Howard and Bruce, the last time we were together was in April when Barron's tapped you as the most likely investors to succeed Warren Buffett as the Oracle of Wall Street. You took very different paths to get here, and I thought we could actually start by going back and hearing a little bit about your journeys and decisions to form asset management companies. And we'll start with you, Howard.
Well, you know, when I started full-time work at Citibank in 1969, investing consisted of stocks and bonds, and the city's results in stocks were so bad, and I was part of it, that I was banished to the bond department in 1978. And just in time to get a phone call from the head of the bond department in August saying, you know, there's some guy named Milken or something in California who deals with something called high-yield bonds. Can you figure that out? And that was, you know, ostensibly the first alternative investing because it was so non-mainstream. Bond investors could only buy investment grade. And then of course the financing from high-yield bonds led to private equity, which really got birthed — you know, a few people did a little in the mid-70s, but it got birthed in the mid-80s for the most part. And then, you know, the next big move I think was venture capital in the '90s, because, you know, in '99 VC investments went up hundreds of percent. Then of course there was the tech bubble burst, and then hedge funds had their day because they didn't go down too much in the crash because of the long-short nature. And then of course private credit. So it's been a great evolution. I was very lucky to be in at the beginning of that process in '78. So, you know, at Citibank I did high yield and converts. Then I went to TCW in '85 to do high yields and converts, and I was approached by a guy named Bruce Karsh who had an idea. He says, why don't we do a distressed debt fund? So we did in '88. And that was a great place to be. And then, you know, Bruce and I and our other three co-founders from TCW had the chance to go out in '95 and start our own company. And, you know, we just felt that, you know, we had done a good job for our clients, and if we could continue to do so, we would have a success on our hands. We were managing $7 billion at the time in '95 at TCW. And we never asked ourselves whether we would ever get back to $7 billion. But then this process that I described took root, and alternatives began to be talked about around '03-'04 in the wake of the tech bubble burst. And, you know, today we're at $230 billion or something.
And Bruce, how did your trajectory align with what Howard's just described?
Look, I would start by saying I think we're still in the very early innings of what Howard described. Like, the business continues to go into private hands inexorably. It's happened for, I'm going to say, 30 years, Howard. And it's going to happen for another 10, 20, 30 years. And the reason for that is because what we generally do is buy assets or businesses and own them and don't have to worry about the distractions of the public markets. And if you just — any of the securities we own, we own great businesses within them and assets, and just run them like they're private businesses. And I guess that's — I say all that because with the amount of money piling up internationally in sovereign funds, pension funds, wealth for private clients, etc., this is not stopping. That's the first thing I'd say. If I go back to answer your question, we didn't know that would occur 30 years ago, but we thought what we had was an — and we had a bunch of businesses or operations in real estate and infrastructure and renewables. And that the only way we figured to grow those businesses was to bring in outside capital to do it. We didn't want to dilute the common shareholder. The only other way to do it at that time was to do it with debt, which wasn't a good idea, as lots of people go bankrupt that way. And therefore we came upon the alternatives industry, and it was early, early days, but we got lucky in being in the middle of that and really created the asset management business out of that. So it was the same — I'd say it was the same trends, but different because we came at it from an operating perspective. We just didn't know how to manage money. We just wanted to run the things that we did and do them well and do them at scale, because probably the most important thing that we fell upon is the things that we do — power, infrastructure, real estate, you know, all the types of infrastructure and even our industrial businesses. The bigger you get, the more exclusive it gets, the less competition you have. The returns are either better or more certain. And that was probably the thing that we finally figured out, and that's why we scaled the business to the extent we did.
I think the thing that really distinguishes Brookfield, the more I've gotten to know it over the last seven years, is this ownership mentality of not being a hired hand who runs pieces of paper for somebody else, but somebody who owns assets and tries to optimize their value. And I think, Howard, we could not have — I think back to when we first talked about partnering on Oaktree. If we didn't have similar ethos about value investing and downside protection and all the things, we probably couldn't have got along, right? Because — and we were — we're different. The firms are different in some respects, but in some respects they're similar. And that gave us the basis of being able to create a partnership that worked.
And when you look at alternative finance, the industry now has really grown exponentially recently. What do you think sets you all apart? And if you could just talk a little bit about the changes you've seen, you know, just in the past five years even.
So, I think what's going on in the industry today, number one, like I said, it's getting bigger and bigger and bigger. It's not stopping, and more money's coming into privates. That's going to keep happening. But like everything, consolidation happens, and therefore all those groups that have a trillion dollars or $2 trillion dollars, they can't manage, they can't give random people hundreds of millions of dollars because it's not meaningful to them and they can't keep track of it and they can't keep relationships. So what's happening is the large groups in the world and the large groups that control capital are concentrating their relationships. And that was part of the reason we didn't have credit within Brookfield to any major extent, and therefore adding Oaktree into it allowed us to have a much more broad platform to be able to deliver to those clients because we could deliver all the way across the spectrum. And I'd say that has differentiated both all the products that we have, but now with our other managers has allowed us to differentiate our product that I won't say nobody, but not many people in the world that deal with institutional, retail, and wealth investors have the breadth of product that we have. And that has given us and will give us in the future an enormous advantage to be able to invest.
But you know, when you say differentiates, Katherine, I keep coming back to the ownership mentality. And, you know, when Brookfield is making transactions for its clients or its listed entities, it's also committing its own capital to the same investments, and that guarantees the alignment and benefits from Brookfield's expertise and operation. And the other thing that I think stands out, again, I've been a director since the beginning of 2020, and what I've seen is, as at Oaktree, the willingness to buy something for your own account that nobody else will buy. And nirvana in the investment world is to find such a thing that other people won't touch with a 10-foot pole, assuming you're right, of course. But, you know, the hired hand might say, 'Well, I don't know. I don't know if I want to do that because it might be unpopular with the clients.' But the person who's committing his own or her own capital says, 'I want to do it because it's something I believe in that I'm getting at a really attractive price because everybody else is allergic to it.' But, Howard, I recall after the first — I'm going to say five board meetings you came to at Brookfield, you said to me one day, because we describe deals, and you said to me something to the effect of, 'I didn't realize your private equity business was actually what you do. This is a real business. You're buying things with downside protection and cash flows, and these are incredible long-term businesses that you can own in the company.' And I think that's been the backbone of what we do — is not to get complicated and just own great businesses in great places, great people.
Well, you know, when Buffett talks about value investing, I think the first words out of his mouth is these are not pieces of paper. These are businesses we want to own for the long term. And that's a distinction — not pieces of paper. And I think one other similarity you all share is your ability to spot — to invest in counter-cyclically and to spot the diamond in the rough. Could you guys — could you each talk about some examples of that?
Well, you know, when I think about willingness to go against the grain, if you will, the best example is October of '08. You know, here we are. We've lost Merrill Lynch, Bear Stearns, Wachovia, Washington Mutual, AIG, now Lehman goes under. People are talking about the end of the financial world. And we have just raised $11 billion in a distressed debt fund, 90% of which is sitting on the shelf. The biggest distressed debt fund in history was $2.5 billion. We raised $11 billion for our '07-'08 fund. Should we invest it? Simply, should we invest it? What if the world ends, as people were talking about? What if all the financial institutions melt down? Well, you know, we made a very simple calculation. We had no facts to go on. We had no prior experience. There was no experience with the meltdown of the financial system. And we simply concluded that if we invested and the world ended, it wouldn't matter. But if we didn't invest and the world didn't end, then we didn't do our job. So it turned a complex decision into a very simple one. And we reasoned that it's hard to predict the end of the world. It's hard to give it a high probability. It's hard to know what you would do if the world ended. And most of the time the world doesn't end. So, you know, in reflection that seems very simplistic, but that's all you had since you didn't have data or prior experience. And so, you know, Bruce Karsh took that decision process and invested an average of $450 million a week for the next 15 weeks. That's $7 billion in one quarter. And that's really all you had to do. So that's just an example.
Simplistic for you, but not for the rest of the world. Bruce, Westinghouse seems to be a good example of something Brookfield saw very early — that saw the potential of very early.
Yeah. So look, many of you know this in the room, but I would say what we always try to do is have — and the only way to do it when you're dealing with markets like that, it's unknowable, right? Like you said, whether the world's going to end or not — it's good it didn't. But for buying businesses, what one can do is try to have more information about certain things than almost everyone else. And if you do that, you'll have more confidence when the time is ready to make a decision to invest. And secondly, you need to have fortress amounts of money around such that you can confidently make those decisions and not have to second-guess whether you're going to be in business after you made those decisions. And third, you have to have the governance and the people and the organization to back your decisions so that on the way through those decisions, you don't do something stupid. Because often people make decisions like that and then they second-guess themselves, and that's where they get themselves in trouble. And often it's not the first investment that actually works the best. The first investment — sometimes the best ones — they go down by 50%. And then you have a really tough decision: do I double down or do I quit? And when you double down, that's often the best investment you've ever made because you got into it, it was the right decision, you just missed the timing. Once in a while — and I'll come to Westinghouse — once in a while it's different. But...
There are just many, many pieces — many real estate investments we've made over the years where we were just too early. You know, the knife was still falling. You never know when the knife's going to hit, right?
The first of the greatest adages that I ever learned was around '72-'73, and somebody told me that being too far ahead of your time is indistinguishable from being wrong.
And it's true, but you have to live with it. And you want to be ahead of your time, but there are consequences. You have to cope. But it actually doesn't matter as long as you're in the investment and you have enough capital to keep doubling down and you keep at it, and you had — I'm going to caveat that with — you had good information up front. If you had — and you can come through the bottom, like we bought Enron when Enron went bankrupt. The power markets were a total nightmare. I think that was 2002, and total, total disaster. And we bought — we bought $900 million, which at the time was a lot of money, of hydro plants in Maine, upstate New York. And it was tough for a long time, but eventually we've refinanced all of our money out and we made a fortune out of those investments. It was many, many times x'd. So it just takes it — but we had to bear with it and keep putting money into it and double down, etc. And I'd say that's the real trick. But to do that you have to be prepared up front and have money. But more importantly, you have to have — everybody has great ideas: 'I'm going to double down.' But if you don't have the capital to do it, or you don't have the backing of your partners, your shareholders, your investors, your board, your investment committee, and those type of things, it can go bad. Now, Westinghouse — look, that one was unusual. We had probably an added benefit. When I go back to what I just described, we have been in the power business — well, in fact, the whole life of this company, 125 years plus. But in the last 50 years, we've been invested in the power business a lot, in every single type. Now we're in all of them, but at that time we were in quite a few. And we had more knowledge about the power markets. And we had one — go back to Howard's thesis — we had one piece of information that nobody else had. They could have had it, but they didn't act on it. The piece of information was that each of the power markets for most of where these plants were in the world that they operated could not shut down, and if you shut them down the grids would go down, which meant that they were staying running for the duration of the life of those plants. And if you did that and you shut them down based on the life of the plants, you'd earn a downside-protected 15% return. That was our blowdown scenario. So when we sat back and looked at it, if your worst-case scenario is you're going to earn 15% runoff, that's pretty good. And the rest is history. Power markets have come along, electrification has come along, AI's come along, etc. And Westinghouse has been very successful for three of our businesses — two funds and one of our renewables public entities. But if you didn't have those things, you wouldn't have been in position to do it.
But just to belabor it a little further, I think the essence of good investing is to kind of cover the downside and arrange your affairs so that the surprises are on the upside. And I know you — I've told you the story before — but in New York back in the, I don't know, '70s maybe it was, we had a multiple murderer called the Son of Sam. And a few years ago the...
Howard, we're going to a bad spot.
We're going to a bad spot.
Yeah. Well, but the cop who caught him passed away a few years ago, and in his obituary it reported that they said to him, 'How did you catch the Son of Sam?' And he said, 'I put myself in position to get lucky.' And whenever I hear you tell the Westinghouse story, you know, you bought something that was out of favor. You didn't have to beat off a lot of other bidders to get it. You had the capital, you had the long-term view, but you also had a belief — because of the piece of information you described — that in the worst case you're going to make 15% a year. So, and the upside from there was...
And I would say that's — nine out of 10 times that's all I ever focus on when our people bring investment decisions to us at an investment committee. It's what's the downside? Like, I don't care about the upside. If you're in 15, 20, 22, 25, 35, 40, you get lucky and earn seven times your money, whatever it is — all those are just bonus scenarios. Just don't lose money, you know, and earn us 12 in a downside scenario.
And we talk about the congruence between values at Oaktree and Brookfield. And you know from its first day, Oaktree operated under the motto that if we avoid the losers, the winners take care of themselves.
Which I would say the one thing that we were — credit has historically been a dangerous place to be in capital markets. And the reason why Oaktree was appealing to us is they had an ethos of downside protection, and therefore we knew that we weren't going to get ourselves in trouble by backing them because they knew how to make credit decisions. And that was probably the most important thing for us in entering into the partnership.
To the question about how to avoid losses. Bruce, at the investor days in New York, you asked everyone to talk about the investments you've passed on. You've asked all the division heads. How do you decide? Talk a little bit about your due diligence process and what makes you walk away from...
