier returns and credit, but within high yield and distressed, they have very equity like characteristics. But it had. A very set parameter in which these instruments function. Right. And so your risk is theoretically capped at four the tenor of the of the instrument. It's nice to it's nice to know that in five years I'm going to get paid back with interest or I'm going to have a donut at the end of the day. Right. Whereas for for equity, it's like you have to consistently always be a permeable perma bull and you have to believe in, in this company. And that stock has no duration. It goes on forever until it goes bankrupt. Right. For for credit, I love the parameters. I love the legalese that binds us. And I think with my previous position and the desk analyst job, this is where I started to figure out, oh, this is a really cool space to be in high yield distress.

Patrick (CEO of WSO): [00:16:09] Yeah, you're there for a while.

WS_PWND: [00:16:10] You're there for a while. And this is this is where I ultimately found a home. And I loved it. And unfortunately, at the time there was a CEO change in like half the group of half the people in my group got laid off. They called it reduction and force. And so I was unfortunate at the time. I just had gotten promoted to VP and never gotten laid off before in my life. And I was like, Man, this sucks. And then there was like a six month gap where I was like, you know, I could have easily gone back to something, but I took six months off and I traveled around the world. I was like, you know, I've built enough savings. And I'll tell you, that summer was probably I'll go in at the end of my life. I'll say that's probably one of the top five things I did in my life. It was probably one of the most fun things I'd done.

Patrick (CEO of WSO): [00:16:59] Six months meeting, just traveling. Where did you go?

WS_PWND: [00:17:02] I went all around Europe. Yeah. Pretty much like England, France, Germany, Italy, Poland, Hungary. Serbia, Lithuania. Sweden, Finland. Yeah. I went through all that and then I did Asia for a bit. And it was it was an incredible time because up until that point, I had not really taken a vacation. So probably it was like five years since I. No, it was it was about seven years. And I had not really taken a vacation because that had been job like, job to job and really just trying to build my brand and my skills. And it was a nice sigh of relief at the time. I knew after six months when I came back, I had to explain that and there was no there is no way that you can talk yourself out of taking six months off. Right. So know you. I don't I don't remember what I said, but.

Patrick (CEO of WSO): [00:18:01] Well, probably I didn't have a vacation for seven years. I was resetting.

WS_PWND: [00:18:06] Yeah, I was resetting. And I think it was probably another version of like, hey, I want to work at your company. But ultimately I was able to come back from the trip and there was a lot of life reflection on on the way. But I think ultimately what I thought was, look, I'm really interested in credit. I really love this product and I think it's going to be around for a while because there are always going to be companies, companies that need capital. There will always be companies that have a good business model but a terrible balance sheet and they need help, right? Yeah. And so I think I was ready to come back after six months. The next job was was I don't know if it was like a transition job or it was just the brand name was another bulge bracket firm. I became a publishing analyst and it was it was it was good in the sense that I understood a different sector, but ultimately I knew that I had taken a step away from the panel. I was a publishing analyst.

Patrick (CEO of WSO): [00:19:06] Credit, credit research, basically. Credit research.

WS_PWND: [00:19:08] Correct? Yeah. And I wasn't close to the PAL anymore. And so there was a separate desk analyst group at the firm. And I knew, having been in the role, that they're the ones talking to most of the investors. They're the ones who saw the flow. And you're really just there to write your thoughts on a piece of paper. Again, I'm not I'm not trivializing the practice. I knew it wasn't for me. Yeah, and you did it, but.

Patrick (CEO of WSO): [00:19:36] You did it. Was it because good brand, both bracket name and because it just you didn't have other options coming back from that long sabbatical, we'll call it.

WS_PWND: [00:19:45] No, I actually have like two other opportunities at the time, ultimately one with this one because, you know, it was it was a good name and there were good people who worked in the group who ultimately, after six months, a lot of them left. But I, I got I got really good at writing at this point. And so the one thing if I had to gripe about one thing, it was the amount of time that passed between the formation and the idea and then putting the risk on because because with any publishing role, you have to go through spot checks, you have to go through compliance, you have to go through like publishing. And there's a whole period of that, right? Like there would be one or two days lag between when you submitted it for publishing until it got published. And so and then like walk that back maybe two or three weeks when you start looking at a name, do work. It's very long process and by the time you get to the end, maybe the trade is gone. And so I knew again that I love the approach of putting risk on you did work. You were iterative on the desk as a desk analyst, you put the risk on, get kicked around it for a little bit and understand how it traded. And as you continue to underwrite and refine your theses, you can either sell out of it or you scaled up, right? Whereas in a publishing role it was just like, Oh man, this is a long process. I feel so further removed from what I really like doing, which is markets. And why did you go.

Patrick (CEO of WSO):[00:21:13] Back to, I guess similar to the sound? It sounds like you had found a was it just, hey, I'm going to try this new thing. I want to become a good writer and there's good people working at this place.

WS_PWND: [00:21:22] Yeah. I mean, it was really the brand and it was I mean, to your point, it was six months. And, you know, you kind of have to get into the swing of things again. And I covered a really cool sector at the time. It was it was blowing up because everything in the space basically started trading like it was the distressed asset. And so I had covered metals and mining in 2015 and 2016. This particular sector also imploded and it started to get me expanding into distressed investing, talking about valuations, thinking about bankruptcies. And that I think was. An experience I, I was really thankful for because the next role allowed me to really start to exercise some of these skills that have accumulated along the way. Yeah, I knew that ultimately, what ultimately led me to leave the cell side was. You don't really take risk at a sell side bank, right. Because of risk requirements. It's not your job to do that. Your job is to be the aggregator of information and then preserve and build relationships with your clients. So I knew the only way that you can actually put your money where your mouth is is actually to go and work at a hedge fund transition to the buy side. And at the time, there was a really cool opportunity that came up and I took it small hedge fund. I had been at large institutions for a very long time. I didn't want to kind of jump through all the the red tape again, all the bureaucracy. I wanted to find a name, find an idea, do enough work. Let's put it on and let's see if it goes up or down. And so it was it was a really cool, cool group. I learned a lot. I was able to put my modelling, my my legalese, my trading, all the all those things that I have synthesized over the years really for the first time into practice. And I'm thankful again.

Patrick (CEO of WSO):[00:23:17] How did it feel?

WS_PWND: [00:23:18] It was exciting, but scary for fun. Look again, this is fine. Dog came around again. I was like, Well, this is my first time in the space and I've never been on the buy side. But I quickly realized that this this is where I wanted to be, right? If you gain conviction and this is something that I don't know if folks are familiar with, but conviction is is something that you'll probably hear a lot in the business, is that you you come with an idea, you iterate, reiterate, iterate, underwrite, go through the risks. You get to a point where you know that you can you can size this position up to 10%, 15% worth of material position within your firm. Yeah. Conviction is that you have the confidence in the amount of work that you've done to be able to take this level of risk. Right. And so when we talk to folks on the buy side or the sell side, oftentimes we will ask them like, what's your conviction level for this? Right. And a lot of people will say, well, my conviction is six out of ten because X, Y and Z variables, I have no idea how to underwrite.

WS_PWND: [00:24:25] I have no information on this. So they'll say, okay, this is kind of like a yo bet, or This is something I have a lot of conviction in because I've looked into all these other supplementary data points to support my view, and that goes a long way, right? And so when you start to when you start to develop this muscle memory, when you start to educate the street on some of your own ideas, on your conviction level, and if as long as these these ideas, more of them work out than don't, then you really start to build up this really good network of buy side guys that you talk to that you can trade ideas with. You can get first dibs on ideas. That is the networking, the Rolodex that you build over your career. And so at this at the shop, I was able to to really put my money where my mouth is. I, I love modeling. I think that is the only thing that can I can hang my hat on.

Patrick (CEO of WSO): [00:25:22] Can you, can you explain like the types of trades you were putting on? So like, let's say there's distressed, I don't know, distressed retailer and you're like, hey, I'm going to buy I'm going to buy the senior debt. I'm going to sell a sub or vice versa because X, Y, Z. And so you were modeling out like the cash flows and whatever, all that stuff. How are you doing this?

WS_PWND: [00:25:42] So there was so there was a retailer that I was looking at during this apocalypse period and they had five different business segments. So as a retailer that have five different clothing lines, there's like a men's or there's a women, there's a children's. And retail is notoriously hard to value because it's it's like it's not a factory that's producing widgets, right? It's like a piece of clothing that could go out of style tomorrow. Right. So so the value of that actually is, is very, very hard to actually pinpoint. But, you know, what I love to do is there are many different ways that you arrive at valuation. So the lazy way that a lot of people on the street that I found were doing was simply trying to figure out what a future EBIT was or stable EBIT that was going to be slapping a multiple range on it and just saying, hey, look, this business is worth anywhere from a couple of hundred million to whatever billion, right? And that kind of approach, sometimes it works. It works sometimes. But that can really get you into trouble when something like when things start selling off, the market goes distress.

Patrick (CEO of WSO): [00:26:46] When you're looking at distressed credit.

WS_PWND: [00:26:47] Yeah, especially because the multiples work until they don't write multiples contract they change trading at two x even was like this was supposed to be a6x business. Now it's trading at two x like and then when you don't have the work to back it up, suddenly you're like, Oh God, what is my valuation based on? Right? Yeah. And you don't want to tell your PMO. It is just a valuation range. But what I did was I, I modeled out historically and I love to take if these companies went back to the greater financial crisis. I admired them all the way back to 2009. I know that's super draconian. People don't do that often, but I want to look at how they weathered very historical periods of stress. 2009 was something special. You saw a massive inflationary period in 2011. You saw the commodity crisis in 2015. You saw the taper tantrum in 2018. Right? You look at how some of these things traded. And so I had to I'm a very visual person, so I need to have a working model in front of me and I build fast these after years of just playing around with Excel, I got really good at building models really quickly.

WS_PWND: [00:27:52] Three same models, LBO valuation, waterfalls, all that kind of stuff. Yeah. So for this particular retail name, I broke it down into all the different segments. I figured out the cash flows for every single one of these segments. The one key thing that I had to determine was this is a retailer that was losing market share. And so it was it had declining sales, it had declining EBITDA, it had ballooning expenses. And so it's a melting ice cube for all intents and purposes. And so you had to figure out what is going to be the stable state of this melting ice cube. Right. Because it's not going to melt forever. It's like saying if you're trying to buy a newspaper company, newspapers are going to go away. They're going to shrink to a sort of a smaller level. It's going to be much smaller than it is today, but you're not going to go away. People will still enjoy reading newspapers.

Patrick (CEO of WSO): [00:28:39] At least not for a long, long time.

WS_PWND: [00:28:41] Not for a long time. It's a very, very long tail. But you have to have an idea of like, how bad can it actually get? And so there's a valuation approach where you're you're slapping a multiple on it, you're looking at other different retail companies in the space, right? So you're looking at apparel like women's apparel, children's apparel, you're looking at their margins, you're looking at their top line growth. You're looking at the unlevered free cash flow lever, free cash flow yields, looking at market cap, if they're public, like looking at if their capital cap structure is upside down. And then you figure out sort of the real values like, okay, where does this particular name slot against everybody else? Right on a leverage free cash flow basis, on a valuation perspective, on a leverage debt to cap ratio, all these different things you say, okay, crappy business, lower margins, upside down capital structure, you know, names in the space are trading 5 to 6 times. This is probably a 3 to 4 times, right? But then you always have to haircut even more that because you know when something goes distress or they go bankrupt. Multiples or prices will trade passive where you usually think they will. It's not enough to say if this thing goes bankrupt. I've done the valuation and the waterfall. This one should trade a 40. I will bet you 99 times out of 100 that bonds trades past 40 into the thirties and twenties and it bounces back up. That's just how things work. Yeah, because there's a real fear when everybody's piling out the door trying to sell it.

Patrick (CEO of WSO): [00:30:11] They will go to pennies on the dollar and.

WS_PWND: [00:30:14] Yeah, and then like the marginal buyer, like the support level or the hedge funds, the guys who have done the work and say, well, this is completely oversold. I know this is worth $0.40, it's a bargain. I can 100 I can to x my money, buy it at 20 and I.

Patrick (CEO of WSO): [00:30:28] Can leverage it up, I can lever it up.

WS_PWND: [00:30:30] Then you can lever it up. You can carve it off as you want. So I mean, like going back to the retail example, I had to figure out every single number one, figure out the space. I had to understand basically operating metrics and the valuation metrics for every single one of these companies. And they had to look to look at a cash flow. So you did DCF. Get it garbage and garbage out. But you have to have a method to the madness, right? Dcf you have to look at free cash flow. You have to look at relative value. Are there better plays out there? This is this is cheap. But is there something cheaper in the market? Right on on a yield yield to maturity or yield to call or yield to worst cases. So as part of that analysis, I had to go through the entire all the different legal documents, credit agreements, indentures for all the various parts and instruments and the capital structure, looking at peak capacity, looking at secure capacity, debt capacity. So in these scenarios, once you've read all the information, you spread all the numbers, you've looked at all the competitors, the scenarios that you underwrite are essentially if this thing went bankrupt, what caused what tips it into bankruptcy? What is this liquidity? How much does drawn under the revolver? How much availability does it have left, right? And if they're burning cash, how many months or quarters did they have until their cash runs out? Right.

WS_PWND: [00:31:55] And so once you get a sense of what that one way looks like, then you look at the different instruments within the capital structure and you say, okay, liquidity runs out in six months. This instrument has a maturity that is in two years. You know, and then you have to ask yourself, is this instrument secure at the top of the capital structure or is it junior? Right. We have to get a sense of. You have to get a bearing of where you are, the sense of where you are in the capital structure. So once you have all this planned out, then you have to look at the documents. You have to look at your debt capacity. You have to look at RRP capacity. You have to look at trapdoors. Meaning if the company wanted to siphon value out from one of the segments and then dividend it back to management, if the documents allow it, they may do it right, especially if there's a sponsor involved. So these are all the things that you need to be aware of that you need to build into your worst case scenario. If X, Y, Z, every single one of these bad things happen. What is that pool of value that I actually have that I can claim on? And how senior am I in that waterfall to be able to claim? And so that was really interesting from the sense that like this is a valuation exercise. This is also an exercise in understanding legalese.

WS_PWND: [00:33:14] What I wanted to really get a better handle on, because at the time I had never been through a process, never been through a bankruptcy process. And those things get really messy. Yeah, that was that became later. My subsequent role, I was able to get more experience there, but at the time that was the progression of the analysis that needed to be done and it didn't happen overnight. These are things that week, weeks your takes weeks you have the model build initially you understand the the drivers countless number of calls with SLC analysts with by say analysts there's a lot of education that goes on because people will have very different views from you. They'll ask you for your view in return. It's like a quid pro quo type of way. They'll give you your review only if you offer something valuable to you too, right? So but for them, it's another data point in terms of how the market, the general market is thinking about this things. So yeah, so then you get a very, very good sense of like, okay, this is my view. But I also need to understand. In the event of an event or if there is an earnings report, what is everybody else expecting? Yeah. And that's going to dictate how that security or that instrument trades on that news. So, again, I, I benefited from all these. I'm like a Frankenstein's monster. All these patched up different parts from all these different roles.

Patrick (CEO of WSO): [00:34:38] Yeah, I'm thinking like, you're like the background you had was probably a really good one for being a natural investor at a hedge fund.

WS_PWND: [00:34:46] Yeah, I would say so. I mean, I would be I'm thankful for that. I would say a lot of folks sometimes have, you know, especially at large shops, they will be like the analysts for a name or situation or an industry. And all you focus on are just the numbers and you have like internal counsel or legal team to be like, okay, just look at that. Go look at what holes there are in this document. Tell me where I can get hurt. I think that's nice. I mean, but if you don't have lawyers at your disposal or you don't have counsel on retainer, you need to be able to do this quick stuff quickly. Right. So it was definitely a very, very helpful skill to learn along the way.

Patrick (CEO of WSO): [00:35:26] So you're there for a couple of years as this kind of distressed role, hired role. And what was what was it like? Was it a roller coaster? You could do really well. You didn't do well. What happened?

WS_PWND: [00:35:37] Oh, I mean, I did well. I was a top generator know, first year, I think second year to some cool trades that we did. Again, it was a very flexible mandate. So we looked at credit long short, we looked at equity long short. So with the hedges, we looked at Cap ARBs. We also did Merger ARB, as well as something I had never had any experience with. But there's John Paulson and all these big guys. They made their careers on merger, right? And so that was something that was so cool. I was like, Man, this is awesome. Like, I'm not only am I working in a product or a space that I'm I get a lot of excitement from, but it's like I'm also looking at equities for the first time. Also, we're looking at a of stuff now that's cool, but why? Why, why leave? They just didn't raise money. You know, it was it was hard. It's it's hard to I mean, I love the team. I really loved the team. It was such a solid group of guys, but. You know, I mean, at the risk of shooting myself in the leg and foot. I mean, I'm a survivor. I want to go where I can best perform, have the best resources available. And I want success for myself as well. Right. And to help people around me.

Patrick (CEO of WSO): [00:36:51] And so when you say they weren't able to raise money, I mean, they had money. Right. You're training. And so what? Why not just continue and like you're doing really well in the penal. So, like, what do you mean they weren't able to raise more like a bigger fund or.

WS_PWND: [00:37:02] Something like that? Yeah. I mean, the, um, was not.

Patrick (CEO of WSO): [00:37:06] It wasn't huge. Yeah.

WS_PWND: [00:37:07] It wasn't scaling as I wanted. And it's, it's, it's hard to, it's, it's hard to run a credit platform and a distress platform if you're, if you choose to invest in those products with. I still believe it's hard to run any type of credit platform if you're under $1,000,000,000. Yeah, I mean, you can you can get away with it maybe at 500 or 750.

Patrick (CEO of WSO): [00:37:34] Why is that? Because you can't you can't play in enough names or something or like or just you're.

WS_PWND: [00:37:38] Just you don't have enough scale sometimes to take big positions. Right. Because it's the stress you need to be able to if you want to make two, 3x4x5x, you're not money. I mean, sometimes you. I can get to this later, but sometimes you need to be able to take entire tranches down or you need to be able to have capital to deploy really quickly. You also, I mean, larger firms with big aims, they get the first look at a lot of these opportunities, whether it's from a primary perspective or from a secondary perspective. Like cap markets head at UBS is not going to know. Small fund ABC with 25. Again, I'm not saying this is the time. I'm just.

Patrick (CEO of WSO): [00:38:17] Excited at 25.

WS_PWND: [00:38:18] 55 million a year, I'm like, you're not. That's that's like that's like I think that's like BlackRock's minimum size, just like for primary issuance, like they need to have at least 25 or 50 million bucks, right? So it's hard to run a platform because you, you get you get overlooked on the primary side sometimes because your order size is just not big enough. Right? Or you're like, what else I really want is for you to trade with them. And so for a small shop, you're getting just death by a thousand because you're getting killed on big tax spreads over and over again. Right. And you can't you can't make a lot of that money back if you're trading that often again. I mean, this is maybe I'm confounding some factors here, but there are shops that are very trading oriented, like a millennium or exodus. And there are like the buy and hold very activist place like the Elliotts of the group, right. Yeah. So but like point being I think, I think the writing on the wall right now, especially with regulation, with administration in terms of oversight, is that it's it's a land grab in terms of assets. You saw two years ago people buying up trading brokerages like TD Securities, I think it was TD Securities or Ameritrade. I think people are looking to buy clients and they're doing so through buying Aon. Right. And so funds that have the largest amount of AM can command the largest positions. They can they can take bets that don't require you to circle outside capital. Right. You can just do it yourself. You can also be the anchor order and build that relationship with sell side banks. Right. And it's just there's there are things that are benefits that come with scale and size. Yeah. So that's why I love.

Patrick (CEO of WSO):[00:40:11] That's why you left. You said, you know, this isn't we're not able we're getting kind of death by a thousand cuts, like you said, even though you're having good ideas and.

WS_PWND: [00:40:19] Even.

Patrick (CEO of WSO): [00:40:20] Even on the right side of a lot of these trades, you're still thinking like, wow, this is for Rowan upstream here with that scale. So what did you did you take you didn't take a break this time. So what was the thought process? You're going to do it to myself. I'm going to go partnering with other people. What was the thought process?

WS_PWND: [00:40:36] Well, so next the next shot I joined because I was to put it simply, I was given I was going to be given a lot of ownership in my positions. I was able to just be very senior and come up with the ideas underwrite and the economics were just a lot better.

Patrick (CEO of WSO): [00:40:53] Yeah, it was. Talk about not necessarily how much you were making, but like the economics of like being the amount of care you get at like a as like a junior person and then like how it can just change dramatically.

WS_PWND: [00:41:07] Yeah. So my, my understanding and again, some people are very hesitant to say, to say so I'm not very sure about what it's like at other firms. But for my understanding by this point I was like a senior senior analyst, level analyst and typically speaking at large, it depends on where you are in the culture. So if you're at an Apollo or you're at a TPG, unless you're unless you're like an MD or you're an actual partner, you're most likely not going to get carried. As a senior analyst, you could potentially be grooming yourself or they can be grooming you for PM role, right? Because you have covered many different sectors in the past. You've demonstrated and excelled in the ability to to be able to manage risk and understand credit analysis. You have an experience for appreciating macro and how that drives your sector, right? That's the pathway from a senior analyst to a PMO. Right, right. And so PMS partners usually at firms, they they usually will get some amount of points. My understanding is depending on where you are, it's anywhere from 1 to 5 points, right? 1 to 5%. But 5% is a lot. Right. 5%. I can't imagine if you're at TPG, you're getting like five or ten points, right?

Patrick (CEO of WSO): [00:42:37] There's too many partners.

WS_PWND: [00:42:38] There are too many partners or a lot of mouths to feed. You're probably getting half a point or a quarter point or something, I'm guessing at this point. Yeah, but but that's part of the the appeal of joining a smaller shop. Is that you? You get another ground floor, you actually build.

Patrick (CEO of WSO):[00:42:53] And there you're getting like, what, ten points?

WS_PWND: [00:42:56] Some places can give you ten points, some other places give you five points again.

Patrick (CEO of WSO): [00:43:01] Maybe you're not the founding, necessarily the founding, but they're bringing you in as a private partner level. They're kind of still keeping most of the care of themselves, probably.

WS_PWND: [00:43:08] But I guess, yeah. I mean, part partners will keep no less than 75 to 80% of the economics right now. So it depends on whether you take seed funding. So if you get seed funding, then they'll ask for 2 to 3 points here and there. And then you have other investors that probably want ownership. And if you're desperate to raise money, then they could extract your pound of flesh in the form of points as well. But I mean, ten points as at a small place, I don't know. I mean, that seems pretty high to me. I mean, I would I would say probably you would know better than I would. I would say like 2 to 5 points is if you were to get points, that's probably what you would given.

Patrick (CEO of WSO): [00:43:51] And that's it. They're bringing you at the partner level or even director level or something like that. Yeah.

WS_PWND: [00:43:55] Correct. Correct. And at the most recent place, I was promoted to partner and I had an economic stake in it. And so what was cool about the setup here is on top of the actual points that you got you for any sidecar or any co-investments, you had a claim on the pal there as well, like a sizable portion. So you can you can claim up to like X percentage of the pal that you made. So let's just say a position made you netted you $10 million post fees, right? You could get X percentage of that, pal.

Patrick (CEO of WSO):[00:44:29] Can you share how what your best year was either at the previous place or this.

WS_PWND: [00:44:33] Year you can give.

Patrick (CEO of WSO): [00:44:36] A range. You can give a range or.

WS_PWND: [00:44:37] Well, we'll just I'll just say it's.

Patrick (CEO of WSO): [00:44:40] Multiple seven.

WS_PWND: [00:44:41] Figures. It's it's multiples of my it's multiples of my base salary. Okay. Thank you. But again, this is not something I want to make it clear that this is not something that people should expect when they join a fund.

Patrick (CEO of WSO): [00:44:53] So listeners, just tell me if I don't ask. They always are like, why didn't you ask me what you made?

WS_PWND: [00:44:57] Yeah, yeah. I mean, it's I mean, PMS at large shops will make 5 million up, right? Like upwards of 3 to $5 million. And for senior analysts or MDS, you can very easily see yourself over $1,000,000, right, depending on the shot. But there are places where as a senior analyst or as a principal or M.D., like, you're all in. I don't know. By like 750 million probably. I think the market right now is probably more 507 54 senior analyst roles. So but I would say people shouldn't expect points and you kind of have to read the room a little bit, do your research, talk to other people at the firm who are senior and don't go in there with like a bazooka and demand like you want five points, right? Like, understand, you know, you should you should present an argument, but ultimately it's up to the firm. So but yeah, I mean, I would say that is a very important question that you should definitely ask. Do not feel shy about asking it and tell them usually what you expect. In fact, I think most places when they ask you for your salary, you're not supposed to tell them, especially if you're in New York State. So you can give them a sense of like like a way that I like to get around giving my number is I ask them what the market rate is, right? Yeah. Have them validate it and then I'll just say, okay, that's fair, reasonable, rather than like telling them what I got paid. So for folks who are interviewing out there, you can ask, ask and put them on the spot. Right? They can't double dare, double, triple, triple. Dare you again like you double dare them and stop there. Have them answer the question. And that gives you a sense of like, okay, this is where the market is. This seems about fair.

Patrick (CEO of WSO): [00:46:49] Yeah. And so do you typically like if they come in a little low or a little light, would you suggest kind of coming in a little higher and say, well, you know, I was thinking more on this range?

WS_PWND: [00:46:59] Yeah. I mean, I could sometimes I'll it depends on who I'm talking to.

Patrick (CEO of WSO): [00:47:04] Yeah. Because you've jumped enough places now that you've had to deal, have this conversation several times.

WS_PWND: [00:47:08] You had this I've had this conversation enough times to have a sense of what the street is paying. So if they were to communicate a number that was a little lower than expected, I'm not going to outright reject it. I'll just say, Oh, that's interesting. I've heard from other places that the all in comp last year for X, Y and Z shop for this senior level was this. Right. Right. So is there a reason like is there like back backloaded pay or like you just have to kind of put in your first year? I like try to make it a more, more of a dialogue rather than be like, this is bad, right? So I try I try to make them feel comfortable in that awkwardness.

Patrick (CEO of WSO): [00:47:52] Well, I've been holding you for a long time, so I just want to say, first off, thank you for sharing your stories. Super interesting and obviously very knowledgeable. Obviously very. You've had a very long and successful career.

WS_PWND: [00:48:04] Thank you.

Patrick (CEO of WSO): [00:48:05] Hopefully I'll keep going.

WS_PWND: [00:48:07] No, absolutely.

Patrick (CEO of WSO): [00:48:08] And I just wanted to say. Yeah, I mean, just give you an opportunity before we call the pod. Just any other kind of final words of wisdom, kind of looking back at your career with all the twists and turns so far?

WS_PWND: [00:48:20] Like what I would tell myself. Yeah, like ten years ago. Yeah. Buy Bitcoin before is over 100 bucks, you know. Yeah, that's an easy one. Yeah, that's an easy one. But you know, I'm kind of half joking. Not half joking.

Patrick (CEO of WSO): [00:48:37] I mean, you hit on it earlier with networking, but anything else? Slightly less obvious.

WS_PWND: [00:48:43] I would tell my I would I would say start to develop your gut feeling and start to trust yourself. Obviously, there has to be a basis in that. But I found a lot of decisions I've made along the way and have been listening to my gut and I've always ended up in a place that was better than where I was before. And it's it's a function of me having a very clear sense of where I want to be and the home I want to create for myself. So invest in that, that sense of that gut feeling that you have and learn to trust it because you're going to need it when you're trading and when you're working in that type of role. I mean, the last thing I would say is like, look, if you have money, start investing going, start to experiment with money, understand how the market trades, you're going to lose some money, but it's better that you start to start out with a small pile. Then those $400 million for a trade at a hedge fund. So not what I did, but yeah, learn to invest quickly and young and then buy bitcoin under $100.

Patrick (CEO of WSO): [00:49:51] One there. Well, thanks so much for your time and thanks to you, my listeners at Wall Street Oasis. If you have any suggestions whatsoever, please don't hesitate to send them my way. Patrick at Wall Street Oasis dot com. And till next time.