E8: Finding Unique Investment Opportunities with Daniel Zwirn from Arena Investors LP

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This podcast is brought to you by Ginsler Wealth. The information discussed today is meant to be general in nature and not tailored to your specific investing circumstances. This means that you should talk to your regular Gensler wealth advisor or your own advisor before acting on any information we discuss today. Nothing in this podcast is intended to be a solicitation and past performance does not guarantee future returns. Our guest on this podcast may discuss concepts that turn conventional wisdom on its head. Prepare to have your mind blown. Today on the Ginser Wealth Unlimited podcast we have Daniels Byrne, Chief Executive Officer and Chief Investment Officer of Arena Investors. We discuss private lending portfolio diversification myths. Are risk and return always correlated? And we discussed the bridging finance situation in Canada. Compare it to Bernie Madoff and how can an investor due diligence these types of opportunities? Let's go.

Foreign

welcome everyone to the Gensler Wealth Unlimited podcast. Really pleased today to have Daniel Zwern, Chief Executive Officer and Chief Investment Officer of Arena investors. Dan has 27 years of experience and over 3,000 privately negotiated investments in 25 countries. He co founded Arena Investors in 2015 and arena has become a 3.4 billion global investment firm focusing on special situations asset and credit investments in corporates, real estate, structured finance and corporate securities. But before I sort of keep diving deep into Dan's background and bio here, we'll let him share some of that with us. So I'll just say first of all, thank you Dan for taking the time. I know you're a busy guy running a big firm there, so looking forward to the conversation.

Well, thanks for having me. You know, as you pointed out, arena is actually it's 3,43 5.5 billion now. It's really a global multi strategy firm that does just about everything that makes sense and really avoids, really steadfastly avoids taking a macro view on things and doing anything that really relies on kind of the proverbial greater fool, whether that's, you know, plain stock investing or other things like that. And we also don't do really mathematics driven investing. But beyond that, just about every type of kind of asset or security you can think of around the world we're involved in.

Yeah, definitely want to dive a little bit deeper into that. I, you know, when I when I think about arena, the go to for me is sort of a private lender or private credit. But the more you dive in, it does sound like you've got six or seven different key areas that you're investing in and focused on. So definitely want to hear about that.

Well, I think that lending is just a way to access, you know, part of the risk and reward of any given company or asset. And so what's, as a kind of, you know, is a multi strategy, deep value investor. Being a lender is good because it forces the investee to pay attention to you and to pay you periodically and to have a date when he or she has to, you know, permit you to realize your value as opposed to, you know, buying a stock that you think is cheap and hoping that someday other people will realize that's the case as well and might buy it from you at a, at a higher price. So there's nothing magical about quote, unquote, private lending. I don't, I don't really actually view it as a, as an asset class per se. It's a place in the capital structure of assets that permits the crystallization of value that we see in companies and assets. And through that it can be a very lucrative thing to do if you're kind of doing it the right way.

Right. And definitely going to want to dive in and hear how arena does it. But maybe before we get there, can you give us a little bit of history maybe about yourself a little bit, and then into sort of how arena came about and how you've grown into what really sounds like a global organization now?

Sure. Well, I actually wrote the business plan for arena in 1995 based on the thesis that, you know, an investment business could be a good business from the perspective of a Warren Buffett kind of view. Meaning can we create intangible value? Are there real moats that allow us to kind of create edge such that we're getting a disproportionate return unit of risk systematically and doing so not through the, you know, given wisdom of any given investment decision, but through the construction of an enterprise that continues to deliver opportunities where that is the case and therefore has, you know, real value. And so I wrote that when I was in the private equity business before business school and, and actually proposed it to the, to the PE firm that I was at at the time. And it was a strategy in some form being pursued by several other PE firms at the time, some of whom became much more broad based investment enterprises with very material franchise value. It wasn't really for them, but nevertheless they were, they were intrigued and supportive. And I went to business school and during that found my way to the hedge fund industry at a firm called Davidson Kempner, where at the time they were just doing a risk arbitrage and distressed ad, primarily in the US And I really Thought I could start to pursue this entrepreneurial bent as I leveraged the access that hedge funds do to kind of freedom of investment that, you know, over time would allow them to go into different geographies, different industries, different areas, seeking always that, that disproportionate return of risk. And so while there I started doing distressed securities and risk arbitrage and private lending and real estate investing. And I did that. I was in, in the US and started doing things in Europe with, I did some of the firm's earliest investments in Asia as well. And slowly but surely I added permutations of industry products and geography to, you know, my investment experience to get more and more familiar. And the more permutations in which I invested, the more it all stayed the same, which was just looking at different ways to lend a nickel against a dime or buy a dime for a nickel. And that said I was happy to be there, but was soon after recruited to started a business from scratch backed by Michael Dell, a billionaire. And while there kind of developed capabilities around the infrastructure of an investment business and you know, the notion of how to hire and fire and compensate and build, you know, accounting systems and all those different things, and was asked to become a principal there, which, you know, at the time at least didn't really permit anybody to be an owner of the franchise, so to speak. So that was less interesting since I was creating franchise value. And then I was recruited over to a firm Plot Hybridge, which was later bought by JP Morgan on a similar but larger transaction. My business there spun off into my own business that continued to grow. It was, you know, unfortunately it ended earlier than it should have because I had a bad guy that I turned in who was later sued by the sec. But in the meantime they took so long that then I had to basically wind out everybody. But during that time I made, you know, 93% up months and $2.7 billion for our customers. Pursuing this very same theme. And despite the government's lack of alacrity in understanding the situation and getting to the right person as fast as they needed to, I was in a position where I started several financial institution related businesses after that, including an asset based lender in factor, a leasing company, two bank turnarounds and a consumer finance company. And then I constituted arena in partnership with a Canadian holding company called Westaim in 2015 and just did the same thing that I'd always done because it never stops working, which is setting up an infrastructure that allowed us to continually make disproportionate return Period of risk. And so today we have about a hundred people investing out in New York and London with satellites in San Francisco, Singapore, Melbourne, Auckland, et cetera. And we also have our own associated servicing enterprise, Questor, Quester Advisors, which was primarily in Jacksonville with satellites in Dublin and Bangalore. We also have about 40 associated joint ventures with partners all over the world with another few hundred people. And the majority of our capital base really is. Is not. It's not a PE firm or a lending firm or a hedge fund or a this or that fund. It's a do what makes sense fund. And so we, like any real investor, we have the ability to do what does make sense and pursue that relentlessly and have no incentive to subject ourselves or to our investors to moral hazard. And so we find ourselves naturally seeing capital pulled away from anything that is less interesting and pulled toward those things that are interesting, which allows us to kind of keep delivering returns, which we continue to do. And there's a lot of stuff to do out there.

So thank you, that's great. And I think one of the themes I suspect we'll touch on throughout is maybe around diversification because as you said right at the beginning, we can invest in anything if it made sense. You just sort of ended on that point to some degree as well. Maybe give us a little bit of sense of the different. I don't know if you call them verticals or types of investments or areas that you play in play being not the right word, but you know what I mean.

Sure.

Just to give a sense to listeners how you build a diversified investment firm with a credit bent, but a diversified investment firm.

Yeah. Well, I think first principles are. One, we want to be as uncorrelated to the overall market as possible. So we don't know what the Fed is going to do, and we don't know about the various vicissitudes of public opinion or otherwise that make crypto good and opportunity zones, then good and this or that fad, good or bad or otherwise. And so we want to have investments that don't really change as the economic environment changes materially. And number two, we want to have as little exposure to any kind of extreme risk that is idiosyncratic. Right. Because no matter how much investment work you do on any given investment, horrible things can go wrong that are out of your control. And so the only way to minimize that is to have a good amount of position diversity as well as to have as little correlation amongst the constituent parts of your portfolio as you can. And you can think of each investment area that we pursue as a permutation of industry, product and geography. So we might be in energy investments in the United States through senior secured debt, right? That's just one thing. So the many of the permutations of industry, product geography are uncorrelated or have little correlation with all the other ones. And so the more of them you have, the less likelihood you have that any given circumstance in the world or associated with a given investment can hurt you. So it's like running an insurance company in the property casualty world. If I only have exposure to Japanese earthquake, I'm going to be worried a lot about whether there's an earthquake in Japan. If I have a exposure to Japanese earthquake and European storms and so on and so forth, and I keep mixing that up, any given circumstance really can't hurt me. And so similarly, we spread out geographically, we're invested in over 20 countries and there, there are about 25 countries in the world that are big enough to merit attention and also don't involve business dispute resolution that is conducted through physical violence. So we're not in Russia, we're not in the Caucasus, we're not in many parts of Africa, but we're into just about every other place, certainly G20 plus in most instances we can understand the rules of the road and you know, we can get a decent amount of capital involved. Number two, we invest across industries without really regard for anything other than, you know, where the best areas are. And frequently there are geological or non value related reasons why people flee from a given geography or a given industry. And that makes us more interested what we like to say, we run into every house that's on fire and we stay in some of them and keep working. And so, you know, I think furthermore we then have a whole variety of different instruments. We will lend, we'll buy existing debt, we will buy different parts of the capital structure depending on where the best return for universe finds itself and really are utterly indifferent to that. So in the last many years to be a lender, right, where other people's money is subordinate to you tends to be a pretty good thing, right? Because of the irresponsible behavior of the monetary authority. Since 2012, asset values have been pumped up. And so one way to mitigate exposure to that is to have other people's money at risk below you. So being a lender is pretty good. That said, if this were 1973 and stocks were relatively low levered and delivering, you know, 20 plus percent unleveraged free cash flow returns, stocks might be a good place to be. Right. When you think about optimizing return punitive risk. And so we're agnostic as to anything other than return for unit of risk, where the best stuff is. I would say also not only just industry, but we're involved in companies and really view that as a, from a Buffett style perspective of looking for real moats and franchises that from a five forces perspective are hard to penetrate. We're happy to be involved in real estate of all kinds, in all kinds of places. And frankly, the farther you get from jurisdictions like the US and the UK and some of the more understandable jurisdictions, the more we tend to be property oriented, because that tends to be a place where you can secure yourself or protect yourself in a way that otherwise you couldn't in more esoteric jurisdictions. We're very comfortable across the whole world of structured finance. And that can mean everything from factoring and aviation to entertainment to insurance finance to trade finance. There's a whole world of kind of non bank finance. Right. Because banks have fled really from virtually everything other than running ATM machines and doing stock brokerage. And so there's a whole series of businesses there that make tons and tons of sense. And we spend a lot of time thinking about that. And then finally in the securities business, where we buy tradable bank debt and bonds and convertibles and equities and do various forms of arbitrage, all featuring the same perspective, which is minimizing our exposure to the overall economic environment and having minimized the idiosyncratic risk through hard catalysts either that arise through the situation in which we're invested or through the structure by which we're invested.

Yeah.

And you mentioned sort of the banks running away from a number of things. I recall you speaking in another venue where you were saying things that are perfectly reasonable investments for you because of the work you do may be almost left abandoned by some of the other traditional lenders. And you can swoop in and with a reasonable, reasonably safe, in your view, asset level, generate some reasonable returns. And I'm not doing justice at all explaining that, but can you give us either use that or give us some examples so listeners can understand what's actually at the lowest level here of what investments look like?

Well, I think largely you could talk about banks and also non banks that avoid things that make sense. Right. In the case of banks, one of the unfortunate unintended consequences of the reaction in 2008 was a massive increase in regulation of banks without any kind of thoughtfulness and so many, many very sensible things. Have been kind of blocked from accessing bank balance sheets because perhaps there just wasn't enough thought given to, you know, what are the good and bad aspects of any given product. And so a whole variety of activities that banks did that banks should be doing are no longer done. And that could be lending to a whole variety of different corporates and assets, providing service in a way that is kind of thoughtful and speedy, cutting the red tape associated with lending, doing things that are more off the beaten path. All of that is gone really. And so that leaves a lot of opportunity, I would say among non banks. There have become a whole series of things that are done that don't make sense and whole things that do make sense that aren't done. Why is that? Well, as Charlie Munger, Warren Buffett's partner, always says, show me an incentive and I'll show you an outcome. And so a very large part of what has become the alternative Investment space post 2008 has really been geared toward packaging investment product to be sold as opposed to making great risk adjusted investments. And unfortunately that has turned what many times were very good investors, or at least reasonably good investors to really marketers. And so without it being really well understood, a whole series of investment platforms in the alternative space have become really just versions of Fidelity or Schwab or anyone else who's in the business of selling investments. A marketing company. They sell things to consumers and institutions just like, you know, Procter and Gamble, right? So Procter Gamble doesn't say I want the best toothpaste possible, that cleans teeth the shiniest and the whitest. They say what can I sell and how do I sell it and how do I package this thing so that the maximum number of customers buy it? That is not a great recipe for wonderful investing. And unfortunately that perspective dominates the alternative space as it has traditionally dominated the long only space now. And so that leaves a lot of windows because there are things that are more esoteric or harder to explain or feature a lot more variety that don't lend themselves to easily being sold, but are really excellent return per unit of risk investments. Conversely, there are a whole series of things that are homogeneous, are able to be understood, are easily able to be packaged, that are horrible investments, and those have been sold all over the place to all kinds of people who now in the last six months are starting to realize maybe that wasn't such a great thing and maybe I shouldn't have done that. And we're only in the beginning of that, of that environment. And so that leaves us the Opportunity to go do those investments that do make sense and be flexible in a way that is not rewarded in the sales channel marketplace. And that opportunity is the challenge of, you know, doing everything we can to make it clear to our investors and, or find investors for whom the level of clarity we can provide is more than sufficient. And so, you know, that's a mix and that that's a challenge for us to market those things that do make sense even when they're not as easily to market as other things.

I know in your portfolio, at least last I checked, there was maybe 150 different positions. Any examples of any of those that would hit the mark of what you've just described? Something that the traditional folks are running away from, but you're finding huge value.

Sure. As an example, on the real estate side, recently we've been buying loans from people where the loan is significantly less than the asset value, but for a variety of reasons, the current borrower can't service the loan. And so if I lent you $6 and your assets worth 10, but there are some circumstances where you can't continue to pay my interest, I should actually go. That's perhaps an opportunity because you have $4 of equity value that you can convey to me or part of it, and you know, you can't pay right now. But let's talk about, well, maybe I'll charge you less interest and maybe you'll give me half of that $4 or something like that.

Right.

But instead most conventional financial institutions say, woe is me. My debt is not able to be serviced. And even though there's lots of value below me, I just really feel like I got to get rid of this loan. And so we'll buy the loan. Seller knows that there's really no chance of losing money. We know there's no chance of losing money. Seller doesn't have the ability to deal with people who are not servicing their loan. As an example, as a bank, they may be required to put more capital against it, making it less profitable. As an insurance company, they may not be able to bucket it in such a way as to make it effectively as capital efficient in the same way that a bank would, but we don't care. And so we'll buy the loan and then we'll go to the borrower and say, we realize you can't service it right now, but if you change the interest rate from 6% to 16%, you know, we might give you six or 12 months and you can work through your issue. We might also say instead of 6%. Maybe we'll just also take, you know, a quarter of the value below us. Or if we propose those different things and you're not interested and you're furthermore being kind of recalcitrant about it, then we'll say we're just going to take that whole asset ourselves. So door number one, door number two, door number three, we're utterly indifferent. We know we're not losing money, just like the seller of a loan knew we weren't losing money. And in fact, we're quite certain we're going to make a good amount of money. And you know, when you think about the level of certainty of our making a significant amount of money relative to the virtual certainty that we cannot lose money, that's pretty good. You know, you should do a lot of that and we do a lot of that. And investments like that, that make all the sense in the world sometimes are hard to explain, hard to package, hard to scale to multi, multi, multi billion dollar levels.

Right.

So as a thing to go market like Fidelity or Schwab, that might not be a great thing to do. As a thing to invest and make money for your firm and for your investors, that's a totally sensible thing to do.

Right.

And so we just stick to the latter.

You've used the phrase a number of times, risk below you or value below you, or having other people's money at risk below you. And in studying arena through our business here at Gensler wealth for the last year or so, I came across a term that I hadn't really heard of before. I had to get one of your colleagues to explain it. And you've explained it to me and you call it the top attachment point. And my sense from the way it's disclosed and described is you want to have the lowest percentage number for that top attachment point. But can you explain that concept and how that works and how private debt, credit, whatever you call it, world maybe seems to be viewed as a riskier lender sometimes. But this top attachment point seems to provide a different angle to view it. So maybe I'll turn it to you to explain that.

Well, I think in that instance, it's always good to think about housing. And certainly I know a lot of Canadians are focused on housing because escalated significantly. So it's a good exercise to think through. But if someone has a house that's worth $10 and I lend $6 against it, right. My attachment points are 0% at the top and 60% at the bottom, right? And so I attach on that $10 asset in the first $6 of risk. Right. And you think sequentially from, let's just divide it into slices of 10 single dollars. The most senior dollar. Right. Is the least riskiest, from 0 to 10%. The, the bottom of the equity stack there, from 90 to 100%, that dollar is the riskiest. Yeah. So I want to be as senior, as low in, in my bottom attachment point as possible. I want to get repaid as much as possible. And by the way, I want to be obligated to be involved as short as possible generally. Right. Because even If I lent $6 against $10 and was well paid, but you asked me to do it for a hundred years, well over a hundred years, that asset could be worth $10, it could be worth $13, it could be worth $4.

Right.

If you give it enough time, the variability in that asset value could be high and it could actually be lower than the $6 of exposure I have. But if instead of a hundred years, it was only one year, the chances that that asset is going to move in total value from $10 to something lower than $6 is very low. So I actually want to get paid the most possible while being the most senior that I can for as generally speaking, as short as I can. Right. Or with regard to duration, I recognize that the longer I'm out, the more you got to pay me. Right. So, yeah, we will go two or three or four or five years, but we recognize that that's intrinsically riskier, all things being equal, than being shorter and therefore need to have greater levels of compensation.

Right.

So when you think about those factors, you know, seniority, compensation, duration, we're continually looking across all these different areas and optimize for those very factors that give us the most return for the least risk, for the least duration. And almost by definition, if you only invest in one country or you only invest in a certain type of asset, the chances that you're going to get the absolute greatest level of return per unit of seniority and duration is low. Right. So by being very broad in that which we look at, we're actually able to minimize risk. And so, you know, like a good insurance company, we spread out and we find where the opportunity is.

Well, thanks for that. And so now that we understand this top attachment point concept, what would be your average top attachment point across the portfolio?

Well, using that example, we're on average, we're not much more than 0% on the top attachment point and about 65% on the bottom attachment point with about two years of duration and over you know, 300 transactions with more than half exited, we were around 17 or 18% return gross. Right. Which is the return we get before we charge any fees or expenses.

Right.

And so in a world where the, for the vast majority of the time of our existence, the risk free rate. Right. That banks pay each other effectively was something like 0 to make 1,700 or 1800 extra basis points relative to risk free.

Yeah.

While taking risk whereby 35% of every asset was capitalized with other people's money below us, we could return period of risk.

Yeah. And maybe said another way if I could.

Sure.

Within a top attachment point of close to zero, if not zero for most of the portfolio. That means you are the senior most lender in the capital stack and yet you are earning high sort of teens type of returns which would be more characterized with a much higher risk asset.

Normally, I would say, and we've described this to banks as an example and we've said, well, look, we're the, the most senior were the 65%. And you know, theoretically, what if I told you I made 8% and the other person has said, well, gee, that's, that's pretty good return. 8% for being the top 65%.

Right.

We say, well, just for kicks, what if we told you it was 18 and they said, oh my goodness, that'd be so risky.

Right.

I said, but what changed from 30 seconds ago?

Right.

Did I get more junior?

Right.

What made it more risky by just receiving more compensation. Right. And that goes to this conventional wisdom that the, the more you're paid, the more risk you're taking. When in fact those two don't have to be correlated materially.

That is an interesting way to, to put it because yeah, normally I tell my clients and investors as well, return is sort of very much correlated to risk. The higher the potential return, the higher the risk. I guess in this case it's finding these opportunities that are either ignored or being run away from maybe by other potential investors.

Yeah. We try to differentiate between value risk and process risk. So if I'm willing to lend past 65%, go to 75% or 80% or 85%, which by the way banks do. Right. For assets they understand.

Yeah.

Taking more value risk. Right. We don't like doing that at all. You know, that's a pretty fair fight. We don't like fair fights. Whereas in process risk it might be, I'll lend you 65% but you need it in 10 days. Right. Well, that's interesting because I don't actually have to take more financial risk. I just have to kind of work harder. Right. Premium. Yeah, we like all kinds of process risk, all kinds of things that don't allow other people to move the way we can.

So you just use an interesting phrase, conventional wisdom around risk and return, I guess. And then just the other day I saw a white paper that you prepared that also might flip some conventional wisdom, and it was called Diversification in Private Market Portfolios. The free lunch that's still too expensive. And so again, as I mentioned, I think a theme of today is diversification is a big subject. Can you share sort of what the conventional wisdom is around diversification and. Well, frankly, really what, you know, the report, because I think the title basically spells it all out, but maybe give us a summary of your conclusions there.

Yeah, what that's about is this notion that approximately 30 investments tend to give you sufficient diversification, I.e. you're mitigating idiosyncratic circumstances, specific risk. And basically that conclusion arose from studies of primarily stock market investments where the presumption was that there would be a base stock price, a mean stock price for any given stock, and the chances that it was above or below that mean were distributed across a normal distribution of outcomes. And so fundamentally, it's not crazy if you're thinking about stocks, right? Because if I have a bunch of $10 stocks, some will end up at 6, some will end up at 9, some will end up at 12, some will end up at 15. And so as a result, as a mathematical fact of the matter, if that's the case, as I go to my 31st and 32nd and 38th and 47th and 56th investment, the degree to which I add idiosyncrasy right to the portfolio to get a better risk adjusted or at least volatility adjusted return. Because mind you, throughout CAPM and Buffett frequently decries this, the underlying presumption is that the bounciness of the Q sip, the bounciness of the stock price, is a proper proxy for its risk, which itself is a deeply flawed notion. But let's assume that for now, given that pool of stocks, that number 30 kind of feels like a level at which I get no greater a level of return pre unit of risk by adding more diversity to the portfolio. The issue is in credit or credit oriented investments as a general matter, right? Any given loan has an interest rate and a principal amount. And if you have 30 different loans instead of 30 different stocks, there are exceptions, but in most instances you're not going to get more than your principal act, right? And so as a result, because you don't have the chances of getting in the prior case, 12 or 15 or 18 versus 9 or 7 or 5, the degree to which diversity is required in order to protect you from extreme downsides from any given investment is much greater, right? Much, much greater. But unfortunately, people have misused this notion of 30 in order to justify a level of over concentration in credit oriented investments that if the investors accept that ultimately is better because the manager of the investment needs to incur less operating expenses per dollar deployed and therefore it's more profitable for the investment manager at any given level of cumulative return because he or she has to put out fewer investments. That's great, except that you're actually taking a lot more idiosyncratic risk than you kind of should be, right? And to avoid that idiosyncratic risk, you certainly need to have many more investments, spend much more operating expense, have much more infrastructure, and consequently actually have a cumulative greater level of scale on average in order to justify the whole thing, to make it even physically possible to deliver that level of diversity while not bankrupting the investment manager. And so it's a lot more challenging to invest and actually do the right thing for your customers than just giving them what they'll eat, you know, what they'll take without regard for what's in their long term interest.

Got it. And as I say, I think that probably gives a little bit of a sense as to why you have 150 some odd positions. When I look at your pie chart of the various investments you've made, it's sliced in so many slices, it gives a pretty clear picture of the diversification. I think you've touched on this already and I think I know what your answer is going to be. But you know, we're in a pretty different, challenging, interesting economic market environment right now. At the beginning, you said you're setting up and building your portfolio and your investments to not necessarily have a big macro picture, macro view. But as you sit there today and the world is doing what it's doing today, how do you think about continuing your investment program? Anything you're doing, changing, not doing, staying away from?

Well, I would say there are things we're running toward because we were not doing anything in the first place that was really exposed to this kind of environment. So as an example, if you look at really what are the primary investments that are having the most problems right now, if there's anything that's consistent across investment grade credit, parts of leverage loans, Cryptocurrency, venture capital, growth, equity, all of those things have little or no cash flow, right? Or highly insufficient levels of cash flow relative to the risk, very few natural catalysts, and an almost complete reliance on other people's actions to substantiate your value, right? And so as a result, when confidence goes away and you don't have certainty that the next person down the line is going to buy it yet at the same or above a higher level, suddenly the bottom drops out of the market, right? And so like any asset bubble over the centuries, it always works out that way, right? Everybody thinks, oh, I'll pay more and more and more for it because there's always the next guy down the line will, it will solve my problem for me. And then all of a sudden some data point undermines that confidence and the whole thing topples, right? And so because we look at intrinsic cash flows to be derived from any given company or asset, we don't really care what the quote unquote market, the, you know, the, the stock price or the bond price or the whatever is, right? We only care about are we appropriately compensated in every instance of the macroeconomic world in that by the cash flows immediately able to be derived from the investment in which we're in. So as a result, you know, when the S and p is down 20%, all our cash flows still are coming in, right? And we like the price at which we paid for them. And, you know, we don't have to sell it to anybody else in order to realize the value because they're coming in, right? And they all have natural liquidation kind of streams or maturities or other things that kind of force the ultimate realization of value. So we're not running away from anything because we like all the things we're doing. We are running towards some things. So as an example, the whole world of growth companies as an example is now very interesting, right? Because the bottom dropped out of all of those things that require the greater fool. There's a very large subset of those things that if you were to make some tweaks, you could make them make money, right? They still have positive value, just nowhere near the level at which people have been paying for them. And so folks like us might say, well, you know, if you're burning X and if you start to finally control yourself, you could burn x 0.3 of x. But, but by the way, you still need 0.3x worth of dollars, right, to get yourself to cash flow positive. We might be able to provide that money and at a pretty High rate, you know, at the most senior level in your capital structure. Right. But that's going to be incredibly accretive relative to the other alternatives for your existing stakeholders. Right. And so consequently, we're creating a great return period of risk. That whole concept as applied to kind of growth and venture oriented enterprises is an enormous opportunity. Right? Because it's as enormous as it is because the profligacy with which capital was thrown at those things and the sheer scale of it for this sheer duration of it was so enormous that now as the chickens have come home to roosters, the opportunity is as big as it was on the other side. Similarly, as an example, there might be parts of commercial real estate, for instance, within New York, even where as an example, there are buildings whose value is permanently impaired because of the new habits. In a post Covid world with how we all work and live and the amount of space necessary relative to the amount of space available, and furthermore, the amount of space that's available that is not kind of really geared to the new environment.

Right?

So it's one thing when you have a bright, shiny new building that's kind of geared to a hybrid work world with fancy new leases from Google or Facebook, right. That still has a lot of value. But if you're in a 1978 office building on Third Avenue, you know, that's not exactly in high demand, does it have a significant positive value? Absolutely.

Right.

Someone will lease that at a price. But does that leasing stream now substantiate the value at which that asset has been capitalized by the private equity in private or securitized debt markets? Absolutely not. Right. And so we're going to buy those debts or we're going to help recapitalize those assets as they have to now adjust to what is a new environment. So there are analogs to these things all over the world that naturally come through change. Right. And so part of our job is to position ourselves so that the things that we're doing, we're delighted by, but that any given source of volatility, either situation specific or macro driven, actually provide us not something to fear, but actually something to run to. New opportunity.

Right?

Because with change comes new asset values, new capital structures, new ways to deal with things that ultimately transfer value from stakeholders who perhaps were not as thoughtful or position themselves to be in a bad place, you know, when and if bad things happen to folks like us who are, you know, beneficiaries of when. When bad things or just when change happens.

Right, got it. That's great. I appreciate that I'm hearing little bells going off, which may mean we're running a little bit out of time, want to shift gears maybe and then come to a close shortly because you are in the private lending area and you got your finger on the pulse of the industry. What's going on around the world and you know what's going on in Canada. I'd be remiss if I didn't bring up private lending in Canada has become a little bit of a scary or dirty word because there's been some issues with a particular lender here that wasn't really operating in an appropriate manner. So, two questions. Any comments on that situation? Number one, but number two, even most importantly, how are investors supposed to due diligence firms in this area and how much work does an investor need to do? Of course we do this on behalf of our clients, but how much work do we need to do to be truly comfortable that we understand what's going on inside these firms before we start allocating capital?

Sure. Well, you know, the Canadian private lender you're talking about is probably Bridge. Oh yeah. They, you know, they're not the only ones. There's been actually several Canadian private lending snafus. And I'd say even before these recent times, credit risk has created volatility in Canadian financial institutions. So historically you look most recently at the private lending issues that have happened. But you could go back to 08 and look at what happened to some of the big four Canadian banks who really encountered some real issues that, that was really, really difficult. And then even before that, there was an insurance company called Confed Life, if you remember, Confederation Life.

Right.

Same thing. They had a concentrated level of credit risk taking primarily in Canada. That made no sense because they were a hammer that only saw nails and they blew themselves up.

Right.

And so basically they were in a position where they had promised a bunch of customers all of those. Right. A relatively simple marketable story, which is we're going to do things that others are doing primarily in Canada. Pretty simple to understand. We're just going to make these loans, we're going to be very covered by assets and we're going to be able to get you, you know, 8 or 10 or 12%. And the issue is that Canada's not that big a market. And the number of things actually that makes sense that the big four or five banks won't do is not that great. And so it actually brings to mind in some ways the Madoff situation. Right. Meaning that you may recall his business was based on this notion of a split strike option trade effectively, right? And if anyone had triangulated and say, well, how big is his fund? How big is the entire market for the split strike options that he claims to be doing? Oh, wait a second, he needs to own like way, way more than the cumulative size of the market. So this can't be possible. So therefore I need to ask more questions. Right? Well, I started a lending business with some partners actually that we took out of Crown. It's now a publicly traded company called Crown Capital. Right. And it was really hard to find loans in Canada that made any sense. There's just not that many, right? I mean Canada is only as big as Canada is. And so when several folks, not just bridge a few others were saying, oh by the way, I have a business of 800 million, a billion, 5, 2 billion of these incredibly return heavy, wonderful loans in Canada, we kept saying maybe we just misplaced, can't, maybe there's another Canada. But I don't know what Canada that is. That provides billions of dollars of mid teens low risk loans. It just doesn't exist yet. Their product was flying off the shelves because it was an easy story to communicate. And so how do you deal with that? Well, if you're not an institution that has a department that kind of hopefully thinks these things through, you're going to need advisors, right? Perhaps like you, perhaps others who are routinely looking at these opportunities, looking under the hood on, you know, not necessarily every single loan, but certainly sampling, right? Let me see a random sample of 10 loans, right? The, the pie chart that you see in our materials. If you pick 10 slices, we'd show you 1040 page memos and you'd say this is crazy or not, right? But it's all written down very clearly. And in fact, in our case, we're affiliated with a public company, so we actually, in our quarterly financials, we list every single loan. We have to anonymize it because we have to protect the identity of the counterparty because they didn't agree to have their name all over the place. But any investor that decides a nondisclosure agreement with us can look at any screen, talk to any person, look at any loan, challenge us on them, tell us why we're wrong, look at the track record, look at everything, right? Because we got nothing to hide. And in fact, when we were creating arena in partnership with a Canadian company in 2015, we already saw that happening. And so we actually erred on the side of kind of wild over disclosure to try to draw a Distinction between the level of transparency we had and the level of transparency we saw in the market. Yep. Absolutely no one gave us credit for

that as much as we wanted it. And so, you know, I can tell you from, from my vantage point, I have access to your data room sign, the NDA, can see all everything you've just described. And that to me, it goes a very, very long way. So I'll give you credit. It definitely goes a long way.

Well, and again, it's why we need to be in over 20 countries, because any given place doesn't necessarily give you the best possible opportunity. And by the way, it doesn't allow you to be that diverse. And so in some of those Canadian private lending issues, not only were the loans crazy, but there weren't that many of them. The concentration was enormous. Right.

Which goes against the whole theme of almost this conversation here. Interesting.

Exactly. So it wouldn't have taken too many questions or too many, you know, too much pulling on the string, so to speak. Right. To get to the bottom of that. And it's always surprising, right? I mean, look at all the people. And frankly, in Madoff, when I was managing what was a top hundred hedge fund in the world, and the day Madoff was announced, I had never heard that Madoff had hedge fund. I'd never heard of them as anything other than a small broker. And lo and behold, many investors of mine were investors in Madoff. And I said, well, what was that? I never heard of this guy. What does he do? And they all thought they were husbanding this magical secret return. And so again, you know, people are sold a bill of goods, right, that they want to hear. That's quote unquote, easy to understand. Right. And they get burned. Yeah.

Okay. Good feedback, good insight, really appreciate it. So let's bring it to a close. The one thing I always ask all my guests, our theme here, our tagline is your wealth unlimited. Because maybe unlike some other folks out there, we can look at any asset class we can help clients with, basically, we think anything they need on the financial side. And so for our guests, we always like to know if there was unlimited options out there. Unlimited in what you could be doing instead of maybe running arena today, what would you be doing if you could do anything in the world?

Right now, I'd be doing the only thing other than spending time with my family that I do do, which is I read a lot. I like to read about a whole variety of things, politics and philosophy and history and things of that sort. Take classes and just think, you know, I think what you find with a lot of investors is most of the times they're always curious and a lot of them are kind of, you know, narrow shouldered and dumpy with glasses on and they tend to read a lot.

So what's the best book recommendation from you at this very moment since you got on the topic?

Sure. Well, I can give you. I actually on my Twitter feed that some folks maintain, I actually put those.

And your Twitter handle is what again, for folks that might want to hear a little bit more from you.

Oh my God, Dan Underlinesworm. Okay, I'm glad I figured it out myself. But I would say, you know, as an example of a recent one more on the business side, I just read as an example, Alan Patricoff's memoirs, no Red Lights. I was an intern for his firm 30 years ago and you know, he's a very insightful, intellectually curious entrepreneur. An investor who has, you know, it's that investment type and area is not a thing that we spend a lot of time on, but he brings a very lucid, thoughtful approach to it that makes a whole lot of sense as an investor in a builder of businesses.

Okay, there we go. So listener can go find that on Amazon or at your Twitter feed, I guess. Well look, thank you Dan. Really, really appreciate it. Your insight and experience clearly shines through here with really enjoyed the chat and very much appreciate your time. So wish you continued success and continued finding opportunities that others don't seem to want and generating high risk adjusted returns. I guess we'll talk to you very soon and just thanks again for your time, really appreciate it.

You're welcome. I appreciate your having me.

Okay,

This has been Brian's conversation with Dan Zwern from Arena Investors. We hope that you've enjoyed their conversation and learned more about how Dan and his team think about investing in lending in different special situations. Please note that Gensler wealth may invest with arena in the future, but this recording does not constitute investment advice nor an endorsement. This has been a Gensler wealth audio production. The unlimited podcast is hosted and produced by Brian Gensler and edited and mixed by me, Katherine Donville. If you're interested in hearing more from us, please like subscribe and give us a five star rating and follow us on all social media. We can be found at ginserwealth. See you next time. An additional disclaimer from arena the information provided by arena investors in this podcast should not be considered a recommendation regarding any particular investment. The actual and potential investments discussed are meant to be examples of Arena's investment approach. It should not be assumed that any of the investments discussed herein will prove to be profitable or that the investment recommendations or decisions made by ARENA in the future will be profitable. This podcast does not constitute investment advice, nor is it a recommendation or an offer of investment advisory services or products. No person in any jurisdiction may treat this podcast as a solicitation or offer of any advisory products or services. A prospective investor must rely solely on the terms and associated disclosures in any final offering memoranda, investment management agreement, and associated subscription documents, if any, which would constitute the only basis upon which offerings of any product or service may be made.