Blissfully Buying BB Bonds with Greg Obenshain of Verdad Capital

In this episode, we’re stepping away from our ordinary world of futures and options to find out why boring old corporate bonds aren’t all that boring after all. Join our conversation with Greg Obenshain, Partner and Director of Credit at Verdad Advisers, as he and Jeff discuss just what running a high yield bond investments portfolio is like. Greg shares the complexities of accessing and organizing the needed data to run a quantitative model on bonds (think no central exchange nor shared order book, etc.), how he racks ’em and stacks ’em, and why there should always be a fundamental lens on quant outputs at the end of the day. He gives some real-world examples talking about the bonds of Netflix, Crocs, and Oil& Gas companies; and why there’s a sweet spot between BBB and B-rated bonds.

Speaking of ratings, we ask Greg how his custom quant model assigns his own ratings, how and why those differ from the ratings agencies, and why multi-billion firms don’t model this area of the high yield market similarly (he says it’s not sexy enough). We finish the chat touching base on some topical bond/rates areas, such as Evergrande’s potential default, the debt ceiling, yield farming, private credit, private equity’s big debt appetite, and more. You’ll also find some nuggets on duration, stripping out Treasury yields, and what both retail and institutional investors typically get wrong when considering holding bonds in a portfolio. Enjoy the chat!


Find the full episode links for The Derivative below:



Check out the complete Transcript from this weeks podcast below:


Blissfully Buying BB Bonds with Greg Obenshain of Verdad Capital

Jeff Malec  02:16

Hello, we’re digging into the crazy world of credit and business and bonds on this week’s episode. Okay, okay, I lied. It’s not all that crazy. It is bonds after all. But applying a quantum approach to which high yield non investment grade bonds put in a portfolio is crazy interesting, at least to me, and we’ve got one of the pioneers in that space to talk through it with us. Today’s guest is Greg Obenshain, whose career in the credit world has spanned in almost internship at Enron to running a billion dollar book at Apollo group. Now as partner and head of the credit funding for dead cat, so welcome, great. We’re just talking off mine how you grew up in Chicago, briefly.


Greg Obenshain  02:29

Spent two years in Chicago in high school and then went back there for business school to kill.


Jeff Malec  02:33

All right. And so where were you coming from? And then where’d you go to before your brief Chicago stint?


Greg Obenshain  02:38

I lived in I grew up in London for a while for five years. Before I came back to Chicago for two and then went to Dartmouth for undergrad and then moved to down to DC went to Boston and back at Northwestern before coming back out to the east coast.


Jeff Malec  02:54

Night. So you do have a little Midwest twang. It sounds like instead of London, London accent


Greg Obenshain  03:01

I’m the Midwest Midwestern guy you’ll ever meet who grew up in London.


Jeff Malec  03:04

Nice and wait, where’d you grow up in Lincoln Park?


Greg Obenshain  03:07

Yeah, Lincoln Park.


Jeff Malec  03:10

And we were just I went to high school in Latin briefly where a couple of my siblings and some friends went. So shout out to the Romans. You play any sports there,


Greg Obenshain  03:22

ran cross country swam and then played a very embarrassing season of JV basketball.


Jeff Malec  03:29

There you go. That’s like me. I was on the JV golf team as a senior in high school down in Florida. Everyone was too good for that. Same story. Exactly. Is the era of the bulls. Yeah, it’s great, great time to be in Chicago. And so where are you now? That’s the we were Where are you now in Connecticut.



Greg Obenshain  03:51

I’m up in Connecticut. I’m in the northwest corner of Connecticut. And Verdad is actually located at a Boston so go there once a while my wife works part time in New York. So we are remote to both places.


Jeff Malec  04:05

Perfect. And that was in existence pre COVID it’s been a COVID thing.


Greg Obenshain  04:10

That was it started pre COVID. And then COVID made it a lot easier. Yeah. So we were in New York and then and then decided to stay up in Connecticut.


Jeff Malec  04:18

So Northwestern Connecticut. So what do you closest to town of Litchfield. Okay. Um, but like what big city Hartford?


Greg Obenshain  04:27

We’d be west of Hartford. Yeah,


Jeff Malec  04:29

Western. There’s


Greg Obenshain  04:29

another city called Torrington in between and then we’re west of that. There’s really there’s really nothing that close.


Jeff Malec  04:36

That sounds good. You know, Ben, have you on the farm life with I’m North Ben


Greg Obenshain  04:41

hunt. I know where he is. I don’t know him personally, but He’s, uh, he’s down in Westport.


Jeff Malec  04:45

You guys should trade some farming nuts. So little Marcy. Were back to Northwestern Dartmouth undergrad. I tried to get in there and they said no, I was either not smart enough or not good enough at football or both. But how is that I was wanting to go to Dartmouth? I visited lovely town.


Greg Obenshain  05:05

It’s, I tell everybody it’s the best school in the world. And yeah, unabashed about it. Great time. You know, it’s hard to be stressed out when you can look up and see the mountains and the Appalachian trail goes through three main streets. So I loved it. I wrote up their crew and it was I was outdoors every afternoon on the river. Pretty hard. Pretty hard to beat.



Jeff Malec  05:27

Yeah, I hear you. I never knew that Appalachian trail goes is part of it’s on Main Street. Yep, that’s right down Main Street. Can’t be too much longer on the trail once you get to there. Yeah. How much further north? Does it go? Yeah, it


Greg Obenshain  05:38

goes way it goes a ways up into Maine up to Appalachian I’ve never done it, but it ends up in Qatar up in Maine.


Jeff Malec  05:46

Alright, bucket list. I parks that bike parts of it. But uh, like two mile parts of it not anything significant. So how did Verdad come around? Give us the story. So you left college?


Greg Obenshain  06:04

Sure. Yeah, actually went to. And I was a consultant after college. I wasn’t in finance, never, never applied to be a banker. never had any interest in doing investment banking. So the question of how I got into this and then went back to business school, and was actually interested in in energy, and I was the only guy applying to Enron as it blew up, because I had a subsidiary called while it was on and then it became an Enron wind. And three days before I got my offer letter from my internship, it became GE wind energy. So my, my business school internship was under the wind turbines, 100 miles north of LA. And because I’ve wanted to renew back, maybe before, before everybody else, I wanted to do renewable energy, this is very early days, and then ended up going into G’s leadership program out of business school. And as part of that process got into the GE, energy Financial Services Group. And that’s sort of how I launched my finance career I’d actually studied for and passed off three levels, the CFA, during that time, even though I wasn’t technically in finance, I had to wait two years to get the designation. Because I didn’t have the work experience required. But I’d passed all the tests, and then ended up going to a firm’s logic data dinner in New York called Stone Tower capital, which got acquired by Apollo and Apollo, I ran high yield, performing high yield for Apollo for four years. And that was the background


Jeff Malec  07:39

of how big was Apollo at the time and how big a big grown to Oh, it


Greg Obenshain  07:43

was, it was it was very large at the time. And I don’t remember the exact numbers. But well imagine well over a billion of bonds at Apollo. And, and I, I had, you know, I did that for 10 years, a combination of Stone Tower, Apollo, my background is really as a fundamental credit analyst. And I should tell the listeners that I’m now most fully quantitative, so that that shift from almost fully fundamental looking at reading adventures, looking at bonds, and then to a almost purely quantitative approach, at least on the screening. The inkling of the idea came when I was working at Stone Tower at Apollo, but I left Apollo to go chase the dream of building a fully quantitative approach to investing in fixed income, because I thought it was very difficult to do, you need to build your own databases. You know, while everybody in the equity world is used to be able to pull down a bunch of data on a company and see both the stock price and the financials together. That’s virtually impossible to do for bonds, or any individual company, you can pull down the, the credit metrics and the bond price. But to do it over time for every company and do it systematically, you have to build your own database. And so I really set out on a quixotic quest to see request to see if I could do that. I thought I could and I could it took a while it was a little course Farber longer than I thought. And in I was out pitching the idea to many different firms, trying to figure out what iteration of the product I wanted to create when I met Dan at for that advisors. And he had nothing to do with credit, but had a very similar view of the world in a very similar approach. leading with quiet and then doing the fundamental work at the at the Angela sort of a quantum mental approach. And I called him and said, let’s start a sort of bond fund together and go into the for that umbrella and do that. And so that’s what I’ve been doing for the last over two years now.


Jeff Malec  09:51

And so he sought you out or you sought him out or a little bit of both.


Greg Obenshain  09:55

We did not seek each other we met as people said we should talk to him. Other I had, I don’t think either of us thought anything would come up. But it was purely a networking call. And because I thought the same way


Jeff Malec  10:08

why you should always take those calls, right, even though Yeah, because they seem to be something.


Greg Obenshain  10:12

Yeah, no, it was it ended up and you know, and it was a few months later when I finally called him back and sort of said, hang on a second. Sounds like we’re doing sort of the same thing. Let’s do something together. But first, it was just, I thought what he was doing was really interesting. And he thought what I was doing was very interesting.


Jeff Malec  10:27

So a few things to unpack, then we can get more into it. But it’s always strikes me, that’s amazing that you had to build your own database, right? There’s many, will you tell me? Are there many multiples of bond volume over stock volume, especially in these smaller size companies? But the data is just not there. Right. You think with all the bond trading that there is there would be, you know, copious amounts of data?


Greg Obenshain  10:49

Yeah, there’s lots of data. It’s just and Well, I mean, just to give everybody sort of a sense of how this world works, because it’s, it’s really different, right? Just take Netflix, because Netflix has bonds, right? You know, every knows the equity, but they have bonds as they’ve raised a lot of debt to fund the content. And they started in high yield. Right. So they were a high yield issuer. And they were rated in the middle of high yield. So they traded pretty well. The bonds were fairly relatively expensive, but not that expensive, right? They’d have several call it 500 to a billion dollar issues that are outstanding. They’re all bought by institutional investors, for the most part, and those trading million dollar lots, right? So there’s plenty and they might not trade every day. So if you look at a price chart of bonds, based on trades, yeah, there’s a lot of there’s a lot of flatlines in there, goes up and down. Right? It looks a lot different than a stock price chart, because in equities, you have a centralized repository of bids and asks from all the brokers right, so there’s a there’s the bed bit best bid best offer. Okay? So stock prices, even I’m not allowed to change it and trading, you can see the quoted price going up and down by the second bonds, that doesn’t exist, there is no best bid best offer database. And so the only thing you have are traits, right? So you look at historical price data based on traits, or you based on it based on an aggregation of broker quotes. And literally that means you call Morgan Stanley and say, Where are you on this bond? Or they actually send out emails still emails on Bluebird? Right? It’s getting a little better. It’s getting a lot better, actually. But that’s still how this this market trades you’re trying year by million? You mean if you want to think about how this market works, you’re buying million dollar lots on the phone? Like that is the old way of doing it. And slowly we’re getting towards an electronic market, but we still don’t have that centralized?


Jeff Malec  12:54

That’s so good job. Just what are the reasons for that? Is that Is it a moneymaker for Wall Street’s they’re not incentive to kind of centralize it? You know, I don’t want money to just disrupt it. Yeah,


Greg Obenshain  13:07

the cynic. You know, there’s been a lot of people who tried to disrupt it. And I think a huge, huge obstacle is that there is nobody’s mandated that centralized pricing service. But, you know, it’s just, and I think it does benefit a lot of people to keep it the way it is, specifically, people who trade a lot of bonds. And also, it’s very savvy, it actually works honestly, works fine for the big players, right?


Jeff Malec  13:35

In order the high frequency can’t read too large, might write this for them. So


Greg Obenshain  13:40

it actually it works well for some people. So but as a result, you haven’t had the investment in or the, or the there hasn’t been the demand for that sort of quantitative data set. That yet it’s coming. It’s it’s here, net, and I’m saying this, and that’s probably a statement that’s three years old, right? There now is a lot of demand for quantitative evidence on everything. But it’s been very hard to do at high yield. And the dispersion of returns are lower in fixed income. Right? So you’re talking about adding two to 3% alpha, right? Not 10 to 12. And you’re back tests so it doesn’t get people as excited. Right? And I think especially equity quants, you try to come into the fixed income world is pretty, it’s hard. You can’t do as much and the returns are lower. So it’s kept people out. Which is good for me. Yeah, but it’s it’s a it’s a tough, it’s a tough space to penetrate.


Jeff Malec  14:42

And so the folks that Verdad we’re doing similar stuff, but just on the equity side, and you said hey, let’s put this together and see what we can do.


Greg Obenshain  14:50

Yeah. Verdad is its DNA is small cap value, and they’ve done a great job with connotative. Yes, quantitative Yeah, the quantitative but we’re at work, we’re really a quantum mental firms we, we run all that we spent a lot of time building our models, but then we actually look at what we’re buying. So it’s not fully and you can’t in both places where we trade, you can’t just go in and buy everything on the wire, right small cap equity, you do need to actually pay attention to what you’re buying and how you’re buying in moving markets. And the same thing is true in fixed income in high yield. And so specifically, I trade high yield sub investment grade bonds. But at the very top end, so guys like sugar communications, Netflix, think people, people you’ve heard of a very often, crocs has high yield bonds.


Jeff Malec  15:41

I just got in trouble on Twitter the other day, I was like, look at this stock that this thing that hasn’t been cool since 2012. And everyone’s like, What are you talking about? This is the coolest, it’s, it’s back in spades. Oh, my God.


Greg Obenshain  15:53

They’ve done it. They’ve done a great job. They’ve moved, they’ve moved beyond the clog, apparently.


Jeff Malec  15:57

Yeah. Everyone’s like, it’s the physical equivalent of NF T’s like you can put a skin on your shoe and make it go on like, Alright, I still don’t get it. But if they’re making money, I’m happy. So to me, how do you how do you square that of like, the model shoots out Netflix, Netflix, Vol is crazy. Really? Like what what would it take for you to be like, we’re passing on the fundamental side, versus what the model spits out? Yeah.


Greg Obenshain  16:27

So sometimes, it’s just thinking, it’s usually something the model can’t see. Right? You know, there’s many different models, some, some are mental models, summer, several quantitative models, and the quantitative models can see what it can see it can see what the historic numbers are, it can see how those stack up relative to everybody else. And it could do that better than a human every single time. Right? So it can rack and stack companies and do relative value better than I ever could. And we think about an analyst sitting at a chair at one of these big banks looking at relative value on credit, they’ve got five comps that they’re looking at, that are sort of in the same industry. And my models are doing this over 1000, comps. And so there’s, they’re just going to be better at relative value based on numbers that it could observe. What if the company just announced an acquisition, or the company just said, guess what, we’re going to lever up to buy back our stock, and we’re going to be good at seven times leverage? My model can’t see that. Right. So it can see the stock prices going up because they’re about to do a huge dividend. That’s good, usually, right? And it looks like leverage historic leverage is low. So the models like this looks amazing what a great buy. And of course, you read the transcript and realize that that’s probably not what you want to be doing. So that’s a good example of where you need you need to have, you still need the human element. Yeah. And that’s what I spent 10 years doing. So I


Jeff Malec  17:48

said, Go all the way to like, I don’t believe in the business. Where do you draw the line in terms of


Greg Obenshain  17:55

Yeah,I don’t view myself as being I think the numbers tell me more about, you know, my favorite, my favorite set of analytical judgments is the management team and judging the management team. And I’m relatively certain that somebody who spent most of their career on Wall Street has no business, judging how somebody could run a shoe company, for example. The historic numbers tell you how they’ve done if they’ve been there, probably a lot better than your judgment, talking to the management team and making some snap judgment about them. So I’m very dismissive of that, in general, I do think, but where I do think you can really understand what a team is saying is when they describe their strategy, and if they can describe it distinctly, and it fits with what you’re seeing in the numbers, that’s a very good thing. It’s, um, and so you can, you can understand why things are happening when the numbers and the narrative align. But I think where you get into a lot of trouble, and when people tend to get in a lot of troubles with the narrative is really exciting. But the numbers haven’t been backing it up. And so I’m a big fan of reading. One of my favorite things to read, ironically, it’s just a letter to shareholders. I like to read them the trade that the earnings call transcripts, to understand what’s happening, and then you learn something that you put into your models. So, you know, doing fundamental underwriting teaches you how to improve your quantitative models.


Jeff Malec  19:33

Let’s go back and kind of the 30,000 foot view of what the quantitative models are doing, like you said, ranking stacking doing that, but what are they trying to pick up? What’s the universe you start with? What do you end up with?


Greg Obenshain  19:45

Yeah, so there’s about 1000 companies that I look at. There’s actually more companies in debt than there are net equity. And so you have a huge, huge reverse. I tend to look at that. 1000 just really referred To those companies that are either at the bottom end of investment grade and for your, for your, for your listeners, investment grade is GE, IBM, big companies, right, that aren’t going to die very unlikely to go default, anytime in the next five years. Whereas high yield, traditionally called junk bonds, you know, always, always a wall street journal article on high yield about how dangerous it is, really has two components to it the very low end, which is stuff that is probably gonna go bankrupt, and the high end, which is stuff that is just not large enough to be investment grade yet. But generally are pretty good companies


Jeff Malec  20:35

can give examples on both sides, right? Like what some of the junk that you would actually consider junk,


Greg Obenshain  20:41

junk. I mean, a lot of the oil and gas companies even prior to the oil and gas crisis just never converted, made money. I don’t want to say specific names. But there’s very often, you know, these are companies that generally have way I think about as this, if you can, you can look at a company’s return on capital, right? They spend $1, how much do they get back, there are a lot of companies that spend $1 and get 85 cents back, that’s generally a bad thing over time, not sustainable. But there’s also a lot of, that’s the very low end of it, that’s that sort of the guys that something has to change, and something has to get better for them to get out of that predicament, or they need to restructure their debt and reinvest in the business will get acquired something, then there’s the guys in the middle, and they make maybe three or four or maybe two to 3% on their invested capital. And they pay 7% on their bonds. So their cost of capital is above their return on capital. And that’s not a great thing, either, but they can last a lot longer. And again, they’re really tied to the cycle. If things are going well, they’re going to do really well. And if things are going badly, they’re going to do really bad. Right? And then there’s the top end of high yield, where they’re not large enough to be an investment grade, they might be a one product company. crocs is actually a terrific example. crocs is a company that’s executing very well, but is in high yield, because it is is a single product company. And you know, it’s got its had, I will call it the Moody’s report is had very Radek EBIT da. Actually, I don’t see that but they said that’s what I’m quoting them. It’s useful, useful, useful example. Right? So that’s a good example of a company that’s at the higher end of high yield. That has a very good business that’s doing very well, but they have, they aren’t investment grade. Right. So those would be the examples. And, you know, the investing at the very top end of that is really, I say, I think it’s the high it is historically the highest returning part of high yield at all corporate credit. But it’s also got a really nice characteristic for somebody like means that most of those companies put out public financials. Right. So I take those public, it’s good. Now going to your question finding sorry,


Jeff Malec  22:50

yeah. Are they all publicly traded,


Greg Obenshain  22:53

not all of them are publicly traded. So you can have public financials and be a private company. And so the, I take those financials and I take the bond trading levels, I take the equity trading levels. And at the core of what I’m doing is I’m saying, Well, I can take all the financial data and the trend data in the financials, and rack and stack every company and set them up, I can stack them one on top of the other, this one is better than this one, this one’s better than this one, this one’s better this one, the way I actually do it is by assigning a rating to them. That is not an agency rating, which is my rating, right? And then comparing that to where the market actually trades those bonds, right? I can look at a bond and say, Well, this is trading. And there’s some complexities in this, right, because bonds have different maturities, they have different coupon. So you need to fix all that quantitatively. But you can look at a bond and say, it’s trading here in the market. And that implies the market thinks it’s rated like this. But my model actually says it’s much better, or much worse than that. And I want to look at this and I’m lonely. So I look at the stuff that’s much better. And then I’m applying some other filters to try to catch some of the mistakes that happen like deteriorating financials, high, you know, equity getting pummeled, for some reason that I don’t know what’s going on, to try to filter out some of the risks. And that’s and that’s basically what I’m doing. But I’m quantitatively ranking every single bond in the universe, and then looking at word spreads.


Jeff Malec  24:20

And I mean, so you’re coming up with a rating. So my brain automatically goes to like your triple B or double B, but you’re saying more of a score of No,


Greg Obenshain  24:31

you know what in your brain think Greg’s great. Greg’s agency rating is double B. The market seems to be trading at a single B and the agency say it’s triple B and I have all three of those numbers. And then they compare exactly like that.


Jeff Malec  24:45

And then but how does that work out in terms of but maybe the markets pricing it in? You know it or you’re saying no the markets pricing it over here? Yeah, I’m pricing it here would be vice versa, I guess right. It’d be more cheaply priced, then the ratings. The public ratings are higher. It’d be, yeah. But that how does that tie in with the yield and whatnot, right, like so in theory, the yield and the price, and the duration and all the rest are all tied into that puzzle.


Greg Obenshain  25:09

Yeah. So here, here’s, here’s some bond lingo for all your listeners. But out, you look at Yeah, you know, when you one of the thing, one of the tricks to doing this really well is when you go look at a bond that’s got a 4% yield, you say? It’s 4%. Okay, fine. What does that mean, right? Well, you know, the first thing you got to do is strip out what you’d get if you just bought treasuries at the same maturity. And maturity isn’t the right word. It’s actually we call it duration, the average life of the bond, right? Well, so it’s trading at 200, or 300 basis points, or three, which is 3%. over that, and then let’s look at where everything else is trading in that in that range. So we’ll take out the treasuries now we’ve got that pure credit spread, that’s what I’m getting paid for the risk of default, right over time. So I’m getting 3% extra over treasuries to own this thing. Is that enough? Right. And that, and that’s what I’m actually using to compare is that spread, not the yield itself. And the reason I’m using the spread is that the yield will increase as you go out over time. So an eight year bond will have a higher underlying Treasury rate than a four year bond. So that’s what I’m doing. Now, in saying that I’m in credit. This is interesting concept that what well, while on treasuries, right, in government bonds, everybody knows that if rates go up, the bond goes down fine. And rising rates are bad for treasuries. Yes, absolutely. And you buy treasuries, and I’ve written a lot about this, you buy treasuries because they are Nate. Because when inflation expectations fall short, when growth expectations falls short, and both of those expected growth and inflation numbers go down, Treasury rates go down, treasuries go up. And so it’s a beautiful asset class, it just is, I don’t do that I don’t play in that asset class, I played an asset class that is linked to treasuries in some way, because their fixed income instrument, but the primary driver is that credit spread. So when growth expectations go down, that’s also bad for credit spreads, they go up, which is bad for the bond, when interest rates go up, because growth expectations are going up, spreads go down. Right, and actually, the more important part of the pricing drivers, and what I do is I spread, they will, that wins out every time. So if rates go down 50 basis points, Treasury rates, my spread might go up 70, or might go up 75. Right, that’s bad. But if rates go up, 50, and my spray might go down 75. Those are extreme examples. But that’s how that works. And so that’s what I that’s why i strip out the Treasury part, just look at that credit spread, because that’s the primary driver.


Jeff Malec  28:05

And all of that comes back to the odds of this company, defaulting on the bank. Yeah, like, and actually, it’s so funny, because that’s, you know,


Greg Obenshain  28:14

credit, I think, just to have a negative outlook on the world, but I have a very positive outlook on my portfolio, right? It’s by the same token, everybody, you’re getting paid for the probability of default, but I am trying to find companies that are getting better, right, I want those companies that have been paying down their debt going up and in rating, or they’re doing something else that you can’t see as easily, right, they’re doing something like they’re buying more assets, but they’re increasing their assets faster than they’re increasing their debt. Right, because they’re actually really profitable. So they’re, they’re delivering the business, even though the actual quantum of debt isn’t changing, right. And so what I’m playing for, is not I’m, I’m avoiding those things that I think are going to get downgraded and do worse. But I’m also actively trying to find those companies that are getting better, that will get upgraded that upgrade. So this is it’s an almost an equity, like kind of analysis. And here’s the cool thing about it, is if I’m terrified of duration and treasuries, because if rates go up, my bonds go down, I’m really excited about duration in credit spread products, because if I’m it for the product for the ones that are getting better, because if they get better that spread goes down. And if you have a longer bond, that bond goes up more, right. And so that’s how you that’s the world of credit, that you’re really thinking about that credit spread. And so and that’s the way and that’s really what my models are doing. I am targeting companies that are getting better.


Jeff Malec  29:46

Um, which is super interesting is that I always think of it as like high yield, the risk of default, all that jazz, you’re saying I’m just trying to identify good companies that are going to keep growing and the risk of default is rather good. Consider the risk of defaults the same across that whole bucket. No, I’m


Greg Obenshain  30:03

de risking my portfolio. Right? That’s what I’m doing. I’m a stuff I’m taking stuff that’s actually doing really well. Right. So I’m actually taking lower risk. And so it’s great. I think it’s a it’s a way to de risk your portfolio and avoid that default risk for what you’re getting paid for in the first place.


Jeff Malec  30:21

But in theory, they each have some unknown, absolute number of their risk of default, right? Yep. Yeah. And, and so how does this differentiate? You know, doesn’t, Citadel or whomever have a roomful of quants that are analyzing the same stuff? How do you feel you’re differentiating from some of the big shops that have infinitely more computing power and can analyze all this stuff?


Greg Obenshain  30:45

Yeah, there’s been a, there’s really interesting, I think it’s dramatic that that’s, that’s gone on. A lot of people got into a lot of people have credit, hedge funds, long, short credit, right. And the idea there is that it’s really been sold to pension funds, you have a 6040 portfolio, they don’t really want treasuries to do 40% of the portfolio, right? So they’re going to these other products, that promise bond like returns really right bond, like downside bond like risk. And hedge funds on the equity side, were really a solution for that. And then that sort of bled over into the credit, side long, short credit. I don’t, I’m not a huge fan of long short credit, because credit is a positive expected return asset over time, that already has low draw downs, if done well. And so I’m not sure what you gain other than increased trading costs, which then, but also allows you to do increased fees and gives you access to the prime brokers at the bank. So there’s, there’s a lot of other benefits, right, because you’re really profitable with the banks. But, you know, I do long only credit. And the way I take down the downside is by focusing on that upper end of pilot, right, and so I’m very, very different. I’m closer to a traditional long only manager who bid you who also have things like this as well. But I mean, I would like to think I do it better. I’m holy, and when I’m wholly quantitative, be focused. And we’re very, and we’re very unique in that we focus, we’ve taken the universe, and shrunk it down to that part of the corporate credit universe that really does well. So it’s a very focused strategy. So reasonable people can’t do it. And then there’s other that I’m sure there are people out there who do versions of this?


Jeff Malec  32:37

Well, is that easy answer is it’s not a big enough opportunity for some of the largest shops.


Greg Obenshain  32:44

Yeah, yeah, it’s not a big enough opportunity. And also, it’s not sexy. Right. So yeah, the easiest way to raise money is to promise high yields. And the easiest way to promise why yields just to show high yields, and that’s lower quality credit, that’s private credit. That’s all these other things and, and go into that. But the truth of fixed income investing is that your return increases with your yield the coupon on your bond, up until a point. So if you go down in quality, you generally make more money in triple B bonds, then the grade above that, which is a bonds, and you generally make more money in double B bonds than you make in triple B bonds, which is the great above double B. And you generally make less money and single B bonds, which yield more than the double B bonds. Because the risk catches up with you, right, you get your downgrade, bad event happening, things happen started to happen in a single beat territory, and really get bad as you enter the sort of the lower end of high yield. And so you see, and I’ve put these, I’ve written about this a lot. If you just do a buy and hold strategy, and you go and you just buy a bunch of W’s you buy a bunch of single B’s, and you buy a bunch of triple C’s, right? Your worst performance is actually going to be that that single B category, where you started, you got paid a little bit more and then took on a whole lot more risk than it was and so you didn’t get paid as much like your face yield was really good. So you went out to market to people, you were paying you were offering seven or 8%, not five or six. Right. And so and that’s and that’s the hard thing. It’s hard to see. It’s hard to sell. It’s hard to do. But it is the winning strategy is to get a lot less risk.


Jeff Malec  34:24

We had a blog post once called bud for the yield, right? It was like the MLPs the yield, but the yield, like yeah, they’re down 72% this year, but that that 10% yield is really saving you. Yeah. So but isn’t that wouldn’t that be self correcting? Right? Like anyone can run those stats or see that, right? That’s not part of your unique data set, right? That’s just out there for everyone to see or no,


Greg Obenshain  34:47

yeah, it is less out there for people to see the new thing I’m actually going and you have to have access. So now on Friday, you’ll actually run this data yourself going Fred, you can pull the VA double B index B index into See, as you can see the results. And so this is, you know, don’t take my word for it, you can go run this, it’s not what you see in marketing materials, it I think, you know, it’s interesting things that work because they’re a little bit counterintuitive. So just take small cap value, which we do and the other part of our business, right? You’re, the mechanism of action for value is that you’re buying companies, and they actually get worse over time. But they had such low multiples, that their multiples actually did better. And actually, you had a very, you had a very good return. So they did less badly than you would expect, that’s a very difficult thing to invest in. That’s actually why doing the quantitative. You know, in my world, it’s by the thing that’s promising to pay you less, right, and it’s just a really hard or intuitive. And if you are an analyst at a credit shop, you do not make your career by going in and pounding the table on WB bonds, right? You make your career by going in and pounding the table on the thing. That’s what that’s trading at 13%. Right. And if that thing works, it’s going, it’s not only you’re getting the 13%, but the yield tightening into 7%. And you’re getting a three, you’re getting 15% on top of your coupon, right? So you’re making 20, something 30% on that bond. That’s how you make your career. And you get those exist, that is absolutely a strategy that exists and it can work. The problem is that it comes also with a 30% negative return. Right? And so you get both of those, every base rate of success is you better be Yeah, you’re starting off with a losing base rate. And so that’s what you’re starting off with a higher yield, that’s much easier to sell. So I think that that is sort of the, the world we live in. And so the way that we view fixed income is to do it right? You got to think about fixed incomes main advantage, its main advantage is that it’s got a no turn stream, and it’s a contract, they have to pay you back, right. So you don’t go to fixed income and try to make equity returns. That’s not its purpose, you go to equity to try to make a group, you don’t go to fixed income to protect yourself from inflation. It’s not its job, it’s not what it does. You go to commodities, or you go to high quality equities, you go somewhere else, to protect yourself from inflation, you go to fixed income, because in that bucket of safe money that you have, it provides you a better return with a better drawdown structure. And so when you think about fixed income, its highest and best use is as a almost as a cash alternative. And it’s not much riskier than cash. But it’s your safe bucket, right and your safer bucket, it’s the stuff that you want to kind of not draw down a lot you want to feel good about. So you can reallocate out of it in bad times, or allocate into it when things are really good. And you’re just a little bit nervous. But that’s what it does it. I mean, listen, if you buy a bond that doesn’t default, even if it goes up and down, it’s still paying and same amount at the end at the farmers coupon. Right. That’s your only game. And so that’s how we view fixed income, you have to use it to its highest and best use, which is as a an income generator that actually pays you back and you don’t want to do is go and all of a sudden Add salt pointers that you’re going to not get paid back.


Jeff Malec  38:19

And that’s interesting, because I don’t think most people think of high yield as safe. And we might even get into trouble for saying it on here. But compliance people it’s not safe


Greg Obenshain  38:30

It is, it has a ton of risk. Let’s be clear.


Jeff Malec  38:33

Yeah. But you’re saying it’s structurally right? It’s different structurally. So you should treat it as such, instead of most people are perhaps treating I yield as equity replacement. Right, you know, treated more as bond replacement.


Greg Obenshain  38:47

It’s really hard to look at, say we got a Crocs, right. You can buy the Crocs, equity, or you can buy their bonds, and I will look at is incorrect is just a wonderful example to use on this right. And by the way, these bonds on forward, I’m talking about crocs, and the bonds are 144. A, which means that retail investors can’t buy them, which is again, really the frustrating thing about the debt market. So because about what I’m about to tell you. So if you look at crushing the market cap is 9.5 billion, and there’s 745 million of that upset, combats. Are you taking more risk in the equity? This is very clear, taking more risk in the equity, right, your valuation sampled by billion versus valuing the company at 745 million, right? Yeah. So that’s what we’re talking about. Now, that’s an extreme example, most cases, the stuff that I’m investing in is about three times the enterprise value is three times the level of the debt roughly up to two to three times, so two to three times the level of debt so that people wonderful to think about what it means to be in high at the top and high yield. It’s that if you’re at the bottom of a high end, and high yield, that’s much closer to one 1.5 1.75. So that gives you a relative sense for


Jeff Malec  39:58

Investors. So an investment grade is…


Greg Obenshain  40:01

Yeah, I mean, let’s, I’m trying to think of a bond right now. But um, it Yeah, it’s, it’s probably gonna be three or four, it’s gonna be very, very high crocks is just because of scale, because it’s smaller, it’s not in the best work and other reasons. So the way I think that that’s a better way to think, think about it. And so when you think about it, when I say it, it’s by its primary advantages, it’s going to get paid before the equity. So you own the company before the equity does. And they have to pay your coupon. And they have to pay you back. Right? That’s, that’s that super.


Jeff Malec  40:46

We mentioned the oil and gas companies were talking, we mentioned Netflix, to me, they have two different types of business, right? The oil and gas need tons of capital, tons of equipment, they got to put all that to work, and then they’re trying to get that small return. Netflix could add 50 million subscribers without any additional capital. They might be a bad example, because they’re spending billions on the content. But right you have these new world companies that have subscription services, and they can just add users without having to build a factory or build capital. Right. So do you find yourself moving more towards those types of companies that Yeah, capital need?


Greg Obenshain  41:21

Yes. I mean, to be clear, Netflix is a huge capital consumer. Yeah. And I care about how a company consumes capital, whether it’s through debt or the equity raises, right. To me, it’s actually I care about the business itself. Right. So one of the things I I do is to look at just the total dollars in the door, where did they get money they got from sales last year, they got it from equity, they got it from a loan they got I don’t care where they got it. Right. But that’s the pool. That’s what they got. And then how did it end? And what did they What did they do with that the next year. And I’m actually unlike most debt, guys, if they grew sales faster than they took on capital, right, because they actually reinvested in the business. Amazon’s a great example, this Netflix is actually a great example of this, they grew their top line faster than they grew their assets, right? It’s a good thing. Because sales and gross profit are the raw material that makes profit, right? That makes net profit. If you grow those, and you have as there’s some reasonable assumption that you can actually then convert that eventually into profit. That’s okay. You the management can make that decision. That’s a very profitable decision. So I do look at that. I think there are some oil and gas companies that actually do that very well, and did that very well. Prior to the downturn, now, they got hit by the commodity prices, but then go bankrupt. They were very good stewards of capital. There’s a few there, there are few and far between, but I owned a few of those in 2014 15. And they did fine. And you can see it in the numbers before 2014 15, because they just had very high returns on invested capital. That’s not the only in oil gas, it happens to be very good metric. They also when you when dug into their financials in the footnotes, they actually told you there’s the last footnote in oil gas financials is actually the one you care about most well throw away the whole other thing is look at the last footnote they talk. It’s actually the defining development cost for oil and gas. And they go through what they did prepare oil and you can actually get a really good sense of, of where if they’re making money or not. So yeah, a little indifferent to the new economy and old economy, I care much more about how much money they’re putting in and how much I got. Now it happens. A lot of the new economy companies are doing very well. Right. But they’re still spending a lot this idea that there’s not capital, and it’s not called capital investment, they’re still investing a ton in marketing in making content for Netflix. Netflix for a long time, like it was outspending its growth. I mean, it is so yeah, I don’t think I


Jeff Malec  43:51

Think what, yeah


Greg Obenshain  43:52

I don’t really I don’t think it’s I actually I don’t get too tied up. And I don’t get too tied up in these debates of what are your assets versus you know, I tend to, I tend to strip it down to cash in cash out. And that’s the cleanest way you can get a look at a company over time. And what you find when you do that, that’s very fixed income background thing to do, right. But that’s the way when your entire career because I actually remember I didn’t start I’ve looked across the high yield spectrum my entire career as a fundamental analyst, I looked at stuff that went bankrupt, I look at stuff that was bankrupt. So I have a much broader and the way you spot the business that was failing was a cash in cash out. And that was ultimately the test. And that’s why when they say fixed income outsiders catch these things before equity analyst is because they are looking at the narrative necessarily because they don’t they don’t benefit from the narrative. They don’t benefit from the growth. They’d benefit from cash in cash out and if they’re looking at a company and saying, okay, they’ve got these growth projections, but look at the amount of capital that’s going to take they’re going to take that For me, no.


Jeff Malec  45:01

No thanks. Yeah. Which is always the narrative of like, watch the bonds the bond guys know best, which seems to be not Oh, yeah. Right. That seemed to be debunked over the last year. But um, yeah. And do you ever consider Are there any, like interest rate hedges or hedges with the equity in the company? You know, no,


Greg Obenshain  45:22

I don’t do a lot of that, I think. So we run as a firm. When we, you know, hedge, we don’t hedge we diversify, right, we go into different assets to do we have a multi strike fund that has commodities for inflation, that has growth equities for, you know, kind of risk off periods, it has small value for risk. All right, we do that. So we allocate, we it’s, we allocate across asset classes, but it’s, it’s a, it’s an offensive strategy, right? I think, reflects, it’s, it’s to go and try to go where the returns will be the best. In within this particular my strategy. I’m very pure, fixed, you know, I am making money by delivering coupon or an improvement in credit quality. And that’s, that is what I do pure and simple, everyday.


Jeff Malec  46:18

And not, you didn’t say, return a principal at the end, right, just coupon and upgrade. And then usually out by


Greg Obenshain  46:25

That I’m usually I’m usually out, I tend to one of the frustrating hands-on manager manages the company’s keep paying me back. So I have a great investment. And then they’ll pay me back, they’ll call the bond, which is good, because they usually call it above where I own it. But you know, it’s our tender for it, technically. But I do have this frustrating thing that equity guys don’t have, which is my bonds go away. So I have to find some find something else I’m really excited about. So, but yeah, that’s it. I mean, and yes, I do get paid at the end, but very often, what actually,


Jeff Malec  47:00

what actually ended up happening is the bonds fall down my list over time. And I would say that my primary function is to buy from the top of my list. And then to the extent I need to clear the room at the top of the list, I’ll sell stuff that’s gone to the very bottom. But otherwise, I’ll just hold it over time, because holding bonds is a great thing to do. Yeah, you’re they literally pay you to hold them, they pay me to hold it. And it seems like maybe because you didn’t come from that client background, right, that you would have, if you were pure client came out of some financial engineering program, it seems like you would have gone directly into the long-short, right, like sell those bottom half in your rankings by the top half. Yeah, you’re sort of netting out the credit risk and everything in our Yeah,


Greg Obenshain  47:43

yeah. I mean, actually, so. Yeah. Yes, actually, you know, you know, in a lot of quantitative strategies, the alpha is driven by the, by the short side, right. It’s, it’s, and so I’m just not owning it. Right, which is not, you know, and, but it my general, even when I returned to art, I think, first of all, it’s very illiquid, it’s difficult to shorten credit, there’s mechanical issues with it. I also just think it’s a, it’s once you add on, there’s the cost of shortening, it’s not a particularly attractive strategy, in my opinion, and then just plenty of people who can disagree me and probably do it really well. But I, I think their life is too short, it’s a lot easier to get paid to own good companies, and, you know, for what I’m trying to achieve, for my investors in this fund. Right. It’s not something I need to do. And so but, you know, I think it’s, um, I probably would have gone to that, I probably would have been misled, or maybe focused on a lot of things that I don’t think are that important. Like, one of the easiest strategies is looking at bonds within a company and just picking the bond that’s cheapest within the company, right? Cuz you’re getting paid a little extra for the same risk. You got to trade a lot to do that. liquidity is out there. My view of the world is no focus on finding those companies are just getting better over time from a credit perspective doesn’t mean they actually necessarily have to get much better for that respective branches a little bit different than equity. From accredited, they’re just getting better over time. And one of the best ways to do that is just by any part of the company, any part of the capital structure in that company, the debt capital structure.




Jeff Malec  49:32

What that’s interesting, though, so in your universe that goes into the top of the model is it each company’s individual bonds or just the company,


Greg Obenshain  49:39

It is each company’s individual bonds, and we do also model and some of our machine learning, we might live at a company level just to make the data easier, and the results are similar. But typically, it almost always the bonds cluster. So if the company’s cheap, all the bunch are cheap. You rarely get you might get one or two bonds that are anomalous, and certainly those ones are I mean, I do effectively choose bonds because there are some that come further up my list than others. But I mean, it’s number like there’s 1000 bonds, there’ll be number 5459 and 62. Right. And they’ll be they’ll be right in the same range.


Jeff Malec  50:16

Yeah. Um, and then let’s talk for a minute on. Right. I don’t even know where high yield spreads are. But they’re I thought and near record lows. Right? tight, very tight. We call it tight. Yes. So near record lows on high yield, we’re at the zero bound on seemingly all treasuries around the world. government bonds, like how do you? Tons of people are out there? I’ve mentioned a few times on this panel like, right, it’s the cliche is a return free risk. So right, how do you approach the bonds overall at the zero bound? Or at these super tight credit spreads?


Greg Obenshain  50:51

Yeah. So I think the answer is, you’re certainly not going down to the risk, right? I mean, I think and now you’re at tights. So we’ve looked a lot at this, right, we’re in an environment right now, which is typically associated with, you know, tight spreads usually means pretty decent growth. A, if inflation is going to happen, it typically happens when starts when spreads are tight, right? Because the economy is actually inflation tends to happen when the economy is also doing really well. And so, you know, if you’re in a, you’re in an environment where spreads can’t go any tighter, I think some people sort of say, well, then why bother with high yield? Right? And I actually think that’s sort of the if you think about what you’re trying to achieve. And what I just talked about, that might be the time that high yield is what I do is the most your investment is the most more attractive, right? And I’ll tell you why. And if the answer is, don’t we say don’t shoot the messenger, right? spreads are telling you there’s a lot not a lot of return in the in the market overall, right? It’s not just high yield does not exist in isolation. You don’t have stocks at PE ease of five, and spreads at record types. Now you have stocks and peas of five and spreads at record wise, they’re really attractive, right? Then you have stocks at Pease of 30. And spreads are really tight, right? That’s how the world works. Everything is correlated, you don’t get environments where spreads are really wide. And stocks are super expensive. At the same time, you don’t get environments where stocks are super cheap, and, and bonds are really expensive. Everything is correlated. And so what you want to do is if you’re if you’re thinking about preservation of capital or think about returns to the cycle, you might want to take some risk off. I personally think that higher yield call do an investment grade, do it high quality, high heeled, do whatever you want. Taking contractual returns in times of high valuations is not is not a bad thing. You might still take losses, but they’re gonna look a lot better than the losses you’re going to take and something that’s high flying. And so I think what springs are telling me right now is that expected returns overall are low. But that is what they are telling you. And you have to think about it in that in that way. But I will tell you, this is it’s I’d much rather be investing with sprinter five or 600. make more money. So they are they are low.


Jeff Malec  53:18

And how do you square that with like the bottom? This is where we’re saying the bond market has kind of been wrong, right? Because they’re saying this is a low return environment yet. Yeah. Getting 50 60% returns owning the equity side. So


Greg Obenshain  53:31

yeah, wow. Yeah. And which has been incredible. Right? The bonds were totally right. In the beginning. Yeah. And then and then there’s just been this this huge run. I think we’re in you know, we’re in an environment where valuations across of everything are very high. And whether I don’t have an opinion on which way it goes? Yeah. I mean, I certainly I find that it’s easier to sort of stick to your, your knitting on that. And I think, but I think when you look at the market environment right now, and you looking at people are saying, we don’t we have no is it? Is it sort of inflationary crack up? Is it a deflationary boom? I don’t know. I actually, I don’t have an opinion. I think find that difficult. But I think that’s when I say, you know, you have buckets to do different things, right? This is not your inflationary bucket. This is not what this does. Right. This is not your growth bucket. It’s not what it does. This is your protect your assets bucket. And so I think if you’re when you’re what I do in this, that’s what I focus on, protect them or generate a yield or that generate a yield, but it’s one of the say, Yeah, but it’s a it’s a contractual return asset. All right. So with Yeah, so that’s what it does. It doesn’t pay the nature of what it does doesn’t change based on where the spreads are. It does change your expected returns.


Jeff Malec  55:08

Got it. Right. And then is that so valuations? Why is that spread is representing that even in the bonds? People are reaching for you right there. They’re driving the price of those bonds up yields down. Yeah, that’s good. any part of that company they want? So that’s, it’s not as clear that there’s a ADP in the bonds. Right? I mean, maybe clear to you. But from looking from afar, it’s hard to see that.


Greg Obenshain  55:31

Yeah. And the high yield spreads are really excellent way to look at the way you think about high yield spreads his risk tolerance and in the market, how much risk are people willing to take? Right when spreads all other not demanding a lot of risk compensation for taking risk? So then I’ve considered taking it that’s what it’s


Jeff Malec  55:55

Got any thoughts on what’s going on with Evergrande? We’re recording on the 21st. here yesterday, big sell off the market kind of bounced back, but I just had proof that in China, at least, like the high yield and the reach for risk got a little out of hand. that’s a


Greg Obenshain  56:12

That’s a real estate. I’m going to I’m going to spare everybody my thoughts. gurjit ated. from Twitter threads on? Yeah, I don’t know. I don’t really, it’s not my area of expertise. It is it is real estate, though. I mean, remember that it’s you could talk about how you have it, that is fundamentally a real estate issue. And we’ve seen Yeah, that’s, that’s it? That’s a different kind of bubble that I usually deal with.


Jeff Malec  56:37

Yeah. Which is interesting, right? If you have high yield on top of like, different, right, we talked about oil and gas, high yield on top of real estate, high yield on top of a commodity play. So how do you view those different things of what am I getting with the business? And what additional risks are there in the


Greg Obenshain  56:54

Yeah, I mean, commodities, or I should have my background, because I started off energy. And so I, you know, deeply familiar with the cyclicality of commodities. And yeah, there is more risk. Investing in in those bonds. Generally, what you see is those kinds of business carried lower leverage, right, they carry less debt because of the cyclicality, and the market won’t give it to them. When the market gives cyclical businesses, lots of leverage, you can get issues like that, but sometimes it’s not. So but yeah, it’s certainly something that I do. It’s very interesting. It’s very hard to model. Because mine is so different. And it’s so episodic.


Jeff Malec  57:39

Right? And then sort of tied in there. I guess that with real estate, but so tons of capital available for these huge private equity firms that plow it back in add leverage? Yep. To the firm’s they’re doing spice them up resell them. Any feelings on that? Is that getting published? Do you do care? Yeah. And those private companies?


Greg Obenshain  58:00

Yeah, we’ve written a lot about this. And so what’s really interesting is that if you want to talk about opaque markets, private credit and private equity are very opaque. Yeah. The debt trades among, you know, certainly it’s not a retail product. And you can see what I do in high-yield bonds. And by the way, my background is this private practice is leveraged loans as well. So I used to in my you know, as an analyst, I fed loans into collateralized loan obligations, okay, so I know this world very, very well. They could be great deals. But there’s no universal database of private loan financial information, we don’t know what it looks like. Now, the CLO structure with a lot of the more, the lower, I would call them lower-risk loans are but it’s actually a very strong structure. I’m not one of these people out, pounding the drum that’s going to blow up. I think it’s actually a very well-structured industry, with analysts looking at the credit and doing real work.


Jeff Malec  59:03

And you’re saying there, I’m loaning my neighborhood private equity firm, you know, $5 million to go buy this business.


Greg Obenshain  59:10

I’ve actually analyzed the business yet, and I’m putting taking that loan and putting it into a structure product that I’ve been selling on to insurance companies, it’s not worth going into the details of that. But there’s real work real and this is not these are not ninja loans to, you know, unworthy borrowers in the mortgage crisis, right. These are this is this is people believe they’re going to get their money back. I think private but I think like any competitive business, and this is especially true of private credit, where they’ve started to go out and do loans directly to the private equity companies and hold the loans or they’re practically over loans themselves. It you know, there is competitive business, right, your, your 10 towards taking too much risk or a little too little compensation. And by the way, private equity is a very competitive business and you’re going to tend towards overpaying and putting too much leverage on The deal to win the deal is a very diverse set of investors in private equity. It’s a very diverse lesson, a diverse set of investors in private credit. So I don’t want to be out there painting the entire both industries to boy brush, but I would say that I think they’re both very competitive with, you know, and you can see where leverage would get too high and pricing would get too low. Now, how does that play out over time? If you’re going to trouble? You know, these are private funds that might be 10 year funds, right. So it just plays out in lower return.


Jeff Malec  1:00:38

Right, maybe Wash U, which was on Twitter yesterday with a 65%. year over year return on their endowment only makes 45%.


Greg Obenshain  1:00:46

Right. Right. So why don’t think I don’t think the returns in the private creditors 65% is very poorly. But


Jeff Malec  1:00:54

Yeah, their whole endowment. Yeah. But yeah. Sorry. Go ahead.


Greg Obenshain  1:01:00

No. And so I think I think that that is that is a very difficult to track part of the market right now, with a lot of competition. And there’s seems to be a magical demand for private credit that didn’t exist one a few years ago. And I think it’s a product that very much is in vogue. And what’s really interesting about allocators, right, is that their list of where they’ll go invest in sort of private equity, hedge fund, and then for our credit allocation, private credit, right? There’s no, there’s no public bonds, there’s no treasure, right? And so you got to look on the mandates page on blueberry has a mandate page to look at it. And there’s literally not a click box for normal credit. Right, that doesn’t exist. It’s just private credit, or distressed or distressed. And so I find that I’m really telling.


Jeff Malec  1:01:52

Let’s just quickly define private credit for the listeners. So private credit,


Greg Obenshain  1:01:59

credit, yeah. Yeah, private credit is, let’s say, I am a large lender, right. I’m a private lender. I’ll do like air Aires is I decided work in Arizona to use Aries because Aries is a good example. Somebody’s done this for a long time.


Jeff Malec  1:02:20

Label guy he works there. He might listen to this episode a dog.



Greg Obenshain  1:02:24

Yeah, so. So Aries, who has done middle market and private lending for many, many years, right? will go out and you are a private business. That’s not public. you’d run a chain of physical therapy shops, right? And you want to take out a loan. At two times, EBIT dollar, five times, EBIT, whatever it is you would you could go to a bank or you go to these private lenders, and the private lenders will lend you the money, but actually just act in the same way that a bank would. Now, you’re a private equity firm now, right? And you do buyouts and you want ease of clothes and ease of transaction, right? So you don’t want to go to a bank, and then it’s going to sell it onto a bunch of people, right? You have to go through the whole roadshow and advertise your deal. Whatever it is, you go to a big private lender has who can write $100 million loan, you can go to 100 million, you can get a you know, a $200 million $500 million loan from one place and close it. That’s sort of the promise of private. Yeah, on a Sunday night. On a Sunday night.


Jeff Malec  1:03:31

I did a deal on a Sunday night, myself. And then I think Aries is actually owned by a, like Toronto teachers pension or something. Right. So it’s actually like an investor loaning their own money.


Greg Obenshain  1:03:41

Yeah. So it’s, and by the way, a lot of these private lenders are owned by private equity now. Yeah, it’s a it’s a whole ecosystem.


Jeff Malec  1:03:49

And, yeah, just so not to be confused. For a second. I was thinking peer to peer credit. That’s a whole nother ball of wax a whole other ball of wax. What thoughts on that?


Greg Obenshain  1:03:58

I have no, I have no thoughts on peer to peer and I haven’t really dug into it as much. I think it’s difficult. And, but I know I I’m sort of all for innovation in the space. So


Jeff Malec  1:04:10

yeah, that seems like a perfect place for right. It’s the same thing. It’s companies and you get maybe individuals or whatnot. Yeah, but


Greg Obenshain  1:04:16

companies, I mean, it’s actually a little different because people don’t tend to have audited financials.


Jeff Malec  1:04:21

But yeah, track records. Yeah. Or, or priced past transactions. Right. Correct. Um, and I’ll keep going with my two more overall bond market. This one’s not bond market, but yield farming on crypto. Any ideas on that or thought?


Greg Obenshain  1:04:36

You know, I would just see, I’ve puzzled over some of the articles about it. Just out of interest, right? Because anytime I see the general rule of thumb is that if treasuries are at 1% and high yields at four or 5%, right, and somebody’s offering you 9% or 10%, something’s different something. I’m dead safe. Shouldn’t spread, and there has to be either of some of these are like 60%, you stake with pull this over here and annualize. Right? So that’s, I mean, I look at that. And I think equity risk, just from a pure numbers standpoint, right. So, counterparty risk and counterparty risk or something, there’s something in there that would make now, people make fortunes by identifying these arbitrage, right? Where they say, okay, actually, it isn’t as risky as 9% would imply, and therefore, it’s great. So I don’t I The answer is I don’t know. But my, my risk senses go up when I see a nine to 10%.


Jeff Malec  1:05:38

You’re not throwing a bunch of it into the fun regardless. And then lastly, the debt ceiling. Any thoughts on that? Show?


Greg Obenshain  1:05:46

You know, I have a very strong Well, I tend to believe that one of the big investors mistakes is to conflate political headlines with investment returns. And that includes elections and things like that. And I tend to just stay away. I did tend to not a pine on that at all. So I The answer is I don’t know. I’m giving you very boring answers here. Sorry.


Jeff Malec  1:06:09

Yeah. Well, in theory, right, it could make treasuries go out for something. But it’s like when it happens, I’ll deal with it if it happens. Yeah. I’ll react. Yeah, it seems like political theater mostly. And then I just wanted to ask, like, generally, what are most, where we’re saying most retail can’t buy bonds. But what most normal investors get wrong about bonds. And then what did most institutional investors get wrong about bonds?


Greg Obenshain  1:06:35

Yeah, I mean, I think I, I’ll start with sort of retail investors about bonds is that they, you know, there’s a difference between treasuries and corporate fixed income, or fixed income, and that includes anything but Muni is in that bucket, and somewhat, and then I put, um, you know, structured credit, I’d put BDC up and all this, anything that is tied to a riskier asset is something that you should think about as how much risk you know, you’re doing first and foremost about the risk you’re taking in that asset and whether you’re gonna get paid back, treasuries are very different. And then they act actually move opposite of them with every asset. And so that needs to be thought about differently in your portfolio treasuries act have historically acted as a very good counterbalance your portfolio in a recession. That is what they do really well, that is their purpose. If you’re going to own treasuries in your portfolio, that’s what they do. Right? credit, non Treasury stuff, all the other debt, right, is really about having something that’s not as 10 hasn’t historically had as high drawdowns or a lot money losses as equity. Right, that’s contractual. So you’re probably going to get paid, you’re very likely to get paid what you’re promised. And yeah, and it’s and so, especially for investment grade, right, and not necessarily for something lower rated. And so where you’re trying to earn a little bit of extra money in the money that you probably would didn’t want to put into the riskier assets anyway. So what I’d say is the mistake that investors make is trying to make high returns in something that should be, you know, a, a more defensive asset, if that’s why you’re using it that way. So what institutional investors get wrong, I think, is they’ve overlooked the beauty of treasuries and they’ve overlooked the beauty of corporate credit at times in favor of the shiny new toy of private credit and of structure it’s actually pretty good but the know in favor of other things and they’ve tried to run away from doing the boring stuff, right in favor of you know, the rocket sciences.


Jeff Malec  1:08:58

Stewing long short credit funds, right? That’s not even a checkbox on the Bloomberg come up.


Greg Obenshain  1:09:02

Right? Right. So that I think that’s the mistake is that you don’t maybe don’t even waste your time. You know, do something boring and then move on and spend all your time on the on the risky stuff. I love it.


Jeff Malec  1:09:20

Any other final thoughts before we go into your some of your favorites to end it up? No, thank you. This has been really fun. Yeah, yeah. So my first favorite, favorite bond guru.


Greg Obenshain  1:09:34

I’m gonna forget her name, and I should have looked it up for him before I got on there’s, there’s Well, I mean, I do I do like God like I do like listening to him just because he’s, he’s controversial. And he also has opinions on everything. And I like the new people have opinions on everything, even if they’re, yeah, even if they’re wrong.


Jeff Malec  1:09:51

Was that good luck? You said?


Greg Obenshain  1:09:53

Good luck. Good luck. Yeah. Good luck. Yeah. And then there’s one minute Oh, I’m gonna forget her name. Give me a second and I’ll tell you I’ll circle back at the end of the answer you know


Jeff Malec  1:10:05

you weren’t going to reach all the way back to Bill Gross I only know to go gross and good luck sir. Yeah. best book on credit is it the pink anyone that I still haven’t read that sitting here staring at me with like it’s


Greg Obenshain  1:10:20

expected returns. He’s AQR guy. He wrote a book called expected returns has one of the best credit sections in it. I think he nailed most of the key themes and credit there it’s a big tome it’s more of a reference book but that is an excellent resource for equity too by the way it’s mostly about something mostly about bonds at all but they the bond part is excellent


Jeff Malec  1:10:39

Nice put that a look that one up favorite I was got usually we have someone in New York or London so it’s gonna ask your favorite restaurant but in Lynchburg. What’s the name of your town again?



Greg Obenshain  1:10:52

I’m gonna I’m gonna go to New York. I’m gonna go out 100 and 20th Street and think it’s I guess Amsterdam Misawa Ethiopian scoring a


Jeff Malec  1:11:01

South Ethiopian even eat with your hands. Yeah. Nice. We had a good one over here in Chicago on wall street like an old town over there. I’m so favorite Chicago bar back when you were around these? right where you are was at the Roscoe pub. Right, love going up there. I know this village Tap. Tap.


Greg Obenshain  1:11:17

It was a village tap. That’s it. Yeah. Got it.


Jeff Malec  1:11:27

And were you a Northwestern fan? Or Dartmouth football or what did you get converted?


Greg Obenshain  1:11:32

Yeah, I’ve never I’ve never been a big sports guy. So I played I didn’t watch


Jeff Malec  1:11:38

all right, not you’re not missing much with Northwestern. And then all our guests as favorite Star Wars character.


Greg Obenshain  1:11:50

You know, I should have known this before I came on and I forgot to do it. But man, I would have to say I mean, I have to go to a walks I’m sorry.


Jeff Malec  1:12:01

That he walks All right. I love it. I used to know that chief guy’s name. It’ll come to me in a minute. But um, yeah, all of them collectively. That’s not going to go over with the with the heavy fans here. But I like Yeah. People hate my deep darkest memories. So. Alright, well, it’s been fun, Greg, thanks so much. And best of luck there in western Connecticut will look you up if I’m ever that area. Which seems unlikely. But maybe if I’m passing through.


Greg Obenshain  1:12:32

I really don’t really pass through here for that. Yeah.


Jeff Malec  1:12:36

Kind of Saratoga ish. kind of close to that.


Greg Obenshain  1:12:39

No, no, no, I’m Salford Brown, whatever, almost up in Western Mass. Yeah. I’m up in the, like Saulsbury areas up here. Much better venue listeners know where those places are.



Jeff Malec  1:12:53

All right, well, I’ll do a road trip visit Ben on his farm and then you up north there. Great. Alright Greg, great talking to you.


Greg Obenshain  1:13:01

Thank you very much.



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