Robert Koenigsberger, Gramercy
Episode 5 of Perspectives our dedicated series where AIMA, in partnership with KPMG, speaks to alternative investment industry leaders from around the world continues with Robert Koenigsberger, Founder, Chief Investment Officer and Managing Partner at Gramercy.
Dive into Robert's captivating journey over the last 25 years, from launching Gramercy—a multi-billion dollar investment powerhouse—to navigating the intricacies of emerging markets across the globe. He passionately argues that ESG is more than just a checkbox—it's an ethos. As he addresses the complexities introduced by globalisation, he cautions about the challenges it presents today. Join him as he unveils the keys to success.
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Founder, Chief Investment Officer and Managing Partner of Gramercy
5 Lessons from Robert Koenigsberger
Robert stresses that ESG considerations should not just be a box to tick for investment firms. "For us, ESG always has been and has to remain a genuine approach...we look at ESG as part of the investment analysis, part of our process”. Robert’s approach underscores the importance of incorporating ESG factors authentically so that these factors can then play an integral role in understanding the risks associated with an investment and ensuring investors returns are protected. He also advises that “ESG in developed markets means something very different than in emerging markets” given that in emerging markets, there is greater potential to make a significant impact through ESG considerations and transformative changes.
Starting a hedge fund or an alternative investment management firm is akin to launching any entrepreneurial venture. Robert notes that “there's an entrepreneurial aspect, it's not just about running portfolios, it's about creating and perpetuating a business. That takes time, that takes patience, that takes perseverance."
The journey from a start-up’s inception to its silver jubilee is peppered with challenges and transformations. Yet, as Robert highlights, "one of the cool things about 25 years is that we have elements of our culture that were there the very first day," demonstrating that the essence of a company can remain intact. However, maintaining this core while accommodating the dynamic nature of growth is a delicate balance. For Robert, “diverse meritocracy” is the antidote as it enables innovation and progress, but it also mandates the creation of an environment accountability. “We're a family that's holding each other accountable."
Firms must have a clear and unwavering mission that guides their decisions. "Our mission today is similar to what it was back then, which is, quite simply just to have a positive impact on the well-being of our clients, our portfolio investors and our team members alike." For Robert, it is imperative that a commitment to client success and overall well-being is the guiding light for anyone in alternative investments.
Read the transcript
Tom Kehoe, AIMA 00:03
Welcome back to The Long-Short. Over the coming few months, we'll be bringing something a little different, the ‘Perspective’ series, in partnership with KPMG. This podcast series will feature conversations with leading CEOs and founders of alternative investment firms from around the world. And today, we're excited to share with you one of a series of conversations we've had with them. Our guests share their visions in a variety of areas, including how to attract and retain top talent in the context of the fierce war for talent, as well as how to navigate the increasingly complex operational scaling challenges and much, much more. The discussions are being led by myself, Tom Kehoe, co-host of AIMA’s The Long-Short podcast, and John Budzyna, Managing Director and US national leader for market development for alternative investments at KPMG. So, sit back, we hope you enjoy the show.
John Budzyna, KPMG 00:57
We're here today with Robert Koenigsbergerer, the CEO of Gramercy funds management. Robert, welcome.
Robert Koenigsberger, Gramercy 01:04
Thank you, very much pleased to be here.
John Budzyna, KPMG 01:06
So, Robert, you run a worldwide investment firm in the New York area. Can you tell us a little bit about your background? Why did you decide to work in the asset management industry to start with?
Robert Koenigsberger, Gramercy 01:17
Sure. I came at it from a non-traditional approach, if you will. So, when I was studying undergraduate studies, I studied political science and the history of Latin America. When I was graduating in the mid to late 1980s, I was also asked to do an honours thesis. And when I looked around, you know, where are the opportunities for jobs in Latin America? And what are the dominant themes? You know, unfortunately, or fortunately, for me, it was really all about the debt crisis at the time the Latin American debt crisis, the last decade, what have you. So, I spent my time on my thesis, working on the historical origins and implications of the Latin American debt crisis. And through that, I met an individual who had been the finance minister of Peru, he had been head of Wells Fargo International, he had lent it, he had borrowed it, and he had defaulted on it. So, really well positioned with a small boutique in emerging markets dealing with the resolution of the Latin American debt crisis. And as we finished those resolutions, that was really the beginning of emerging markets fixed income as an asset class, because a bunch of defaulted loans became bonds, and then there was an index that was created. So, that's kind of how I meandered over to the asset class, so to speak.
John Budzyna, KPMG 02:34
Interesting, and obviously, you have you've had a long successful career. Are there any special defining moments in your career that you would speak to in terms of pursuing this investment strategy and things that have been successful for you?
Robert Koenigsberger, Gramercy 02:49
Yeah, man, I think, the early part of my career, it was explicitly financial advisory, working with these countries and kind of putting Humpty Dumpty back together again, after you've fallen off the wall. Mid-career, if you will, I started working for banks, running the capital positions of the banks in emerging markets, but then also advising our clients on how to successfully invest in emerging markets. And I'd say the defining moment for me was at the end of my career with the banks, on the sell side, what I realised a lot of conflicts of interest within these banks, and it's really hard to just be a pure representative of an investment position when you have other departments of that institution, investment, banking, research, etc.
I recall sitting in a debt restructuring, when I was at Merrill Lynch, the Russian Federation was the obligor. And I remember thinking of Russia as the obligor, yet sitting to my left, they had sent someone sat next to me from investment banking, they were already thinking of them as the client. So, the defining moment for me was when I realized that doing debt restructurings and doing investing in emerging markets from a platform that has conflicts of interest is not for me. And that was a decision to set up Gramercy, where we're just solely focused on getting the best outcome for our clients without having to worry about the institutional constraints, if you will.
Tom Kehoe, AIMA 04:16
So, let's talk a little bit about Gramercy, the firm that you established. I guess it's 25 years ago, you established the firm. What were your goals at that time and what are they now? Have they changed since then?
Robert Koenigsberger, Gramercy 04:30
Sure. Again, I think 25 years ago, our goal was quite simple. And that was to build an investment management firm, dedicated to emerging markets, one that would be conflict free and simply focused on the best outcome for our clients. And over the 25 years, we have evolved what we're doing. But you know, our mission today is similar to what it was back then, which is, quite simply just to have a positive impact on the well-being of our clients, our portfolio investments and our team members alike.
How do we think about doing that? We need to make sure that we're a top performer, that we're meeting our client's absolute and relative performance expectations. We focus on the 6 P's, that performance is the sum of our platform and our people and our purpose and our products and profits, and that we need to be a perpetuity. And as my partner Muhammad likes to say, you know, performances isn’t everything, but without it, we have nothing. And of course, we have to have a diverse and collaborative meritocracy, with a culture of empowerment and accountability. And really important for our industry is we need to make sure that we have no non-recoverable mistakes, you know, there can be no new legacy positions. And if we can do all that, then we'll be able to deliver upon our mission.
Tom Kehoe, AIMA 05:51
Can you then provide an overview of the investment strategy at Gramercy, as you say, central to that is emerging markets, but there are a number of different types of strategies that you incorporate.
Robert Koenigsberger, Gramercy 06:06
So, first of all, we are emerging markets, that's pretty much all we do. And that's all we've done for our entire careers for 25 years as a team and 35-plus years as individuals. We're focused on emerging markets credit, both public and private credit. And we do it through the lens of having a multi-asset firm. And to us, we feel advantaged to have the depth and breadth, to have all the major return streams within emerging markets. So today, what we have is traditional fixed income, long-only emerging market debt, we have our opportunistic hedge funds if you will, we have private credit or asset-backed lending in emerging markets, and we also have special situations within emerging markets. Then, super powerful on top of that is, we have a multi-asset single best idea approach, where we can build portfolios that can tactically move around these return streams. And so, for us, we have the ability to start with a blank piece of paper, tailor-make strategies and portfolios for our clients, we can partner up at the top on a multi-asset basis, but then we can also partner on any of the individual strategies that we manage.
John Budzyna, KPMG 07:25
There's a lot of discussion right now in the emerging markets valuations area around the topics of deglobalisation, and how that might impact your investment strategy. And obviously, volatility impacts so many things these days.
Robert Koenigsberger, Gramercy 07:43
Yeah, a lot to unpack there. I mean, one is around valuation, and we can talk about that, where are we in the midst of valuation? I mean, we're just coming out of this 2022 Russia, Ukraine, higher interest rate dislocation. And, you know, there's been a series of major dislocations in emerging markets over 25 years. And this one rivals any of those, and we can certainly talk more about that.
But in terms of this theme of deglobalisation, I mean, I think that's an important theme, which is, is globalisation reversing or deglobalising? Is it on pause? Quite frankly, this state of quote ‘deglobalisation’ kind of reminds me of where we started, which was really emerging markets was never intended to be this homogeneous asset class, it was a bunch of individual countries that you had to have expertise. Deglobalisation means regionalisation, it means clubs, it means borders, it means developing expertise and presence in all these regions in different countries. For us, that approach has been via platforms that we have in many of these countries, and certainly, all of these regions. We like to use the term Glocal that, we need to be global and local, at the same time.
Tom Kehoe, AIMA 09:04
So, Robert, where are we then in the present emerging markets cycle? Where do you see value for investors that are willing to allocate to emerging markets,
Robert Koenigsberger, Gramercy 09:14
There's cycle and value, which I'll unpack. In terms of a cycle, where are we? And as I indicated before, I think over the past 25 years, we've had kind of 11 major dislocations in emerging markets credit, and that becomes the end of one cycle and the beginning of another. It's important to realise where you are in that cycle because if you're too close to the end then you need to be more protective, and if you've just gone through the end and the beginning of the others, it's a rosier outlook.
When you look at these 11 dislocations, they all have had different factors, but they've looked similar in terms of the quantum. So, they all dropped about 20% It took about 5 months peak to trough. 7 or 8 months later, they're up about 27%. And on average 12 to 24 months later, they're up 30 to 50%. So, 2022 was clearly one of those dislocations in emerging markets, down low-20%, depending on what index you were looking at, and we've started that recovery. I think this cycle looks the most like Mexico ‘94/95, which was a long drawn-out dislocation and a long recovery. And I think it looks similar to that because there were two things that created the dislocation back in ‘94/95. That was the Fed raising rates, and some idiosyncratic risks in Mexico around the peso crisis and what have you. So, ‘22/23 feels similar to us. We've had some recovery, but we think there's a lot of recovery left within the marketplace today.
Where do we see value? That means that emerging market debt itself has become cheap, but we don't want to buy it as an index, we don't want to passively go after it. So today, where we see value is distinctly in what we call high conviction emerging market debt. And that's a combination of some of the high-yield names that are out there. Certainly, with the dollar having peaked, certain local markets within emerging markets make sense. But then where we see a lot of value is in private credit or asset-backed lending in emerging markets. And with rates higher, we're able to get higher rates. But there's been a crowd out. If you look in a lot of these markets, local banks and foreign banks aren't lending the way they used to, we're at that part of the credit cycle outside of emerging markets. So, the ability to get outsized returns that give you higher return and less risk, because you get uncorrelated collateral. And of course, you give up a little bit of liquidity. But we think there's a tremendous amount of value there. And, we'd like to think that that's the kind of the special sauce of the multi-asset portfolios that we're building.
John Budzyna, KPMG 12:03
There's a variety of opinions about the topic of China, and whether that is investable, people have different views on the matter. So, what is your view and the view of Gramercy on that?
Robert Koenigsberger, Gramercy 12:16
We think that investability is always a function of price, right? So, you can enter a place like China, if we're talking about bonds at par. And we would say, from a par perspective, we're definitely not China bulls, right. There are lots of challenges for par investments in China. But when you start thinking about highly distressed sectors that have low initial entry prices, we become much more bullish. One example of that today is the property development market, the property sector within China, there's been all sorts of horrendous things written about it. But quite frankly, all that's captured in the 5 to 10 cent price that you can enter today. And when we look at China property bonds today, they trade at 5 to 10 cents. They're trading below published liquidation values that accounting firms have put together, yet none of these firms, I should say the ones that were focused on, maybe the six or seven that were focused on, none of them are talking about liquidation. They're all talking about restructuring, classic Gramercy stuff, take the old defaulted bond, put it through a box and get something new on the other side. And quite frankly, this sector is just too important for China's recovery. It's like 30% of its GDP. So, (we’re) not China bull, top down. Bottoms up, we're bullish about a couple of sectors.
Tom Kehoe, AIMA 13:37
Yeah, I've heard you reference it to the subprime crisis in the US in 2007-2008, right?
Robert Koenigsberger, Gramercy 13:43
Yeah. I mean, the property market, it's akin to the US and in maybe ‘09 and ‘10 forward. So, going into ‘07 and ‘08, China looked very similar to the United States. But now you're starting to see, similar to the US Tarp, if you will, the Troubled Asset Program, you're starting to see that type of approach in China today. And again, when you're talking about 5-10 cent bonds that have already published debt restructurings, that have imputed yields of 50%+, do we think they're going to recover at par? No, but could that 5cent bond be 15/20/25? Absolutely.
Tom Kehoe, AIMA 14:24
I've read as well, if I'm correct, that you've held investments in Russia and Ukraine. So, what's your take on the situation there with regard to investing in either of these regions?
Robert Koenigsberger, Gramercy 14:39
Sure. To be clear, we're proud of the fact that we held neither Russia nor Ukraine sovereign when Russia invaded in 2022. And for us, it was a pretty simple analysis. If you go back to, I think it was December/January, our analyst came into the IC (Investment Committee) and he said, you know, I think there's a 40% chance that Russia will invade Ukraine. I'm not sure if it will be a capital I, or a small I invasion, and I think prices will drop 10 cents. We’re like, well, you just said it’s a coin toss, and with all due respect, if they invade, it's not going to drop 10 or 20 cents, it's probably going to drop 50-60 or 70.
So, we looked at the prices of Ukraine, at the time they were trading at 80. So, no invasion, maybe they go up 10, invasion then they drop 60. So, that didn't make sense. So, we sold that. And the same thing with Russia, you know, trading into the 100+, no invasion maybe it stays there. Invasion maybe it drops 50/50+. So, in February of ‘22, we had no Russia or no Ukraine. Today, Russia remains un-investable, you'd asked about China, Russia is clearly un-investable. And I'll say it's legally un-investable, because we can't invest in Russia due to the OFAC (Office of Foreign Assets Control) restrictions. But it's more than just legally un-investable. We have a hard time if we were able to invest in Russia, being comfortable doing so because, quite frankly, even before this revolt that we had, or uprising or whatever you want to have called it a couple of weeks ago in Russia, it's not clear to us what a post-Putin Russia looks like. And if you don't know what a post-Putin Russia looks like, then how can you start to think about investing there? It reminds me of the days of Yeltsin when, you know, Yeltsin would get sick, and you'd get a call that he was in the hospital. And depending on which hospital he was in, you could invest or not invest, because if he was in the cardiac hospital, you had no clue what would come next in Russia. And if he was just sobering up, then perhaps it was investable. But it's really hard to understand and discount and factor what a post-Putin Russia looks like. But also, how a post-Putin Russia might be treated by the West. One, there's this whole debate about US$400 billion reserves that are tied up, and what will happen to that. I guess the investability of Russia in the future is going to be highly dependent on what happens with that US$400 billion. But also, how's the West going to treat Russia, right? Will it look like Germany after World War 1, where it was just determined that Germany was a bad place and should be ostracised, or what looked like Germany after World War 2, which is, you know, the Russians are good people, they just had bad leadership, and we need to reembrace Russia. It's not that long ago that Russia was in the G8. So, we would say today, it's (Russia) just un-investable legally, and un-investable otherwise.
On Ukraine, we're comfortable that there'll be a recovery of probably 15 to 35 cents. So, when it's traded lower, we're tactically involved. However, we suspect there might be a higher haircut than others because it might not be truly just about debt sustainability, but the politics around putting Ukraine back together again, and what the G7 may require. It reminds me Poland and Bulgaria in ’93-94, when the G7 gave 50% haircut to both, not because either of them needed debt relief, but because they were such important buffers at the time when the wall had fallen, that they wanted to err on the side of making sure that private creditors created enough room for them.
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John Budzyna, KPMG 19:19
So, Robert, if we can move the conversation to another important asset, and that is the people that you surround yourself with. You mentioned earlier, the 6 P's and people being a very important part of the overall platform and you can't have performance without great people. And so, the question is, how do you attract and retain the best people for your firm?
Robert Koenigsberger, Gramercy 19:45
So, first of all, I'd say that attracting and retaining talent is more than just compensation. And of course, we align ourselves with the financial success of the firm with that of the team, but more is required and certainly purpose is required. But having a meaningful career, right, it's like getting paid well is not enough. And so, we have something called GCM, Gramercy Career Management. We're a very strategic firm, we have a series of strategic offsites for the firm, where we set our vision for 3-4 years at a time, and we call that the castle on the hill. This is where we are, and this is where we're trying to get to. Well, we do the same thing with our employees. So, when we have a vision for the firm, then we ask them, we say, how do you simultaneously contribute to the vision of the firm and move your career the desired direction. All of a sudden, it creates a dialogue for creating an agreement on what the next step looks like for somebody, what they need to do and what we need to do to prepare them for that.
Remember, we want to be a perpetuity. One of the great things about boutique asset management firms is we can put out outsized returns, we're nimble, whatever the challenges are, people want to make sure that you're going to be around. Nobody questions whether Blackrock is going to be around in 25 years. So, our ability to perpetuate ourselves is with that alignment, it is with that Gramercy Career Management, it's making sure that people have meaningful careers, and they see themselves advancing here. That's ultimately how we think about attracting and retaining talent.
Tom Kehoe, AIMA 21:28
So clearly, culture is very important when attracting and retaining talent, right?
Robert Koenigsberger, Gramercy 21:33
Absolutely. One of the cool things about 25 years is that we have elements of our culture that were there the very first day when there were 3 of us in a loft in the Gramercy Park. But then we've had to evolve that culture over time. What do I mean? Since the early days, our culture has always felt like a family. The cool thing about families, and families certainly have their challenges, but the best way for us to have a positive impact on the well-being of our clients is to make sure that we're nurturing and pushing our family at the same time. So family is a big part of our culture. But as we've grown, we have to make sure that we have this diverse meritocracy, and that we're a family that's holding each other accountable. Again, the predominant word we hear is family, for better or worse. Families have good conversations and difficult conversations, but it's what's kept us together for 25 years,
Tom Kehoe, AIMA 22:39
A direct consequence of the COVID-19 pandemic has seen businesses having to be more flexible with their employees regarding the way that they work, including an option to work remotely. And some firms have been trenchant, in their view, requesting staff to return to the office full time. Where do you stand in this debate, Robert?
Robert Koenigsberger, Gramercy 23:01
I guess the buzzword is hybrid. So, like many, we've settled on the hybrid approach. But when you unpack that, for us in investment management, we believe that proximity really matters, that people need to be close to each other, that there needs to be a flow of information, spontaneous collaboration matters, and that something can start from just a few ideas. We encourage people to have ideas that aren't necessarily fully thought out or researched before they start discussing them. That's very difficult to happen when you're not in the office and when you're just on Zoom.
I often say that God invented the trading desk so that information could flow freely, and that mentorship could be constantly ongoing. So, I recall the best investment that we did in 2021, it almost didn't happen. I remember being in the office in December of 2020, everybody was locked down. One of our lawyers was here, and Thomas said to me, our case, what a shame we can't do that investment in Mexico. And I'm like, what are you talking about? So, he told me about it. He said, well, my boss said that we couldn't raise capital for it, I said I've never heard of it. So, we went from that spontaneous conversation to the single best investment that we did in 2021, based upon Thomas and I just happened to be in the office at the same time.
So, hybrid is the word for us. We have our whole team together Tuesday through Thursday. I don't understand when people say well, some groups are together Monday and some are together on Tuesday. For us, it's about the whole firm being together, the whole family 3 days a week. 5 days is maybe too much, but 0 days is definitely not a deal for us.
John Budzyna, KPMG 24:45
Certainly. Robert, as the investment industry evolves, the skill sets, the type of folks that are successful at a hedge fund. What do you look for or in terms of research analysts, data analysts, and candidates? How has that changed? Or, how do you compete with others in the industry for talent?
Robert Koenigsberger, Gramercy 25:10
I'd start by saying that we prefer candidates and look for candidates that have an obvious interest in the background in what we do. That may sound ridiculously obvious, but there are so many folks that you have to weed out that just want to try something out, right? So, we're looking for people that have experience in emerging markets elsewhere, they're dedicated to a career in our space, they're looking for a career, not a job.
Recent MBAs, to me, tend to be somewhat confused and their professional wanderers, which is not great for us. So, we're a boutique, we're relatively small, it's hard for us to think about hiring a bunch of MBAs, who are generalists. A lot of MBAs go back to school, because they're trying to figure out what they want to do, not that they don't necessarily have the skill set to do it. So, we found that's not necessarily a great fit for us. So, we'd like to go to banks. We find a lot of talent in the local markets themselves. So, that helps us in terms of creating a more diverse team. It gets us presence in those different markets. But it's people that are dedicated and want to be there to begin with.
John Budzyna, KPMG 26:24
When we look at the overall industry, we also see many of the leaders of the industry that began in the 80s and 90s, and the early 2000s, beginning to step down and get this idea of succession planning. When you look at the industry, are we approaching a generational change? How do firms deal with succession?
Robert Koenigsberger, Gramercy 26:51
You know, I think it's been a big challenge for a lot of firms. Quite frankly, I mean, it's been one of the real head-scratchers for me, in the hedge fund industry. So many hedge funds haven't really thought about and focused on next-gen(eration). They think of it more as an annuity, how long will that first gen be around, and less of a perpetuity. To me, that seems like not only bad business but somewhat unfair to the other constituents around the firm.
What I mean by that is, if you're an investor, you really want to invest in a firm that you're not sure when the annuities are up, right, when they're done, when they're going to become a family office. The same thing for employees. I mean, who wants to work for a firm that doesn't intend to be around forever? What type of career is that? So, we're focused on being a perpetuity, not an annuity, which means that we need to perpetuate ourselves. We can't simply disappear because the first generation is no longer around. Quite frankly, that can be because they've retired, and don't want to be around. It could be an unfortunate event that they got hit by a bus or what have you. So, we need to de-risk Gramercy for our clients and employees alike. We're aligned with our employees in the short term, we talked about that a little bit. But we have plans in place with funding secured, to transition to the next-gen to the extent that if the first-gen gets hit by a bus or hopefully that we get to slowly move out of the business someday.
Tom Kehoe, AIMA 28:25
So, can you elaborate on what that strategy is? You've been very open IN discussing your firm's leadership strategy, what is it? What have you done?
Robert Koenigsberger, Gramercy 28:35
Let's think about the unplanned departure, the hit-by-the-bus scenario. Quite frankly, when we went out and spoke with a lot of legal firms and investment banks, and what have you, and we said, look, what's the off-the-shelf succession plan, and none of them had it. So, we had to come up with us ourselves.
We said, look, the two biggest risks, the two big things that we need to solve for at the event of disassociation, if you will, is one, the estate, right? That can be really disruptive when it's not pre-wired how the estate is going to roll out of the partnership, and also to have the funding available for that. And at the same time, you can only imagine what it's like to be an employee where one of the senior partners or the founder of the firm has been hit by a bus. They're probably put their resumes out pretty quickly. So, we needed to solve those two issues.
We did it by defeasing that outcome with a large amount of life insurance, of key man insurance. With those proceeds, we're able to, one, strike a deal with the estate which is, here's some money now to de-risk this for you, and then take some of that money and pay retention bonuses for those that are the next-gen leaders so that they understand, one, there's capital here, two, some of that capital has been used to completely de-risk the firm, get rid of all the debt, pay off the capital accounts and what have you, but now here's the retention bonus. By the way, in addition to the retention bonus, you'll be buying out the estate over time on the balance of what wasn't funded with the life insurance. So, we try and solve those issues and create alignment through an ecosystem that will perpetuate the firm.
Tom Kehoe, AIMA 30:37
Let's talk for a few moments about the megatrends that are impacting the asset management industry and the world at large. The biggest megatrend that we're talking about in this series, and it's one that folks are constantly opining on, is the growing influence of technology. And specifically, we're talking about the influence of AI, and its increasing role across our sector, but also across civilisation. What's your view on artificial intelligence?
Robert Koenigsberger, Gramercy 31:14
For starters, I’ll stay more focused on what it means for the industry and what it might mean for our firm. First, I would say that we don't fear AI. But we are really curious, and we want to seek to understand how it might help us deliver upon our mission. We suspect that it might level the playing field for us visa vie larger investment firms. We started thinking about coding and what have you, technology and programming. It's certainly early innings, that's for sure. But it's a theme that we're clearly paying attention to, and we can't ignore. I think seeing Ken Griffin and Citadel go out and try and get licenses for their entire firm is probably supportive of this notion that one needs to be focused on it.
John Budzyna, KPMG 31:57
How soon do you think that the industry will embrace AI? How do you see it affecting the broader asset management industry and the investment approach that you might take?
Robert Koenigsberger, Gramercy 32:09
I think a lot in the industry are approaching it and probably are embracing it. So, they're probably embracing it by not rejecting it. But I'm not sure that it's far enough along that people can just rely upon it blindly. And outside of our industry, we've seen some of the disasters of AI, I'm thinking about the legal industry where lawyers have actually gone and had arguments completely crafted by AI and it refers to cases that didn't even exist, or what have you. When I've done AI on my own background and says, you know, I went to Brown, I didn't go to Wharton or whatever it may be. So, I think at this stage, it's really dangerous to rely upon it. But at the same time, I think it would be dangerous for our industry to ignore it, both the benefits that it might create and the challenges that it might create in the future.
Tom Kehoe, AIMA 33:01
And of course, when we think about AI, we also think about generative AI and the various tools out there, OpenAI, ChatGPT, and the influence that they may have on the investment approach and the operations of the asset management industry. Do you look at that at your firm? Is that something that you think you were likely to explore going forward? What do you see in terms of the impact on the wider asset management industry using these tools or not using these tools?
Robert Koenigsberger, Gramercy 33:29
I think it's early. We embrace the notion that we have to pay attention to it, but not blindly follow it and explore where it may be useful and where it may not be useful. Again, when I think about emerging markets and what we do in our industry, I'll go back to the question on the work week, I just think that proximity matters, that primary research matters. When I think about some of the best investments that I've made in my career, it's because I actually made the time to go on the trip, look the person in the eye, see the body language, etc. I don't think AI is ever going to do that.
I can tell you some of the worst investments I made are the times when I didn't take the time to do that trip, I wasn't able to read the things that humans read like body language and intuition and what have you. So, I have a HP12C on my desk. That's a great tool for investing. I don't rely upon it solely. I imagine that AI will continue to develop to be a tool for the investment management industry, but certainly, not one that we should rely on.
Tom Kehoe, AIMA 34:34
You have an interesting perspective on ESG and sustainable investment, particularly given the strategy that you have and the fact that you are involved in emerging markets and private debt. What can you tell our listeners about that and how you view ESG and sustainable investment through the lens of these strategies?
Robert Koenigsberger, Gramercy 34:55
I'd start with, for us, ESG always has been and has to remain a genuine approach, right. I think a lot in the investment management business have just been quick to try and check the box on ESG. For us, quite frankly, we look at ESG as part of the investment analysis, part of our process. By that, I mean, we have found, over many years, that if an investment has a better ESG rating, even before ESG was a thing, right, and ‘G’ meaning Governance, right? That the higher rating that somebody has in the ESG world, the better credit they are, and those that have low ESG credit scores have proven to be really difficult credit. So, for us, it's just an integral part of the investment process. When we have an investment committee, we're talking about ESG not because it's the last thing we have to check the box on, but because it's an integral part of the obligor, understanding the business and understanding the risks of the business, because again, a low ESG score is a low risk to somebody's business.
Number two, we've evolved our approach to ESG over time, so I think, early on, it was ESG1.0, for us, and it was trying to triage where an institution may be, and having some of cut-off for the provision of capital, i.e., if they didn't reach a certain level, then you would not make the investment. Take the filter approach. We found that with our ESG 2.0, we're trying to use our capital to make change. We found that the minute that you say no to someone because of ESG, you have no impact. But if you say, yes, contingent on some of these ESG enhancements, then you're dancing. So, we've gone from this exclusion of people because of ESG, to try and use our ESG capital to be inclusive. And we found that, that's how you have a bigger impact.
Lastly, I would say that ESG in developed markets means something very different than in emerging markets. In developed markets, I think it still tends to be a bit of a 1.0 approach, which is, is someone at 8 or 9? Can you maybe make them a 9 or a 10, which is impact, but the marginal impact is a lot less than in emerging markets where we maybe can take a 2 and turn them into a 5 or take a 4 and turn them into a 7. Whereas what impact are we going to have if we just say no to a 4?
John Budzyna, KPMG 37:39
So, Robert, when you look at the hedge fund industry, structurally, recently, many alternative investment firms are establishing themselves as multi-strategy platforms. What you described before was interesting because you almost do something similar within the context of emerging markets. So, is that the prototype for the industry ahead?
Robert Koenigsberger, Gramercy 38:04
You know, I'm not sure about the industry or alts firms generally, but for us in emerging markets, it is the optimal way to invest, right? Why wouldn't you want to have more depth and more breadth or more tools in the toolbox to be able to build portfolios than to just be stuck as a one-trick pony. So, for us, multifaceted, you give us a blank piece of paper, and when we say multi-asset, we're really talking about multiple return streams within credit in emerging markets, we'll use equity opportunistically, but we're not a traditional multi-asset firm. But if given a blank piece of paper, we're going to take a multi-asset approach because I think one of the mistakes that people made in emerging markets over the years, and they've had a bad experience because of it, is when we talk about the cycles. So, they tend to invest after the big recovery because some consultants told them` ‘now's the time’ after a 30-50% jump, which is not great, you're supposed to buy low and sell high, but they pick one return stream, and they stick with that return stream. So, they take US-dollar or local, and they ride it up and down through that cycle and then they wake up in 5 or 10 years ago and it hasn't been a great ride.
With multi-asset, you have the ability to tactically move around the different return streams because value and relative value change. Oh, by the way, at the same time, we found that these different return streams in emerging markets really are uncorrelated, which is hard for people to believe because 25 years ago, emerging markets were an overflow asset class, it was risk on or risk off. Well, beta may be going up or down and private credit may be doing something different and then you have special situations, and you have opportunistic credit, but that's systemic in an idiosyncratic nature. You put all that together in the in the toolbox. It's pretty powerful.
Tom Kehoe, AIMA 40:01
I guess you're going to say yes, but, do you find that this is a strategy and an approach that investors are more accepting of?
Robert Koenigsberger, Gramercy 40:12
They're accepting of it, but I think one of the challenges investors have is that they are bucket heads. What I mean by that is, multifaceted generally doesn't necessarily bucket because these investors are set up with were fixed income, or were equities, or were public equities, private equities, or public debt or private debt. So, when you take this blank sheet of paper approach, it doesn't necessarily connect with a lot of institutions, because they're trying to figure out the bucket. For those that have that bucket or have the approach to be more top-down about their portfolio, it's certainly resonated. When I think about our multi-asset portfolios, we have some of the largest, most sophisticated sovereign wealth funds in the world invested in them, and at the same time, we have high net worth and RIAs in the same vehicle. So, it’s pretty powerful.
Tom Kehoe, AIMA 41:11
We've been asking our guests to provide a score from a scale of 1 to 5 as to how optimistic they are about the prospects for the hedge fund industry over the coming 5 years. Where would you scale your level of optimism for the industry?
Robert Koenigsberger, Gramercy 41:25
The challenge I have with the industry is the strategies that are in that industry are quite broad. So, to take the whole industry and throw a 1 to 5 rating, I think is challenging. That being said, again, within our industry, within emerging markets, I'd say the prospects for alternative strategies are quite high, a 4 or 5. We're moving away from beta. If you can move away from beta and anchor yourself in private credit, and be opportunistic, which means sometimes it's there, and sometimes it's not there. It's quite strong. I think emerging markets is not a place for the passive investor. When I think about when we started the firm 25 years ago, and the index wanted us to have 18% of our capital in Argentina, when we were already writing research that Argentina was about to default. You can say, okay, well, that was 25 years ago. Well, in 2022, if you passively were involved in Russia and Ukraine, I think it costs your portfolio over 800 basis points of absolute performance.
Tom Kehoe, AIMA 42:27
So, where do you see the biggest opportunities or the greatest tailwinds for the industry over the coming 5 years?
Robert Koenigsberger, Gramercy 42:35
Yes, I think for the industry, I would say the tailwinds are the fear of missing out on given that for passive investing, it may have peaked. With the way markets behaved in 2022, with quantitative tightening, with higher rates, we're starting to see that alternatives are an important tool in the portfolio toolbox, which was hard for people to remember when we were in a quantitative easing, lower rates, phase. It was harder to differentiate against beta, the headwinds for the industry.
I think the barriers to entry are quite high, much higher than when we started in 1999. We started with US$4 million in our first fund. Today, I think it's hard to get a launch done for less than 100 to 50 (US$ million). That's because the regulatory barriers are high, and the cost of the regulatory barriers are quite high. The minimum capital that's necessary to maintain a platform today, I mean, again, 25 years ago, you could be a couple of individuals sitting in a conference room with a couple of Bloomberg terminals cranking out returns, and then you hired an accountant to put out K1s, it is much more complicated than that today. And it's expensive. One of the challenges in the industry today has been fee compression. So, clients and regulators are requiring more and more, and the industry is getting paid less and less for that. That's certainly a headwind.
John Budzyna, KPMG 44:08
And so, what would your advice be for those that are getting into the industry? What kind of advice would you give them if someone were going to start a hedge fund today?
Robert Koenigsberger, Gramercy 44:19
I mean, I think a couple of things. One is patience. I think the hedge fund industry got a little bit lazy over the years, or spoiled I should say. There was all this notion that I can leave a big investment bank, someone's going to give me a billion dollars, and I'm off and running. Starting a hedge fund, starting an alternative investment management firm, it's like starting any other business, right? There's an entrepreneurial aspect, it's not just about running portfolios, it's about creating and perpetuating a business. That takes time, that takes patience, that It takes perseverance. There's been a lot of success and even more failure in this industry. A lot of that failure comes from people not having the mindset of what it takes to be an entrepreneur in this industry.
Tom Kehoe, AIMA 45:16
So, in the remaining few minutes of this episode, I'm going to ask you to talk a little bit about the philanthropic efforts being carried out by Gramercy. I can see on your website that you're involved in two initiatives, maybe perhaps more, the Right to Dream as well as the Cristo Rey mentorship program, what can you tell our listeners about this?
Robert Koenigsberger, Gramercy 45:35
First of all, We have a tremendous amount of gratitude for the success that we've had over the past 25 years. We're always looking for ways or means to share that success. But to do so with institutions that we think we can truly have an impact. Oftentimes we say no to very large institutions that certainly have impact, but we're not sure that we have Gramercy, with our time and our talent, and our treasure, can have an impact. So, we're always looking to filter down to where can our capital work and our time can make a difference. Currently, where we're most focused is, as you mentioned, Right to Dream and Cristo Rey.
Right to Dream is helping talented soccer kids from Africa, basically come to the United States, study at boarding schools, and then move on to college, both on a scholarship, but then we've been really focused on how we mentor them away from soccer because soccer has been the journey, but it's not the destination for many of the kids. So, how do you manage that varsity coach in college? How do you get that first internship? How do you put a resume together? So, a lot of our focus of Gramercy has been later stage with Right to Dream and we call it ‘mentor the dream’, because often, once they get out of high school, they can get lost. And similar to Cristo Rey which focuses on kids who are getting frustrated at high school. Again, when they graduate high school, they've been super successful, and it's a great program. Even their statistics of how well their kids do in college have been really impressive. But we're trying to sit down with these kids and young adults, I should say, and really mentor them through a successful college experience. Really set them up for postgraduate success, because many of them are the first in their family or the first generation in their family to go off to college. So, to be able to get that mentorship from someone else who's done that before them. It's really helpful.
John Budzyna, KPMG 47:43
Robert, it's been really delightful to speak to you today and have this discussion. I think your insights are extraordinary. We really appreciate it. Thanks for joining us today.
Robert Koenigsberger, Gramercy 47:55
Great. Thank you very much. I appreciate it.