A conversation with Canyon Partners' Josh Friedman ’82

Small owner of the Raiders but a big owner of Charlton Athletics.

It wasn't really that complicated. My dad, who was not college educated, from the time I was young—we grew up about 15 miles west of here in a town called Wayland—my dad said, because I was really good in school, he said, 'You have to go to Harvard and you have to go to Harvard Law School and you have to go to business school, Harvard Business School.' That's what my cousin Eli did. He was the only successful one in the whole family. You'll notice there's an Eli Goldston professor at the law school and at the business school and at the college. That was my dad's third cousin or something. And my dad said, 'And when you're done, you have to have your own business. Don't work for people.' Actually, he used an expletive. Don't work for—because he didn't like the people he worked for. But he said, 'Don't be a lawyer. If you do it, don't do it for more than a couple of years. You have to have your own business. Have to have your own business.' And that was the thinking of a guy who was really smart, not really well educated, per se. His dad had died when he was about 13 years old, and they were dirt poor and clawed his way into a middle-class living. And my mother was a school teacher. He ended up being, as I said, a non-accredited engineer at a company called Raytheon, still exists. But he was always—grew up in the Depression. So he was obsessed with financial security, and that was my dad's simple formula to financial security.

So what I was thinking was that I would have my own company and I would work at a startup, which I guess is what everybody does today. And I thought I would start up something techy out on Route 128. There were all these electronics companies. I knew a lot about that stuff. I had done nothing with physics and electrical engineering undergrad. And that was my plan. And I really wanted to have my own business. I didn't really want to work for other people. My dad—and I'd ask him that, why should I have my own business? He'd say, because you're short and you're Jewish and people are very prejudiced against both around here. So, you don't want to do that. You want to have your own business then nobody—you don't have to answer to anybody. That was my dad's, again, his simple logic. It turned out to be great. It turned out to be kind of a great bit of logic. But I got waylaid because here I was in my JD/MBA program and I had a bunch of summer jobs and of course I was a really good student. What was all the competition for? It was going to work for Morgan Stanley or Goldman Sachs or whatever. Investment banking was the thing. So I figured, well, I'm really young. I was a couple of years young for my grades. So, I figured maybe I'll do that for a couple of years and then I'll figure out how to do my own thing after that. And I had no idea what Goldman Sachs really was. I don't think my dad who was giving me all this great career advice had a clue what Wall Street was. Private equity really didn't exist. There were three dozen firms back then maybe. So, it was just starting. But that's—I did that because I thought it would be a great way to kind of credentialize myself. I would learn—and by the way, I also thought law would be really good to learn. HBS would be fantastic because I'd get 10 years of experience in two, which I think proved to be the case and then some.

I was a good—if I picked a career according to what I was really, really best at, it would be at taking exams. Really, I'm really, really first-class at taking exams of all sorts. I was good in physics exams and let me tell you, the guys—you want to see smart people, there's a lot of really smart people at Harvard Law School. They're not all so crafty about how to take an exam. The guys in physics are off the charts but they were at that era—this was, you know, when I graduated undergrad, '76—the guys who went on to become the greatest physicists of our era, they didn't study. They just were there, you know, 'I'm doing the even number problems, I'm doing the odd ones because that's the even number ones, the problem set, I'm doing the odd number one just in case because that might be the exam.' And so I was ready, they weren't ready, they were just way smarter. So but I knew how to take exams, so that's how I did that. That was what I was good at. And I liked it—it was like solving puzzles. It was like doing the New York Times crossword puzzle.

So, I was a second-year associate at Goldman. My roommate from law school and business school is a guy named Mitch Julis. We eventually started our firm together. Mitch had been a bankruptcy lawyer and he hated practicing law. So, he quit and he ends up doing bankruptcy investing at Drexel on the West Coast, which is generally regarded as being kind of a third-rate firm. I'm sitting here going, I don't really want to work for any of these firms. So I was keeping track of who all the real financial entrepreneurs were out there. Who's going out and buying companies and selling companies and building private equity businesses, not with a fund per se, but just building things—the Derald Rutenbergs and Andre Meyers of the world, early stage, the Wes Rays of the world. And I knew all about this guy Mike Milken. And so Mitch goes out there because he was writing an article about investing after he quit Weil, Gotshal. He had no idea what he was going to do and he wrote an article about investing in a recession and one of his strategies was buy junk bonds. He flies out, interviews these guys and they say, 'Wow, we don't have guys who went to Princeton and Harvard Law School and Harvard Business School. Why don't we interview you instead of you interviewing us?' And basically he became the bankruptcy analyst. And then he heard they had—that Mike had this plan of going out to use high-yield bonds to finance leveraged buyouts, which had never been done. And he needed somebody kind of to run that area and Mitch said, 'Oh, you should call, you know, my roommate Josh.' So, I left being a second-year associate at Goldman. I became a partner at Drexel. And I think the guys at Goldman had almost none of them had even heard of Drexel. A year later, they had because every single deal was a Milken-Drexel deal. You'd look at the Wall Street Journal, we were involved in 90% of the stuff, of the acquisitions going on, every hostile deal, every buyout. I mean the market share was tremendous and because I was running capital markets, that was what I did. I was in charge of this area and I'm like, we didn't know what we were doing. We had no idea, we were making it up but we had—the market would tell us and that's what Mike Milken was doing. It was pretty brilliant what he did.

Yeah, most would have. I was probably partially ignorant of how good an opportunity it would have been to stay at Goldman Sachs. I'd been hired by Steve Friedman who was running the firm two years later and I was sort of his guy. So I was on the fast track there, but I didn't really want to be at any of those firms. I wanted to have my own business. And Mike Milken, I knew was running—when he was running the high-yield group at Drexel, it was essentially a hedge fund. It was in the early, early days a $2 billion hedge fund with all capital provided by the firm and a 35% promote. Pretty good. And so after all expenses, so it was even like Citadel and the expenses all passed through. So that was kind of what it was. And I figured, okay, Mike is giving money to all these incredible financial entrepreneurs and these guys running these LBO firms. There weren't that many back then. It was KKR, Clayton Dubilier, Wes Ray, you know, Gibbons Green, Van Amrongen, the predecessor, Leonard Green, Adler & Shapiro, and a few others. And Mike's idea was let's use our capital to just offer them our capital instead of have them go to these insurance companies and let's invest in these deals. And in the early days of the buyouts, the deals were fantastic. Multiples were low. The buyout firms would approach a divisional manager at a part of a conglomerate and they'd buy that division. The CEO of that division will quickly realize that he's more aligned with the buyer than the seller. And so they're trying to make the price low, not high. You can't do any of that anymore. But then the competition is ferocious today. But that was the business back then. And I just figured if I want to have my own business, if I want to run my own business, if I really want to be on my own, here's a firm that is running around financing people who are entrepreneurial who want to buy companies who don't have any money. This is a much better thing to do than to become a very high-priced auctioneer of companies, which is what I was doing in the merger department at Goldman Sachs. We were good at it. It was pioneering. They were fantastic mentors but here was a different kind of mentor in a much less controlled way.

Oh, there you go.

So, you know, some people plan their lives and sometimes, you were saying, some you just have to keep your antenna up so that when the opportunity that suits you is there, you know, you take a shot at it and if it's not working, you know, you can pivot, right? Today, people pivot like crazy. Well, Mitch wanted to be an entertainment lawyer. You know, we weren't interested in credit and bankruptcy and this and that. And he went for an interview with some Beverly Hills law firm. He figured it must be an entertainment firm. There's nobody else on the interview schedule. And they talked to him and they go, 'So why are you interested in us?' He says—he starts talking about the movies and this and he had memorized every movie that had ever been made. I mean, he has an encyclopedic knowledge of entertainment and still does. And he goes on and on and on and they go, 'Well, that's great, but we're actually a bankruptcy law firm.' And so he's like, 'Oh, forget it.' I'm interested in it all. And they go, 'No, no, we're doing Jerry Lewis. It's bankruptcy.' Well, Mitch is a Jerry Lewis fanatic because he had gone bankrupt and he wanted to get out of his contracts. We use it to get out of all the executive contracts. And so then they said, 'And we're doing Tom Petty and the Heartbreakers.' You know, he signed a six-album deal with Universal. The first album took off. He doesn't want to deliver the next five albums. So he's trying to get out of it by using bankruptcy. And so Mitch says, 'Okay, I'll try it.' And he does it for the summer and he ends up loving bankruptcy stuff. And he was always an investor. I couldn't figure out why you'd want to be a lawyer in the first place because he always loved investing. We did some investing back when we were in graduate school. We were taking our student loans and putting in the Fidelity money market account earning 14% while we hadn't paid—weren't paying interest yet. That was pretty good. And so you had to pay it for the tuition. We kind of forgot—I hope this Fidelity company isn't going to lose our money. You know, it was a money market fund. The rates were crazy in '82. It was the Volcker era. So, anyway, that's how the whole thing got started. And then Mitch starts doing credit stuff, becomes a bankruptcy lawyer, starts trading bankruptcy, and that leads to—before you know it, we're both on the credit side of the equation. So, it was really not intended. But that's one of many.

No. Probably not. But I was at a very young age in a truly unique position at a truly unique part of Drexel. You had this big firm and there was one department driving it and it was the high-yield department. It was well capitalized. It was creative. It was actually a hedge fund right inside of a firm. That's what it was. And I was like one of the most senior guys in that fund. So that was a great place to be. So I probably wouldn't have left if it had kept on that trajectory or at least left so soon. I was there five years. Very influential five years with unbelievable mentors in the form of Mike Milken and a guy named Peter Arian who passed away. He was a great guy and brilliant, brilliant guy, PhD from the Fletcher School. Really smart guy. But no, I probably wouldn't have left at that point. But I probably would have left eventually and I probably would have ended up on the private equity side as opposed to the credit side of the world.

Well, there's all these other people today founding firms like before they finish school and they quit. So eight years might be—maybe that's a long time. And I spent a long time in school, too. So maybe it wasn't quite so dramatically young. Well, we didn't have a particularly brilliant business plan when we started. We had another partner, actually, we had a couple other partners, but they eventually all went away. They didn't either have the discipline or the interest in sticking with it while we figured out what we were doing. We didn't really know how to raise money. George Soros offered to give us $100 million to start a hedge fund, but he wanted basically half the fees and I didn't want to do that. Maybe that was a bad decision because we could have probably done that for a while and then given him the money back. And it would have gotten us off way faster. We got a couple of people that we knew, an insurance company and a fund of funds and a foreign bank to give us big managed accounts like, you know, 50 to 100 million each to go out and buy securities in the aftermath of Drexel blowing up. Now remember, Drexel was the only market maker of any significance in a new asset class of high-yield bonds. And you have an economy that's coming out of a recession. You have savings and loan institutions failing left, right, and center because of real estate problems. Many of them owned high-yield bonds. They're taken over by the government which is now puking these into the market with no market maker. So we're looking at this stuff and like the prices are so low you could cry. We know these credits. So we got these managed accounts and that was great. So we started buying securities and those things had rates of return like 50, 60% for three years. But then you have to give the money back. So now what do we do? Well, we now got to raise a fund. We had no idea how to do that. So we started with $17 million. Nine of it was ours. So, you know, it was—and then eventually we figured out how to raise institutional capital and slowly, slowly, slowly. So we were not—it wasn't a big flash-in-the-pan success. We also were doing initially a lot of restructuring advisory work because there were a lot of bankruptcies in the aftermath of Drexel's—or companies that were just in distress and we were uniquely knowledgeable about how to rejigger these balance sheets because of where we'd come from and that was advisory work where you could at least get fees right away while you were trying to figure out where you were going to get somebody to give you money. But we didn't really—I don't think it was nearly as well thought out or as well planned as it could have been had we been maybe a little more exposed to what the industry looked like. We were doing it kind of in a vacuum.

Well, we started with more than just Mitchell so we couldn't get it all right. But Mitch and I both had sort of the same outlook on things. You know, ethically, we knew what happens when you make a mistake on anything that involves crossing lines or being too aggressive. We didn't want to get anywhere near those. We agreed on that. Mitch was really smart, really diligent, very, very good research guy, particularly in bankruptcy and distressed. So, we said, let's just give it a shot. You know, I don't know, we'll figure out which way it goes. We didn't really know which of the different things that we were doing were going to really work. And we were doing some private equity initially too, but sort of fundless private equity stuff, but I knew that Mitch was smart and trustworthy and hardworking and those are three really important things.

29 and change, but it's—

How has the original strategy for Canyon changed over the years and how have you balanced, you know, the desire for the firm's growth while staying nimble into new asset classes or opportunities?