In this episode, Jeff Malec talks with Adrian Keevil of Plustick Partners about his path from corporate finance and academic research to investing, and how his work on stakeholder relationships informs the firm’s approach. Keevil explains Plustick’s old-fashioned partnership philosophy and its focus on distressed, event-driven, and special-situations investing, from overlooked assets and misunderstood businesses to shorting unsecured bonds. He also shares the personal and professional experiences behind his perspective, including his family’s history in market trading and lessons from studying how real businesses operate. The conversation explores portfolio construction, credit markets and private credit, the potential economic effects of AI, and the ethical questions AI raises in business and education. It wraps up with Keevil’s Charlottesville restaurant recommendations.  – SEND IT!

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From the Episode:

NEW WHITEPAPER: Beat the Market with Less Volatility

PODCAST: Zigs, Zags, and Finding Micro Cap Winners with Ian Cassel

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Check out the complete Transcript from this week’s podcast below:

Running an “Old Fashioned” Hedge Fund with Adrian Keevil of Plustick Partners

Jeff Malec  00:09

Welcome to The Derivative by RCM Alternatives. Send it. Hello there. Welcome back to The Derivative, brought to you by RCM Alternatives, where we just put up a new white paper. We took about 12,000 mutual funds and ETFs that were around in January of 2020, and saw how many did better return than 6040 with less fall and a beta less than point five to the S and P. Just 22 made it out of 12,000. Pretty crazy. Then we did what we do and put it on hard mode, and then super hard mode. Ended up with just five in the end. So go check it out: rcmalts.com/white paper. rcmalts.com/white paper. Okay, onto this episode where I get to talk to Adrian Keevil, who’s a professor of business ethics at UVA, but that’s just in his spare time. On his day job, he helps run the cleverly named Plustick, an old-fashioned hedge fund. His words that looks for opportunities and what others see as tainted companies. We’re covering that weird word, taint, as well as distress, AI, and hidden assets. Just don’t call value. Send it. All right, everybody. We are here with Adrian Keevil. Did I get the last name correct?

Adrian Keevil  01:34

You did. Thank you.

Jeff Malec  01:35

What’s the background on that name, Keevil?

Adrian Keevil  01:38

It’s an English name. My dad was English, and his family came from a town. It’s a town in Wiltshire called Keevil, and they all came from there, I guess, and made their way up to London. And then he came across the pond.

Jeff Malec  01:51

Nice. Have you been back? You visited that town.

Adrian Keevil  01:55

I’ve only been there once when I was young. It’s sort of fun to go and take a picture next to the sign.

Jeff Malec  02:01

Yeah. Here we go. But but his

Adrian Keevil  02:02

whole family basically moved up north. It’s kind of a cool story if you if you want to hear it. I want to. It’s not totally. It’s not totally a side story, but it’s a little bit of an origin story, I guess. They they were farmers, poultry farmers, in Wiltshire, and then moved up to London to open a market in one of the big markets in London. This is a long time ago, a few 100 years ago, and they would sell the farm-raised poultry that they had, sell some game, and then they realized at some point that there were a lot of farmers like them that had game to sell. That the market wasn’t centralized, so pricing was really weird. So they created the first market for poultry.

Jeff Malec  02:42

Oh wow!

Adrian Keevil  02:43

So they traded from I think four in the morning till like 10 in the morning, and then do whatever they did for the rest of the day.

Jeff Malec  02:50

That’s where these Chicago grain traders get it, right? They still exactly,

Adrian Keevil  02:55

exactly. It’s right, exactly right. The origin system stayed the

Jeff Malec  02:58

good gig down at the Board of Trade, just 930-ish till 130 p.m.

Adrian Keevil  03:03

100%

Jeff Malec  03:04

That is a cool story. It’s always weird to me, like your name, where they just came out of this town, and people like, “Oh, that’s the guy from Keble, and then it just became your last name.

Adrian Keevil  03:14

Exactly. I think, like in the old English, where she was like De Cavelli or something. I guess everyone had the same name. They had first names, but they all kind of the same last name because they’re from the same place.

Jeff Malec  03:24

Love it, yeah. And then we were we were chatting offline a little. You’re in Charlottesville, Virginia, which is favorite spot of mine. My sister lives there. How did you end up there? You a QIM alum, or how did you end up there? There’s not many funds. Yeah, it’s

Adrian Keevil  03:38

there’s a little industry, a little kind of cottage industry of funds down here, both private and public market funds, and some as the QAM in the managed futures sort of realm. And I came down though for graduate school first for an MBA, and then for a PhD at the Darden Business School here, and then stuck around after after the PhD.

Jeff Malec  03:58

Both you got both. You didn’t want to leave school. That’s such a nice clue. I know.

Adrian Keevil  04:02

My friend is a brain surgeon, and actually, I was at business school same number of years he was medical school. So I know it’s funny.

Jeff Malec  04:12

The and what was the what was the PhD in?

Adrian Keevil  04:16

I studied. I call it behavioral finance, but really, I was interested in understanding stakeholder relationships that companies have, you know, with their you think of stakeholders just as someone who can impact the firm or who’s impacted by the firm, and so that’d be like customers, suppliers, investors, lenders, employees, community regulators, those sorts of things, and trying to figure out a way to value those relationships and also sort of investigate the quality of those relationships, such that you could sort of predict future performance of the business in a way that wasn’t really reflected on, or at least not called out in the in the historical financials. You could see clues there, but you know those aren’t things that show up in financial statements. But there are things. Impact businesses, so that was what I came down to do. And and then when I was finishing up the PhD, I was on my way to be a professor, and I was going to use the research to inform my investing and do some investing on the side, maybe have a little fund. And my partner, well, now business partner, then it was a friend or acquaintance. He convinced me to to put the reverse the order and invest with him full time and and do a little professoring on the side. He had a great line. He said, “Do you really believe in your research? I was like, “Yeah. He goes, “Then you ought to invest behind it instead of just talking about it. So that was that was sort of the origins of Plus Tick Partners.

Jeff Malec  05:38

And I always want to say Plus Stick, but no plus tick, and that’s the old. Yeah, you

Adrian Keevil  05:43

got it. Sorry, I didn’t mean to talk over there, Jeff. You, you know, I want to hear where you’re going with it because you’re a market guy. You know it comes from.

Jeff Malec  05:50

Yeah, exactly. So tell us what the I I actually didn’t know. I think I guess I knew if I scraped the back of my brain that it went away. But yeah, tell us what’s yeah went

Adrian Keevil  05:59

away. The uh you know the the old zero plus tick rule or uptick rule where you had to if you wanted to short a stock you had to short it into a plus tick or an uptick and you know we’re our our hedge fund is sort of a throwback hedge fund to the way hedge funds used to be and we’re big believers in market integrity and the idea that you could bear rate a stock into the ground you know on technical pressure, maybe not fundamental. We don’t think is the greatest thing for markets, and so our name is a little bit of a nod to an era when markets were a little bit more driven by people, and there were sort of norms around and regulations around to keep the markets functioning properly for everyone’s benefit. And what do you mean by the old school hedge fund or what you can like a yeah an old fashioned hedge fund old fashioned partnership like our Tommy my business partner he that in the past worked at Hambertson Quest when he was younger and saw one of the first hedge funds that got created there and you know back then when hedge funds and then he co founded a fund actually in 1990 so really early days called New Generation which he co-managed for like 22 years with a partner and a bunch of folks there. And the when hedge funds launched, this isn’t meant to be a lecture, but it’s kind of interesting that they were really vehicles. Professor

Jeff Malec  07:11

hat on. I’ll put the

Adrian Keevil  07:12

professor hat on for a second. You know the history lesson a little bit that they were you know really created for the benefit of families and individuals and some institutions that were willing, you know, that were willing to accept a reasonable amount of risk, the fee structure I think was the origins of the fee structure was somewhat arbitrary. And I think, you know, if you do the math, the fee structure, like a classic two and 20, really does start to over time probably favor those that gather assets because it’s a pretty good business collecting 2% you know, and producing whatever kind of return you need return to keep your investors happy.

Jeff Malec  07:47

Yeah, but not necessarily have a big call option. Yeah,

Adrian Keevil  07:50

exactly. It’s getting paid to have a big call option, and I think you know our idea was to take it back to the way it used to be, which was you know smaller, probably smaller team. Everyone focused on the investing side of the business, obsessively focused on performance, sort of willing to tolerate risk and volatility in pursuit of of performance. You know, in a reasonable amount of volatility and risk. You know, complete alignment between your LPs and the GP. So it’s really a true partnership, and ideally that we would be the biggest investors in the fund, and you know have our money here and all that stuff. So it’s and and there weren’t a lot of funds that were doing that when we launched in 2012. It was you know most of the guys who had good track records really had scaled their businesses and grown, and and honestly the market also developed just that hedge funds and alternatives in general became more palatable or interesting to pension advisors and insurance fund managers and those kinds of folks who have a different sort of goal in mind compared to a family. Generally speaking, like they might care about like a 7% with really low vol, or they might you know want some kind of other thing that doesn’t necessarily comport with maximizing the return. They want to not

Jeff Malec  09:04

get fired. Checks and boxes not get fired. Exactly.

Adrian Keevil  09:07

They don’t want to. They want to not get fired. You know, and actuarial assumptions, all those sorts of things. That’s not something that a family or individual typically is focused on. And so, our you know, we figured there was a good market of folks who are interested in in a fund that would at least try to outperform and have that as sort of the central mission of the business,

Jeff Malec  09:27

and then do you like a lot of people? I think would hear old fashioned hedge fund and just think like way more volatile, like 50% vol or something. Are you that’s part of it? Not that it’s like yeah, but there’s

Adrian Keevil  09:39

some vol. There’s more vol. We’re not trying to hedge out vol. We, we, my partner has a great saying. He doesn’t like to be hedged against making money. Yeah. So, so we’re not trying to necessarily hedge out, hedge out. Well, I wouldn’t say hedging out vol. We’ll get to that later, maybe. But in terms of hedging out, it you know single position risk by you know offsetting you. Going long, and then you know buying puts. There are other things that you could do to sort of hedge out your risk of being wrong. Because in our view, at least, you know it. You can and and we’ll get into strategy in a little bit and sort of see how it works from a sort of a mechanical standpoint. But you can trim your losses if you’re wrong. You know you can be aggressive and get out of things, but if you trim your upside and you’re right, that’s a big problem. You can’t you can’t really undo that, and so we’re we’re we’re looking for positions that are going to have big moves. And so if we hedge out some of the risk, we’re also hedging out some of the upside and potentially a lot of it if it has a big move.

Jeff Malec  10:38

I’m hopeful. It seems like portable alpha is making a bit of a comeback institutionally, and even coming down to the retail level, that some of the institutions like, oh, we want high vol. We have to. We don’t have to put up as much money, and we could be holding it over here in T bills or whatever else, right? That’s to me. I’m always like, give me as much volatility as possible, because then I have to give you less money, right? From your lips,

Adrian Keevil  11:00

from your lips. That’s the that’s the idea, exactly. Yeah, which which

Jeff Malec  11:04

to your point, families get that, individual investors get that, and I think the institutions just have too much money.

Adrian Keevil  11:09

Yeah,

Jeff Malec  11:10

right. They’re like, I, I don’t have a money problem. I have a yeah allocation problem. I have to get it all out the door. Yeah, interesting there. And then so you, your partner, how many total are on the team?

Adrian Keevil  11:22

There are four of us on the investing team, and then we have a group of folks helping us on the ops side. But you know, four is kind of. We found that four is a good number. Maybe have might hired other analysts at some point. Have five of us, but we like to have a small team. We’re all covering all the names together. Very collaborative. Sort of a pretty intense day, and we’re, you know, we’re investing junkies, and we want to work with folks who are investing junkies. So we’re kind of at it 24 hours a day, just because it’s fun, you know, not because we run a sweatshop. It’s like, right? I don’t think.

Jeff Malec  12:04

So let’s dive into the strategy then. So I wanted to call it kind of macro. Would you push back on that, or I’ll let you describe it, then I’ll push back on you. You

Adrian Keevil  12:13

know, it’s funny. We’re it’s another consequence of us being sort of old-fashioned. We don’t. We kind of go back to the days when there weren’t really categories. I would say in hedge funds, but you know, if you put us into the context of the categories that people have nowadays, I would say that we would probably fall into the distressed event-driven special situations bucket or three buckets. You know, we we we’re distressed in that we do we are credit-oriented, although we express our investments a lot of times through equities, and we both come from well, Tommy especially from a distressed background, the traditional financial distress, and you know, and since we launched the fund, we’ve had a considerable amount of bankruptcy restructurings in the portfolio, but you know, those are those are episodic and highly dependent on the credit cycle. You remember when we started, the maturity wall was like in 2014, and that then the maturity wall was 2016, and then it was 2020, and now I don’t think anyone talks about the maturity wall anymore. It kept on getting pushed out. So you know, we we also like the things like we really love about distress investing is that when something really blows up, and people lose a lot of money. It, it kind of, it not surprisingly, psychologically freaks a lot of people out. You know, so most folks aren’t comfortable with bankruptcy. We’re very comfortable bankruptcy just because we’ve done it so many times. The code is predictable. It’s yeah, but a lot of investors just aren’t geared up for that. Some people have in their mandate that they can’t hold distressed securities or you know financially distressed securities, and so what that does is it creates like a whole bunch of sellers who are because they’re scared and justifiably scared, and then a few universe of buyers because there aren’t as many folks who are interested in buying distressed securities, and then sort of a psychological taint that sticks around on a business after it’s gone through a bankruptcy, particularly a pretty bad one, because everyone lost the money, and you know people are pissed off. They think it’s a POS, and so it kind of if you’re creative with your research and you’re and you’re able to sort of step aside from the the taint on it, you can start to find investments that where you don’t have to really speculate what the thing is worth. You can actually figure out what the assets are worth, and you know what the sort of capital structure is worth, and then do the math and subtract it to see what the equity or whatever the security you’re interested in should be worth.

Jeff Malec  14:32

And but not just right like most hedge fund people are going to jump to distressed debt, right? Exactly, and that’s mostly

Adrian Keevil  14:39

and that’s where exactly and that’s where it gets mostly expressed. But now I think that business over the years has moved much more on the litigation side, and so the funds that are really focused on distress nowadays, I would say maybe within the last it started about 15 years ago. I’d say probably the last five or 10 years has become the bigger thing to be distress lit. Where your sort of idea, one guy put it. I’ll clean up the language. It was a trader friend of ours who said, “You know, it used to be that you got you spent a lot of time to find good value in the market, and now you spend a lot of time to find good value in the market, and you spend more time trying to screw everyone else out of it, so you can make more, and that’s I think where the market has gone. And for better or worse, it’s become like highly litigious. And that’s just not our thing. Like we’ve been on committees, we’ve done that, and it just-it’s a time like

Jeff Malec  15:31

grabbing a seat on the board and putting that further on the

Adrian Keevil  15:34

committee. Exactly. These putting

Jeff Malec  15:37

shareholders to get more than those shareholders,

Adrian Keevil  15:40

100% And so you’re sitting on a committee, and you’re going up against other committees depending on where you sit in the capital structure, and it’s like really fun, really fun, and time consuming. But you know, you can juice your return a little bit, but you’re not getting like a five bagger generally in that kind of a scenario. It’s like fighting over certain things that are sort of technicalities in the bankruptcy process, and so we we’ve done less and less of that over the years, I would say. And what we discovered kind of early on was that that same dynamic, the the taint and all those things that makes I think distressed markets really inefficient also happens in the sort of we call it performing markets or the more general markets where a company makes a bad strategic decision, or there’s an ethical scandal, or there’s a recession in its industry, or a new competitive entrant, whatever the reason is, and the stock goes from 200 to 30. You have the same kind of dynamic that you have with distressed, in that people lose a lot of money, they sell the stock, you know, they never want to hear about X, Y, Z, POS again, and you can get in there, go to the hood, figure out what’s going on with the business, understand its stakeholder relationships, make sure everything’s squared away, and and buy a stock that might not go from 10 to 200 again, but it could go from 10 to 30 or 40 or 50 pretty pretty reasonably. And so that’s what we end up doing a lot more. I would say, if you do that kind of style of investing, and within those within that world, there are a few different sort of wrinkles on

Jeff Malec  17:08

it. Real quick, how do you? So, if it goes bankrupt, though, aren’t the equity holders wiped out? Yeah, so this

Adrian Keevil  17:14

would be a company that doesn’t isn’t going bankrupt. Like the business actually is okay, but the future value of the business has been significantly questioned by the market. So whether there’s that market’s

Jeff Malec  17:25

reflecting that risk that that might go to zero, yeah,

Adrian Keevil  17:28

exactly that it might go to zero, or you know, frankly, like sometimes it’s just there’s fatigue and grouchiness. You know, you know how like pain trades go. Yeah, don’t do it. Don’t tell them exactly. No one wants to hear about them. Yeah, most

Jeff Malec  17:42

people on this pod would be talking about right riding that momentum, like yep, following the trend down, not trying to catch the proverbial falling knife. Right, you’re going to falling knife

Adrian Keevil  17:53

exactly. Yeah, so you you do have to be careful there, and we like to wait until the the situation is like really actually improved, and we can have hard evidence that suggests it’s improved before we invest. You know, you can still have a stock go down from there generally, but usually, um, you can be pretty comfortable that you’re underwriting to again. This is where the credit perspective comes in that we’re underwriting to like a liquidation value that’s above where we’re paying.

Jeff Malec  18:20

And then, do you need to get a seat at the table, so to speak? Do you have to have inside info with the? That’s a loaded term. Ignore that term. No.

Adrian Keevil  18:30

Do you have to have right meet with management and really get the, or just you’re on the sidelines like any other investor that might buy the stock, but you’re doing all the research that’s publicly available. It’s it’s that we’re trying we’re trying to avoid dealing with managements, and because one thing we’ve learned also doing this a long time is that management teams typically really good salespeople, and managers are really persuasive. And you know when we’ve spent time with management and like heard their view of of how things are going, and it’s it’s we’ve gotten swanned in the past a few times, and so we realize that we can actually do a better job if we don’t talk to them, unless we really have to. So we’re trying to find management teams that truly get it, you know, that have really and you know where the we can identify why the stock cratered, and you know where the bonds cratered, and then understand what it’s going to take to turn around and go see to try and find evidence of that happening. And we’ll try and triangulate on a management team. Like we might talk to their competitors, we might talk to other investors or lenders who’ve dealt with them, suppliers who’ve dealt with them. We’ll read trade journals, look at court transcripts, that sort of stuff. But we try and stick away from them just because they’re they’re really so good at persuading. They’ll tell you

Jeff Malec  19:45

what you what you want to hear.

Adrian Keevil  19:47

Exactly.

Jeff Malec  19:49

So that’s the long side, but then you also will take shorts, right?

Adrian Keevil  19:52

Yeah. There’s actually one other wrinkle on the long side that we do, which is kind of it’s it’s a little bit it’s related, but it’s a little bit different. And we we like companies that have hidden assets, you know, where you can buy a security, like generally it’s a stock, but you can buy the stock for the price of the business and then have an asset thrown in, like some kind of valuable asset that is for whatever reason not producing cash or sort of not core to the business. And you know, one example that we really love to find when we can find is radio spectrum, you know the stuff that they use for cell phones and other devices, and that’s through a finite. I guess it’s a commodity, but there’s a finite fixed amount of it. There’s a lot more use for it now in these days, and so you have companies that were once like a satellite company or once like some other sort of a weird business that didn’t really didn’t really ever materialize. That business is terrible, but the spectrum that they own can be really valuable if it’s repurposed and used. And so, we like those kinds of things. Where you know, another example recently was Moderna stock, where it was kind of we thought it was trading for where the the the vaccines would be worth, like the vaccine business in a in a reasonable case, and they had this whole cancer therapy regime going with Merck that was basically not priced in. It was like a free option, so we like that kind of stuff too.

Jeff Malec  21:10

And then that was crazy. That jump right. So I was just about to ask if you’re dealing in all like small cap, mid caps, but no, Moderna’s a huge stock. That then yeah, like it traded like a biotech startup for one day,

Adrian Keevil  21:23

totally. And that’s a classic example where the stock was at. I don’t know what the high from Moderna was. Definitely in the two hundreds. Might have been higher. You know, went down. You know, to the 20s and hung around the 20s and 30s for a long time. And it’s funny. It was just this. You know, it’s a. You know, it’s we’ve seen. I don’t know. I can’t totally explain it. At some point, maybe when I have more time for academic research, I’ll try and do a study to figure out why. But you know, we didn’t find anyone who was really talking about this this cancer therapy or technically a vaccine, but it’s more like a therapy. You know, Merck has Keytruda. It’s their largest drug. It’s I think the largest drug in the world. It’s like 30 plus billion dollars a year of revenue coming off patent. There is some pressure for Merck to keep that thing going, obviously. And this therapy that they were doing in conjunction with Moderna made Keytruda more effective in some really robust early stage clinical trials. And there was you know phase three readouts coming down the pipe, and but you know, for whatever reason, it wasn’t reflected, and RV wasn’t reflected in the stock price. So you see, did we

Jeff Malec  22:27

like Moderna? Wouldn’t necessarily a conglomerate, but like a

Adrian Keevil  22:30

yeah

Jeff Malec  22:30

things with lots of business lines or different products. Like, does the market tend to price them at the lowest multiple, right? So like it was getting priced at their lowest multiple product, totally sure you got that, but we’re just going to discount this to what you got, right? Or like

Adrian Keevil  22:46

that’s right.

Jeff Malec  22:47

Time Warner stuff is the same thing, right? Like,

Adrian Keevil  22:50

yeah, totally. Well, they’re final. Cool. You’ve

Jeff Malec  22:52

got HBO, you’ve got this stuff, but you also have this beast of a legacy table business that nobody wants. That’s what we’re pricing you to.

Adrian Keevil  23:00

That’s what we’re pricing to you, and you see it sometimes also when you have a business that has multiple lines that cross industry groups at investment banks, and so depending on what group covers them, you know they’ll get a multiple based on that industry group. It might not actually be appropriate, and and those folks still have a lot of influence, I think, over how things are priced generally in the market. Like with Moderna, there was every analyst had like a $30 price target, except for this one analyst at a place called Brookline Capital Markets. She had $135 price target on it, and that is because she was looking at the cancer data, and she’s super smart, not afraid to make a a gutter call. But yeah, I know the,

Jeff Malec  23:39

and that’s surprising to hear that they have any legs to stand on anymore. Like after all that we’ve been through with all the.com and everything that the analyst community is still chugging along.

Adrian Keevil  23:50

Certainly in our distress world, it is too. Like the the we deal with a bunch of weirdos in a good way, you know, who analyze the strangest securities you’ve ever you know you can come across, and they’re super smart, and I think in distress, you know, especially in credit, the spreads are still pretty good. You know, they’re still getting paid well, and you know, chunky equities sometimes you know the commissions are okay. Those folks are, I think, not only really smart but also doing good work. And we found that yeah, that’s been a huge resource too. Like no one really talks to those folks for whatever reason, but

Jeff Malec  24:20

like why why don’t they get poached by hedge funds and want to go do, or do they just have this short shelf life where they’re really smart covering that, and then they go on to other things?

Adrian Keevil  24:30

It’s a good question. Sometimes they get poached. Sometimes they were at hedge funds and it didn’t work out for whatever reason. You know, sometimes it’s a personality thing. Like they’re just

Jeff Malec  24:39

yeah, yeah. I’d rather just cover these couple stocks and not play up in the middle of the night. They’re

Adrian Keevil  24:44

not like smooth, you know. Sometimes they’re not like smooth talking type guys who, you know, they have a good niche. They make money. They they’re happy. They do weird stuff. They like their clients, and you know, so so it kind of works for them. I think they’re not always right. You know, they’re not always right. Obviously, yeah. What makes a market? Yeah. So you’ll go as big as Moderna. Will you go? Is there a limit on how small you’ll go? We had the you know micro cap guy on a couple weeks ago. That was a fun. That was a fun episode. Yeah. I had. I felt like I had decent amount in common with with him. Um. You know, being sort of like in the weird sector of capital markets. This is another kind of another weird sector of capital markets.

Jeff Malec  25:22

Yeah,

Adrian Keevil  25:24

and yeah, we will do pinks. We’ll do over-the-counter stocks for sure. They have to be pretty liquid. Like we can’t, we don’t like to buy stuff that just doesn’t trade because we just don’t want to be locked into something. We don’t trade a ton, but we like to have the ability to get out of something if we think the story’s changed or if there’s something with a thesis that we don’t like, and so we try and have things that are even if they’re over the counter, they trade with regularity, and we know who’s trading them and where we can find liquidity pretty quickly if we need to.

Jeff Malec  25:53

And then, what’s it look like in terms of what you’ll risk on a trade and how long you’ll hold it? That that whole calculus on the long side. A

Adrian Keevil  26:00

full long for us is 5% and so we typically have about 20 longs. So that’s 5% at cost, and then we let our we like to let our winners run. We used to let our winners run with no at all governor on it, assuming that the thesis was still good. And so if we had like a 10 bagger and nothing else moved, it would be almost 50% of the portfolio, you know, somewhere you know like that, you know, relatively much larger than the rest of the portfolio, and that was great. And I think that works mathematically. The problem is like a 50% position in your book. If it moves down, obviously it creates a lot of volatility. You kind of have to be right because I’ll kind of get into our portfolio management if you’re curious, our theory on portfolio management for what we do, but you kind of have to be right if you have it’s basically like 10 positions in one. And so we’ve started now last I would say three or maybe four years ago we started trimming stuff when it gets above 15, even if we think the thesis is still great, and then reinvesting it into other stuff that we like that hasn’t moved yet, and that I think has reduced some volatility and actually boosted returns. So it’s been a good thing.

Jeff Malec  27:07

You might get some rebalance premium out of that too. But yeah, exactly. Do you view it as like a venture portfolio? Like I’m going to have all these, and one or two is going to pay off, or are you more like no? I believe. I mean, I know you believe in all the, but I don’t need them all to hit. I just need one or two to hit.

Adrian Keevil  27:26

That’s the. It’s it’s sort of. It’s the same. Like the first time Tommy and I talked about it, the first thing that came to my mind was, yeah, this this is a little bit like venture. Not that you’re expecting to have a bunch of zeros and one, you know, 1000 bagger, but that you structure portfolios so that you can make mistakes. That was kind of like the idea. If you have 20 positions that you know well, where you have a minimum two to 3x return hurdle, if you’re right, and ideally a window into a five or maybe a 1010, plus type return if everything goes well and you’re also a little lucky. So if you have 20 those at 5% Let’s say you have one or two that really win, a few others that do pretty well, like their doubles or whatever. Then some that are flat, and a couple that are down 50. You can still make a great return, you know, because your winners really compensate you for your mistakes, as opposed to like. Sorry, go ahead.

Jeff Malec  28:18

I was just saying, but that’s the danger of what you said earlier, like switching to like, oh, we’re going to take some off and reallocate. Like, if you cap that,

Adrian Keevil  28:26

you you get like we’ll let it we’ll let it rip. Usually, what happens is like these are event driven situations where you know where the the stock has a mega move on some news. Like Moderna is a good example. We’ve had other ones in the past where there have been like competitive bids for an asset that they own, and in in those scenarios, like you’re not trimming on the way. You like you come to work and it goes from 10% of your portfolio sometimes to 20 or 30% in a day, and then we’ll then and then we’ll we’ll pare it back. Yeah, yeah. So we’re not. It’s a good point because we’re not like rebalancing every day. If it gets to 12% we got or 13% we have to take it back. And it’s not that it’s a little bit more when when some kind of catalyst is realized and something goes really up, and then as opposed to letting it be 40% of your portfolio for the next six months, we’ll we’ll take it back. And you know, you just can’t cheat on your hurdle, like you can’t like for our strategy, if we had positions that were going to return 15% and you know you had one that that didn’t work, you got to find a whole bunch more. It’s going to take you a long time to catch up. If your one position’s down 50, you got to be so. For us, we’re not like doing it the way I think. I don’t paint venture in a bad light, but those folks are making small, calculated bets. They’re truly they’re you know they don’t know the business might not even exist in some cases. They’re betting on a management team, and and there’s a lot that can happen and go wrong. With us, we’re trying to underwrite and understand businesses that already exist that have cash flows or assets and great management teams, hopefully, and good sales relationships and. Good relationships with their lenders and and and those things that you know where I think we’re expecting to be wrong just because it’s just I think we’ve done this long enough to be humble and know that even if you think you can be right you can still be wrong and so we wanted to structure the portfolio in a way that would actually work to compensate you for some mistakes just some normal mistakes you know or bad luck.

Jeff Malec  30:22

That’s where you differ from the really old-fashioned hedge fund guys. They would never think they could be wrong. Will not be wrong. We’ll just lever it up. I haven’t heard you once say value, but like part of me thinks this is just a value story, right? You’re a value investor, and you’re waiting for the value to be right. But my

Adrian Keevil  30:47

partner is beating that out of me, that language for some because it

Jeff Malec  30:51

has sucked for so long, or no seller, not at all.

Adrian Keevil  30:54

It’s so funny. That’s what I thought it would be. No, it’s not that at all. He thinks that things are worth what they’re worth. Yeah, like the market price is the market price, so don’t tell me about some intrinsic value. There’s no value; it doesn’t exist. No one’s willing to pay for it. It doesn’t exist. So get that language out of your mouth. But I will say that that that we do. I if I can get him to relax that a little bit, we have an awesome relationship. We we have a lot of fun here too. But if I can get him relax that a little bit. I would say that yeah, we are value oriented for sure. Like we’re trying to find things that are, and he would hate it if I said the word mispriced, but you know that in sort of classical financial you know theory are mispriced, you know due to some market efficiency because of a either it’s overlooked, misunderstood, complicated, you know bankrupt, you know a turnaround, those sorts of things,

Jeff Malec  31:42

and it and but it’s not it’s different than wait like a merger arb guy or something. It’s waiting for the event and then buying the side they think is mispriced based on those facts. You’re like coming in way before an event saying, “Yes, I don’t know if it’s going to be bought. I don’t know if it’s going to reshuffle its management. What’s going to happen? But I like the fundamentals, basically.

Adrian Keevil  32:01

Yeah, like like there was you know one company ComScope that that we were sometimes we come at things from a short like shorter company we’ll short we short bonds. Do you want to get in the shorts now? Is that a good segue? It was unintentional. Yeah, yeah. But this is this is a good this is a good one. It’s illustrative, I think, of our of what you were getting at before, and also gives a little short. So we like to short unsecured bonds typically like that’s our bread and butter on their short side. There are a lot of good things about that. There are a couple of real quick. When did unsecured bonds become a thing, or what? What are those doing? Who’s who’s issuing those? The company. Yeah, companies are issuing them. They’re usually at the bottom of a of a capital structure below bank debt and secured bonds, you know that have asset coverage or you know cash flow coverage or some other kind of coverage for the value of the bonds. There, it’s you know in theory kind of like I guess you could think of it like a credit card, you know, where it’s been unsecured,

Jeff Malec  32:55

basically high yield liability.

Adrian Keevil  32:56

Yeah, exactly high yield bonds that don’t have asset coverage, and you know, and and what’s cool about those shorting those is if a company goes bankrupt that has you know a lot of like a top heavy top top heavy excuse me capital structure where there’s a lot of secured paper and paper that have rights to assets and bankruptcy above you those unsecured bonds at the bottom of capital structure can be effectively worthless, just like the equity, and so you can short a bond at par. Theoretically, it goes bankrupt. There’s no asset coverage, and you cover it zero. That obviously is totally theoretical because you’re shorting it. Yeah, usually in the ’90s, and you get maybe 10 cents or five cents when you cover it. But you know, so it’s it’s it’s just like shorting equities. The difference being that you’re you’re borrowing bonds, and the other difference being that’s awesome. I think is that if you’re wrong or if you get squeezed, you know, bonds that aren’t converts generally don’t go above much above par. It might go to like one and two or three or you know something like that, depending on the interest rate. But it’s it’s not going to go to 8000, you know, like a stock can do.

Jeff Malec  33:59

Right,

Adrian Keevil  34:00

and so that’s why we like the short bonds, and all our bonds are are just idea driven alpha ideas. They’re not hedges on our long book. So it’s

Jeff Malec  34:10

what does that mean? Idea driven like that?

Adrian Keevil  34:12

Yeah,

Jeff Malec  34:12

soft AI’s eating software or something like that.

Adrian Keevil  34:16

No, sorry, that was terrible. I’d use a very vague term. They’re like specific idiosyncratic one-off things that we think you know. Company X is going to go bankrupt within six months, and the bonds are trading. You know, in the 80s, and we think there’s zero asset coverage. Let’s short those bonds, and if it goes bankrupt in six months, then we’ll make a lot of money. And if it doesn’t, you know, probably cover and take a little bit of loss and move on to the next one. So the long book is usually three or four years average duration, I would say, for an investment, and the shorts are more like you know six months less, maybe. And

Jeff Malec  34:48

it and it’s not long short equity. You’re not matching those up in any way. They’re just two separate sides of the coin of expressing different views.

Adrian Keevil  34:55

Exactly. Sometimes we’ll do some weird stuff like we’ll short a bond. And then, as a hedge, we’ll buy the equity. If the equity is at like 50 cents or a quarter or something like that, we’ll buy a little equity, short the bonds. Because if it doesn’t go bankrupt, that equity can tend back, and so it compensates us for being wrong on the short. But, but we’re not usually pairing off trades like long something, short something else. They’re all individual standalone ideas.

Jeff Malec  35:20

And then that could be based on, like, give me a few examples of that, like management, or they couldn’t. They went out to raise new money and they couldn’t.

Adrian Keevil  35:27

It’s generally like a company that has a lot of leverage and a maturity that’s coming up. You know, maybe in the next six months or so, and we have substantial doubt that they’re going to be able to make the maturity because you know the business is declining. They’ve double-pledged assets potentially. They’ve got a lot of other obligations that the business has that aren’t necessarily on the balance sheet, like technology debt or cap capex debt, like a retailer that allows the stores to get gross. Those sorts of things that are, you know, they are obligations, but they don’t necessarily show up on the balance sheet as like as a loan or a bond, and so we’re shorting it with the expectation that when that maturity event happens, that there’s going to be a restructuring or somewhere around there. Maybe usually it’s a little bit before company goes bankrupt, and that’s those are that’s the the typical short situation. You know, it’s it’s somewhat episodic and a little bit dependent on the the credit cycle. That’s also you know, and there have to be some bankruptcies happening. Like right now, there aren’t many. There are a few out there, but not a ton compared to you know normal times. Even with rates

Jeff Malec  36:30

have been going up, why is that? What’s your macro view on what’s happening there?

Adrian Keevil  36:34

I would say the two factors. One is that there’s still a decent amount of liquidity from from the stimulus in in 2020, you know, and the and the monetary

Jeff Malec  36:46

from the we’re still we still have stimulus. Can you believe it? There’s

Adrian Keevil  36:49

still a lot of cash sloshed around from those days. A lot of folks refi’d out. That’s you know they turned out their debt, so that helped them buy some time. And I think monetary policy generally has been pretty loose, even though interest rates have increased. You know, there’s the money supply is pretty healthy, liquidity is pretty good. Credit markets have been really good, and then I think the other big change is the advent of private credit, where you have you know folks with really deep pockets that have a vested interest in a company not structuring or not hitting a at least not hitting a Chapter 11 case in court, they might restructure it out of court, but and and it’s another source of liquidity, I think, for companies that are looking for money. So, but the the

Jeff Malec  37:28

private credit guys were struggling big time, like yeah, over the last 18 months, right? Of gates and you

Adrian Keevil  37:33

know, it’s funny,

Jeff Malec  37:34

no distributions and all that. So that’s kind, I guess, to your point. Like, yes, they’re doing all that so that they don’t see the bankruptcies.

Adrian Keevil  37:41

I think that’s part of it. I mean, I think also as part of that narrative, it was so interesting. Like, if you looked at their net assets, most these private credit folks were raising a lot more than they were getting redemption requests for,

Jeff Malec  37:52

which is kind

Adrian Keevil  37:52

of interesting. So their net assets were going up. You know, I think you know credit markets are a little weird, also because, and this is probably why Tommy, my partner, doesn’t love me using what’s the value because like credit markets are so mark to market still. You know that if something is for sale and there are no bids, like it can just you know it’ll trade down. It won’t even trade. It’ll just yeah you know hit a bid low and then all of a sudden someone else wants to get out. They trade it lower, and so I think there was a little bit of liquidity. If you know those markets, like those guys do really well, they didn’t want to print trades and cause like a cascading panic that you know wasn’t necessary. Because again, it could be a company that’s in perfect shape, but no one’s ever heard of it. So they someone’s trying to sell a big slug of paper, and it’s not a big issuer, and maybe it’s a small issue, and people don’t know the business. You know that thing might go from par to 80, just because someone’s looking for a print and they need they need to get out. And so I think that, to me, explained some of that gating behavior a little bit more than like, oh my gosh, these guys are lying about their portfolio companies and it’s all fake. And there’s some of that probably, but there’s definitely some covenant lightness and stuff like that-that’s that’s out there, but like it’s not. You know, I don’t think we didn’t think it was emblematic of a huge credit cycle. The sovereign situation that might be a bigger deal.

Jeff Malec  39:11

Do take we think.

Adrian Keevil  39:13

I mean, like companies go bankrupt and countries can go bankrupt too. You know, if we’re watching France pretty closely again. We’re always bottoms up. You know, we’re not macro folks. I would say we have to be aware of the macro because it impacts stuff that we’re dealing with. And you know, French government bond yields have blown out. I think the market knows that because it’s on the euro, it can’t print money like we can to inflate their way out of the problem. And so their only recourse if they end up having too much debt is just is just to to default, and you had some politicians kind of insinuating that they would be interested in doing that, and that can cause people to really get a little freaked out, and you know it wouldn’t probably cause a currency crisis because they’re on the euro, but it could cost us. Because cause some kind of a cascading sovereign debt situation, and that’s also compounded by the fact I think that there’s a lot of supply, a lot of credit supply right now. You know, a lot of countries are issuing a lot of bonds because they’re running deficits, most of them, and then also with AI, you’ve got you know hundreds of billions of dollars of of bonds coming out of corporates and loans that are attractive, yielding with you know great corporate sponsors, and and so I think there is a there is a risk that bonds go lower because there’s a lot of competition right now for dollars in credit world, but

Jeff Malec  40:35

bonds lower yields yields higher.

Adrian Keevil  40:37

Yeah, bonds lower yields higher, but we’re not seeing that so much in like a typical credit cycle, where you have you know companies truly running out of money and not being able to tap the corp the the markets yet, their costs of debt is going to the roof. There’s no question, but they’re still able to finance. They’re still able to find financing generally for for maturities and for you know general corporate purposes, and so they’re able to kick the can. I think, and that you know, that’s not

Jeff Malec  41:05

a, it’s not a big piece of your model of like, hey, if the yields are above X, we don’t want to touch any balance sheets below Y or something like that.

Adrian Keevil  41:15

Generally, not. We try and think of them all independently.

Jeff Malec  41:18

Yeah, yeah. You know,

Adrian Keevil  41:19

and and you know, you know I don’t want to date you, but we’ve been around long enough to remember sovereign you know U.S. corporate you know sorry U.S. government bonds at these levels. You know this was kind of a normal level historically. Yeah, exactly. Yeah,

Jeff Malec  41:33

that is. I was just talking with someone about that the other day. Like what? Like everyone’s crazy. They just are like, why aren’t rates at below 2% Like well that that was the abnormal part. That was weird.

Adrian Keevil  41:43

That was really weird. That was kind of normal, and it’s healthy. Like if government bonds yield 7% like that’s a great thing for a lot of retired people and a lot of you know. I hope it doesn’t get there, but that’s like just competition for return in capital markets. You know, assuming that it’s not like a huge crisis, which

Jeff Malec  42:01

right

Adrian Keevil  42:01

maybe will be that’ll bring the

Jeff Malec  42:02

old fashioned hedge funds back. Hey,

RCM Alternatives  42:05

100, we

Jeff Malec  42:05

got to beat 7% Let’s go. We we got to bring our vol off 5% in order to beat 7% return. And how how did you become a credit guy? So if you were just in school, school, school, and then right to this, or you weren’t. I

Adrian Keevil  42:18

was in corporate world first. Like my dad was investment banker, and he he actually practiced investment banking every day of his life until he died. He was he was one of those rare people who just loves investment banking and loved loved markets and loved loved his clients and and just loved the sort of the I don’t know for those of us who are in the business, just the essence of financial markets, and so I always kind of assumed I was going to go into corporate finance. and And when I was, I did a summer internship at Cowen, actually on the on the trading desk, which was really cool. But I thought I’d go into into investment banking, and he advised me instead of doing an analyst program at an investment bank to go work for a real corporation. I was like, imagine that. It’s like there’s these companies that exist out there in the world that don’t just. I thought they were just

Jeff Malec  43:07

chess pieces. No, they’re actually

Adrian Keevil  43:09

no, they’re real. And I and you know and and you know. So he said, go work one of those companies for a couple years. See if you can get a corporate job where you can kind of see how how how companies actually run, how they’re managed, and you might end up liking it also. But if you end up going into investment banking, like you’re planning, then then you’ll probably be better dealing with your clients because you’ll have some experience in an actual corporation. I didn’t really know what that meant. Now I am like really grateful for that advice because I think if I’d spent my whole career on Wall Street, I might not have understood how real companies that that you know that you know that you don’t just exist to move money around, which is kind of what we do at the end of the day. You

Jeff Malec  43:49

got payroll and

Adrian Keevil  43:50

yeah, you make a thing. Touring

Jeff Malec  43:52

what exactly was the company? Can you say?

Adrian Keevil  43:55

Yeah, yeah. I went to work for a company called it was a it was a holding company of advertising agencies and some media agencies called Young and Rubicam Inc. and it had been was actually really cool. It had been private. It founded in the 1920s. It went. It was private, and it did had done a recap with a fund called Hellman and Friedman. They’re they’re top tier, awesome sort of technology media oriented. At least they were private equity fund run out out of San Francisco, and so this company was it was pretty big. They they had a they had somewhere around 20,000 employees, which at the time was was a decent amount of people. 1200 offices, 120 countries. It was a pretty big operation, and we went public, and and then we were added to the S and p5 100, and I went in in the management training program right after the company had gone public. Ended up working for the chairman of the business, and then when we added the S and p5 100, all of a sudden this company that no one really had heard of or cared about before had to be added to a bunch of portfolios, and so investors. And analysts had questions. I’m like some really good questions. For example, you have all these offices. Where do you guys make all your money? Like, which offices are the most profitable? And we just didn’t know because

Jeff Malec  45:11

yeah, that’s not you

Adrian Keevil  45:12

know like. And so one of the one of the things I had to do was to reach out to all the CFOs of every office, get their financials, and then create like a, and we call it maybe we’d call it probably an operational financial model where we understood what their revenues were and what their expenses were at an office level. All the accounts tied obviously, but we just didn’t know at that level of granularity. And what was crazy, what ended up happening, which was really interesting, is we found a we found a bunch of money in places that we didn’t know was sort of there, which sounds weird, but like India, for example, had capital control, so you couldn’t repatriate profits. You had to keep them there, and so, but B, what we found was that the offices that we thought were making all the money that were, you know, really fancy to like, you know, for lack of a better term, you know, had slick management team, awesome office space. You know, whenever you went out there, you had the best time. Put

Jeff Malec  46:04

them in a lineup. That’s the one you would pick. Yeah,

Adrian Keevil  46:06

100% You think they were crushing it, and then the ones you thought you were crushed that we thought were terrible, that had dowdy offices. That you know, the guy went home and and you know read to his kids at night. Those those places. This is obviously is a little bit drawing some stereotypes, but those the places we thought we’re making money, we really weren’t. In places we thought we weren’t making money, we really were. And that, to me, that was like it was such an eye-opening experience for me because I always assumed naively as a kid, and I’m probably not alone in this, that businesses know everything. Like a public company, they know everything about their business. You know, they know, they know, you know where who’s making money. They know who’s, you know, doing what and where they need to invest. And you know what that showed me is you have some really smart people running a really good business that’s done really well and been around for a long time, and they don’t know that stuff. And they have the same bias of what we didn’t know the word. I didn’t know the word bias back then, but they have the same sort of like misconceptions about the reality of their business that you that a normal person would have.

Jeff Malec  47:09

It’s like I tell some investors sometimes, like, what do the institutional guys do, right? Thinking that they’re just smarter because they’re bigger, and I’m like, well, mostly they’re just the same as you, as like a guy with 100 grand trying to find the best thing, and they just have way more money and a little bit more guardrails. But yeah, same thing. Like you don’t you don’t know what you don’t know until you know you

Adrian Keevil  47:31

don’t know what you don’t know. And so I realized that then that kind of got me interested in investing, and you know that you could actually make a difference. That research could actually make a difference because he might be able to understand the business maybe even better than a management team did, or at least there was like an avenue for finding out things that other people didn’t necessarily know about a stock.

Jeff Malec  47:51

You almost invented private equity with that, yeah. You’re like, hey, you guys don’t know enough. I can come.

Adrian Keevil  47:56

I can come and help you. I really know. I really know more about your business than you do.

Jeff Malec  48:10

What’s your take on private equity? Do you see a lot of like private equity scars, for lack of a better term, in like some of these distressed names? Like they got loaded up with the debt. They took them out too fast. They opened too many stores, right? I’m thinking of Pot Bellies, the Chicago institution here. That yeah. Do you see that in real time? Of like, is that some of what happens?

Adrian Keevil  48:31

Yeah, it’s it’s if it’s funny, but it depends on the sponsor. You know, like there’s some sponsors that will will never, or I wouldn’t say never, but that are that in our view have been very very reticent to let a company file and they’ll keep it going. You know, particularly ones that focus on like tight industry, you know, industries that have quick cycles like oil and gas. You know, hospitality, typically real estate. You know, where you have boom and bust cycles. Some funds will keep a business going through the bust cycle because they know boom’s around the corner. Others will let it go and just move on to the next thing because they’ve taken dividends out and they’ve sort of realized as much as in the investment as they’re as they’re going to get in their minds, and so they just roll. And so we do we do definitely when we’re investing in a sponsor back because a lot of these sponsor-backed businesses also have publicly traded debt, so the company’s private, but the debt is public. And we’re if we’re investing in those businesses, we’re definitely aware of who the sponsor is, where the business sits in the track, the life life cycle of the fund that it’s in. You know which managing partner is running it. You know what’s their track record. What’s like how they dealt with capital market with bondholders in the past, and those sorts of things that I think can give you a decent insight in what’s going on. But we have seen our fair share of businesses that get hollowed out. That’s, but I’d say that’s kind of the minority. We’ve seen some terrible businesses that were good businesses to begin with that go bust. And we’ve also seen some ones that that have a portion of the equity public and a portion of equity private that do really well because the sponsor is actually really good. So I think it it sort of depends. But yes, I mean there’s certainly and you know, gosh, there was one. I definitely won’t name any names of the sponsor. It’s all public. So anyone who wants to

Jeff Malec  50:19

darn it, come on, diligently. Well, now let’s deal with these three guys.

Adrian Keevil  50:23

This this one company, it was a tel. It was a telecom merger. They merged, so they took over like the third tier telecom wireless telecom business in Greece, and then proceeded to dividend themselves out like all the money, and then left a shell that was totally worthless. And in discovery, they found the name. You know, when guys do deals and gals, they come up with names for the deals. It’s kind of cute. You know, like before it gets announced, they had Project Helen and Project Troy.

Jeff Malec  50:55

I was about to say, was it Project Trojan Horse?

Adrian Keevil  50:58

100% And so this was like an egregious situation that you know is probably still being litigated 10 years later. We we out very quickly, but yeah. So yeah, you see that stuff, but you know, and it’s it’s a little more nuanced, I would say, probably generally. Sorry about pot bellies.

Jeff Malec  51:19

Yeah, I mean, it’ll be bad. It’ll

Adrian Keevil  51:21

just it’ll restructure. That’s so people forget that bankruptcy isn’t like a death sentence. Yeah, it’s it’s a very healthy process. I still joke.

Jeff Malec  51:29

I’m going to ask you about one name, FanDuel, whatever they’re called, Flutter Entertainment, which just got hammered because of prediction market stuff, and they were just old school betting. Yeah, that was one of my biggest holdings that had been going up like crazy, and then I am not a professional single name stock investor, so I missed all that news and got basically down 70% Like, is that something you would look at, or that it’s

Adrian Keevil  51:53

definitely something that would be on our radar for sure? I’m I’m actually intrigued by that one too, like because there’s a regulatory angle, there are a bunch of different things you kind of need to handicap to use a betting term to to really understand if it’s if it’s a good business going forward and you know obviously those guys invested a lot in in effectuating regulation that you know allowed them to be licensed to operate in all these states and then here you have this prediction market business that comes out that doesn’t, for whatever reason, have to conform to those same regulations, and so there’s a like there’s this term we use in academic world called non market strategy, where businesses compete not only in their businesses but also like in their ability to effectuate regulations, and so yeah, you know it seem it does seem though unfair, especially since the states. If I want to like think about the benefits of of gambling operating in a state, is obviously the states’ budgets, you know, benefit immensely from gambling tax revenues. Yes, some of the residents of those places end up with gambling addiction, but it’s not the rates aren’t yet. It’s not that prevalent. It happens. It’s not that prevalent. It might be somewhat preventable to a certain degree, and certain those people can be helped. But the state budgets that really education and other things that rely on gambling tax revenues that are getting sort of hollowed out by the prediction markets moving into bank. And now

Jeff Malec  53:19

in Illinois, here they just added like a 50 cent per bet fee, which is on the normal sportsbooks, but not on prediction markets. So, like then, that to your point, that’s going to cause this friction where the state’s like, no, we want, we’re going with the one that gives us the revenue,

Adrian Keevil  53:34

pays us the money, and so I think there are various lawsuits going on at some point that’ll be adjudicated in the courts, and I can’t imagine it’s possible, and I haven’t done a lot of work on it. So don’t, don’t, you know, listeners out there, don’t bet on this. Sorry, I keep on dropping the puns, but

Jeff Malec  53:49

yeah, you know, it’s

Adrian Keevil  53:50

it seems it seems highly improbable that that a federal court would not see the merits of state regulation for betting, given the tax revenue issue being local and not federal. Obviously, there’s other federal taxes that are collected too, but the state taxes are really important to the state budgets. If someone’s figured out a way to circumnavigate that, doesn’t seem fair.

Jeff Malec  54:13

Yeah,

Adrian Keevil  54:14

and so maybe that that ends getting so long story long. FanDuel’s super interesting. I met some of the manager of senior management team over there actually just because they’ve I teach business ethics at Darden now as the first year course and we’ve had those folks come visit us a few times they because they’ve done a pretty good job in terms of the the addiction side of the bit of of gambling and it’s a good management team.

Jeff Malec  54:36

Do you ever start the class? I’d be like, wait, there’s business ethics. I thought that left like 100 five to 10 years ago. That’s still a thing. 100.

Adrian Keevil  54:45

It’s it’s it’s the shortest class you’ll ever take.

Jeff Malec  54:50

The but then say you had you’re like I love this vandal bet. You could just place that trade, or you go in front of a committee. Like, what’s it look like internally when you want to put. We, if

Adrian Keevil  55:00

one of us has an idea, like let’s say I’m interested in Fanduel, I’ll put together like a very short form, like a one pager. It’s like for us, the analogy that we use, if if you think about like buying art, like the market for art, you can buy art at a place like Sotheby’s or Christie’s, you know, one of those big auction houses, and you know it’s a vetted piece of art, the provenance of where it’s been before, and its life is known, and you sort of know who the other bidders are, especially when you’re buying it and you see their hands go up. But there’s people on the phone, you kind of know who they might be, and you end up paying what should be like a fair market price. That’s how I would sort of characterize, in this analogy, characterize the broader markets, and it’s you know in in to extend the analogy for art, you know, we’re kind of shopping for art in a junk store, you know, or like the roadside antique store, where you know who knows why something ended up there. Its provenance is definitely not known, but you’ve got a chance at finding something that’s like again, Tommy will kill me, but mispriced, like fundamentally mispriced, and you know you might find a Declaration of Independence, or you might find some famous painter, you know, painting that someone for 10 bucks. But in order to find those things, you have to look through a lot. And so we’ve designed the way we design our research process is to allow us to really see a lot, as many ideas as possible. And so the first phase is this: literally, we want to we want to invest as little time as possible until we think that something actually has promise, we use this very technical term called “if there’s a there there. And so the you know the first phase is you do this one page thing. I’ll take it to the guys. I’ll take it to Tommy first. Say, “What do you think about this? Kind of interesting. Then I’ll we’ll bring it to the group. Say, “Here’s why I’m thinking about this. Here’s why it’s the. Here’s why Fanduel is distressed. Here’s what it would take to turn around. Here’s some catalysts on the horizon. We’ll batter it around, and if we think it’s worth more time, then we’ll start to put more time into it. But we always do it in like little iterative steps, so we’ll know exactly. Go research this facet of it, and let’s get back together. Get back together. Go research this facet of it, and get back together. That way, we can keep you know five or six ideas. We look at as many ideas as possible. We can keep a lot of them moving at the same time, anyway. So that’s how I would start. And I would say, you know, here are the issues. Here’s the business. Here’s the you know the stock price. Here’s its capital structure. It’s not going bankrupt. It’s still profitable. I assume in assets exactly because in asset and there’s this regulatory component to it, and one of you know my behavioral angle comes in where we think about these stakeholders. You know, if I was going to think about Fanduel, you’ve got the customers, you’ve got the the states, the regulators, and all these folks have a stake in the outcome of this business. And you know, depending on how Fanduel’s dealt with, I think Fanduel has a really good record of dealing with the regulatory bodies and their states where they operate. I think they’re generally well regarded by those folks, and you know, there’s. I would spend more time, obviously, trying to get hard evidence for that. That’s my general assumption, anyway. So let’s say I did a bunch of research and found that to be the case, then I’d have a pretty strong belief that when push comes to shove, and this thing gets this regulation or this litigation rather gets to the the federal courts, that it’s probably going to go in their direction, you know, which is the

Jeff Malec  58:10

yeah the other if you if you don’t have any more room, like you have these four ideas that are all great, but the portfolio is already full, can something go out for something to come in,

Adrian Keevil  58:21

it can. It definitely can. It definitely can. We’re always looking for. We’re always looking to improve the portfolio. So, all my I love all my babies, but looking at you guys, none of you guys are safe. Yeah, love my children.

Adrian Keevil  58:32

You can all be replaced tomorrow if we find something better. So we’re we’re always trying to find something better. If

Jeff Malec  58:47

you’re tired, listener, you can hang up now. But I’m going to go into AI now because you sound like you would know a good bit about this. So, a, are you using it in that research process? That seems like you could do 1020, 30, 50x more ideas with

Adrian Keevil  59:03

it, 100% 100%

Jeff Malec  59:05

And B, are you seeing like I’ve you’ve heard me on the podcast saying I think this is going to be recessionary, and a lot of these companies are going to have trouble being replaced, which we’re starting to see some of that happen with software. Like, is that part of your thesis, or that’s part on the board of like, hey, we got to worry about this piece too.

Adrian Keevil  59:25

Yeah, I worry about it. I worry about it all the time, and and it’s like a little bit of worry because we do own some AI related infrastructure. We own Applied Digital, which we’ve owned since it was like a $2 stock and was a almost bankrupt Bitcoin miner. It’s a phenomenal. I think it’s a phenomenal business, great management team, well positioned. We own some innodata and one or two other smaller things, but you know that. But the short thesis is really interesting because I mean, there’s two sides to it. There’s either going to be this like enormous productivity gain, which could be really good for markets. I think you kind of got you’ve gotten that listeners. If you are avid listeners to the show, you’ve probably heard this before, but. Jeff said something similar. There, there’s going to be this weird possibly thing where earnings growth is through the roof, but that yeah, employment unemployment goes up, and at some point that obviously would catch up with earnings because people can’t buy as much stuff because they have jobs, and and that could create a recession. I think my my hope that so we have to watch for that, and that we can just see in the fundamentals without like speculating too much. Like if if we see unemployment tick up, there was some stuff this weekend in I think in Bloomberg about banks getting ready to fire a bunch of people because of AI. You hear stuff anecdotally. I’m sure every company is going to blame AI for firing people just because they want, you know, because they just want to fire people.

Jeff Malec  1:00:43

Well, and it helps them justify their spend on it too, right? Like

Adrian Keevil  1:00:47

100% yeah. And they sound smart, you know. Wow, they’re AI. I think my and you know, so it’s hard to predict what could happen. I think you’ve done a really good job of articulating the recession scenario, and the only like there is a a bull case scenario that’s I think a little bit different from just the productivity gain piece and that’s that you know companies really do compete for talent and you know there’s an element of you know and and also they compete for customers on things that are other than price you know like a brand equity can be one way to think about that, or you know, sense of purpose. You know, the company’s values, and you know, companies. It might be that companies, the company A, decides it wants to do like the same amount of output with fewer people, and so it becomes much more operationally competitive. And company B wants to grow its output with the same number of people. So, company company A fires a bunch of people and and and can do the same amount of work. Company B decides it really wants to grow the business using AI and not fire people. So, have people actually be more productive and and lever them to make the business itself more productive. That is awesome. the The flip side is a lot easier, obviously, to cut costs than it is to grow revenues in most industries. So there might be like a little bit of disconnection in timing, but I think those businesses that have that approach are probably more likely to be able to recruit and retain good talent, assuming that humans are still involved,

Jeff Malec  1:02:19

right?

Adrian Keevil  1:02:20

And maybe one day the AIs will want to work there too.

Jeff Malec  1:02:23

I thought you were going to go with that. The people have to compete for talent, so that puts a natural like cap on what they can do. And so you’ll have a lot of smaller companies that can grow tremendously because they don’t have to compete for the talent anymore. Yeah, they can outsource the talent to the

Adrian Keevil  1:02:39

AI. I think that could be great. And then the big businesses that like, and you know, the small businesses do employ a lot of people. Like, if I think most people work for small businesses in the U.S. at least, and yeah, if if the the hardware store that you work for all of a sudden becomes much more productive, that’s probably good for you. I’m a little bit worried about the sort of the quote white collar,

Jeff Malec  1:02:58

yeah,

Adrian Keevil  1:02:59

jobs that that could be at risk, you know, and that’s legal. Yeah, yeah, and you know, investment bankers and you know, people that are

Jeff Malec  1:03:08

analysts.

Adrian Keevil  1:03:09

Yeah, analysts exactly analysts. Hopefully, not portfolio managers. But you know, that that makes me a little bit nervous, and that’s probably don’t you think that’s kind of likely? And then those folks will-they’re smart. They’ll figure something out, and but you could see definitely a recession before there’s the growth phase.

Jeff Malec  1:03:24

Yeah, right. Or if they’re just their spending is curbed by any yeah by some X, that’ll have a multiplier effect down lower,

Adrian Keevil  1:03:33

especially since they are big taxpayers too. You could have like government revenue issues. You know, the government ultimately could make it illegal to fire someone because of AI. That could be one thing that right. But it is like

Jeff Malec  1:03:46

if you were going to draw up the perfect scenario, it’d be like let’s go after the biggest w2 earners in the country. Right, it’s like kind of what it’s doing. Like what? No, that doesn’t sound like a good idea. And then lastly, we’ll finish up. Like, where does that fit in with your business ethics class, like what are the students asking about this? What are you trying to talk about it? Like, does the AI need ethics? Does it have it? That’s a really good

Adrian Keevil  1:04:09

question. You know, it’s we we. I mean, there are two sides. One is like, what is what are the ethics of AI? You know, in terms of like what what is it? What should it be used for? What in you know in an academic setting? Obviously, that’s different question than in a business. You know, what’s you know, you know, should you represent your work as your work when it’s been generated by an AI model? All these sorts of questions that are kind of interesting. You know, if you know how should you manage your business? You know, given the ability to fire people and remain productive. You know, should you be that kind of a company? Is that the kind of business you want to be. Those sorts of questions are interesting, and then yeah, what are the ethics of AI? I think is you know, and it is a massive unanswered question. And you know, it you know I’ve heard people having debates about do do the models have rights? Like, do we have to think about these agents as sort of like people? I’m not sure I go all the way there, except for hey, my, I love you. You know, my bots, I love them. I don’t want them to come after me. You know, in case there’s singularity or whatever they call it. But no, you know, I think those kinds of read

Jeff Malec  1:05:12

this in the future. They’re like, no, yeah. Adrian said he loved his bots. You, you guys love it.

Adrian Keevil  1:05:17

Exactly. This transcript will save me. You know, the it’s it’s it’s it’s really complicated. And then you know, if if they have ethics, whose ethics are going to give them? I mean, obviously, ethics is a very deep. Yeah, there are all different schools of thought on ethics in terms of what’s the right way to make a decision. Is it some kind of utilitarian framework that you know kind of maximizes the benefit of the grace of people? Is it some kind of a consequentialist thing where you have a bunch of rules, or is it, you know, the ethics of care where you know you kind of maximize just general welfare and care for people? You know, is there a virtue angle to it? You know,

Jeff Malec  1:05:53

and then is that the government’s job to put all those in place, or each of these companies, which is the big lots of big question out there to cross, yeah,

Adrian Keevil  1:06:02

yeah, and and then like there’s another risk I think of you know things like effective altruism, which you know on the surface seems like a really good idea, but but it’s also a little bit dangerous because you know what someone views as like the right way for the world to operate might be great, but the rest of us have to live in that world also. It might not be right for everybody, and so you can think, “Oh, this business is so good; they’re operating with you know with the you know with the goal of doing X, Y, or Z for society. But that might not be good for society. Might not be good for me or you. You just don’t know,

Jeff Malec  1:06:34

right? Which I could just be like a the model could be like, “Well, I’m supposed to optimize for society, and I’m using too much water in this data plant, so I’m shutting myself down. I’m shutting

Adrian Keevil  1:06:45

myself down. Totally,

Jeff Malec  1:06:47

I’ve concluded I’m not good for society.

Adrian Keevil  1:06:50

You know, if they start to realize that lies actually work really well, you know, they can they can shortcut and not actually do the work and not burn as many, you know, tokens by just lying to somebody or making something up, and my manager has no idea that I’m just making this stuff up, and I’m not burning any tokens. Anyway, we’re kind of getting off topic, but

Jeff Malec  1:07:08

no, but I knew I knew you’d have some good thoughts. Appreciate that. Yeah, and the students is crazy. Like, yeah, like a, are they going to have any jobs, and then b, how how are they going to use it and put it out there?

Adrian Keevil  1:07:23

And that’s, I mean, so far they’re still having jobs, and how they’re going to use it is still being written. You know, and it’s, it’s, I think it’s going to be super interesting. We started last year for the first time, allowing students to submit AI generated work, but I had to, I had to see all their prompts. And at first, I was like, “This is so dumb; they’re not doing any work. But then, like, actually, the prompts tell me if the person actually understands the ideas or doesn’t.

Jeff Malec  1:07:45

Right? Because I’ll be like, “No, that’s not quite right. Like, you need to be more on this angle or whatnot.

Adrian Keevil  1:07:49

Totally. But then the initial prompts twice

Jeff Malec  1:07:51

the work for you, right? Then you got to read the thing and the prompts.

Adrian Keevil  1:07:54

I kind of just end up reading the prompts because the prompts are basically like a real well-written outline, and also when the person’s critiquing a response, I’m like, “Oh wow, they actually really understand this on a pretty deep level, like a deeper level than whatever AI model they used really kind of understood, or the AI model was missing the point, and this person actually understood it. And because writing an essay is awesome, I love to write. But on the other hand, like, is that the most productive use of someone’s time, or is like once you understand something and you’ve had it outlined. Is that should that be sufficient? Kind of going back and forth on that, and it’s really hard for me because I love I love academic research and I love writing, but I do also see that there’s like this parsimony of the prompt, which is kind of an interesting way to convey ideas, and might end up being the only thing that anyone really needs to do going forward.

Jeff Malec  1:08:39

Parsimony of the prompt, I love it. Yeah, it’s gonna be a boat name. That’s good. Yeah, for

Adrian Keevil  1:08:45

you and I sail away when

Jeff Malec  1:08:46

the

Adrian Keevil  1:08:47

bots are coming after us.

Jeff Malec  1:08:48

I love it. All right, Adrian, give me your best three restaurants in Charlottesville. We’ll leave it there.

Adrian Keevil  1:08:53

Okay, Okart Social.

Jeff Malec  1:08:56

Oakard Social. I’m not gonna remember any of the ones I’ve actually done.

Adrian Keevil  1:09:00

Not in any order. Maggie’s Midtown and Riverside Lunch. Those are three. If you haven’t hit any of those, I highly recommend next time you’re in town.

Jeff Malec  1:09:09

the The scene there is crazy. You like having this great, great food in this small college town. You’re like, what? How did this happen? That that’s a research project. That’s a history project. Like, why is there such good food scene there in Charlottesville.

Adrian Keevil  1:09:21

It’s it’s bananas. Oh, there’s another place called Bird House. If you like roast chicken, that place is awesome too. It’s only roast chicken, but it’s really good. Only roast chicken. Yeah, highly recommend it.

Jeff Malec  1:09:31

All right, Adrian, we’ll show everyone where to get a hold of you in the show notes. Thanks so much for coming on.

Adrian Keevil  1:09:37

Thanks for having me, Jeff. Really appreciate it.

Jeff Malec  1:09:39

Yeah, yeah. Thank you. Okay, that’s it for the pod. Thanks to Adrian. Thanks to RCM. Go check out that white paper. Thanks to Jeff Burger for producing. We’ll maybe probably be back next week. If not, the one after that. Peace.

This transcript was compiled automatically via Otter.AI and as such may include typos and errors the artificial intelligence did not pick up correctly.