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One of the few charms of the COVID era has been virtual events with a wide variety of the industry’s leaders. Distressed debt investor Marc Lasry, co-founder and CEO of Avenue Capital Group and co- owner of the NBA’s Milwaukee Bucks, fits that description. On April 13, 2021, Marc Lasry sat down with CFA Society Chicago’s Cosmin Lucaci, CFA, of Brownson, Rehmus & Foxworth, Inc., for a thoughtful conversation that concluded with questions from attendees.

Questions and answers have been paraphrased and edited – nothing here is intended as a direct quote.

Cosmin Lucaci: In such a fast-moving market, why do you appear to be waiting and reacting to market developments?

Marc Lasry: When there is a time of dislocation, you never want to be the one forced to sell.

Hedge funds provide liquidity. After our performance in 2008 (-25%), our 2009 (+62%) proved that you do not want to be the one forced to sell. Because rates are at 0%, you want to be the one providing liquidity, and our goal is to take advantage of that dynamic.

CL: Given what’s transpired in the last year, is traditional investing gone for good? Is waiting for a market-wide correction something that only appeals to luddites?

ML: If you are a special situations person like us, if an investor gave us $5-10 billion, it would be too much. We cannot do deals that large. A fund around $1 billion is fine. If you went back to the beginning of 2020 and described the events of the last year [with the pandemic, shutdowns, etc.], no one would have said the market would hit a new high, but the market liquidity provided by the Fed is what buoyed markets. With the cost of capital at zero, you can have a large amount of capital. There are always people who need capital, but this is not the most scalable business. We can lend to large companies at higher yields, but we don’t have $5-10 billion worth of opportunities. We try to take advantage of situations and inefficiencies and keep our fund sizes around $1 billion so we can take advantage of market conditions. The larger you are, the harder it is.

CL: Can you talk about where you see specific opportunities in next 6-18 months, and will default rates ever go up?

ML: Defaults will stay around 2% as long as rates do not go up, and I do not see rates going up. Also, there is a lot of equity capital out there. We are lending in Europe at 10-15% for special situations. We did a similar deal in the U.S. with a major domestic carrier where we bought some planes and leased them back at 15%. There are always companies that have issues, no matter how much capital you have. There are always problematic situations. We try to invest at the top of the capital structure. We have been able to find a lot of opportunities so far in travel & leisure, energy and power, the theatre industry, for example.

CL: How is your investment in the Milwaukee Bucks similar and different from your other investments?

ML: It is pretty different. When we bought the team, it was pretty much last among the 30 teams in everything. We started changing the culture and the way people view things. It is hard to make annual profits in a sports franchise. We bought the team for around $500 million, and they were netting around

$5 million. Today, the team is breakeven, but the franchise is worth around 1.5 times what we paid. What we learned was that if you want to win, you likely cannot make money. We put all the money into putting a winning product on the court. I cannot say to the fans, “Good news, we are going make a lot of money, but bad news, we are going to lose.” Long term, though, it increases your franchise value.

CL: What is your take on non-fungible tokens (NFTs)? Is it a wave or a mirage?

ML: I think it is a wave, not a mirage, but how big a wave, I don’t know. Is this a 5-foot, 10-foot or 20- foot wave or is it a 100-foot wave? If it is a big wave, it fundamentally changes how we view things. What is clear is that there is a group of people who wholeheartedly believe in it, and they are younger than you and I are. Now, when we were young, we thought we knew everything and we did not understand how older people could not understand what we knew to be reality. So, would I buy that digital asset, the one that sold recently, that someone bought for $69 million [Beeple’s “Everydays – The First Five Thousand Days”]? I do not think so, seems high, but he has turned around and is licensing it and he thinks he will make more than that. The runner up bid at $65 million ended up buying a Picasso that same week from the auction house.

CL: You are faced with a lot of opportunities every day, so how do you decide what opportunities to pursue and which to forego?

ML: You end up trying to help others who have helped you. My daily routine does not really change. You come in, look at everything we are investing in. Every day is different, but you get into a rhythm. What ends up happening for me because of the Bucks is that I have something that can occupy a lot of my nightly activities. We all have hobbies and things we love doing, mine are just more public than other people.

CL: I heard that you were going to be a truck driver when you were younger. How would you describe the American Dream as an immigrant here? Would you still want to come here if you had to choose today?

ML: I do not think you could do what we have done anywhere else. The ability to succeed is second to none here in the United States. I would have been a truck driver, and I was happy being a truck driver; I thought it was a fabulous job. Compared to when we started, I think things are harder, but we can still accomplish a great deal. The opportunities may not be the same, but at the end of the day, everything is about hard work. You must have really good grades and work super hard because there is always someone else who is also doing it. It will be difficult, but nothing worthwhile isn’t difficult. Our job today is to try to give everyone a chance to succeed, learn and grow.

Audience Q & A

Q: Is the SPAC market a bubble that could burst?

ML: I think it is a market. People always think when something new comes along, it is a bubble. But no, we have a lot of SPACs because they provide an easy way to go public. They may go down in value because people value those companies too high, but there could also be a lot of value there. There are a lot of companies that can get that value by selling to a SPAC. So no, I do not think it is a bubble.

Q: With spreads where they are today, what are your thoughts about leverage in the market?

ML: That is a hard question, because even if you have a bad company, if you have more optionality and more time to turn things around, you might be able to do it. Some companies might survive that would not otherwise, as that extra time can give them a chance to find new ways to succeed. You want companies to try to turn things around. People may or may not buy that equity, but cheap credit just allows you more time. You need a great management team or a great reason for existing.

Q: How do you think about diversification within your portfolios?

ML: We try to have 25-30 names. I wish there were 100 phenomenal situations, but there aren’t. You might find 10-20 where you put real money to work and the rest smaller amounts. We try to put around 3-5% in each investment.

Q: Why do you not expect rates to go up?

ML: The Federal Reserve wants to keep rates low to keep the economy going. Governments do not want high rates because they can create greater wealth inequality and more instability. The amount of outstanding debt has grown 75% in the last 5 years in the US. That means there would be higher interest payments with higher rates, and that means less money for social services, so I think they will focus on keeping rates low.

Q: How have you changed the structure of your Avenue Capital Group team to address the changing structure of the market?

ML: You must look at more deals. Smaller deals mean more work. You need larger teams to do the same amount of work.

Q: If your basketball team makes no money, how do you decide what price to buy and sell at?

ML: The Golden State Warriors were bought 10 years ago for $315 million, and they were valued recently at $5.5 billion. You might say roughly 100x net cash flow. Most NBA teams are worth $1.5-$2 billion, and some worth $3-$6 billion.

Q: Is navigating markets or contract negotiations with Giannis Antetokounmpo harder?

ML: Both different and extremely hard! Markets involve looking at macro, micro, trying to decide where to invest. Negotiations with players can be difficult because sometimes people are not making strictly rational decisions. An incumbent team can offer roughly 20% more in the NBA. For Giannis, we could go to 30% more, $70 million. Ultimately, for players, sometimes it is not about the money. They might want to play in LA or with their best friend or win a championship. Personal motivations become a bigger factor. Giannis saw the benefits of being with us, but it was not a slam dunk. Money is a factor, but not always the biggest factor.

Q: What reading do you recommend?

ML: Blink by Malcolm Gladwell, because the book says we always make decisions quickly and subjectively in the blink of an eye, so I might see you and decide if I like you and spend an hour confirming that belief. So, you must do the work to make the right conclusion. Outliers is also good, because it talks about how success is 10,000 hours you must put in, and investing is the same. The more you see and learn, the more you get a feel. Also, Steve Jobs by Walter Isaacson, because it talks about the reality distortion field Jobs creates, because he did not care if you said you could do it or not. He said you could do it, so you have to find a way to do it. Be careful when investing, when people tell you they can do things that seem illogical, like WeWork. Do not suspend disbelief. I ask myself, “What am I missing? Am I making a logical decision? Am I being prejudiced by my view of the situation?”

Q: What do you look at when analyzing the management team of a company?

ML: We want to make sure they really understand the business. Do we share their vision of the business, do we think they can execute on that vision, and can they explain it? The process takes time. You must spend a lot of time to see if the management is what you think it is.

Q: Would you be willing to share some investments that did not go according to plan?

ML: Too many! But why does an investment not work? Your thesis was wrong – what you believed would happen did not. You are going to be wrong sometimes. That is just reality. Your job is to minimize those mistakes. Market may tell you that you are wrong, so ask “Why does the market say we are wrong, but we think we are right?” You must keep asking that question to make sure the thesis holds.

Q: Are there any traditional market signals that you have lost confidence in?

ML: Not really, but I have learned that you do not want to fight the Fed. Just get behind the Fed and you will do well.

Q: Are there any concerns with the federal deficit, or do you believe that it does not matter?

ML: I think it does matter, but I think the market believes it does not matter. When money is easy to borrow, everyone is going to borrow, because you can borrow at 2% and can invest for a larger return. The risk free rate being zero puts a lot of pressure on everyone; not everyone makes 10%. Someone has to be the seller. Always remember why someone sells – they think it is going down. You are buying because you think it is going up. But right now, the Fed is making money very cheap and wants more liquidity in the system.

Q: Do you think private investments will grow faster than public investments for institutional investors?

ML: Institutional investors do not always like mark-to-market accounting, so yes, it will grow exponentially. You pay for that liquidity, and some institutions do not want to see price changes on a day-to-day basis.

Q: What excites you about credit markets in the near and short term?

ML: Finding opportunities that others are not. I love that about this business. The ability to find things, structure deals and try to make money. And it has gotten harder. That has been the challenge for everyone.

Q: What are your expectations coming out of COVID – what returns to normal, what does not, and are you changing your portfolio considering the recovery?

ML: We are changing the portfolio. For example, how much of the airlines should you own? What is happening to hotels? We are taking advantage of some of those things, but you are betting on how quickly things turn around. I do not know if everything turns around at the same speed. For example, our basketball team – we want fans back in the arena, but are you comfortable sitting next to people you have never met? It was never a thought before, and fans would celebrate together, high five, and hug.

Q: Is the NBA investing internationally, like in China? What business opportunities exist outside the US?

ML: Avenue sees lots of opportunities outside the US in special situations. There are not well-developed markets for specialty lending outside the US. For the NBA, there is massive demand for the product. I expect that we will expand internationally in the next 10 years in some way.

Q: How do you compare investing today to the era of the Great Financial Crisis?

ML: Today is easier. After the GFC, you were still worried about the system. Today, you only worry about how quickly we can get back to normal. I am more optimistic now.

Q: Who would you want the Bucks to play in the Finals, and how many games would you want the series to go before they win?

ML: I just want to get there! The Lakers, Clippers – it doesn’t matter, we just want to get there. Our coach would like us to win in 4 straight games, but I’d like it to go to 7th game, down 1, got to make the shot, and hopefully, it goes in and we win by 1 with no time left. If I could write it, that is what I would like, but not to have a heart attack, it is better to win in 4 games.