Bloomberg Wealth: Steven Tananbaum

I think of credit as a contract. In credit, you have a preferred return. You're first in line. We want to understand what's the essence of the situation, how it's going to work, what are the variables, and then pay psychotic attention. I will know exactly what worked and what didn't work on the funds I manage on a day-to-day basis pretty much since I started managing money when I was 25 years old. Steve Tannenbaum knew early on he wanted to be an investor. When I was in college, I got my series 7 and 63 traded stocks with my bar mitzvah money, turned that $2,000 bar mitzvah money into about $35,000. He started an investment club at Vassar mostly to watch how people think about markets and the global economy. That curiosity still shapes his approach to investing. Even when you look at today with the tariffs, what does it mean? What conclusions do people jump to? So I knew I wanted to be on the buy side but was told that the training programs would be a terrific training ground. So he dove in. Steve joined Kidder Peabody right out of college in their investment banking program. Two years later, he landed at Mackay Shields. I was the youngest person on the investment team at Mackay Shields by about seven or eight years. I was 24, about to be 25, and it was about a half a billion dollar fund. In 2000, he co-founded Golden Tree Asset Management with a couple of backers who believed in what he could build. I was fortunate. I had two primary backers, and he said at one point when I was thinking of leaving, Steve, I'll give you more money and raise your fees if you go off on your own. Today, Steve is Golden Tree's managing partner and chief investment officer. He oversees about $60 billion in assets. The firm has over 300 employees with offices around the world, from New York and West Palm Beach to London, Dubai, Singapore, Tokyo, and Sydney. As more institutions lean in the private credit for its higher returns, Steve says the space keeps getting more competitive. We start the year wanting to win a Super Bowl. We have to prove ourselves each year. We also know that we have to keep getting better, because if we don't, whoever has just entered the environment of investing or the universe of investing is thinking, how can I be better than what I've seen other people do? Can you tell us what Golden Tree Asset Management is? What type of firm are you? So we're a global asset manager who specializes in credit. Our expertise is pretty broad. In fact, we will focus on public debt, private debt, distressed and turnarounds, structured products, real estate debt, and emerging markets. For people who aren't financially sophisticated, explain why credit is a better thing to invest in than equities. What's the difference between credit and equities? In credit, you have a preferred return. You're first in line. And so you would expect to get less, because you're taking less risk. In the case of something like high-yield debt has probably preferred return for 30 years, call it seven-ish percent, whereas equities have been more like nine percent. And I think that's a fair estimate. If you look at more opportunistic credit, it's actually returned better than equities with less volatility. You would want to be involved in credit where you're getting the returns of equity, but with protection. So for people that really are not credit investors, what credit is, is basically a bond of some type where somebody is saying, I'm going to pay you back with some kind of promise, more or less, to pay you back the certain interest rate. And if the bond or the credit is very good, you're almost certain to get it back. If it's not that good, something could go wrong. Whereas equity, you don't have a guarantee of a return or anything like that. I think of credit as a contract. If it's a very good credit, it doesn't matter what your contract is, because it's a very good credit. Other times, you need more rights. In the case of equity, there are some equity where you're aligned. So if you're a minority equity investor, if you're a shareholder, you're aligned. In the case of credit, you're first in line, so you have a different relationship. In recent years, firms in my business, the private equity business, have said, we like the credit business and we've gotten into your business. So you see private equity firms now have private credit businesses. And that's in part because interest rates have been high, and so the return that private credit investors have been getting has been pretty good. Now that interest rates are coming down a bit, probably going to come down more at some point, do you think that credit will be as good an investment as it has been the last couple of years? I do. In terms of private equity and private credit, they've actually grown the marketplace from their sourcing, from their innovation. So it's been good. And we always believe that there's going to be more competition. In fact, we expect more competition tomorrow in terms of who's doing credit and doing interesting things than there is today. Now we have high tariffs that might go in. As we talk right now, it's not clear how much they will go in, but let's suppose they go into effect in some meaningful way. Do you expect high tariffs might produce a bad economy that might yield a very good time for people to buy credit investments at distressed prices? It's developing. So you will get that bad economy. Right now, the market, and we've gotten some news about a temporary reprieve on certain of the countries that were originally had higher tariffs. And we'll see when we get more detail what that means. Take something like a leisure. You take something like gaming. You take some theme parks. You look at oil, which has dropped almost $15 in the last few weeks. The energy companies, the oil service, they're anticipating a lot. Then there are companies like in telecom, where for the most part, they shouldn't be materially different with or without tariffs. Yet, because for liquidity reasons, those bonds are down a lot and their equity prices are down a lot. And that provides an opportunity. In the private equity world, when we make investment decisions, very typically, we have these large memos that people prepare. The people that prepare them often think that bigger the memo, the better the quality of the investment, I guess. In your trading world, do people come and talk to you and say, let's do this or do that? Or you have memos. How do you make a decision? That's a great question. And I'm a big believer that there are two ways that people approach investing. One is they want to know as much as they can about a typical situation, about the situation that they're evaluating. And they want to make sure that nobody can stump them. And therefore, it's a very deliberate process. And it can result in long memos. That's not what we do at GoldenTree. We want to understand what's the essence of the situation. What are the variables, no more than five and closer to three, and then pay psychotic attention and focus on those variables for how it's going to work. So let's suppose you get a two-page memo. How long before you say, I made a mistake, or we made a mistake, and let's get out of the position? Sure. Well, you take, for instance, the tariffs a week ago. So we were not predicting what happened. So the world changed, and we have to re-evaluate what our thesis was. And when the thesis changed, so do we. Another reason to sell would be a stop loss, which from a risk management standpoint, often we'll have caught a 15% and a 20% stop loss on equities. And the idea that we can revisit it after it goes through, let's just say sell 50% at 15%, another 50% at 20%, and then the rule broadly would be we revisit in 30 days. It could be that they just got it wrong. They thought they were going to have a sales increase and a volume increase, and it turned out neither. That's another reason to sell. And then there are also reasons for why we would buy more, even at higher prices, because the situation's gotten better. In the trading world, there's a temptation, nobody's ever suggested for you, that you get inside information. And some firms have had problems in that younger people have done things to get inside information. How can you be certain when you're making a trade decision that somebody who came to you with information that you should buy this or buy that hasn't gotten illegal inside information? First is to establish a culture of compliance. I mean, it just has to be part of your culture. What does that mean? It means training. It means a process. It means that if you're not sure, there's a very clear route to ask. As you look at the global economy today, what do you think the biggest risks are? So when I think of in the U.S., the biggest risk I see are two. First is that the growth in nominal income is actually less than the growth in our deficit, which means we're going to have a debt problem in the U.S. If we can't grow our way out of our debt, that's going to be a problem. The second is inequality. If we just extrapolate the inequality that's occurred in the U.S. and it continues, and particularly if the bottom half doesn't do materially better, that's going to be an issue. So those are the two areas I worry about. All right. So what about the general economy today? Some people are saying because of the tariff threats that we might be heading into the R word, a recession. Do you think we might be heading into a recession? It's certainly possible. This has only been in effect for one week. If you look at Trump one's legacy, he was good economically. He did a good job of creating an environment where income inequality got better from the bottom going higher. And he was somewhat of a crowd pleaser. So if you take the tariff at its face value, it's going to be very problematic. It's gotten off to a tough start and confidence has been weakened. So you know a lot about debt. Let me ask you about this type of debt. The U.S. government has about a 1.8 trillion dollar annual deficit or debt and we have about 36 plus trillion dollars of total indebtedness. Are you not worried as an investor that this is going to be something we can't service at some point that's going to hurt the economy or you're not that worried about it? So the equation I'm focused on is nominal growth in relation to what the deficit is. So if you can get nominal growth greater than what the deficit is and then you run it out over time, you could have an improving credit situation for the U.S. So we're not starting from a good place. I acknowledge that. But where we need to get to is where that's trending down opposed to trending up. What about the dollar? The dollar is the only reserve currency in the world. But some people say that the president and his policies might lead to a devaluation of the dollar. Are you worried about a devaluation of the dollar or you think that's not realistic to worry about? In the last couple significant corrections in the in the market, you take 2008, you take the pandemic 2020, the dollar was a safe haven. If you look at how the dollar did versus a basket of other major currency, it actually lost ground. So it certainly didn't behave as it typically does as a safe haven. And so the dollar as a reserve currency, it certainly as just reporting is interesting, right? There's no alternative right now, but that doesn't mean there can't be. It's developing. But I think also when you look at tariffs, one aspect of how to get a better trade balance would be to have a weaker dollar. I was the youngest person on the investment team at Mackay Shields by about seven or eight years. I was 24, about to be 25, and it was about a half a billion dollar fund. So let's talk about your background. Where were you born? So born in New York City. My dad still lives in the apartment I was born in. Really? So do you have siblings? I do. I have an older brother. And did your father, was he a professional distressed debt investor? No, he worked in a family business, was a conglomerate. When my grandfather passed away at 61, my father and his brother left the business. And he was good with numbers. So he formed an actuarial consulting firm with my mom. So your mother and father had a business together. Yes. And that worked out, I guess. Yes. So where did you go to high school? Went to Horace Mann. I was a lifer there. So I started finger painting in nursery school and then graduated. And the finger painting led to your art collection, no doubt. Yes. So from Horace Mann, where did you go? I went to Vassar. Vassar. Okay. And after you graduated from Vassar, what did you do? I went to Kidder Peabody in their two-year investment bank program. So they allowed me to stay on, but I let them know that I wanted to be on the buy side. In fact, when I was in college, I got my Series 7 and 63, traded stocks with my bar mitzvah money, turned that my $2,000 bar mitzvah money into about $35,000. Wow. I wish I'd known you then. Wow. My bar mitzvah money went from $2,000 to $0,000, I think, but okay. And also formed an investment club at Vassar. And what was interesting for me on the investing club was I got to see how different people think. Even when you look at today with the tariffs, what does it mean? What conclusions do people jump to? It's only been a week now since he's announced it, yet there are so many divergent and very different approaches to how this is likely to play out. And so I knew I wanted to be on the buy side, but was told that the training programs would be a terrific training ground. All right. So you're in two years at Kidder Peabody, and then you went to McKay Shields? Yep. To McKay Shields. Yep. McKay Shields. And you were doing what there? So I started off as an analyst, and it wasn't typical for people who were 22, 23 years old to be in that business. It usually was a longer apprenticeship. And so I was the youngest person on the investment team at McKay Shields by about seven or eight years. So I was the analyst on a two-person team running high-yield bonds. And within two years, I took over the fund. How old were you then? Yep. I was about to be 25, and it was about a half-a-billion-dollar fund. So did McKay Shields show you to their clients, saying, we've got a 25-year-old guy running your money? Did they do that, or they just kept you in the background? They kept me in the background, but I remember it was Robbie Curry and Chris Sykes, and they both had a lot of confidence in me. I remember talking about it. They said that they saw something in me. And when I became the lead portfolio manager, the fund was the bottom decile. And within one year, we were the top decile and kept that position for pretty much my whole time there. So usually when people are in a top decile in a category, they ultimately conclude they should be a boss of something, maybe their own company. So what year did you decide you were going to go be your own boss and start GoldenTree? I'm in 2000. You call your friends and family and say, I'm starting GoldenTree, and you can invest in this company. And then people say, yes, here's the money, or did you find it a hard time to raise money? Great question. I was fortunate. I had two primary backers. One was Glenn Dubin and Highbridge. So Highbridge was a client of mine for about four years. And so Glenn originally recruited me to run their credit sleeve at Highbridge. And I said, why don't you just give me the money to run at McKay Shields? And he said, at one point when I was thinking of leaving, Steve, I'll give you more money and raise your fees if you go off on your own. I ended up having three partners. And I believe that we could have a billion dollars under management plus our first year, which 25 years ago in 2000, that was a healthy raise. And that's what we got. And how much do you manage now? We're about $60 billion. $60 billion? Yes. That's under management. So in the trading world, it's pretty binary. You're either good at it or you're not good at it. And let's suppose you hire people in this business and they start losing money. How long before you say, you know, this isn't for you? When we bring people on, we're looking for a previous record of success. So we don't train people, particularly on the investing side, right out of college. They would have come with already experience. Then there's also the why are they wrong or why are they right? Are they right for the right reasons? Are they wrong for the wrong reasons? And then there's also collegiality. How do you work in a team? But I would say that within a two to three year period, we, you know, usually you get a sense whether, you know, someone's talent. Do you ever hire English majors or history majors or you only hire STEM majors? The first thing, there are lots of roles at Golden Tree. I encourage my boys to go to liberal arts and to be in whether it was poli sci, economics and be fluent in other areas. So I think having a broad perspective can be very helpful. You have how many children? I have two boys. Two boys. And are they yet in the age where they're out of school or they're... So they're 28 and 30. All right. So are they in the trading world or investment world? They just formed a firm with my oldest boy's best, best friend. They've been investing in real estate and it's been out there off to a terrific start. If somebody is very good at what they do, do you say to them, you're very good, but go to business school or you say, don't go to business school because you're very good at what you do? So I didn't go to business school. And I think that the markets are a great business school. So we don't encourage people to go to business school. We encourage them to take the CFA. That's a good way to get more technical trading. If it was something that they feel they wouldn't be complete without going to business school, there have been people who've done nicely with us who've wanted to go, but that's been more the exception. Whatever industry you're going to think of, pick one you love. Just having talent doesn't mean you're going to be successful. Distressed debt isn't really new. It started getting traction back in the 80s during the high-yield bond boom, led by financier Michael Milken. A lot of companies took on debt and many of them eventually ran into trouble. By the early 90s, investors began eyeing distressed securities. Investors saw it as a way to buy low, wait for recovery and cash in. So how does it work? Distressed debt investing is basically buying the debt of companies in trouble, companies that might be perhaps close to default or even bankruptcy. Funds buy that debt cheaply from banks or other funds that don't want to deal with the situation, betting that they can profit from a turnaround, a restructuring, or even by gaining control of the company's future. Interest in distressed debt skyrocketed during the 2008 global financial crisis. Credit funds and private equity firms, including big names like Oak Tree, Apollo, Aries and Blackstone, seized the opportunity. Flash forward to 2020. The pandemic brought a halt to the economy, then high inflation and lastly, rising rates. Many investors thought these events would trigger a wave of defaults and a flood of distressed debt. But that big wave never came. In other words, no recession, no spike in bad loans, no real distressed cycle. Still, distressed debt investing continues to evolve, with new opportunities emerging every time the economy shifts, even slightly. Let's suppose you have a distressed investment and you get a 14% rate of return based on the low price you got and other factors. And then you exit. The company turns around, you exit, you get your 14%. There's another type of distressed investing. Is that what you're referring to, where the company actually goes into bankruptcy, you are part of the ownership now because the debt becomes equity, and you ultimately fix the company up and you exit and that's another thing that you do? Yes, but it's not just working within what the company that filed comes out. It's actually using it as a base, as a platform to transform the company to give us the most options. And we have a separate M&A team that works at GoldenTree on maximizing the value and helping with strategy. So if I had put money with you, if I'd known you in the year 2000 and you told me you were starting this and I said, look, I've got $100,000, I'm going to give you $100,000 and invest it and I'll call you in 25 years and see how it's done. How would my $100,000 have appreciated? What kind of rate of return would I've had over 25 years? Our hedge fund, which has been around for about 25 years, has averaged about 10%. So that's been our long-term returns is about 10%. And so that's what you would have gotten in the hedge fund product. 10% a year for 25 years? When you hire young traders, what are you looking for in them? So a trader is different than an investor. So an investor is somebody who has very good perspective over the medium to long term and has a view of how a situation is going to play out. I think of a trader as somebody who sees price anomalies or the best way to take advantage or to execute in a situation, but also somebody who connects the dots here and now. Now, in terms of which qualities are best for that, to just be broader, what would advice to be in the finance business? First is pick whatever industry you're going to think of. Pick one you love because it's what you spend most of your time doing. Then see if you have any talent at it. Because if you think you have talent at it, it just starts with talent. Do you worry that too many people think that they know how to invest in credit and there's too much competition now because everybody wants to be a private credit investor? You know what? We know that each year it's going to be more competitive for what we do. It's a growing industry. And so we start the year wanting to win a Super Bowl. So what does that mean? That means having a special season. And we know that what happened the prior year was a prior year. And we're starting with no wins. We have to prove ourselves each year. We also know that we have to keep getting better. Because if we don't, whoever has just entered the environment of investing or the universe of investing is thinking, how can I be better than what I've seen other people do? So we're always trying to get better and to win a Super Bowl. And thinking about this has been 25 years since we've been in business, we've been very competitive for our entire duration. Suppose the president called you or some president, any president called you and said, you know the debt markets very well. Why don't you come and be secretary of the treasury? Would you go into government? I love what I do. I have a lot of unfinished business at Golden Tree.